Good afternoon, this is Ji Yun Yi from KRAFTON IR team. The company will present the Q3 2021 results. I thank the international and domestic investors and analysts for participating in our conference call despite your busy schedules. Please note that the results presented today is in accordance to K-IFRS-based tentative consolidated numbers. The management and financial information could be subject to changes with external auditors review. First, CFO Dongkeun Bae will present on major business results.
[Foreign language]
Good afternoon. This is Dongkeun Bae, the CFO of KRAFTON. Third quarter 2021 is the first quarter for KRAFTON as a listed firm, and it was also a quarter in which the company accelerated its growth as a global game company. We grew multi-platform live services stretching from PC, mobile to console, and successfully launched Battlegrounds Mobile India or BGMI. We are ready for the launch of New State that will further add to our influence and expand the PUBG IP universe that got the attention of tens of millions of global users. With company-wide efforts, KRAFTON recorded the best ever quarterly revenue in the third quarter, and operating profit grew rapidly both on a YoY and QoQ basis.
[Foreign language]
In preparing for our IPO, the company had shared four growth strategies with our staff and management, shareholders, investors and analysts. In accordance to what we have said, we are implementing our strategies. Following is the result of our execution. First, the company has developed PUBG: New State to further add sophistication to PUBG's live service, revenue maximization and PUBG Universe expansion. We have also developed Thunder Tier One or TTO for core fans of top-down shooting genre. Second, the company has expanded global businesses in emerging markets, as exemplified by our investment in Pratilipi, the largest web novel platform in India. Third, the company secured unique creativity through M&A, such as the M&A of Unknown Worlds. Lastly, there were progresses with our internal projects, core competency and technology procurement to realize an Interactive Virtual World through new technologies such as deep learning.
In the case of deep learning, I cannot disclose the details, but next year the company has plans to introduce content platforms and virtual friends using AI, an attempt Korean game companies did not easily embark on. Through technology innovation, KRAFTON is preparing for the coming future with the goal of realizing an Interactive Virtual World. I deeply thank the investors and analysts for supporting our challenge and belief. I also thank the staff and management of KRAFTON for their passion and dedication, even during difficult times.
[Foreign language]
Now, I will give you the details of our business results. First, on PUBG PC and consoles, we are focused on delivering a more robust user experience for our core users who stayed with Battlegrounds since its launch. Seasonal content structure was serviced every three months, and this year we've changed the structure to live service to continuously sustain the interest of our users. Core gameplay was improved and fortified on an ongoing basis, and content expansion that did not let our users become bored led to mode use rate increase. This tied in together with new TAEGO Map launch, event pass, and collaboration within games enhance the virtual cycle of game content. PUBG PC has been working on items or goods content expansion to address the user consumption needs within games. Weapon upgrade content was introduced on the PC platform for the first time in June.
After the introduction, in-game ARPU had grown nearly 50% in Q3 compared to the previous quarter, leading PC revenues. In Q3, Your Shop system was newly added along with the upgrade-type weapon. This attempt to reintroduce popular items was well received and contributed to in-game revenue as a new revenue source.
[Foreign language]
Now, on mobile business results. PUBG Mobile is directly serviced by KRAFTON in Japan and Korea, and other markets are covered by Tencent as a global publisher. PUBG Mobile user base is very steady, and the company continues its strategy to quickly introduce mobile-suitable attractive content to maximize revenue. PUBG Mobile has rebranded Royale Pass. The Royale Pass was introduced in two-month intervals, and since July, the interval has changed to one month and has been rebranded as RPM. The level, mission, and price was adjusted accordingly so that the users could more easily achieve Royale Pass missions. Through collaboration with Tesla last July, gamers could experience autonomous driving on Tesla Model Y within the game. The attempt to link the experience with gameplay was well received by our users.
[Foreign language]
The most meaningful achievement for the quarter is the successful launch of BGMI, Battlegrounds Mobile India , where KRAFTON is quite strong. BGMI was launched in July 2nd, and more than 40 million Indian users pre-subscribed, testifying the interest there. Average MAU for Q3 recorded 42 million. This was a relaunch after 10 months of service stop. After the launch in Q3, focus was on providing stable service. The hugely popular esports league restarted in India, too. Seasonal promotion targeting Diwali is planned for Q4. Through differentiated localized service operation, we will continue our campaign to further cement our premium image in India.
[Foreign language]
PUBG: New State is launched today, and it holds much meaning for the rationality of our company. An unprecedented pre-subscription number of 55 million is a good indication of how much global PUBG fans have waited for the launch. The potential of New State has been illustrated through various opportunities, including showcases. New State is the result of our accumulated technology competitiveness, global live service competency, and monetization efforts. It will further expand PUBG's influence and user bases in the global game market. The launch received huge attention, and we will focus on stable service operations in the earlier stages, and through continuous content update and service evolution, we'll continue the growth as the next generation battle royale game in the long run. I hope that you all will participate to experience the essential battle royale that is on par with PUBG PC.
[Foreign language]
New State is differentiated in that it is a universe expansion of PUBG. PUBG Universe narrative goes beyond giving priority to gameplay and will introduce a bigger world to the global users. The three newly introduced PUBG webtoons follow diverse genres and stories and will be delivered to the global audience through Naver Webtoon. We have plans to introduce PUBG Universe awareness to our Indian users through the Indian web novel platform Pratilipi, in which we have invested.
[Foreign language]
Lastly, on the recently announced acquisition of Unknown Worlds. This was the largest ever acquisition for KRAFTON. The acquisition will add to KRAFTON's game portfolio and will also aid us in expanding to a new genre based on unique creativity. Subnautica of Unknown Worlds is an underwater exploration game that maximizes immersion. It can be converted and developed for users with new devices such as VR. The title now works on PC and console platforms for single players, but has great potential and could be converted for the mobile platforms and multiplayers. We believe the new titles being readied by Unknown Worlds have unique creativity that could define new genres. In this light, the acquisition of Unknown Worlds is more future-oriented.
Since before the IPO, KRAFTON has established networks with numerous overseas studios, and through such networks have pursued a strategy to expand the growth potential of our company. Going forward, KRAFTON will be true to the fun of games where imagination can be unleashed, and we will continue to link creativity-based game ecosystem that can deliver technological innovation and unique game experience.
[Foreign language]
Now we will be briefing on 2021 Q3 financial results.
[Foreign language]
First, I will give you the revenue results. The business results mentioned above have translated into our financial results as well. The consolidated revenue for Q3 is at KRW 521.9 billion, which is a 14% increase QoQ and 42% YoY. This is the best quarterly result ever. Online game revenue, including PUBG PC, TERA and Elyon, has grown 46% QoQ and 112% YoY, thanks to PUBG PC's profit model sophistication. As for mobile revenue, including PUBG Mobile, Battlegrounds Mobile India and technology service fee, it has grown 8% QoQ and 31% YoY, thanks to continued revenue efficiency improvements of PUBG Mobile and BGMI launch.
Console game revenue, including the results of PUBG Console and TERA Console, has grown 20% QoQ and 55% YoY. Lastly, on other revenue, the proportional calculation of Google Stadia contract terminated in the second quarter, leading to a decrease by 45% QoQ and 43% YoY.
[Foreign language]
Now on consolidated operating expense and profit. The consolidated operating expense for Q3 increased KRW 41.5 billion QoQ and KRW 127.5 billion YoY at KRW 326.6 billion. With the listing, accounting standards for some items were changed, impacting labor and stock compensation item numbers. As for major expense items, in the case of labor, bonus nature cost in the performance compensation incentive item was separated in the past, and since Q3 it was integrated into labor cost. According to the changed labor cost standard, performance compensation incentive cost decreased compared to the second quarter. Labor cost decreased to KRW 12.6 billion QoQ at KRW 80.8 billion. The wage increase at the beginning of the year was reflected in full, and with headcount increase with business expansion, labor cost increased KRW 13.0 billion on a yearly basis, YoY basis.
[Foreign language]
Now for app fees and costs. BGMI launch in Q3 and revenue increase of PUBG PC led to an increase of KRW 19.5 billion over the previous quarter and 19.3 billion won increased YoY at KRW 59.6 billion. As for fees and commissions, it decreased KRW 25.3 billion over the previous quarter at KRW 17.0 billion and increased KRW 15.3 billion YoY. This reflects the investment in esports, in-house creative content production, and game development-related outsourcing costs and server costs.
[Foreign language]
With the market expansion with new game releases, marketing costs increased KRW 12.5 billion QoQ and KRW 10.3 billion YoY at KRW 20.5 billion. Stock compensation expense increased KRW 43.2 billion QoQ and KRW 59.7 billion YoY at KRW 70.6 billion. This is due to the fact that after the listing, the value calculation method of some stock options given as performance compensation incentive changed to a system that hinges on share prices and was temporarily reflected as stock compensation expense.
[Foreign language]
As a result, Q3 operating profit grew 12% QoQ and 17% YoY at KRW 195.3 billion. OP margin for Q3 is 37.4%. Adjusted EBITDA reflecting stock compensation costs grew 30% QoQ and 50% YoY at KRW 283.3 billion.
[Foreign language]
Now on non-operating profit. Non-operating profit, including other income and financial income, recorded KRW 74.7 billion with weaker won and corresponding FX related gains. Thanks to the growth of our operating and non-operating profit improvement, our net income in Q3 increased KRW 37.0 billion QoQ and KRW 68.3 billion YoY at KRW 178.3 billion. Our net profit rate is at 34.2%.
[Foreign language]
This concludes the presentation and preview results. We will now entertain questions. Due to time limitations, please keep your questions to two each.
[Foreign language]
Now Q&A session will begin. Please press star one if you have any questions. Questions will be taken according to the order you have pressed the number star one. For translation, please press star two, that is star number two on your phone.
[Foreign language]
The first question will be presented by Sammy Yang from JP Morgan. Please go ahead with your question.
[Foreign language]
Yes, I will give you the translation of the two questions. First, what is the management expectation for your new release, the new state? What is your hopes for the revenue numbers as well as the user traffic and other metrics? Could there be any cannibalization with your PUBG Mobile title? This was the first question. My second question is related to Metaverse and NFT. Roblox, their daily active user for their overall service offering is somewhere around 47 million. Their gross booking number is at $6.0 million. How about your PUBG Mobile IP? What's the difference of your DAU numbers and gross booking numbers compared to the company that I aforementioned?
Because there is a huge value difference in terms of corporate value and many new companies in this new realm, their multiple is being rerated. I would like to know about the company's position on Metaverse and NFT.
[Foreign language]
Yes, I think it's three questions in all. First, I would address your PUBG: New State launch related question. We've launched this title at 3:00 P.M. today. It's only been an hour and a half since we first introduced the title to our global audience. As was mentioned during the presentation, in the early stages, we will focus on service optimization and stabilization. I did mention to you the pre-registration number, unprecedented number of 55 million. We have to cater to this much user base, and now it's up to us to retain them and to ensure that the gameplay goes without any glitches. After the stabilization, of course, we have to concentrate on converting the users to a paying user. I believe the timing of that activity will fall somewhere around 2022.
The technology gap between us and the followers, I think is great when it comes to our new title, New State. On top of that, we have our competencies in live servicing. At this given point in time, it's quite difficult for us to give our outlook for the performance of the new title, and it's our policy not to disclose game related metrics. We have big expectation for the new release. It's only been out there for an hour and a half, but the daily average user number has already reached 2.7 million. Since it's only been an hour since the launch, you would see this number as the number of concurrent users.
As is mentioned in the earlier part of my answer, in the very early stages, we will most focus and give priority to stabilization of our services.
[Foreign language]
Now to address the second part of your question, which is related to cannibalization, the possible cannibalization of our PUBG Mobile title with the launch of New State. As was mentioned during our IPO session, we have no real concerns over the possible cannibalization of our PUBG users because of many reasons. First, PUBG Mobile users, their game loyalty is quite high, as is illustrated by our third quarter results. There is good potential to further enhance profitability of our PUBG Mobile title. We have still very much expectation for our PUBG Mobile title. The New State and Mobile both fall largely into Battle Royale genre. I believe that these two titles have a different positioning in the Battle Royale genre. It's an expansion of our PUBG Universe.
The New State is a new expansion, and it has its own role there. With live service of our new game, we will be illustrating to our audience how different the titles are. Well, in the, as was mentioned, with Mobile, we will be focusing on expanding the user bases of our PUBG Mobile title. After that, there could be even co-marketing activities between New State and Mobile to create a win-win situation.
[Foreign language]
Now to address your last question related to Metaverse and Roblox and other players in this field. KRAFTON does not really use the word Metaverse. For some time, we have gone with the word Interactive Virtual World. The realization of this Interactive Virtual World is closely correlated to our long-term growth. Accordingly, we have been investing in this area as well as researching many possibilities. It's good to know that Metaverse or Interactive Virtual World, in our term, is getting much attention nowadays and is thus creating a market. It's a testimony that our strategic directionality was right.
[Foreign language]
We are fully aware that NFT is now getting most of the attention of the market. It's a hot item. It's good to know that goods and content in the Interactive Virtual World has true value to it.
[Foreign language]
We are keenly interested in the move or the directionality of how NFT will evolve going forward. It will bring about changes in the gaming mythology as well as expand, you know, the player bases. Accordingly, we as a company have invested in funds of some of these companies.
[Foreign language]
However, if the goods and content within the virtual world is to hold true meaning, the game itself must have competitiveness. The game ability is a very important factor here.
[Foreign language] .
NFT and play to earn, it could lead to the titles gaining more popularity. In the long run, if the game itself is not attractive, if it has a smaller user base, then I don't think it would last for a good time. If you earn goods in your games, your game play, and if your NFT content is to have value outside the virtual world, and if that value is to last a longer term, the game ability of the title itself is most important.
[Foreign language]
I'll give you a concrete example here. Let's say you have Michael Jordan doing a dunk shot, and that's on your NFT token, and that video or NFT film would hold an enormous value. Let's say you have a video of the CFO doing a dunk shot on NFT. Well, that would be not very valuable. It all depends on fame ability.
[Foreign language]
Billions of game users, they have got to know battle royale game through our title. I believe that we were the ones to actually create this battle royale genre, and we have a positive view in bringing together the games and NFT technology. Rather than going for NFT with our game IP, I think we should first focus on adding more fun element to our game titles as well as expanding the ecosystem related.
[Foreign language]
Just imagine what kind of ripple effect attaching NFT tokens for KRAFTON game IP would create. It would be on a different level, and we continue to research on deep learning and blockchain technology. Well, should we come up with a meaningful result, of course, we will be relating that message to you.
[Foreign language]
In your question, you mentioned Roblox and compared their DAU numbers and their gross booking numbers with their PUBG numbers. Well, in some ways, they could be seen as similar, but an apples to apples comparison is really difficult when it comes to games and platforms. As for Roblox, it's more or less a user created content platform provider. Well, creating an economy and system or an ecosystem within the game, it's quite a meaningful achievement for all game companies.
[Foreign language]
Next question please.
[Foreign language]
The next question will be provided by Soyun Shin from Credit Suisse. Please go ahead with your question.
[Foreign language]
Yes, this is the translation of two questions. First is on New State. While you said New State is differentiated from your other game titles, and because of that, it won't lead to any big cannibalization effect. How about the revenue generating geography and user bases? Is it quite different from your existing title? What is the marketing strategy for your New State? This was the first question. Now on to the second one related to deep learning. I believe deep learning is essential in order for you to realize Metaverse or create a virtual world. How would you use this in your business? How would you be using it for your business? That was the second question.
[Foreign language]
Yes. Now on to the New State versus PUBG related question. Well, as you're well aware, PUBG Mobile, it gained a lot of attention in markets including India, Asia, Middle East. One reason that we've decided to introduce New State is because we did not really get a dominant position from the Western audience when it comes to Battle Royale Mobile. We wanted to gain a stronger position. Therefore, we've introduced New State. With the pre-subscription numbers we've received, the results were quite strong in Asia, Middle East, Southeast Asia and the North America. The expectation is set for the new title.
The game has been out there for an hour and maybe 55 minutes now, and I'm checking the results on a real-time basis, and it's quite late at night in the U.S. region, but I see that the U.S. players are quite enjoying themselves.
[Foreign language]
As for marketing of New State, we really do hope that the pre-subscription number actually do translate into actual numbers. We are working on social aspect of things to introduce or induce the users to really participate. It's an expansion of PUBG lore. We're working in-house on creating the lore related content and communicating this to our gamers. The global regional offices, they will get the help from the local influencers to create a hype on this title.
[Foreign language]
If a specific target is to last a longer term, it really needs a geographic target, a very honed targeting for different geographies. Well, esports league, it's quite essential for the titles to enjoy a long life. New State, we hope to create an esports league as soon as possible and have events and tournaments and make it a title that's fun to watch as well.
[Foreign language]
Okay. Your other question was related to deep learning and how we will be setting our directionality related to deep learning. Well, we hope to use artificial intelligence in our new gameplay and also technology development.
[Foreign language]
We hope to use deep learning not to just merely reduce production costs or development costs. Our focus is elsewhere. It's to provide new type of fun and new type of immersion to our existing game users. It's to organically bring together content to our users. We have what's called Special Project 2 related to deep learning. We used to have seven teams. The number now has been expanded to 10 teams. Should there be any good tangible results from the team activities, we will be testing it on our users.
[Foreign language]
We are thinking of other uses other than for games. We have a plan in place to introduce AI content platform, and we are working on Korean language-based services as well.
[Foreign language]
It’s at rather an early stage, but I did mention to you virtual friends in the presentation. Within the virtual world, you would have virtual friends whom you could interact with and form a long-term relationship based on attachment. That would be within the game. With conversation with the users, the virtual friend would get to know the user more, and it would build a more stronger bonding with the user. We could think of non-player character within the games. According to the NPC's persona, dialogue auto-generating function could also be something of a possibility. While the NPC would remember the characteristics of the user and respond accordingly. That's another big possibility.
We would work on gaining these required technology powers and reach out to our core game users to deliver them more fun.
[Foreign language]
In order to realize this Interactive Virtual World, there are some required elements, mandatory elements, and we have been working on technology development to actually have those elements in place and we secure some of the required elements as well. There is good possibility that we use our required technology for non-game purposes as well. Starting next year, we could, I think, introduce them to you.
[Foreign language]
Because of time limitation, we will entertain one last question.
[Foreign language]
The last question will be presented by Jingu Kim from KTB Investment & Securities. Please go ahead with your question.
[Foreign language]
Yes, I will give you the translations of the questions. What is the monthly average user for your third quarter? This is my first question, and I would also like to know about the upside of your PUBG PC ARPU from business model fortification perspective. Is there an upside to PC ARPU? And what about the revenue contribution from the Indian market when it comes to PUBG Mobile?
[Foreign language]
Yes, as for our KPIs, well, the company does not disclose KPIs. As was mentioned during our IPO, well, the third quarter MAU is pretty much similar to the number that we have witnessed in the second quarter, somewhere around 8 million. The number is being sustained. As for ARPU, as was mentioned during the presentation, it's on a rise and it's quite difficult to say when we will be reaching the ceiling, because, well, if you look at the purchases within game, it has more than two-fold grown compared to the earlier part of last year. ARPU, it has seen even a steeper growth at three-fold. In the fourth quarter, with the introduction of upgrade style weapons, they upgrade every two months. The most recent upgrade was in October. The next one will be in December.
Well, if you consider that, there is still very much an upside potential for our ARPU improvement.
[Foreign language]
Well, mobile revenue, well, it's at a high single digit number. Well, before the service start last year, well, we had a certain gross revenue number there, and I think it's back to where it was. Using our brand, we would approach the local market with a more attractive localized content. With service stabilization of our game being restarted in the Indian market, well, I do think there is also upwards potential for our financial numbers as well.
[Foreign language]
Well, I had anticipated a question on Unknown Worlds, but it was not posed today. Well, as for New State and BGMI, a lot of information has passed on to the market. I guess perhaps you did not ask Unknown Worlds related question today because you have as much information as the information on New State and BGMI.
[Foreign language]
Yes. Unknown Worlds, it has a lot of similarity to KRAFTON. The game is played in an open world. It's a survival game with a lot of freedom given to the users. The tension is there, as well as creative gameplay. The company has high respect for the fan community, and this is what we liked about them.
[Foreign language]
When we decide on an acquisition of a studio, we think or we study how the production will continue after the acquisition. Will the leadership continue with passion on production of new titles, and will there be introduction of exciting new IPs going forward? This is what we look in new studio acquisition. The founders of Unknown Worlds and the management at KRAFTON, we engaged in long discussion together, and we're quite confident that they will continue to churn out new IPs and titles with passion.
[Foreign language]
Unknown Worlds, they have introduced Natural Selection and Subnautica. These two IPs were released, and at the early part of next year, or there will be an early access to their third IP. I believe that this third IP to be introduced by Unknown Worlds, the company, could be the genre-defining IP just as PUBG.
[Foreign language]
We think it's quite a positive thing that a new game genre be created by their new IP. The acquisition will also aid us in expanding our user bases for PUBG and KRAFTON, since Unknown Worlds has a very strong position in the Western PC and console market with core fans.
[Foreign language]
Yes. As management of KRAFTON, we will continuously communicate with the market participants. As was mentioned over and over in our communication activities, we have been consistently sticking to our strategy. Whenever we see any new developments within our business, we will be making sure to deliver the message to the market participants. I do hope that you enjoy New State.
[Foreign language]
With that, we will conclude the third quarter earnings release of KRAFTON. I thank all the participants.