(FL). Good morning and good evening. Thank you all for joining this conference call, and now we will begin the conference call of the fiscal year 2023 third quarter earnings results by KRAFTON. This conference call will start with a presentation, followed by a Q&A session. If you have a question, please press star one. That is star and one on your phone during the Q&A. Now we shall commence the presentation on the fiscal year 2023 third quarter earnings results by KRAFTON.
(FL). 2023 Q3 (FL) K-IFRS .
Good afternoon. I'm Jung Min Hyun from KRAFTON's IR team. I would like to extend my appreciation to analysts and investors from both home and abroad for joining our third quarter 2023 earnings release. Please note that today's earnings presentation is based on K-IFRS consolidated estimates, and business and financial information are subject to change upon the independent auditor's review. I would invite our CFO, Donghoon Bae, to run through the highlights of the company's business and financial results.
(FL) CFO (FL) IP PUBG (FL0 , Scale- Up the Creative (FL) .
Hello, I am Donghoon Bae, CFO of KRAFTON. KRAFTON has been steadily servicing its global IP, PUBG, and preparing for release of new titles based on its Scale-Up the Creative strategy. Thanks to diverse in-game content offerings and monetization, PUBG PC revenue was up to Q3 2023 on a cumulative basis, which accounted for about an equivalent to 98% of 2022 total revenue, while the growth trend continues. Since the resumption of BGMI services, traffic was up by more than 19% versus immediately before the ban, as market positioning in India is becoming robust.
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Under the strategic direction of Scale- Up the Creative, we've been investing into game studios and sourcing games for second party publishing. During the third quarter, we made investments into five new global studios, and with a total of thirteen studios invested this year, we are expanding the pipeline for the future. Through this pipeline expansion, we are redefining ourselves as a game developer who used to launch one triple-A title in a single year since the IPO to one that delivers multiple number of big and promising titles every year periodically. In line with this approach, KRAFTON will showcase two new titles at this year's G-STAR event. I would like to take this opportunity to thank our investors and analysts who have supported KRAFTON's transformation and the challenges that it embarked on and would also like to thank everyone at KRAFTON and the creative studios for your passion and dedication.
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With that, let's move on to key highlights of the business.
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In Q3, PC revenue came in at 121.3 billion, which is up 4% quarter-over-quarter. There was an update of classic maps, Miramar and Erangel, for the PUBG PC and console, and with the launch of new weapons and continuing adjustment of gunplay balance, we are providing new gameplay experience to our gamers. There was also Aston Martin supercar collaboration during the third quarter, which won raving responses, while we also added Chroma features that can be used to change the colors of progressive weapons, enhancing the appeal of game items. We also hosted PUBG Dev Team Live Talk since August, strengthening direct user communications, taking their feedback to live services, which also invited positive responses from PUBG's core gamers. As such, through new ways of communications and stronger live servicing of PUBG PC and console, we've been able to attest to the sustainability of PUBG in the global market.
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In December, we plan to launch a new large-scale eight by eight kilometers Rondo map, which we expect will deliver a totally new experience to PUBG gamers through scale of choice and offering of manifold warfield backdrop. With the release of the Chroma feature, together with four popular weapon schemes, we expect to drive meaningful results in terms of both traffic and revenue in the fourth quarter.
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For the mobile business, third quarter revenue reported ₩309.1 billion, which is up 26% Q-on-Q and 9% year-over-year. We are seeing three consecutive quarters of growth from most of the regions for PUBG Mobile, and since the restart of BGMI servicing, traffic regained pre-ban levels, whereas revenue was able to record its record high, contributing to the overall growth of the mobile business. PUBG Mobile garnered great response with the release of Dragon Ball collaboration and theme mode in time for the summer holiday season. Highly attractive skins and global brand collaboration, like that of Aston Martin, were very popular, underpinning the growth trend
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Since the resumption of BGMI services for three months, from July to October, we successfully held BGIS event, which is a large-scale e-sports event with spectators, which was first of its kind for BGMI. There were more than one hundred thousand teams registering for the open tournament, and during the three days of final competition, viewership reached above 10 million, solidifying our positioning in the local e-sports market. Our objective for the fourth quarter is to continue with localized content offerings for the Indian market and solidify BGMI position within the local market by collaborating with influential partners in India.
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Guided by Scale- Up the Creative strategy, Krafton has made minority equity investments for second-party publishing and new title development in order to source original IPs. Let me first run through an update on new title pipeline slated for launch in 2024.
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Dark and Darker Mobile is a game in the extraction RPG genre, developed by Blue hole Studio, and is quickly gearing up for release next year to move ahead of others in the global market. It is based on a medieval fantasy universe, bringing together elements of Battle Royale, Dungeon Crawler, and RPG, designed to deliver the fun of playing extraction RPG to the mobile user base. Gamers fight against other users or dungeon monsters to win treasures and make their escape. We will quickly validate the core fun factor so that we may launch the game sometime in the first half of next year.
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Next is Project inZOI. It is a high quality life simulation game, currently under development inside Krafton, slated for release for the PC platform in the second half of 2024. The game is powered by Unreal Engine 5, offering the appeal of avatars and superior graphic performance, mimicking a real city. Gamers will become the characters of the story they create and will experience what life has to offer and its joys and sorrows. At next week's G-STAR event, we will have demo booths for Dark and Darker Mobile and Project inZOI for your viewing.
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Last but not least is Project Black Budget, under development for release second half of next year. It's an extraction shooter game developed by PUBG Studios, and we've been getting a lot of interest. Based on PUBG's gunplay and open world expertise, we will be offering new form of entertainment to shooter gamers who grew together with PUBG and will win the hearts of gamers in the extraction genre, which has yet to become a prevailing game segment.
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Next is an update on minority investment we're making to source titles for second party publishing. So far, we made investments into a total of thirteen global studios, gaining minority stake, and will be able to release these game titles starting next year, after which the numbers will gradually grow. Also, three projects where we have the first priority in negotiating publishing license from listed developer, People Can Fly, who are based in Poland, and US-based developer, Studio Sai, will also be in the pipeline, ready for release in 2025 in phases. Krafton will continue to invest into global creative studios so that we may source and secure original IPs.
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2024 will be a year of full-fledged expansion of new game titles, with the release of games from Krafton's in-house development teams and the creative studios. We will successfully carry on with the Scale- Up the Creative strategy, unconstrained by any genre or platform, in bringing many new titles onto the budding platform so as to meet the ever more sophisticated expectations of the gamers community.
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This was a brief update on Q3 2023 key business highlights. We now move on to financial performance in greater detail.
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Consolidated revenue for Q3 2023 reported ₩450.3 billion, which is up 16% Q over Q and 4% year-over-year.
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Moving on to consolidated basis, operating expense and profit. Consolidated operating expense was ₩261 billion in Q3, which is ₩5.4 billion increase Q-over-Q, and ₩28.1 billion decrease year-over-year. Labor cost was down ₩0.9 billion Q-over-Q to ₩102.3 billion on the back of organization reshuffling and efficient headcount management. On a year-over-year basis, due to increase in headcount across the company, labor cost was up ₩3.4 billion. Platform fees and cost of revenue was up ₩27.8 billion Q-over-Q and ₩12.2 billion year-over-year, coming in at ₩59.5 billion on the back of resumption of BGMI services and PUBG mobile global growth and revenue growth seen from other game titles. On the back of esports investment, production of creative content in-house, outsourcing costs for game development and server costs, as well as decline in outsourcing costs following the completion of TCP development, commissions paid was down ₩5.7 billion Q-over-Q and ₩20.4 billion year-over-year, reporting ₩64.9 billion.
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Marketing expense was up $9.4 billion Q-over-Q, driven by spending related to restart of BGMI servicing and launch of Defense Derby. While due to the base effect of TCP pre-launch marketing spend of last year, marketing expense was down ₩1.7 billion, coming in at ₩18.1 billion. For stock-based compensation, there was a decline of ₩20.8 billion Q-over-Q, driven by fall in equity prices, while the decrease was ₩27.5 billion year-over-year. All in all, third quarter operating profit reported ₩189.3 billion, up 44% Q-over-Q and 31% year-over-year. Operating margin was at 42%. Adjusted EBITDA after reflecting stock-based compensation and depreciation, as well as other variable expenses, was up 13% year-over-year, reporting ₩197.3 billion.
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Last but not least, on the non-operating accounts, which is inclusive of other and financial revenue due to strong dollar leading to FX related gain, as well as gains from disposition and valuation of financial products, non-operating revenue was up ₩63.1 billion Q-over-Q and down ₩77.9 billion, reaching ₩91.2 billion won. Last but not least, consolidated net profit for Q3 was up ₩83 billion Q-over-Q and down ₩14.9 billion year-over-year, reporting ₩211.6 billion won, and net profit margin came in at 47%.
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This ends the presentation on Q3 2023 earnings. We will now move on to Q&A. Please go ahead with your questions if you have them.
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Now Q&A session will begin. Please press star one, 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. The first question will be provided by Jingu Kim from Kiwoom Securities. Please go ahead with your question. Thank you for taking my question. I have two questions I would like to ask. The first is: how would you strike a balance between profitability and user metrics for your PUBG title? I asked that question because I would like to understand what is the extent of organic growth that we as a market can expect on a per annum basis from your company. Second question is, you mentioned quite a bit about the new upcoming titles. What is your internal priority? Meaning, could you provide some color as to what triple A titles that we can expect?
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Responding to your first question on PUBG, basically all of the games that are based off of the PUBG IP, as you know, do not adopt a pay to win model. So it's extremely important that we build up the user traction, and hence, our priority is placed on maintaining and managing those user indicators. Also we do not in any way assume any user engagement or user traffic sacrifice just because we want to further improve our profitability. Once again, user traffic is quite important, so our focus is to further enhance user traffic based upon which we will be able to achieve more efficient monetization. As the business results actually show, we've been doing this quite well through the live servicing of these game titles. Regarding the extent of organic growth you can expect on an annual basis. As you would appreciate, we do not provide guidance on those specific figures, but if you look at the entire game market and the Battle Royale segment, as well as the markets that Krafton PUBG IP games are being serviced, if you take a look at those numbers as a reference, you will be able to go further.
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Responding to your second question regarding our internal prioritization, whether we have priority of new titles or whether we consider a certain group of games to be a triple-A game title. The whole term triple-A is a bit confusing if you're not clear enough. Basically, as an outcome, you can call a certain game as being a triple-A game title if it becomes a global success. Another approach is which came off of the US market. Basically, they will invest heavy amount of resources into the so-called triple-A game title, so it is a method of production for these such titles. They will go through about three to five years of development cycle and the huge backing of investments and assets. So anyhow, based upon those definitions, what I can say is that, as I said during the presentation, 2024 is going to be a new title expansion cycle for KRAFTON. I mentioned three during the presentation, but actually there is much more in the new title pipeline. The reason why I mentioned three is not necessarily because of the priorities that we have internally, but this really signifies our commitment to make these three titles into a global success. We are seeking global success, and we are telling you that we will endeavor to make those game titles global success. So that's why I mentioned those three titles, and maybe in that sense, you may consider that as a priority, but no, within the company, we do not define as a certain game title having priority over other specific game titles. If you look at across our whole game title pipeline, we look at the probability of the production, the market impact that it will have once it's developed and the amount of resources that will be invested. It is upon those criteria we make our decision as to whether we want to take that game title into becoming a global success, and it was from that approach that I mentioned the three titles.
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Next question, please.
(FL). The following question will be presented by Donghwan Oh from Samsung Securities. Please go ahead
(FL).
Thank you. From Samsung Securities. My first question relates to your financial performance. Your operating profit has been very positive, and I believe that is driven by significant lowering of overall cost base. Aside from the share price fluctuations, which had an impact on bringing down your labor costs, I would like to understand as to whether you will be able to continue on with the current level of marketing spend and application or market platform fees. Also, since you have many new titles that are upcoming, will that not drive up your A&P expense? So what is your strategy in terms of cost and spending? Second question relates to Dark and Darker Mobile. Currently, Nexon and Ironmace, the developer of Dark and Darker Mobile, are currently in legal dispute. Will that have any implications for your upcoming schedule?
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To answer your first question on marketing expense and application or market platform fees, we actually would like to pay more market platform or application fees, because that would mean that the game titles that we service directly is actually growing, and that would then translate into much higher application fee. I'm talking about the absolute amount of application fees that we have to pay because it is a variable cost. So as we are able to service more products more directly, then that would lead to better performance, and then we would eventually would have to pay more application fees or market platform fees on an absolute basis. In terms of the marketing spend in 2023 on a year-over-year basis, it will not be an increase of marketing spend, but rather a decline. In the fourth quarter, we will be making certain preparations for PUBG PC going forward for next year, and also there are some marketing activities are scheduled for Defense Derby as well. So if you look at over or across 2023, it was not just about cutting costs. We focused more on efficient cost and efficient spending, which will help drive the overall top line revenue, which will help receive more momentum from growth in top line revenue. I would have to say that the operating profit performance was not just positive because of lowering of costs, but it was driven by continuous improvement of revenue. So that top line improvement will continue to be our focus.
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Regarding your question about Dark and Darker IP related dispute, it is, as you mentioned, a dispute between two other companies, legal dispute, and we are not a direct party to this dispute. Our basic position is, which we have previously communicated to the outside, is that Bluehole Studios, the name that they have developed, we've made 100% development in terms of all the assets that is required and that is used within our game title. We have a trademark agreement, and the name that we are using is Dark and Darker Mobile. We will wait and see how the court judges and what decisions are rendered by the court, and we will, of course, follow the decision that is rendered by the court and the judiciary, and we are making appropriate preparations to respond to whatever judgment is rendered. But I don't want to talk about any assumption at this point. Whatever that decision be, we will make rational operational choices.
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Next question
(FL).
I have two questions. I would like to ask what is the market that you're targeting with Dark and Darker Mobile? What is the current trend like for this shooting genre? What are the expectations that the company has with this game title? Also, BGMI traffic seems to have regained the pre-ban level. What does the trend look like for your top line revenue, and when would you be able to go back to the pre-ban level revenue?
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Responding to your question about the target market for Dark and Darker. If you look back at the whole evolution of PUBG PC, when we released it into the Western market, it was a great success and we expanded to Asia and other regions. Mobile also spread across the globe following the similar footsteps. Considering the appeal that the original IP has regarding Dark and Darker, I believe that it does have a very clear and compelling appeal to the Western users. As you know, we are working on the mobile version of this title, and the target market that we set for ourselves is the global market. I believe I said something similar during our previous conference call. Just focusing on a certain game genre and a business model structure for success in a specific local market has become a thing of the past. In the past, all you had to do was bring the gameplay that is based on PC or console platform and just implant it in the mobile platform, and you would have been able to succeed. However, all of the gameplay elements are now fully implemented on top of the mobile platform, so it's not really about the platform per se, but the new experience, the new game elements that you are able to provide that actually dictate your success in the market. So if a game wants to be a global success, I believe at this point, gaining popularity and support from the Western market is quite important and hence that is the approach that we are taking with this title.
(FL).
Regarding the current trend that we are seeing for the mobile shooting genre, because basically it involves gun play. But as I said before, we don't see any specific trend that is platform specific. It is more of a universal trend, I would have to say. If you look at our other upcoming new titles, which is Black Budget, basically it also targets the extraction shooter genre. A lot of games are currently testing and trying different things, whereby the model is one, the players will win certain assets in-game and win certain elements or gears in-game, and then we grow those characters out game. So that is a new approach that many game companies are testing at this point. I believe that as a new genre, this extraction shooter segment is not yet well defined, which means that if a company is able to define this genre quite well, then that means great possibility of making this genre and that game into a major mainstream game title. So we believe that both for the PC platform and mobile platform, the interest and the appeal that the extraction genre has will continue to grow.
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Responding to your question about BGMI. First of all, the traffic has actually surpassed the pre-ban levels and also the revenue figure. We are on par with the past quarterly record level. When the ban was first lifted, I have to admit there was a bit of a market confusion because there was a rumor that it is only going to be short lived, maybe for about three months, and that made the gamers shy away from actively purchasing skins or certain gear, because if the unban is short lived, then there would not have been any reason for them to spend that money. But afterwards, we've been able to really stably establish the services, and we have been able to prove our capability in servicing this game quite steadily. So now the Indian users have all seen that the game will be serviced with no interruptions. And so there's been a bit of a gap in the rebound in traffic and the speed at which the top line revenue follow that. But we are quite certain that we will recover the BGMI revenue to the previous levels. But our objective, as you would appreciate, is going to be actually achieving more than what we've seen pre-ban.
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Next question, please.
(FL). The following question will be presented by Eui-hoon Jung from Eugene Investment Securities. Please go ahead with your question.
(FL).
I just have one question. Before the start of the conference call, you made a disclosure on acquisition of tangible assets. Can you provide a little more color as to the acquisition of this land, building?
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At the timing of the IPO, we had in terms of the use of the proceeds of the IPO, as you've seen in our disclosure information, there would be an acquisition, an investment into the facilities and buildings, and we have not yet done that up to this date. If you look at our global organization, it had grown to have more than three thousand people, and we now are at a point where we need space for our headquarter as well as for our creative studios, and we saw a good candidate at Seongsu-dong. The whole game development process is a process of collaboration, minimum twenty, thirty people, up to five hundred to six hundred people. It is not easy to find a site that provides you with the accessibility as well as this large space that we require. Coincidentally, at Seongsu-dong, the Megabox site became available and providing good accessibility and good working environment. Also, since we are a game company, we also have different motion capture equipment that we need to use, and that space provides a very high ceiling as well. We wanted to go and grab at the opportunity and had then decided to make that acquisition.
(FL).
Well, with that, we would like to close KRAFTON's Q3 2023 earnings presentation. Once again, I would like to extend my deep gratitude to all of the investors and analysts for your interest and support. Thank you!