NC Corporation (A036570) Earnings Call Transcript

Good afternoon, everyone. We sincerely apologize for the delayed start. There was a technical issue with the conference call system on the provider's side. Now it has been resolved. Let me briefly -- this year, NC is delivering predictable, sustained growth. This is driven by the success of our legacy IP spin-off strategy with Lineage Classic, the strong global launch of our new title and the full ramp-up of mobile casual, our new growth engine. Third quarter revenue was KRW 686.5 billion, up 91% year-on-year.Year-to-date revenue came to KRW 2.144 trillion, up 83% from the same period last year. Lineage Classic generated KRW 158.7 billion in the third quarter. In about 8 months since launch, its cumulative revenue has reached KRW 427.8 billion. Key traffic metrics, including the number of paying users have held steady without any major swings and purchasing patterns have also stabilized very much. So going forward, we expect Lineage Classic to keep generating stable revenue unlike the typical retention curve of an MMO. AION 2 generated KRW 52.6 billion in the third quarter. Over the roughly 10 months since launch, its cumulative revenue is KRW 338.6 billion. Revenue from AION 2's global service will start to be fully reflected from the fourth quarter. Over the roughly 42 days from early access on September 30 through November 10, cumulative billings came to KRW 110.3 billion. That outpaced our early momentum in Korea and Taiwan. Peak concurrent users also hit 410,000, beating our record in Korea and Taiwan. Our mobile casual, which you may have a lot of interest, continues to deliver sustained growth, beating even our own expectations. In the third quarter, revenue grew from the previous quarter to KRW 171.9 billion, which is 25% of NC's total revenue. In particular, our rewards platform, JustPlay, more than doubled year-on-year, thanks to solid advertiser demand, and it led the growth of our Mobile Casual business. Next, let me go over our operating expenses. Out of total operating expenses of KRW 566.9 billion in the third quarter, personnel expenses were KRW 249.9 billion, and they stayed stable quarter after quarter. Our marketing expenses also have maintained efficiently. Marketing expenses totaled KRW 158.1 billion. Marketing for NC's Core Game business came to KRW 27.8 billion. This shows that our streamlined marketing management system has firmly taken fruit. Most of our marketing spend, KRW 130.3 billion, was in mobile casual, where spending like user acquisition and rewards actually tied to revenue. Operating profit for the third quarter was KRW 119.6 billion with an operating margin of 17%. This shows that we are growing revenue and managing cost efficiently at the same time. I want to especially emphasize this point. Unlike in the past, this structural improvement that we have shown in our third quarter results, this structural improvement does not depend on a single hit IP. It's the result of our 3 growth pillars: core game, mobile casual and new IP publishing, all running at the same time. For more details on our performance and future strategies, I will hand it over to our Co-CEO, BM Park, who is here with us today. Thank you.

Hello, everyone. This is Co-CEO, BM Park. As our CEO (sic) [ CFO ], Willy Hong just explained, after 2 years of groundwork, 2026 will be the year our 3 growth pillars have taken shape and make visible results. In the first quarter, we had shown our existing IP and new IP on the 2 fronts, we had successful results in both Korea and Taiwan. In the second quarter, in our Mobile Casual business and inside that our most pivotal element, JustPlay, we showed you the results of acquiring JustPlay. In the third quarter, we have our new IP AION 2. We have shown you the successful launch of its own global publishing. Last year, we gave you the guidance that this year's revenue -- guidance will reach -- guidance will be about -- 2026 revenue guidance of KRW 2 trillion to KRW 2.5 trillion. However, if we keep the current pace, we expect that the revenue this year will reach about KRW 2.8 trillion. Compared to about KRW 1.5 trillion in 2025, that's remarkable growth. This was made possible by the interest and advice of our customers and shareholders and the dedicated efforts of all our people at NC. In 2027, we expect to keep growing as these 3 pillars fully come together and become more advanced. We've announced 2027 guidance of KRW 3.2 trillion to KRW 3.4 trillion. But just like this year, we will do our very best to exceed it. For the visualization of such performance and results, there are 3 things shareholders and investors should keep an eye on as we work towards next year's target. First, existing IP. On top of enhancing our live services, we will keep expanding into more regions, opening up new markets and launching spin-off games. That includes AION Classic Mobile, Lineage M in China and MISTBOUND based on the Guild Wars IP. Through this, we will steadily sustain great annual revenue. Secondly, for the new IP, our global publishing capabilities with the launch of AION 2. Building on that, we will raise the chances of success for our upcoming global titles. Over the first half of next year, we will roll out new shooter and subculture games one by one, both our own titles and titles we publish. They include Astrae Oratio, Cinder City, Limit Zero Breakers, Time Takers, which we've been refining through rigorous user testing and validation. Third, mobile casual. This year, fourth quarter through additional M&A and business expansion, we aim to complete our value chain for the reward platform and publishing services. We expect that this kind of ground -- underground framework will complete to a certain level. By fully unlocking the 3-way synergy among our rewards platform, development studios and IP publishing, we will make a quantum leap in 2027. I would like to point out that the business structure NC is pursuing is optimized for the fast-changing AI environment. MMORPG, which is NC's core strength, require vast world, vast volume of content, sophisticated server technology and continuous live operations. So for a certain period of time, we expect that MMORPG is an area AI cannot easily replace. And also, this is our core strength, and we will keep refining and improving. Also in the [ current ] reality and situation where AI is bringing and helping a huge volume of games into the market facing such current development reality, we believe that the role of publishing and platform is even more important. Therefore, we will be committed to improving and enhancing our global publishing capabilities of our core games. And also inside our mobile casual area, making the publishing expansion into the platform will further accelerate and continuously enhance our capabilities and growth in the AI environment. Today, I focused on our 2027 guidance. However, I want to emphasize that NC's new business structure will continue to refine, and we will continue to enhance our new business structure. And also, we will have our full year with our major IPs and games. I expect that we can show you exponential growth -- explosive growth in 2028. We expect to share more specifics at the event for media and analysts. Now we will go into more details during the Q&A session.

[Operator Instructions] The first question will be provided by Eric Cha from Goldman Sachs.

I have 2 questions for you. Number one, the question is about AION 2 Global. So before the release of AION 2, the management's message from NCSOFT was that AION 2 has already received a lot of user feedback in Korea and Taiwan. And also in terms of the game business model architecture and design compared to Throne and Liberty, AION 2 will go much, much more user-friendly and also it will -- it's supposed to have excellent retention. That's what I hear from NCSOFT's management message. But from the outside, some of the metrics and indexes that I can see straightforward is the Steam traffic. And looking like compared with Throne and Liberty Global, the first initial part of its launch and comparing the AION 2 currently, it seems like they are very, very familiar. So maybe in that sense, it will be a little bit difficult to tell you that the AION 2 retention is particularly better than Throne and Liberty. Do you think this is showing the limitations of our MMORP genre? Or do you think there is still a little bit of issues left with the business model with AION 2? I'd like to hear your perspective on the business model. Number 2 question is the mobile casual growth is very excellent, like JustPlay, it's high -- it's great, high growth. So what do you think are the contributions for the high growth? Can you explain and elaborate a little bit more about the growth driver? I would appreciate that.

I want to address your question number one. So basically, in general, when we look at the Korean MMO, there is a vertical progression inside Korean MMO games. So you are right about the attrition rate may go similar with the 2 games. But however, compared with the Throne and Liberty, we can look at the situation for the AION 2 in a little bit macro perspective. When TL launched, there are not too many competitors out in the market. However, for AION 2, this was the results they achieved at the same time, fighting the headwind. As you all know very well, Call of Duty, Phantom Blade, WoW Forever, they continuously and sequentially rolled out in the pace of like 1 or 2 weeks, and this is the notable results they achieved. So one thing I really want to mention to you all is that when we are comparing Throne and Liberty with AION 2, the paying user and the hardcore users retention rate, AION 2 is showing much, much greater results than Throne and Liberty. So we are keeping a close eye on that as well. So we'd appreciate your continuous interest. And also, we would appreciate it if you can -- if you will closely watch and monitor how AION 2 is performing across November and December.

Address your second question. So the JustPlay's continuous and explosive growth, maybe we can look at that from 2 perspectives. So the number one is macro perspective. So currently, we can see that right now, the platform is very much leading the game development. Last year alone, we saw that in 1 month, mobile casual games, about 2,000 mobile casual games came out into the market. This year, it's like 4,000 to 5,000 games out into the market. So this, in other words, we can say there's something like JustPlay. It is actually the wind is helping pushing them from the behind. So this is, kind of, the macro perspective and macro background is there for it to continuously grow and push them to -- leading the growth in terms of the industry environment. And also from the micro perspective, I think the people here, the [ AppLovin ], these people are very much specialized for the ad tech. In terms of the products, they are making the composition very, very much user-friendly. And this one, in turn, leading into the high UA, this in turn increasing the MAU. And also as a result of that, the advertisers, they are making the ad prices higher and engaging with it together. So this, kind of, virtuous cycle is established, it's in place and it's continuing to expand. So this, kind of, virtuous cycle is already -- it is in place and it is established from the micro perspective. And we expect that and we want to tell you that this will lead continuous growth. And lastly, not only the rewards app, but the publishing and our mobile casual game studio, its combined revenue, we expect that they will account for 25% to 30% for next year's guidance. And also, I want to add more -- one more comment from Mr. CFO, Willy Hong. So one more thing I want to add is that what Mr. BM Park just said that does not include our inorganic element. So when we announce shortly our new M&A, the additional revenue and growth that's being generated in this part is not reflected. Next question, please.

The following question will be presented by Junhyun Kim from HSBC.

I have 2 questions for you. Number one, my follow-up question for the mobile casual. So do you perhaps have some, kind of, UI/UX update for this? And also, do you expect that this, kind of, our development and the synergy effect, do you think it will lead with the synergy effect? And also this synergy will expand into the margin expansion? And also, like, in the advertisement industry, when we make the expansion, do you think perhaps maybe it can a little bit restrict and limit the third-party expansion leeway? And also, if this is translated into in-app purchase, I want to know what kind of reasons will be the reasons for that? And also, I appreciate it if you can also make a little bit update on the JustPlay-related metrics. My second question is about the cost. I heard that the core business marketing expenses, even after AION 2 is launched, it seems like the core business marketing expenses a little bit -- they dropped a little bit declined. And 2027, we can see that a lot of new titles are coming out. So maybe if there is a marketing expense guidance, I would appreciate that.

I actually want to ask you another question. Can you elaborate a little bit more about what you mean by UI/UX update and the mobile casual?

Yes. So what I was talking about is when I go to the JustPlay app like -- and also when I compare it with other similar rewards app, like, how they display the game, yes, we understood.

So yes, firstly, to answer your #1 question, JustPlay, its current primary market is North America and some areas in the European countries. They are the primary markets. Actually, recently, I also saw that the JustPlay app is out in the Korea, but this one is a beta service, not the actual official service. So of course, very naturally, when they make entry into Korea, we will make sure that some of the -- there will be some of the improvements where it's necessary. And also earlier in my presentation, I mentioned and explained that with our additional M&A and business expansion, we expect that the framework that we desire is about to be completed. Inside that actually is also the rewards app. And just as you mentioned, the third-party and IAP, yes, this expansion plan is also included in there. So if it's expanded with the third-party and IAP and on top of that, we add our third-party models, I think our studio publishing and rewards app, the 3-pillar synergy can further be improved and refined. Yes. Some of the big strategy, our co-CEO, our 2 co-CEOs have about the mobile casual is that I want to give you a little bit more context about that. So actually, this time, we are additionally carrying out with additional M&A. JustPlay is actually centering around IAA and first party. And now what we are additionally trying to do is IAP and third party. So this is very complementary, trying to make a complete structure. That's the strategy we are having in mind. And for the -- JustPlay's metrics and MAU, this is actually related with our core competency, so we cannot give you too much full details for that. But for the MAU, I think it's safe to say that it doubled compared to last year. And also looking at our current pace and trend, our top line growth is -- our expected full year compared to our expected full year, in 2027, at least we expect to see around 50% or more additional growth. That number is -- this number, we are confident based off of our current results and metrics. And the core game marketing expenses, addressing this question, how it's going to be in the next year. So this year, we had made for the marketing expenses, very efficient execution of the marketing expenses, and you asked about next year. So as NCSOFT has repeatedly emphasized and explained, our -- over the past 3 years, our marketing expenses and its efficient operation. In some sense, maybe we can also say that the mobile casual [indiscernible] adopted in there, and it's even more one step up in terms of its systematic -- executed in a systematical way. So as we are emphasizing, we want to tell you one more time that out of our total revenue, less than 10% out of the total revenue. This policy is -- we are keeping it very rigorously. And despite we are having many multiple new titles rolling out next year, we also expect that less than 10%, this kind of meaningful or even lower than 10%, that kind of marketing expenses we expect.

The following question will be presented by Joon Ho Lee from Hana Securities.

I have one question for you. So when you were explaining about the new IP strategy, I think there was no mention -- no particular mention about the Horizon Frontiers. So I'd like any updates and plans for that.

Horizon, actually, the development stage, it's being completed to a certain extent. It's being completed and the process is going smoothly. And with the IP holder, Sony, we are continuously discussing with Sony about its right timing for the launch, and we expect that we will soon have the announcements for that.

The following question will be presented by Jin-Gu Kim from Kiwoom Securities.

Yes, I have a simple question -- a brief question for you. So I heard that you mentioned about the AION 2's global revenue. Likewise, if you can check with us about the combined revenue for Korea and Taiwan, I would appreciate.