Good morning. I'm Lily from the IR department of Kakao Games. Let us begin the first quarter 2023 earnings presentation. Today, I am joined by CEO Leo Cho and CFO Terry. We will start with the CFO's presentation on 2023 first quarter earnings results. As a disclaimer, today's earnings release includes estimates on K-IFRS-based consolidated statements, which are subject to change upon the auditor's review.
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Hello, I'm Terry, CFO of Kakao Games. Allow me to present on the company's Q1 2023 financial performance. Q1 consolidated revenue was down 6% year-on-year and up 6% Q on Q, reporting KRW 249.2 billion. In terms of the revenue breakdown for PC games, some of the services were terminated with a view towards profitability improvement, but on rising PC room traffic and positive impact following the ArcheAge 10-year anniversary domestic event, which opened new servers end of last year, PC game revenue was down 4% year-on-year but up 30% Q on Q to KRW 14.1 billion. ArcheAge 2 is powered by Unreal Engine 5 with best ever graphic quality and further drawing on the engine's potential have added more depth to its immersive content while we are allocating more developers.
We are also preparing to expand the PC game lineup by way of publishing titles from genres that are more likely to have a success run in Korea. For mobile games, Eversoul, which is a new IP combining the subculture with strategic elements, has taken a solid positioning in the market, receiving positive user feedback on its immersive elements of a romance story-based system and user-friendly game servicing. As likelihood of success was demonstrated in Japan, which is the main target market, we are fast working on making up for some of the weaknesses and expanding the content volume. ArcheAge War rolled out in the face of very fierce MMO competition, has been highly recognized for its game elements, like the fast-paced battles and positive circulation of in-game resources through the exchange market.
On top of which, the convenient features such as Link service and KakaoTalk alerts received good feedback while we continue to see stable indicator measures since the launch. We therefore expect to see a long run streak of popularity powered by a full-blown siege warfare and combative content. In the domestic market, we focused development efforts behind leveling up Odin's Siege Warfare, and also disabled and removed auto-farming bots extensively, as it undermined in-game fairness and equity. All this led to a marginal dip in performance indicators. But as in-game environment improved, we've seen our core user base become more robust, and we are preparing for another rebound in time for a massive update for the second-year anniversary event.
As such, for the mobile game revenue, new title release helped to make up for Odin's domestic decline, but with limited Q1 impact from ArcheAge War, mobile game revenue was down 13% year-over-year, and up 1% Q on Q, reporting KRW 153.9 billion. Next, other revenue was up 9% year-on-year and 11% Q on Q, reporting KRW 81.2 billion. Although Kakao VX's screen golf business saw muted revenue growth year-over-year, higher OEM revenue from Sena Technologies drove an increase in other revenues.
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Next is on operating expense. Q1 consolidated operating expense was up 6% year-on-year and 5% Q-on-Q to KRW 237.8 billion. Looking closer at the breakdown, labor cost was up 4% year-on-year and down 6% Q-on-Q, reporting KRW 49.4 billion. We are winding down certain projects and businesses that are not efficient enough, or where there is high level of uncertainty in terms of monetization for the purpose of ensuring cost efficiency. While we maintain conservative hiring policy across the company, we will make HR investment in order to secure talent for speedy development of new titles and to sustain competitive edge without losing a keen eye on managing profitability. Marketing expense was up 36% year-on-year and 33% Q-on-Q to KRW 20.3 billion.
We focused our marketing efforts behind the release of two new titles, Eversoul and ArcheAge War, but we plan to keep marketing spend against revenue to be at similar levels versus previous years. Commissions paid, which is a variable expense paid to studios and marketplace, which is linked to the movement in the revenue, was up 3% year-on-year and 9% Q-on-Q to KRW 92.4 billion, on the back of added commissions paid to the developer of Eversoul, which is an entity where we hold equity ownership. Depreciation was up 5% year-on-year and 2% Q-on-Q to KRW 21.1 billion on the back of higher lease asset depreciation following the expansion of office working space.
Other expense, comprising Kakao VX and Sena Technologies' COGS, was up 4% year-on-year and 3% Q on Q to KRW 254.6 billion, driven by only a slight increase in expense versus revenue increase, underpinned by improved cost bases of Sena Technologies. All in all, Q1 consolidated operating profit was down 73% year-over-year and up 27% Q on Q to KRW 11.3 billion, while consolidated net profit came in at KRW 4.2 billion. Last year on a consolidated basis, revenue was skewed towards Odin, which has higher margin, while this quarter share of Odin's revenue decreased and with marketing spend mostly being focused on the launch of ArcheAge War, consolidated operating profit recorded a sizable year-over-year decline. However, as the revenue from ArcheAge War will be booked for the full quarter going forward, we expect OP margin to normalize gradually.
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Despite deepening competition in the domestic mobile game market, Kakao Games has found IPs highly likely to succeed through strategic partnerships and investments while introducing new titles from varying genres and taking every single one of these new releases onto the top grossing list. As such, we continue to build upon meaningful experience of success in the market. In order to sustain this experience of success, we are channeling all our efforts behind identifying game studios and engaging in investment discussions as our priority is to invest into a well-formed team that develops game IPs, which is globally scalable in a way that is punctuated with originality in terms of vision and means. In terms of overseas studios, our focus is to first look into possible investment or strategic partnerships with those developing games in a genre that best tailors to the Asian market, including Korea.
In terms of global expansion, based on the experience and performance built up from Guardian Tales and Odin, we are planning to place full momentum behind entering the Japanese market with Odin at the forefront, gearing up for June release in Japan. Aside from taking proven game IPs to Japan and other Asian markets, we are setting up strategies for each game IP or game genre to win global reputation. We will do our utmost to demonstrate meaningful results from our global endeavors. Thank you once again for all your support and interest. This brings me to the end of Q1 2023 earnings presentation. We will now entertain your questions.
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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 have pressed 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.
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The first question will be provided by Ho-y oon Jeong from Korea Investment and Securities. Please go ahead with your question.
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Thank you very much for taking my question. I would like to ask two questions. First, can you provide us with an update on the servicing of your ArcheAge War? If you could share with us some of the performance indicators, such as revenue on a daily basis, that would be quite helpful. Also, as there are other MMORPG titles that are being continuously released into the domestic market, can you also share with us what your projection is for future performance? Also, has there been any cannibalization impact that you see between Odin and ArcheAge War?
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Hello, this is Leo. I will respond to your question regarding the performances that we are seeing from ArcheAge War, as well as any potential signs of cannibalization between ArcheAge War and Odin, and also vis-à-vis the competing game titles such as Night Crows.
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ArcheAge War is based on stories and characters that are reminiscent of its original IP. We are receiving good feedback and assessment from the community that this game really plays and leverages the entertaining elements of a warfield content, which is the key characteristics of an MMORPG title by providing a very fast-paced combative content, as well as quick nurturing of the characters. It actually offers a very clear growth objective through the users competing in combative content such as PVP, and it was able to really establish an in-game economic system through the exchange marketplace. As you know, it is maintained at the top grossing list since the release. We would, of course, have to view this from a long-term perspective, but we have many updates that are planned going forward.
With these endeavors, we believe that we will be able to maintain the current ranking. Also with the extensive leveling up of the siege warfare content, we believe that there will be an opportunity for us to see another rebound going forward. As of today, we also opened an additional server so that we may onboard new users.
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In regards to your question about the cannibalization, when we were developing and preparing ArcheAge War, from the very beginning, our assessment was that the target user, as well as the gameplay directions, were very different between ArcheAge War and Odin. Internally, we did not have any concern regarding cannibalization. If you were to compare ArcheAge War to Odin in terms of the content and the game system, it really targets the hardcore user base. Usually when there is a new title release, it is the low to no-paying users that would actually move over to the new title. But in the case of ArcheAge War, because the play styles are very distinct, we expected that there will not be any user cannibalization. With regards to the competing titles, of course, we would have to take in a long-term horizon perspective and wait and see how things play out.
But usually, when there is a release of a new MMORPG title, the ones that actually move over to the new title are the low-to-no-pay users, as well as the auto-bot accounts. We believe that there is a much lesser or very minimal amount of movement that we can witness from the core user base. And of course, all of this will depend on how we continue to provide good servicing and how we operate this game going forward.
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We'll take the next question, please.
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The following question will be presented by Sohye Kim from Hanwha Investment & Securities. Please go ahead with your question.
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Thank you for taking my question. My question relates to the background or the reason, if you could share with us why we are seeing Q1 Odin's revenue and traffic dip, and also if you could provide color on the Q2 outlook, that would also be helpful.
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As this was also announced on the community bulletin, over the first quarter, we've really focused on making our hardcore user base much more solid, going through an improvement and enhancement work on the services that we provide. We really focused on leveling up the level of completion of the types of contents that we provide, rather than focusing on something new. For instance, we have improved on the Siege Warfare and also continued on with the renewal of the existing contents, including the Valhalla Battle. Another very important work that we've done was, in order to maintain the balance of the economic system, we really had a strong crackdown against any unfair activities.
Basically, we came up with ways to make sure that we prevent the activities of the auto-bot accounts that are reckless, so that we could provide a very good in-game environment where the hardcore users can enjoy the game. What we did was we introduced a very strong entry barrier preventing these users who actually undermine the game equity and game environment's fairness and had put in a very rigorous authentication process. Because of these efforts, we've seen a slight dip in the small- ticket revenue as well as the traffic of the low-paying or no-paying users on a Q on Q basis. We've seen that we have not seen any significant turnover of the mid to high-end hardcore users. Rather, we've seen actually an increase and a much more solidified basis of our core user base.
At this point, we are also making thorough preparations in time for the second anniversary, where we will see multiple extensive updates slated for the end of the second quarter. Soon we will be able to share with you more details on the community bulletin, and we believe that we could leverage this as an opportunity for us to drive another rebound forward.
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We'll take the next question, please.
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The following question will be presented by Jin-goo Kim from Kiwoom Securities. Please go ahead with your question.
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Thank you for taking my questions. I would like to ask two questions. I understand that your next new title is also an MMORPG. Can you explain your key strategy? To be a little more specific, can you focus on the gameplay direction and any of your strategies behind Ares and Goddess Order, which are upcoming titles. Second question is on your strategy for blockchain and any updates.
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Domestic mobile game market is very much fierce in terms of competition across very high-quality MMORPG game titles. It has to meet a very high standard of user needs. We are seeing diversified user needs wanting for more new and varying content. Kakao Games under this backdrop has leveraged its strength. We are preparing and developing games from various different genres that are familiar to the users, but at the same time distinct with originality. Ares , I can say, is an MMORPG blockbuster title that could really work on the global market as well. It adopts a near future universe and provides the best ever graphic and offers the non-targeting combat and gameplay, which is strategic and three-dimensional, that really focuses on the action element.
It also provides free customizing capabilities which really differentiates Ares from all the other existing legacy MMORPGs. Basically, therefore, we believe that we will be able to onboard a broader base of users. We believe that because we've brought some changes to what people are used to from the MMO genre, where things are very much medieval fantasy-based and also combat-based, we've really catered that and changed that to a near-future universe. Also in the open field, we have adopted non-targeting combat and also we introduced a suit-change system that people can actually use depending on the types of plays across all of the different classes. This is a game that allows people to really enjoy the strategic gameplay and action at the very high level of freedom.
Unlike other medieval fantasy- based MMORPG, basically, we are providing a very fun factor through the war field and also the siege warfare competing PVP element. Now, that is what has been provided by these fantasy- based MMORPG titles. Ares , basically, on top of that, provides also a cooperative attack element. Also on a periodic basis, the field content and the different contents would actually go through certain changes, and people could really enjoy the multi-play aspect of such cooperative attack. With that, we believe that we will be able to attract a broader base of users. Just some time ago, at 9:00 A.M. today, we also released a teaser film that really best depicts the universe of Ares .
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Another thing I would like to add about the developer of this game title is that this team has developed previously other triple- A game titles with the best quality graphic and differentiated action element. They have built over a decade of experience supported by and powered by the engine and the server capabilities. We are, at this point, trying to make all the thorough preparation so that we could release the title in Q3, the early third quarter.
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Regarding Goddess Order, basically, this was developed by a developer who previously developed Crusaders Quest. Based off of their knowhow on 2D dot graphic, Goddess Order is an action RPG. It also provides a manual control. Thanks to this combat system, people can actually feel a console-like game control when they play this game. This is a play structure where action play is the key, but if it's very focused on action play, sometimes people would feel quite fatigued. However, it adopts a horizontal scrolling across the X-axis, which actually alleviates the fatigue from playing on a mobile device, but maximizes the fun of the combat. Another characteristic of Goddess Order is that it is based off of a well-knit story and a scenario. Unlike other mobile games that simply offer action-based combat content, it is supported by a full storyline as well as a well-knit plot.
We have high expectations and hopes for this game title, and we also have great expectations for the global performance as well. In order for us to sustain that level of performance, we believe that it will be important for us to further expand on the content volume. Hence, we've decided to adjust the timeline of the launch to the fourth quarter.
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Regarding the update on the BORA platform, the key vision and the objective under this initiative is that because this BORA platform is a Layer 2 solution, basically it seeks to provide the foundation whereby different content services and blockchain technologies and tokenomics can easily be combined. By providing this basis, basically we can facilitate the development and provision of game and non-game content, and we can also secure a meaningful amount of volume for the assets that are onboarded on the BORA platform, which will drive the overall growth of the BORA ecosystem, and at the same time, really build upon the drivers of revenue and platform revenue income from the onboarded content.
In order to improve some of the shortcomings that we have so far experienced, we have set up an environment where the transactions and the trades can easily take place upon the global chain where there is much more liquidity for the token assets and NFTs. Hence, we have built a multi-chain together with the globally well-known platforms like Polygon and NEAR Protocol. Through the cooperation with these platforms, we are able to facilitate the access to the global user pool as well as trade in the relevant assets. With the opening of the U.S. server in April, the MMORPG ArcheWorld has made use of Polygon multi-chain in minting the Land NFT, which was sold out immediately after it was released. We are at this point on the top traded list of OpenSea, which is a global NFT marketplace.
Also, we have developed an onboarding toolkit in order to alleviate the inconveniences of the UX that people are experiencing on the blockchain infrastructure, and also to provide better user experience to our user base to the level that is quite similar to the services that are provided through Web2. We basically improved on the authentication, trading, and payment convenience. Also because of that, we are able to very quickly provide the infrastructure that the developers need when it comes to blockchain. Soon, within the year, we are planning to onboard about four to five games and non-game content on the BORA platform. There is also BORA Battle, which is a joint project that we are engaging in together with our governance partners, Neptune and Mobirix.
At the same time, we are at this point planning to release different types of services, including golf IP-based NFT fan community service, which is being developed by Kakao VX, as well as entertainment celebrity IP-based puzzle game, the details of which I cannot disclose at this point, as well as a social casino. We are planning to release all of that before the end of the year.
We also have high expectations for BORA Battle, which is an arcade game service whereby players all around the world can play this casual game of puzzle, cards, boats, and racing. This is a PvP battle game. Right now, we're working to officially launch this before the end of the third quarter. If we make use of this massive global traffic that currently exists upon the Mobirix platform, I believe that even in the first month of its release, we will be able to attract a meaningful amount of users.
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Next question, please.
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The following question will be presented by Seung-h o Choi from Sangsangin Securities. Please go ahead with your question.
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Hello, I'm Seung-h o Choi from Sangsangin. I would like to ask you a question regarding— compared to your Odin promotion event, I think that for the new titles, we've seen the promotion expense actually go down. Can we expect to see such trend continue for your upcoming titles, for instance, on Ares? Also, I think this time around you did not go through with the BJ promotion. Is that the case? What would be your plan for the future?
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Regarding the marketing spend for each of the game titles, we set our marketing budget based on projected performance as well as the level of expectation that we have for that specific title. It is based off of that projection that we control and manage our marketing expenditure. When we see that a certain marketing impact is not as good as what we had hoped, then we would of course cut or slash that marketing spend. If the marketing impact is very positive and helpful, then we very aggressively and actively would increase the marketing spend. The company as a whole did not adopt any marketing spend-related policy, whereby we say that we are continuously going to cut the marketing spend. We are going to be more flexible and agile in responding with our marketing expenditure in light of many different aspects.
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Now regarding the BJ promotion, the way that we've done it in the past, there were positives, but also our judgment is that there were more negatives versus the positives. Hence, we decided not to engage in these BJ promotions in the form that we have done in the past. There are other ways that we could collaborate and cooperate and work together with many different BJs. Now, whether this new approach is going to be good or bad, hard to say at this point.
We would have to wait and see. We believe as a company, what's important from a long-term perspective is to build that trustworthy relationship with our user base. We felt that it would be more important and very important to listen to the voice of our users, the VOCs. For ArcheAge, where even if we did not engage in the past type of a promotion, we are seeing good results and good performance, and we were able to win a stronger confidence and trust from our users.
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Next question, please.
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The following question will be presented by Jin-goo Kim from Kiwoom Securities. Please go ahead with your question.
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Just one more follow-up question. What is your global expansion strategy?
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Kakao Games has its competitive edge in different game genres, including MMORPG and 2D game genres, but different regions have different preferences. We are at this point coming up with detailed strategies for each of the game IPs per these different geographies. For our core genres like MMO and RPG, the key markets are Taiwan, Hong Kong, and Macau. Based upon the experience from these markets, we will tap into Southeast Asia as well as the Japanese market. If you look at the Western market, we feel that we need to explore these markets with content that fully reflects the user preference. For ArcheAge, the second market that we are considering after domestic launch is Taiwan. In the case of 2D-based games, there is a very strong positioning in Japan and Southeast Asia. For Eversoul, we are planning to enter into the Japanese market.
For Goddess Order, we think that this game title will be well received across all of the geographies, but since the main target is Japan, we will make more thorough preparation for that market. If you look at the Western market as a whole, we see the characteristics where the content volume and storylines are considered very important. Basically, Western players and gamers seem to have a sense of resistance against automated gameplay. They consider the game control aspect quite important, so the preferences are very different.
Ares , if you look at this game title, already has all the elements such as the universe, the graphic quality, storyline, as well as PvE content, which can fully work for Western gamers. Odin is also gearing up for a Western release, and at this point we are making some improvements on the gameplay aspect and platform so that we could solidly enter that market.
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In terms of the casual game genre, although we don't directly cover it ourselves, we've been continuously developing and making investments into these light core games through Neptune. For global casual genre games, recently the trend has been, at least to the BMs, there is much more simplified gameplay as well as advertisement business model that is embedded in these types of games. If you look at the recent two new titles that was released or introduced by Neptune recently, there's Rumble Heroes: Adventure RPG and Cat Snack Bar. We are seeing good global performance coming in through these new titles. BORA Battle is soon going to be launched globally. BORA Battle, once again, is an arcade type of a game service where there is a collection of casual games.
There is a joint project that is ongoing with Mobirix, and also Neptune had recently merged with AdX, and so we think that there's going to be more additional monetization opportunities. As such, because the casual game market size is much bigger on the global stage, we are really looking forward to positive performance.
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Last but not least, aside from going global, we are also focusing on bringing already developed and proven game IPs from overseas into the domestic market and expanding that to the greater Asian market. We were able to be very successful through introducing PoE , Uma Musume, Princess Connect, and Onmyoji. We really introduced these variety of global IPs which became very successful. Please stay tuned. We will be able to share with you more news upcoming as we engage in more discussions and investments with these overseas studios.
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Next question, please.
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The following question will be presented by Jaemin Ahn from NH Investment & Securities. Please go ahead with your question.
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My question relates to China. With the licenses now being given by the Chinese authorities, the market seems to be opening up. What is your take, or what is your strategy against this?
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The Chinese market is definitely not an easy market. Of course, we are taking the genre and the types of game contents we think will work in China and tapping into many different channels. Having said this, because this regulatory aspect is not something that is at this point fully confirmed, we cannot easily predict the market opening to take place that easily. I think what we can say is we will of course take our IPs, appropriate IPs for the China market and really eye for a good timing for entrance. I think that's all I can say on this question.
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Thank you very much. This brings us to the end of Q1 2023 earnings presentation by Kakao Games. Thank you once again for joining us this morning.