Pearl Abyss Q2 2023 results

Last week, Pearl Abyss, the owner of CCP, had its second quarter results.

Nosy Gamer has also done a good writeup on his blog.

The entire transcript including the question and answer session is at the bottom of this post.

Just looking at Eve Online

In Korean Won, Eve Online (so PC and Mobile) rose from 17.7bn Won in Q2 2022 to 20.2bn in Q2 2023, a rise of 14%.  (Was 16.9bn in Q1 2023).

Always best to compare to the same quarter in the prior year - this therefore avoids seasonal factors.

I looked at currency, the USD was broadly flat Q2 2022 vs Q2 2023.whilst the Euro got 5% stronger.

So, for now, lets leave currency out of it though not forget it perhaps added a 1-3% to the revenue growth in Won.

Q2 2022 was when we saw the 30% monthly subscription price rise which came into affect in May 2022.  It would have taken a while to affect the entire player base but i suspect now is.

So, Pricing is up 30% and overall revenues are up 14%, that suggests (paying) account numbers are down around 12-15% vs Q2 2022. That will not be the same as players given some players will have dropped an account or more but stayed with at least one account.

What did Pearl Abyss actually say about Eve?

From the translated transcript which is at the bottom they said the following about EVE:

"In the case of EVE Online, which did not have major competition launches like Black Desert, in Q2 it was able to enjoy a IP effect, which have been accumulated until now. In addition, we have an event which celebrated its 20th year anniversary and had an update, which completed a new expansion pack Viridian. In particular, we added detailed new tools in this expansion pack and it is praised as being the essence of EVE Online, which has been accumulated for the past 20 years. Accordingly, there was a great increase of users and EVE IP sales increased around 20% and recorded highest sales among the past five quarters."

"EVE IP operating revenue recorded KRW20.2 billion and increased 19.4% Q-o-Q."

"EVE also is planning to offer diverse content and service. In particular in Q3, we plan to hold the Alliance Tournament which is a 10to10 PvP event. We are planning to hold Alliance Tournament as an event where the best members of each alliance engage in combat and others can cheer them on and users can solidly unite.

Most of all, EVE celebrates its 20th anniversary this year and we are preparing for the biggest ever fan fest this year. The fan fest which will be held in September will not only be a festival for users that enjoy live service but also introduce diverse genre games which utilize EVE IP that we have been preparing and we have plans to share these plans at the festival as well."

What does the market think about CCP / Eve Online?

The analysts who write about Pearl Abyss, as usual, never make any mention of Eve Online or CCP.  They see it as a revenue line in their models that has matured.

Looking at the overall results of Pearl Abyss

They looked weak to me on revenues and produced an overall loss but hoped of a better Q3

In Korean Won, revenues fell 17% vs Q2 2022 (it is best to compared to Q2 2022 rather than Q1 2023, irons out seasonality).  This, i think, was less than was hoped and was due to lower than hoped revenues from Black Dessert mobile and Black Desert PC.  Diablo 4 released in June can't have helped the PC version where as more competition in Korea mobile gaming will have been a headwind to the mobile version.  This, therefore, continues the ongoing revenue decline from Black Desert.

But, the company is hoping for a better Q3 given they are seeing improving user traffic in Black Desert PC following a well received update (player numbers were up 65% in July 2023 vs July 2022) and this is continuing into August.

They are also showing a new trailer for Crimson Desert at Gamescom this month (23-27 August in Cologne, Germany) - though no news of any launch and pricing.

What makes Pearl Abyss different to other Korean gaming companies is that Pearl Abyss targets a global audience vs other Korean gaming companies which target the smaller domestic audience.

The lower revenues, ongoing wage inflation pressures and higher marketing costs to fight back against the competition pushed the company to an operating loss of 14bn Won.  That all came to a final loss of 4bn.

And so the shares were actually up 7% over the week.

The entire transcript of the earnings call

Operator

Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference call for the Fiscal Year 2023 Second Quarter Earnings by Pearl Abyss. This conference call will start with a presentation followed by a divisional Q&A session. (Operator Instructions) Now we shall commence the presentation on the fiscal year 2023 Second quarter earnings results by Pearl Abyss.

Speaker

Greetings. I am Kim Yoon[ph] from Pearl Abyss IR team. First of all, I express my deepest gratitude to the analysts and investors in and out of Korea for taking part in the 2023 Q2 Pearl Abyss earnings presentation despite your busy schedules.

Before elaborating on today's business results, I would like to ask for your understanding regarding the following: the financial and business results contained in today's earnings release have been prepared for the convenience of investors and is subject to change depending on the final closing of our books. In addition, the accuracy and completeness of the financial and business results in the earnings results material are not guaranteed and the company is not to obliged to give updates of the accounts given after this date, so please take these factors into consideration.

We have here with us at the earnings presentation today Pearl Abyss' CEO, Heo, Jin-young; CBO, Kim, Geong Man; and CFO, Joh, Seokwoo. We will first hear the business performance presentation highlights from CFO, Joh, Seokwoo, and then engage in a Q&A session.

Seokwoo Joh

Greeting.s I am Pearl Abyss' CFO, Joh, Seokwoo. Thank you once again for taking part in our company's earnings conference call despite your busy schedules.

During the past couple of months, there were many implications for the game industry. In the case of the PC market, we were able to feel how important IP was through the high performance of IPs with legacy leading the market. In the case of the mobile market, competition was getting fiercer, profitability was declining, and accordingly the importance of the console market was getting more important. To keep in step with this market situation during the past several months, we were able to experience both the positive and negative aspects while operating our service.

Now I will touch upon the Q2 major business activities and results from core IPs. Black Desert was able to expand the new zone Land of the Morning Light globally around the world, which first launched earlier in Korea in March and received great response. Land of the Morning Light, thanks to detailed background based on excellent graphics as well as a highly immersive story received higher claim from overseas media and users. The update of Land of the Morning Light which received higher claim from Summer Game Festa with content at the level of a new game recorded 81 scores, 81 metascore for a PC game and received historic record high score among all Korean Games. However, due to the high performance of major PC and console RPG competitors, large scale execution of Global Marketing of Land of the Morning Light was delayed and, accordingly, there were not significant financial results in Q2 with the update.

Afterwards, the Black Desert Festa was held on July 1st and thanks to the continuously improved game user convenience, Land of the Morning Light update with the storytelling improvement, which was previously pointed out as a weakness, and the content which was accumulated for the past nine years, we were able to have a great increase in new and returning users. I will go over this once again in the Q3 highlights.

Also in the case of Black Desert console, due to influence of large global titles with IP legacy in Q2, sales was weak. We launched Megu Class and Usa Class Awakening which received good reviews in PC and mobile and continued a positive user trend. In Black Desert Mobile, due to the fiercer competition of the mobile market after the rebound in the previous quarter, sales showed a declining trend.

However, we launched the new zones Everfrost and Guardian Class in June and maintained positive user reviews. In the case of EVE Online, which did not have major competition launches like Black Desert, in Q2 it was able to enjoy a IP effect, which have been accumulated until now. In addition, we have an event which celebrated its 20th year anniversary and had an update, which completed a new expansion pack Viridian. In particular, we added detailed new tools in this expansion pack and it is praised as being the essence of EVE Online, which has been accumulated for the past 20 years. Accordingly, there was a great increase of users and EVE IP sales increased around 20% and recorded highest sales among the past five quarters.

Next, I will go over Q2 performance. This quarter's operating revenue posted KRW78.4 billion and decreased 8.6% Q-o Q and operating loss and net loss posted KRW14.1 billion and KRW4.4 billion respectively and posted loss.

I will explain in more detail about operating revenue. First, operating revenue by core IP. Operating revenue for Black Desert IP in this quarter posted KRW56.5 billion and decreased 16.3% Q-o-Q. EVE IP operating revenue recorded KRW20.2 billion and increased 19.4% Q-o-Q. For operating revenue by region, it was 21% for Korea, 22% for Asia and 57% for North America and Europe. For operating revenue by platform, it was 79% for PC, 16% mobile and 5% for console.

Next, I will walk you through our operating expenses. Q2 operating expenses posted KRW92.5 billion, a 9.2% increase Q-o-Q. In the case of labor expenses, it was KRW49.6 billion, a 12% increase Q-o-Q. This was an increase including around KRW7 billion of incentives including treasury shares. For your reference, head count at the end of Q2 is 1,341 employees and there are 801 developers among the total employees, which is around 60%. In the case of commissions, it recorded KRW18.1 billion, a 5.3% decline. Q-o-Q. In the case of advertising expenses, despite the Land of the Morning Light large scale update, it posted KRW8 billion, a 26% decrease Y-o-Y. However, we greatly decreased advertising expenses in the previous quarter, so on the whole, it increased KRW2.3 billion Q-o-Q.

Lastly, I will cover Q3 major highlights.

Black Desert in Q3 will also showcase diverse new content. The Black Desert Factor, which was held on July 1st was a paid event, but all tickets completely sold out in just 10 seconds and was greatly successful. The event showcased and promised diverse updates and improvement in user convenience and existing users greatly emphasized and was able to elicit interest from new users and returning users. Although there wasn't aggressive marketing, through natural user inflow, EAU increased 51% in Korea and 74% in North America/Europe, and (inaudible) increased 65% Q-o-Q.

Recently, consistent interest is being maintained through additional user convenience improvements and user feedback improvements, and new season of 3to3 PvP Arena of Solare and update of Sea Palace as the summer event of Land of the Morning Light. Most of all, we are operating meeting the needs of users and working hard to improve new user retention.

In addition, we are updating new zones and we have an update of large-scale PvP Faction War of the Roses and we are preparing for an Asia siege or event. War of the Roses is a massive battlefield that will pitch 300 players against 300, a total of 600 split into two factions and we're preparing a large scale war-style PvP which is different from the past. The Asia siege war event where yields with the best performance in each region, Korea, Taiwan, Hong Kong, Macau, Thailand, Southeast Asia and Japan, will gather and play together. And this is expected to give players the unique fun of playing Black Desert with Special features of global IP and being directly serviced to all regions.

For Black Desert console, we recently updated Land of the Morning Light that we first showcased online. We are seeing that along with the PC platform users and revenues are growing. In the console platform, we are following the diverse updates that were showcased on PC including Megu class awakening and we are preparing to continue our solid performance.

For Black Desert Mobile, we plan to increase the fun of game playing through large scale updates including new class Wizard and through season characters. In particular, the season system which was designed so previous efforts do not disappear and go wasted and differentiate it from other mobile games offers continuous fun and is expected to lead to great performance for the long run of our IPs.

In addition, we plan to increase contact with global users in Q3 as well. Recently, Black Desert participated in TwitchCon which was held in France, and in August, we plan to hold the Heidel Ball for Black Desert Mobile users. EVE also is planning to offer diverse content and service. In particular in Q3, we plan to hold the Alliance Tournament which is a 10to10 PvP event. We are planning to hold Alliance Tournament as an event where the best members of each alliance engage in combat and others can cheer them on and users can solidly unite.

Most of all, EVE celebrates its 20th anniversary this year and we are preparing for the biggest ever fan fest this year. The fan fest which will be held in September will not only be a festival for users that enjoy live service but also introduce diverse genre games which utilize EVE IP that we have been preparing and we have plans to share these plans at the festival as well.

Black Desert franchise and EVE franchise performance has rebounded and EBIT admits the solid performance we are continuously preparing for new IPs, in particular with the recent growing importance of the console game market and by seeing the size of the market growing once again, we could confirm that we were not wrong to prepare for new IPs for the console market that we deeply thought about in the past.

We are working hard to develop Crimson Desert with the goal of completing development within this year. After previously twice disclosing footage, we will showcase the more developed Crimson Desert at Gamescom, which will be held in August. We will do our best not to disappoint investors and game users who have been waiting a long time for Crimson Desert, which received high expectations from when it was first disclosed. In particular, in the AAA console market where competition is getting more heated, we will do our best not only for game Development, but also in service and marketing so that this will take root as new IP and become a title which will continue for the next 10 years or more of performance.

For the IPs which were already disclosed including DokeV and PLAN 8, we will review the appropriate timing and methods to communicate according to the development situation of the game. While seeing the numerous players who are still enjoying playing Black Desert which has been in service for nearly 10 years and EVE Online, which has been in service for more than 20 years, we are once again recognizing the importance of IP and community. Through continuous investment for Black Desert and EVE IP, which are live, we will prepare for longer service of the two IPs on the one hand and also work hard so that our new IPs can live up to their high expectations. We will look forward to your interest and support. Thank you very much.

With this, we will conclude the Pearl Abyss 2023 Q2 Earnings Release Presentation and start the Q&A session.

Questions And Answers

Operator

Now, Q&A session will begin.

Question

Thank you very much for this opportunity. I have two detailed questions. I am Kim Jingu from Kiwoom Securities. First of all, I would like to know about what is your direction for the update of Black Desert when you think about user traffic and continuity? And can you also tell us about how you're going to have more engagement with your streamers or users and give us your direction to do so including other attempts? And can you give some color to Black Desert revenue or sales op site? Also, can you give us some of your thoughts on your confidence in your Crimson Desert in-game footage and the implications of engine advancements, and also I would like to know more about DokeV and in-game footage as well.

Answer - Geong Man Kim

Thank you very much for your questions. I would like to answer them. And regarding the Q2 Black Desert sales, it is true that it was impacted by the launch of large-scale competitor titles and the seasonality. So there was some weakness.

Regarding Black Desert in Q2, with the expansion of Land of the Morning Light, which was first showcased in Korea in Q1 to global in June of this year, we were able to have great interest from overseas media and users.

In particular, we scored 81 in Metacritic which is an overseas review platform, which was the highest score among all Korean RPG games.

However, since we launched this content in late Q2, we expect the updated effect to be reflected in Q3.

In addition, with the Black Desert Festa, which was held in early July, the user event, we are seeing a very positive user trends not only in Korea but around the world.

In addition, we have seen the DAU for July, which increased 65% compared to the previous month, and we have seen an increase of 151% for Korea and 74% for North America and Europe. And even now when we are in mid-August, we are seeing these positive user trends continue, and we are seeing it as a cornerstone for long run success.

And regarding your question about streamers. We are seeing very famous streamers in Korea and also in North America and Europe who are voluntarily streaming Black Desert, and we are seeing many people are joining the stream. So we tend to have a great relationship and maintain a great relationship with them and to have a very positive relationship going forward.

Black Desert is celebrating its 9th anniversary this year and it is being actually very positively reviewed once again in the market recently, and we are going to do our best for the best quality of service, so that all the increased new and returning users can enjoy the content in the way that they want in a variety of different ways.

Answer - Jin-young Heo

Thank you very much for your question. And I would like to answer your question about Crimson Desert. First of all, I would like to express my deepest gratitude to everyone who is having high expectations for our new title and showing a great interest, and thank you also to our investors as well.

Crimson Desert is targeting the global AAA console market. For the past year or so, we have had countless tests with our external partners and we have received great reviews regarding the high expectations that best fit a AAA game and diverse are very positive reviews for our games.

In particular, we have been closely listening to the feedback of our partners who are experts in the console market and we have been perfecting our game and listening to their feedback very closely. So we expect to have great performance.

It has been some time since we first disclosed Crimson Desert but for this long time we have been working very hard so that the quality of the game has developed by leaps and bounds.

In particular, at Gamescom this year, we plan to disclose new footage of the games that will actually showcase the real gameplay of Crimson Desert.

We will show you how Crimson Desert is being developed and perfected and show you the level of quality that we are aiming for.

Regarding the details of our footage. We would like to kindly ask you to actually wait until Gamescom and see our footage, and I'm sure that you can find out.

For DokeV, I believe that we had given you information that through black-based engine. We have been shared the resources and assets that are being used for Crimson Desert and it is being developed greatly as well.

Since we are using the black-based engine, we are improving the development efficiency, so we believe that after Crimson Desert, it will take a relatively short amount of time for us to actually finish the development of DokeV.

Since we are smoothly developing the game so far, after we disclosed the Crimson Desert footage, we will be able to actually think about how we can give you more information about our development status and the high quality of our game going forward.

Question

Thank you very much for this opportunity. And actually looking at the game industry, it seems that there are some times when game development is being delayed or there needs to be more time for late minute polishing-- last-minute polishing. And we have been waiting a long time for Crimson Desert. And I know that you have said that you are pushing for late within this year to complete the Game. But as stock investors, I believe that maybe to invest conservatively, if there is a possibility that this can be delayed, do you think there is that type of possibility that investors should keep in mind?

Second question is regarding exclusive contract with Sony or Xbox or other platforms that is being mentioned in the media. So can you give us some color on the future direction of whether you're going to maybe engage in some exclusive offers with certain platforms and have first publishing on them or first contracts with them, or are you going to push for all the game platforms actually launching your game at the same time? Thank you.

Answer - Jin-young Heo

Well, first of all, I would like to truly thank everyone for waiting for such a long time for Crimson Desert so far. Thank you very much for your patience.

I know that time has been passing, and we have seen the development of technology and we have seen many of the titles that have been launched, so I know that user expectations has been heightening. But I can tell you that Crimson Desert is following the heightened expectations of those users.

So I believe to meet the heightened expectations of everyone, we are spending a little more time in order to perfect the game. And for Crimson Desert, we have been working very hard with the target of completing development by the second half of this year.

Our development of the game is very smooth and we are going to do our best so that we can perfect the development of the game as is targeted and do our best so that it can be launched as soon as possible.

And regarding partnerships, well, we have been talking to many partners, but we haven't had any conclusive talks or discussions that have been in conclusion yet.

We will consider Pearl Abyss profits and our interest for the utmost priority, so that we can make the best decisions that can lead to the best performance in the market.

What I can tell you is that for Crimson Desert, we want the most global users to enjoy our game. So we're going to do our best so that our goal will be to provide our games to everyone through as many platforms as possible.

Question

Thank you for the opportunity. I think others have asked a similar question, so I only have one question to ask you. And for Black Desert Online, we have seen a very encouraging trend after the update with traffic. And I would like to ask you about, what are your forecast for sales revenues going forward for Q3 or even Q4 for Black Desert Online?

Answer - Geong Man Kim

Well, thank you for your question about Black Desert sales, and it seems that for the different trends they are a little bit different for different regions and for different services, but we are seeing that the rise in the revenues or sales is actually following our rise in the numbers of users.

And our Black Desert team will do our best so that these positive trends can be continued going forward.

Question

Thank you very much for this opportunity. My questions might overlap with other questions, because I came a little bit late to the con call, so please excuse me if they are overlapping questions. My first question is about your current development status of DokeV. And can you tell us a bit more about the DokeV development situation and what is happening with the team? We are hearing some noise in the market about DokeV and I am curious about why there is some noise in the market, and I would appreciate your comments.

And for our investors, well, can you give us what should be their level of expectations for DokeV, and if you can compare it to the expectations that they can have for Crimson Desert, it will be greatly appreciated. And after the (inaudible) update, while we are seeing that there has been great maintenance of traffic and can you tell us about any other updates for the second half that you are expecting? Thank you very much.

Answer - Jin-young Heo

Well, thank you for your question about DokeV and I think what you are mentioning stems from the fact that there are high expectations for DokeV and we are actually focusing a lot of our manpower and our efforts into the completion of Crimson Desert. So I think that is a part of the reason behind what you have just mentioned.

Well, we also have shown you some footage of Crimson Desert and DokeV and we do know that there is great interest in DokeV from everyone and we are also in line with your high expectations.

And we believe that this high interest also is from the fact that this is a unique genre, so it stems from the characteristic of the genre as well. And we promise you that we will do our best to complete Crimson Desert as soon as possible and to have more focus into developing of DokeV with our core manpower after that so that we can do our best to meet the high expectations of the market.

Answer - Geong Man Kim

And you asked a question about Black Desert. And even after the update of Land of the Morning Light, we are maintaining our traffic very well.

And like we have been doing for the last nine years, we are planning to have diverse update of content for the second half of this year, so that our interest and our success can be continued.

Question

Thank you very much for this opportunity. And first question is about when you're going to have the update of Land of the Morning Light for Black Desert Mobile. And can you tell us about what are the expectations you have internally for Crimson Desert. For example, are you targeting it to be a global action RPG game level that is very popular? Can you give us some color on that? Thank you very much.

Answer - Geong Man Kim

Well, regarding your question about the update of Land of the Morning Light for Black Desert Mobile, what we normally do is we prepare for the content and then we see our internal scheduling and we disclose it to users and have the updates. So we are going to do our best so that we can follow this process and to let the market know as soon as this is decided.

Answer - Jin-young Heo

Well, regarding your question about expected results for Crimson Desert, well, as mentioned several times, we are targeting it to be a global AAA console game. And we have shown our game countless times to our partners and have received great acclaim and they said they have high expectations as well. So internally, we also have very high expectations for Crimson Desert as well.

However, we know that in order to turn these high expectations into great performance, we must have a great degree of perfection to meet the very strict preferences of our users and to have a great playing environment that is optimal for users to play, so we are well aware that we need to meet these requirements.

And we promise you that we will do our best not only for the quality of the game, but to also polish the game to perfection, so that we can have a great developed game so that it can lead to great performance at the end of the day.