Good morning. I'm Lily from the IR team of Kakao Games. We would like to begin our second quarter 2023 earnings presentation. Today, I am joined by CEO Leo Cho and CFO Terry. We will start with the CFO's presentation on second quarter earnings. As a disclaimer, today's earnings release includes estimates of KIFRS-based consolidated statements, which are subject to change upon the auditor's review.
[Non-English content]
Good morning. I'm Terry, the CFO. I will start presenting on the second quarter 2023 financial performance of Kakao Games. Second quarter consolidated revenue was down 20% year-on- year, but up 9% Q-over-Q to KRW 271.1 billion. Q2 revenue breakdown is as follows. PC game revenue was down 20% year- on- year due to suspension of some of the services and an absence of revenue momentum for PUBG. There was a 16% decline Q -over -Q with revenue reporting KRW 11.9 billion. In order to diversify the platform into PCs and console, on top of ArcheAge 2, we are continuously making strategic investments, some of which include Frost Giant's Stormgate, Grinding Gear Games' PoE 2, and a new looter shooter title from Lionheart Studio, and another new title using web novel IP by Ocean Drive Studio, all with a view towards securing new engines for growth.
For mobile games, even in the absence of revenue momentum like major updates, in line with our plans, which was mentioned last quarter, a second-year anniversary update served as a turning point, triggering a rebound in revenue-related indicators for Odin. Such impact is continuing to this date, and upon this robust user base, we will again run regular release of major content updates and expect to further boost performance through content updates catering to our heavy users. In Taiwan, there was speedy servicing of Odin's content update, helping to support similar levels of user and revenue indicators versus last quarter.
In Japan, user acquisition was quite difficult because the genre in which Odin is in is not considered mainstream, but its top-notch graphic quality and fast-paced combat is receiving good ratings. This genre has inherent size limitations in Japan, but Odin, since its launch, kept its number one positioning in the MMORPG segment as we continue to run operations that cater to local needs through holding various on/offline user roundtable meetings and fan meetings, and holding events that reflect user preference and through appropriate adjustments in the difficulty level of the game. ArcheAge War has gone through a moderate phase of downward stabilization, which is a characteristic distinct to this genre, and users are gearing up for full-fledged competition, which is helping to sustain relevant indicators.
Since the competition-based dungeon update end of July, the fun of war combat is growing as we prepare for major updates in the second half, which can be a momentum for top-line rebound. Uma Musume had a large-scale content update as part of its Korea's first-year anniversary event, and carried out on and offline events in parallel that drove a big rebound in user metrics and revenue. Thanks to continuous efforts put into user communication, we were able to reaffirm unwavering support of the fandom. Eversoul also carried out user-friendly servicing, which continued gameplay improvements, and since its semi-anniversary event, there was meaningful rebound in performance indicators, including retention. In the second half, we will also focus on boosting content volume and elements of the subculture to prepare for Japan release.
As such, full quarter recognition of ArcheAge War results and Uma Musume's rebound in performance measures drove mobile revenue growth. Due to the base effects of Odin in Taiwan year-over-year and Eversoul rollout, mobile game revenue was down 19% on year, but up 12% Q o Q, reporting KRW 171.9 billion. Next, for other revenues, the other revenue was down 21% versus last year's peak, and due to seasonality, there was a 7% increase Q -over -Q, reaching KRW 87.3 billion. Due to concerns over recession, we expect growth to be sluggish for Kakao VX and Sena Technologies for the time being, so we plan to focus on profitability management.
[Non-English content]
Next is operating expense. Q2 consolidated operating expense was down 5% year -over- year, and up 3% Q o Q to KRW 244.6 billion. Looking at the breakdown, labor cost was up 7% year-on-year , and 9% Q o Q to KRW 53.7 billion. With the expansion of new title lineup targeting the global market, both direct and indirect expenses increased following the hiring for development studios during the second quarter. We are currently running a policy focusing on hiring developers while keeping quarterly labor cost at the second quarter levels. On initial stage marketing for ArcheAge War launch and pre-order marketing for Ares, a newly released title, marketing expense was up 1% year-on- year and 2% Q -over -Q reaching KRW 20.6 billion.
We have marketing activities planned for the second half for global expansion, and as efficiency of performance marketing for live games is increasing, we expect share of marketing spend against total revenue will decline. Commissions paid is a variable cost paid to the marketplace and studios in line with fluctuations in revenue, and it fell 2% year- over- year. With growing revenue share of in-house developed IPs, there was a marginal increase of 0.4% Q o Q with commissions paid reaching KRW 92.7 billion. On rise of tangible assets in golf business, depreciation cost was up 2% year- over- year and 2% Q-over-Q reaching KRW 21.5 billion.
Other expense comprised of COGS from Kakao VX and Sena Technologies was down 22% on year and 3% on quarter to KRW 56.1 billion, driven by sustained improvements in the cost rate even under lower seasonality impact during the second quarter. All in all, Q2 consolidated operating profit was down 67% year -over -year and up 133% Qo Q reaching KRW 26.5 billion, while consolidated net profit reported KRW 8.7 billion. We believe cost is being managed efficiently amid continuing backdrop of macroeconomic risks, and we have prioritized revenue growth during the second half of the year in order to maintain a balance between investment and expense management.
[Non-English content]
To speed up global challenge and opportunities, we've prioritized and prepared for domestic pipeline expansion and those projects bore results this quarter. In the midst of many competing titles, ArcheAge War is still one of top grossing titles, and Ares, released last week, is expected to successfully position itself in the market with its uniquely distinct game system and gameplay. We believe competitiveness that will steer the future for Kakao Games underpinned by pipeline expansion will come from not only MMORPG games, but from our experience across various different genre and lineup of titles.
Apart from new MMORPG games, we are dialing up chances of success in the global market by way of genre diversification, including action RPGs, collectible games, looter shooters, real-time strategy, subculture, and casual games. On top of building portfolio of various different genre, we will also facilitate expansion into other platforms which are PC and console, in line with our plans to make them into new engines for growth. In the second half, we are planning on launching Goddess Order, which is AAA title targeting global user base and global expansion of Odin and Eversoul.
We will grow in a stepwise trajectory using a variety of titles in the pipeline so as to bolster competitiveness, which is unique to Kakao Games. Once again, thank you to everyone for your continued support and interest in Kakao Games and the challenges that we have embarked on. This ends the earnings presentation for the second quarter of 2023. Let's now entertain some questions.
[Non-English content] Now Q&A session will begin. Please press star one, that is star and one, if you have any questions. Questions will be taken according to the order you press the number star one. For cancellation, please press star two, that is star and two on your phone. In order to allow as many Q&A chances as possible within the restricted time, we would appreciate only two questions per each participant. [Non-English content] The first question will be presented by Hee seok Lim from Mirae Asset Securities. Please go ahead with your question.
[Non-English content]
Hello, I am Lim Hee seok from Mirae Asset Securities. My first question relates to what the company's assessment is of the initial results you're seeing from Ares' release, and what is your projection for its future performance. My second question is, where do you think is the source of your global competitiveness? Could you also share with us as to what your future schedule is with regards to your global expansion?
[Non-English content]
Thank you for your question. You asked about what our internal take is with regards to Ares' release. It's only been about a week since its launch, but Ares as a game is seeking a little different type of gameplay compared to other mobile competition-based MMORPGs. Rather than focusing on inducing people to spend more money up front so that they can actually climb up the rank and try to trigger more PK-based player versus player type of combat, this game focuses more on the actual scenario of the game, which is storyline based, allowing people to directly play and target and grow within that content, within the storyline, so that people can truly enjoy the very fundamental entertainment element that the game has to offer.
We watered down the mandatory necessity for people to spend more at the very beginning. We really enhanced on the immersiveness of the game. We've decided to take on a direction of really focusing on the continuity of the game and the gameplay. Through this approach, we were able to successfully onboard our users, and going forward, we expect the paying ratio to go up. Basically, this game from a system perspective is quite different from other competing games. Initially, the users have a bit of a difficulty in learning this type of gameplay. We are seeing that people are adapting themselves to this game itself, and we see that we are getting very good ratings through various different communities, especially people talking about how good the action play is, as well as this very unique and distinct game system that Ares is offering.
Also, the economic system that is designed to really accommodate the low-paying users is receiving good feedback as well. Despite the fact that the initial stages have been designed as such that monetization or people paying for certain items has not been made into something that is mandatory, we see that this game title, in terms of the top grossing indicator, in a very short period of time, distinguished itself as a top-ranking title. I think that really reflects the satisfaction of the users. Now, in terms of how we're going to service and update this game going forward, we are going to create an ecosystem where various different user segments can really enjoy and continue the game, even including the low-paying users. Under that objective, we're continuously reviewing and applying different balances even after the release.
Just like other PC RPG games, we want to be able to service this game over an extended and longer life cycle. Our objective is to make sure that the users will make a voluntary decision in paying for and playing the game. I admit that it is too early to say definitively, since it's only been about a week since the launch. We are planning on really leveraging these differentiated play elements as well as the economic system, which we will further scale up, and we will use that as a key competitive edge when we take Ares onto the global stage. Regarding the future plans for global expansion, our collaboration with Second Dive had, from the very beginning, been ongoing with a very clear objective to target the global MMORPG market.
Through the previous title called the Dark Avenger series, this developer studio, Second Dive, already enjoyed big success through its action RPG title on the global market. Basically, through this game title, we wanted to bring action RPG with the SF, science fiction, universe. We are enabling the gamers to change up various different types of suits and engage in SF-style combat, and they can make use of different combat gears. This has really appealed to the global user base. Also, SF universe is a very popular genre for game players. By providing very detailed action movement and impactful curation effects, we are able to bring about very animated combat for the game players and were able to deliver good fun and entertainment to our user base.
After the domestic launch, our trailers have been spreading to other global markets, and we are receiving very good and positive feedback from our overseas global users. During 2023, we will focus on securing service stability and also focus on updating content. That will be our key for this year. Although at this point it's difficult to say specifically as to a timing as to when we will launch into the global market, we will fully prepare for that going forward.
[Non-English content]
Next question please.
[Non-English content] The following question will be presented by Jin-goo Kim from Kiwoom Securities. Please go ahead with your question.
[Non-English content]
Thank you. I am Kim Jin-goo from Kiwoom Securities. My first question relates to your core flagship title Odin and ArcheAge War. Can you share with us some information about what the Q2 positioning looks like and what your projection is going into the third quarter? Second question is a question on your new title, ArcheAge 2. Can you share with us more details regarding the gameplay, the business model, and the timeline going forward?
[Non-English content]
Thank you for the question. First, responding to the question on Odin. During the first half of the year, there was deeper competition amongst multiple number of new titles in the mobile MMORPG segment. During this period, Odin focused on improving its siege warfare for the high-ranking users, and it received very positive responses. Since the second anniversary update, which took place end of June, that was a turning point. After which we saw not just the high-ranking users, but all of the users that had left the game, as we were able to further enhance the content offerings, actually came back to the game. That really drove a significant rebound in top line sales.
We are seeing that impact continue as we go into the third quarter. In terms of the traffic related measures, as we launch the new class where there is a high combat efficiency and better skills, as well as new servers, which is helpful for growing the characters. As we launch these two all at the same time, we were able to better satisfy the users. Through multiple events through which we provided benefits to our gamers, we now see that all the activity related measures have improved. Supported by such high traffic, we at this point believe that once we are able to release major updates in the second half of the year, that will also translate into good results.
Our plan going forward is to conduct major content updates every four to six week cycle so that we can continue on with this positive trend of performance. During the third quarter, we will be bringing renewals to the Stronghold Invasion Season 2 and the Shadow Fortress. This will be able to provide more entertaining factor to the gamers, and we are at this point also preparing for a stronger reward system. We will also be updating a new chapter, Niflheim, for the benefit of the heavy users.
[Non-English content]
Moving on to ArcheAge War. We are very clearly targeting a group of users who really prefer that competition, which is supported by a very traditional competition-based MMORPG gameplay, which ArcheAge War is offering. Thanks to that, amongst the competitive game titles, it's been able to continue on a very high-ranking position in terms of top grossing game titles. Since the launch, we have been conducting multiple content updates. We've been providing very clear-cut goals to the gamers and giving them very clear elements that they could really use to entertain themselves. Thanks to that, we've been able to create new competitive content as well as dynamics, which is helping us really minimize the downward stabilization in terms of the top-line revenue and traffic within a certain segment of the cycle.
Also, to provide you with a little more specifics, we've conducted competition type-based dungeons for heavy users. We've conducted the siege warfare update, we did server migration, and through providing various different types of growth content updates, we've been able to create a virtual cycle of gameplay. All of the efforts that we've put in for people to actually step up their specs for a full-fledged competition is translating into a sustaining trend of traffic and top-line revenue.
[Non-English content]
Regarding the planned update and expected impact from ArcheAge War, basically ArcheAge War runs 32 servers in four different realms, and as of end of July, we've conducted a realm dungeon update, basically triggering people to compete with one another to gain the legendary item for the top guild across the eight servers that is per each of the realms. This was able to create a dynamic where the most heavy users have really engaged in combat, and the fun of war field game has only accelerated ever since. Such deeper competition has stimulated users to want to grow more, which translated into more item purchases and a virtual cycling of in-game resources.
Also, as the availability for these items have become much abundant for the mid to low-level users, we are expecting a traffic rebound as we enter into the second half of the year. We're also planning to introduce new occupation classes as well as the job change system, new growth elements, and new as well as returning events for new users and returning users by end of August. We expect that this is going to help us drive traffic rebound in the second half and work as a revenue momentum.
[Non-English content]
Regarding new titles, first on ArcheAge 2, I guess there will be quite a bit of interest since we are developing for both PC and console at the same time. The first trailer was released in the previous G-Star event for ArcheAge 2, and it received a lot of interest from our user base. Our objective is to complete that development by the second half of next year. ArcheAge 2 is supported by Unreal Engine 5. It offers AAA graphic quality, and it provides a seamless open world. It is one expansive continent-based universe. It actually shares a common universe with the ArcheAge series. However, this is an MMORPG game that really focuses on single play that is underpinned by individual content and storyline.
We are planning on offering various life-related contents so that the users can really enjoy the open field that it offers. We will make improvements on the trading element, which is a signature content of ArcheAge, so that people could really actively engage in trade at the guild level and the town levels. Also, we will apply collaborative customization to the housing system so that we could really increase the touchpoints that the game has with the users in terms of various different types of content as the story actually develops within a single-play structure. Because ArcheAge was under servicing over a long period of time on the global market, it really has a deep bench of fan base in Russia and other Western markets, and also in the global markets.
Therefore, we are anticipating a good performance. At this point, we're very much focused on improving the completeness as well as optimization of this game as we embark on concurrent development for both PC and the console platform. Although it's not determined, maybe for ArcheAge 2, I think we will be able to share with you more details during the game trade shows for next year and be able to share with you more details relating to its gameplay and many other information. That is what is going on as we speak in terms of planning.
[Non-English content]
On top of ArcheAge 2, there are some other list of new titles that is currently under development. For instance, Ocean Drive Studio is at this point developing The Swordmaster's Youngest Son, which is based on a dark fantasy light novel, and it really has a deep bench of fandom, both in the domestic and overseas market. Ocean Drive Studio is using this IP to develop an action game, and the target market will be the global market, and it will be for both PC and console platform. Lionheart is also developing a looter shooter game title for both PC and console platform. Frost Giant, which is a game studio based overseas into which we've invested, is at this point developing an RTS game. Playable Worlds is also developing a new game title as we speak.
[Non-English content]
Next question, please.
[Non-English content] The following question will be presented by Seung-h o Choi from Sangsangin Securities. Please go ahead with your question.
[Non-English content]
Despite a slew of new releases, you are able to keep your marketing cost at manageable levels. With regards to the marketing spending going forward, what would that trajectory be like, and what is your second half plan in terms of marketing expenditures? Also, what are your plans for additional hiring?
[Non-English content]
Hello, this is Terry. You are right that at Kakao Games, we have many new titles in the pipeline. From the very beginning, when we prepare for a new title development, we very closely review the marketing spending as well as ways to control and manage that spend. That's why we've been able to keep the marketing expenditure at guided levels. If we look out into the second half of the year, there are also many new titles that are upcoming. Our key objective of marketing activity would be to maximize user acquisition and also to bring good initial performance.
One thing that we are very confident of is the performance marketing efficiency that we were able to achieve on the live games. We can say that our marketing spending efficiency is quite positive and quite good. Hence, I can tell you that in the second half of the year, marketing expenditure ratio against our revenue will further improve. Even despite the higher number of new titles, we believe that in 2023, on a per annum basis, we will be able to maintain marketing spend efficiency.
[Non-English content]
The reason why we saw an increase in second quarter labor cost compared to our plan has been very clear cut. It is because there were many new titles in the pipeline, there was a need for acquisition or attracting of the talent, the developers. We've been quite aggressive in hiring developers, and that was the key driver behind the increase in the labor cost in the second quarter of the year. In Q3, our plan is to keep the labor cost level flat versus the second quarter. And of course, we will be implementing our hiring policy in light of the development of how the new titles are being made, as well as our revenue and sales performances. In Q3, we're expecting a flat on a QoQ basis in terms of marketing spend.
[Non-English content]
Next question, please.
[Non-English content] The following question will be presented by Dong-hwan Oh from Samsung Securities. Please go ahead with your question.
[Non-English content]
I have two questions. First is that your other revenue was relatively weak this quarter. Can you give us some information regarding revenue and operating profit of Kakao VX and Sena Technologies? Also, what can be some of the synergies that we can expect from Sena Technologies with your game business? Because I believe that we haven't been able to see too much of synergistic effect from this, and so would like to gain some color on that.
[Non-English content]
Regarding the businesses of Kakao VX and Sena Technologies, these are businesses that are dependent on how the economic cycle plays out. That is why right now we're focused more on the fundamentals, on the bottom line profitability, rather than focusing on driving for growth. Giving you the revenue breakdown, Sena Technologies accounts for 55% of the other revenue and VX takes on the rest. Now for the profit, at this point, the review is ongoing, and it will be difficult for me to share with you the specific number, the breakdown between VX and Sena, but we'll try to get back to you through another channel.
[Non-English content]
Moving on to the second part of the question about the synergy with the game business. You are correct. At this point, there are no specific synergies that we will be able to highlight. Currently, different endeavors are being reviewed. The review is ongoing, but for Sena Technologies, the stance that we've taken is one of a conservative stance. Although I can't, at this point, share with you the details relating to what those aspects are in terms of Kakao VX and collaborations or synergistic effect with other Kakao subsidiaries, I believe that we will be able to share with you more details in the second half of the year through other avenues and other channels, either through the press, etc.
Once again, our focus at this point is not really driving a top-line revenue or growing the size of either the Sena or the Kakao VX business. We are very much focused on managing profitability, so that even if there is economic recession, we will be able to endure through that difficulty. At this point, the focus is on fundamentals.
[Non-English content]
With that, I would like to close our second quarter 2023 earnings conference call for Kakao Games. Once again, thank you very much.