Good morning. This is Jason Lee, Head of IR at NCSOFT. Thank you for participating in the NCSOFT Earnings Conference Call for the first quarter of 2024. In today's conference, we are joined by our new CEO, Byung-moo Park, and CFO, Won-joon Hong. We'll first review the financial performance of the first quarter of 2024, followed by insights into NCSOFT management strategies from CEO Park and CFO Hong. Now, let me begin with the financial highlights.
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Q1 sales recorded KRW 397.9 billion, down by 9% QoQ and 17% YoY. Operating profit rose 568% QoQ but dropped 86% YoY, totaling KRW 25.7 billion. Pre-tax income posted KRW 78.4 billion, reflecting gains on the valuation of financial assets driven by strong dollar. It represents a QoQ transition to surplus and a 45% YoY decline. Net income was KRW 57.1 billion, up by 127% QoQ and down by 50% YoY.
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Next, let me discuss sales by game. Q1 mobile game sales recorded KRW 249.4 billion, down by 17% QoQ. Sales declined across the four mobile games, with significant drops in the sales of Lineage2M and Lineage W due to the base effect from the last quarter's large-scale update.
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Q1 online PC games posted sales of KRW 91.5 billion, up by 4% quarter-over-quarter. Lineage, Lineage 2, and Guild Wars 2 experienced a quarter-over-quarter increase, while Aion and Blade & Soul recorded a quarter-over-quarter decline. Lastly, royalty sales increased by 7% quarter-over-quarter to KRW 32.7 billion. Royalties for Lineage and Lineage 2 IP increased from the previous quarter. Please refer to our earnings call presentation materials for the details regarding sales by games.
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Now, let me discuss operating cost. Q1 operating cost totaled KRW 372.2 billion, down by 14% QoQ and 6% YoY. Labor cost was KRW 202.8 billion, down by 1% QoQ and 4% YoY. The estimated wage increase was pre-reflected to some extent, but the provision for incentives declined. Marketing cost dropped 83% QoQ to KRW 6.9 billion, driven by efforts to reduce marketing campaigns for new title releases and overall marketing spending. On an annual basis, the cost increased by 42%.
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Depreciation rose by 4% QoQ and declined by 1% YoY, totaling KRW 27.8 billion. Variable costs and other expenses totaled KRW 134.7 billion, down by 17% QoQ and 12% YoY. Due to a decrease in game sales, distribution fees declined along with other costs.
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Next, CFO Won-joon Hong and Co-CEO Byung-moo Park will present NCSOFT management strategies.
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Good morning. I'm CFO Won-joon Hong.
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Today it will be different from the general earnings call format. Although presenting Q1 performance is important, considering that we are facing difficult challenges, it is more important to discuss what kind of strategic directions our company will pursue.
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As you may know, in March, during the regular shareholders' meeting, CEO Byung-moo Park has been appointed as a new Co-CEO.
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Today we are joined by our Co-CEO Byung-moo Park, and he will discuss how our company will change looking forward, and this will be discussed at the top management level.
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First of all, our CEO Byung-moo Park will present our strategies and visions for our company, and then we're going to have a Q&A session.
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Good morning. My name is CEO Byung-moo Park, and I believe this is my first time introducing myself as a new Co-CEO, and I feel a great sense of responsibility stepping into this role.
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There are a lot of things that I would like to present, but for the interest of our time, I will pinpoint the points that I want to discuss today.
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My critical role as a CEO is to continuously make sales and profit growth, and as a result, I want to pursue continuous growth for ROE. For that, we have been dedicated to find measures on how to achieve this goal.
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Although it will take some time to see the results coming from our various initiatives, I would like to briefly talk about my opinions in four points, which is about sales, cost, and allocation of our resources, and stock price management.
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In terms of sales, although there has been a concern over sales, we have stabilized our sales starting from the second half of last year, and we have maintained stabilization in our user base for the existing IPs. So based on this performance, we believe that there will be robust cash flow in the future.
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Based on this performance, we will launch new IPs including Battle Crush, Blade & Soul S and TL globally as promised this year, and we promise to release Aion 2, Project G, and LLL next year.
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On top of making continuous sales growth, we are continuing our efforts to increase and expand our geographical areas for our games.
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For this year, Blade & Soul 2, which already acquired the government license from China, we are collaborating with Tencent to make sure that our game will have a completely new experience, and we are going to release this as planned within this year.
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This plan will be soon announced, which is that we are going to establish a JV with an excellent company in Southeast Asia, and starting from L2M, we are going to expand our market in the Southeast Asian region.
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We will accelerate this geographical expansion next year.
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Also based on the successful IPs of NCSOFT, we are planning on releasing a new genre game within this year and two of them next year, totaling three games based on the existing IPs to secure more new revenue streams, and at the same time, we are porting existing IPs to console.
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At the same time, we are currently operating Purple, which is the platform for NCSOFT games, but starting from this year, we are planning on monetizing this platform, and our goal is to release two or three global AAA games within this year, and if this turns out to be successful, we will continue to accelerate this project next year.
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Although we are planning on releasing and developing many games after 2026, we believe that there needs to be further efforts in order to achieve sustainable sales and profit growth.
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To reduce this gap, we want to implement the publishing business including investment and IP securement, and we will actively pursue M&A, and at the same time, we will license our IPs.
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In terms of cost, as we announced already, we will reduce labor costs, which is considered fixed costs. So within May, we are going to complete the process of recommended resignation, and we are going to also implement a spinoff for some functions within our organization. Based on these efforts, we are planning, we are aiming to reduce our headcount at HQ to around the mid-4,000.
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We have been freezing the replacements of our headcount for the manpower that are not considered as mission critical, and except for the manpower that are mission critical, we are going to outsource these functions.
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This is the beginning step of our process to optimize our business, and the optimization of our management and business will continue.
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We will make a centralized organization for marketing spending so that we continue to manage our marketing costs, and on top of that, we will make sure to manage the other variable costs using the ROI analysis and AI technologies.
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Regarding the efficient allocation of our resources, we already know that the construction of the new building has been made public through the media outlets.
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We will make sure that we don't further increase our real estate assets. For example, we are going to sell the building in Samseong-dong, which is owned by NCSOFT, to procure the financing of the construction of the new building, and also if needed, we are going to liquidate the R&D center in Pangyo to make sure that we no longer increase our real estate assets.
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Now I'm going to talk about the management of our stock price. We believe that our stock price has been close to the liquidation value, so as announced yesterday, we are going to buy back treasury stocks worth KRW 100 billion.
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After this buyback, we estimate that the ratio of the treasury stock will be around 10%, and this will be utilized for M&A funding.
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We will make sure that the ratio of treasury stocks will be around the 10% level, and if we conduct additional buybacks, then we will consider retiring the surpassing amount.
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Since we are going to revisit the three-year shareholder return policy, which was announced previously next year, we are going to look into the appropriate ratio between the treasury stock and dividend, and if we surpass the ratio of 10%, we will seriously consider retiring these surpassing amount of treasury stocks.
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On top of that, for the 10% ratio of the treasury stock, which will be used for the current M&A funding, if we don't make M&A cases within a certain period of time, these treasury stocks will be retired gradually. We are considering this plan.
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During my tenure, I will make sure to increase the value of our shareholders, so in order to do that, I'm going to make sure that our support organization and development organizations work as one team without any silos, and at the same time, we will make sure that the development organizations can be more agile to respond to the changing trends.
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Thank you.
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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.
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The first question will be provided by Jae-Min Ahn from NH Investment & Securities. Please go ahead with your question.
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Thank you for taking my question. I'm Jae-Min Ahn from NH Investment & Securities. First off, I'd like to send my support for the new CEO who's dedicated to taking on new challenges for the company. I have two questions. First is about M&A. You've emphasized the importance of M&A in the general shareholder meeting as well as the media conference, and I'd like to know the direction of the strategies of the M&A initiative. Secondly, I'd like if you could provide details of the launch timeline of the new titles, as well as your expectations for Blade & Soul 2 in China, Lineage 2M, and TL.
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To answer your question, I've mentioned this multiple times about our M&A direction. We're going to take three principles when we proceed with our M&A discussions. First, it should be a company that could create synergy with NCSOFT, and second, it should be a company that guarantees stability and sustainable growth potential. And third, the M&A deal itself should be accreditable to our financials.
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As part of this initiative, our teams have worked hard since the second half of last year and have been reviewing various candidates, and we managed to reduce that list of candidates to a selective list, and now we are in the initial stages of discussions with one or two companies.
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I'd like to answer your question on the new title launch timeline.
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You mentioned about expectations, so I'll address that.
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Starting the second half of this year, we will ramp up our releases of new titles.
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We'll start off with Battle Crush's global launch in June.
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Starting with Battle Crush, we have a timeframe window of one year and six months, and we will be releasing about 10 titles.
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For this year, we have three titles coming up. It includes Battle Crush, Blade & Soul S, and a new game that is based on our legacy IP.
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We're also going to move forward with our regional expansion for TL, Blade & Soul 2, and Lineage 2M.
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We have higher expectations for the year 2025 as we will be releasing the so-called blockbuster titles.
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And those megahits include Project G and our important product Aion 2, and our shooter game LLL, which we have invested a lot of time.
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As Mr. Park mentioned earlier, in 2025, we will be releasing two new games of new genres that will be based on our legacy IP. It will be a casual genre game.
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Although it was unfortunate that we did not measure up to market expectations surrounding Blade & Soul 2, starting from April 9th, we have been beginning our pre-registrations for Blade & Soul 2 in China.
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That is going well with figures up to one million users.
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On May 9th, we started our first round of CBT.
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We're working closely with their publisher to make adjustments.
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We are revising our monetization scheme for the game.
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We removed the auto hunting feature.
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We are testing a new build that is focused on content that's focused on progression.
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As you know, there is an event called China Joy, and we are going to actively engage and leverage that opportunity.
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No one knows how the expectations will turn out, but we noticed that in a gaming community in China, Blade & Soul 2 was listed as the number one most anticipated new title.
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A very talented team of our company are engaged in very high-quality localization work for the game.
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We're reflecting the demands and needs of the monetization scheme that works in the local market.
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As Mr. Park mentioned, we are also working with a renowned company in Southeast Asia for the expansion of Lineage 2M in the region.
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I think Mr. Park mentioned about this initiative because there is much growth potential in Southeast Asian MMORPG space.
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We are sure that we will generate meaningful results if we leverage L2M's proven gameplay experience quality and the cooperation with a strong publisher.
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The following question will be presented by Eric Cha from Goldman Sachs. Please go ahead with your question.
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Thank you for taking my question. I have two questions. You mentioned about a lot of challenges, and my first question would be about the internal review process. As you can see, the newly released titles didn't turn out to sit well with the game makers' community, but I'm sure that there must have been numerous review processes before the launch of titles. It feels that there might be some room for improvement of the existing review system. I'd like to ask the new co-CEO, Mr. Park, on your thoughts about the problem of the existing review system and how are you going to change the system. My second question is a bit simpler. You mentioned about the pipeline and the workforce plans, but based on these changes, what are your forecasts for their earnings this year and next year?
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There are several problems, but first of all, the review duration is too long. This caused some development delay, resulting in the game not being able to follow up with user trends.
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Secondly, up until now, when we released a game of a new genre, we didn't do much of an external test. As a result, we weren't able to reflect the expectations and the preferences of our game users.
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In response to this, the new system that we adopted at the end of last year is to create a review committee pool of people that are younger.
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We review the pre-production stage, core stage, and mass stage of the development, focusing on the ROI.
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If it's a new game, whenever this game goes through this phased review process, it needs to have an external test done.
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We realized that the longer the development period gets, it not only cannot achieve the ROI expected, but also it cannot measure up to the trend changes. Therefore, we created a system where we provide a guideline requiring the development team to end the development within a certain period of time.
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You might have heard news about our new games going through CBTs or FGTs. This is part of our efforts to improve the system.
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The reason why I have much confidence in providing the details on the launch timeline of our games this year and for next year is because we have this new review system in place.
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I'd like to provide my thoughts on the earnings guidance that you asked.
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Year 2024 would not be able to turn meaningful earnings results because, as I mentioned earlier, year 2024 is a time where we diversify our IP, genre, and platform, and we're also pursuing our global expansion initiatives. It's a year where we lay the groundwork for building that sustainable growth potential. I don't think our earnings for this year will be that much different from the profit or sales consensus.
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2025 would be different because the games that will be launched in the second half of this year will be captured in full for the full year of 2025. Also, the three blockbuster titles that will be launched in 2025 are also in store. So there will be some meaningful changes to our earnings in 2025 compared to the consensus.
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I also think there are additional upsides. First is the upside coming from the management optimization. We are making multiple efforts such as the overhaul of the game review process that you mentioned. It's happening on a much deeper level, and we are seeing some cost-related changes. All of these efforts will be captured in full soon.
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This, Mr. Park could elaborate more on this, but other than the details that we could disclose during this earnings call, there are multiple efforts to raise the profitability on a company-wide level, and we'll be able to disclose them gradually as time comes.
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I'd like to add a bit more. Of course, achieving big growth in 2025 is important. As the CFO mentioned about the guidance of 2024, my thought is that we are making all our efforts to achieve performance that exceeds market consensus with our teams.
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The following question will be presented by Seyon Park from Morgan Stanley. Please go ahead with your question.
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Thank you for taking my question. My question is about the specific cost-saving plans. How much do you expect to gain in cost savings per year coming from the recommended resignation? My second question is about property assets. It seems like there are already commitments made to the new office building construction. How much resources do you think will be additionally needed, and how would that be captured in cost increases? When would that happen?
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Thank you for your question, Mr. Park. The impact from the recommended resignations, as you know, is not certain because the number of the exact scale of the resignation is not defined. Of course, there will be some one-off costs to be increased. It's not likely that the positive impact from this program will turn up in our financials. But since we do have an excessive fixed cost, which is our labor cost, I believe that this process will be good for us in the long run. As we move on with this process, we will provide the results to our analyst and investor communities.
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Regarding your question on the new office building, we decided to invest in this building in 2021, and we got the building permit, the construction permit in 2023.
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We cannot backtrack on this contract, but to provide some numbers, as you mentioned, the purchase price of the land for the new office building was KRW 430 billion.
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This number is already executed, but additionally.
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We started our construction in March this year, and the construction will be completed in 2027.
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On top of the KRW 430 billion, we are going to see an additional KRW 580 billion in construction costs.
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I don't know how the global inflation trends will turn out, but in a conservative perspective, we might expect some additional increases, and we are trying to minimize these costs.
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To spread this cost out in terms of modeling, I could say that you could roughly divide the cost execution over 2026 and 2027.
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To elaborate more about the efficient use of the resources that Mr. Park mentioned.
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Currently, our company owns two buildings, one in Samseong-dong and our Pangyo R&D Center. The combined book value of these two buildings is KRW 230 billion. However, the market value is KRW 1 trillion. These buildings could be used to increase efficiencies. Therefore, I could say that we do have options to offset the additional increase in construction costs with these assets.
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The following question will be presented by Stanley Yang from JPMorgan. Please go ahead with your question.
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Thank you for participating, Mr. CEO Park, in this conference call. I have two questions. First, I'm sure that the company has reviewed its strategy regarding the Western market and the console market. What are your thoughts on the expected performance in these fields? I'm wondering if there's a new approach that's different from the past. The reason why I'm mentioning this is there has been some meaningful performance in the console market with Korean games, either games that are based on legacy IPs or games that are based on the talent of NC.
Second is about the R&D cycle. The R&D cycle is about four to five years. It's pretty long. Even if there will be new development process, there are concerns that since these are based on the legacy IPs, there might not be some innovative changes. I'm wondering if there will be some significant changes on this front.
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When you look at the market structure, the Western market is pretty big. It's bigger than the Chinese market. By platform, console is a growing platform greater than mobile and PC.
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In order to approach things more efficiently, we are continuing to cultivate ArenaNet, which is under NC West, as a leading studio in the West.
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Our plan is to grow NCA, which will be in charge of publishing various genres of games in the Western market.
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Of course, we are going to focus on the genres that we are confident in, but we are also developing games that are of a new genre that we're not used to. And for these genres, we will be working with publishers who are fit for these genres.
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Therefore, we're currently working to focus on publishing games of genres that we're confident about through NCA or our subsidiaries in Taiwan, Southeast Asia, and Japan. However, for genres that we don't have much expertise in, we will be working with external publishers through our global command post and NC America. This way, we could help ensure that our new genre games could secure a footing in the new market.
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We're currently discussing with multiple potential publishers, and I think we'll be able to develop further details as time comes.
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The console market is a market that we must move into.
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As you know, a lot of the games that we're currently developing are being developed on console alongside.
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For instance, Battle Crush will also be developed on console and released. TL will follow suit.
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More details will be disclosed sometime around July and August, but we are working with a global platform company to bring our existing IPs to console as well as other IPs.
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I emphasized working with companies that could provide synergy with us through M&A. We are considering companies that could help us make the synergy in the Western market, the global market, and the console space.
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You mentioned about the R&D cycle being too long, and our biggest goal is to shorten this R&D cycle that fits the market trends.
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Last year, through the game review process, we streamlined some projects that do not fit the trend or have a long cycle. For instance, we changed an MMO. We might have changed MMO into an MO. We also streamlined some excesses to fit the market trend.
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For instance, another example could be reducing the development of the game on multiple platforms to shortening that to one or two platforms. The important part is to enable these projects to be able to finish within a reasonable time that fits the trend. This is a consensus that our management and the teams have.
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I'm sure that there might be doubts about this considering our previous track records, but please, I ask for your continued interest, and I will make sure to deliver the titles on time as I committed.
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The following question will be presented by Miseon Lee from Citi Securities. Please go ahead with your question.
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I have two questions. First one is about user sentiment. For the previous years, there has been a rise of the so-called Lineage-like genre represented by an aggressive business model. I think this caused an impact on the brand value as well as the loss of trust from users in Korea and abroad. What are you doing about this? This is causing games to receive criticism even before launch. In order to increase the hit ratio of these new titles, what kind of efforts are you making to increase the brand value and trust back? Second question is, as you said, as you see that the Lineage style monetization scheme is not sustainable, and there must be changes to the monetization scheme, how do you think will the monetization scheme change for Aion 2, and how do you think these changes in business model impact the future sales?
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He thinks the direction of the business model and user sentiment are all related.
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As mentioned previously, it's not about the marketing or PR efforts to recover our brand value and gain back user sentiment, but it's about releasing new games and genres that are user-friendly.
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For other titles in the pipeline, by not applying the Lineage-like business model but applying a lighter model such as a Battle Pass or a business model focused on cosmetics, we will be releasing them. And if the users could trust us, I think that will lead to a user-friendly monetization model.
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You asked about the impact of these BM changes on the sales. I think sales is the number that is the actual user number times their RPU.
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These lighter BM models will be focused on the global market and will be global gamer-friendly. Although these games will have a lower ARPU than Lineage-like games, since it will have a larger user base, I believe that the sales would be on par or higher.
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A little more about TL. In Korea, many users criticized TL for being the typical NC game. However, when you look at the results of the CBT and the technical test on TL across global users, there were no criticisms based on those typical biases that we see in Korea.
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Thank you for all your questions, and we will now have the time for CEO Park to deliver some closing remarks.
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In order for a company to grow, I think the trust between the shareholders, users, and the management is the most important.
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However, up until now, we lacked this kind of trust system among these stakeholders, leading to our users not trusting us when we launch new games and our shareholders not trusting us when we take an action.
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As mentioned, however, we will rebuild trust with our game users through new games, new genres, and new monetization models.
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From the management, we will make sure to work as one team and make our organization more agile so that we could deliver earnings that exceed consensus.
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Therefore, I also ask our shareholders and our investors to keep your continued interest and trust in us.
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Thank you.