The author is an analyst for Shinhan Securities. He can be reached at sokang@shinhan.com -- Ed.
4Q23 review: New game and profitability disappoint
NCsoft registered operating profit of KRW3.9bn (-91.9% YoY, -76.7% QoQ, operating margin of 0.9%) on sales of KRW437.7bn (-20.1% YoY, +3.5% QoQ) for 4Q23, falling far short of the consensus estimate of KRW13.1bn. Weak market response for the December-released Throne and Liberty led to limited earnings contribution in 4Q23. We believe the QoQ growth in company-wide sales was driven by existing title updates instead of the new game release. Meanwhile, marketing spend was controlled to less than 10% of sales despite the launch of a new game and participation in the G-Star 2023 event, and labor cost remained mostly unchanged. During the earnings call, NCsoft announced dividend payments at KRW3,130 per share (KRW63.6bn in total) for a dividend yield of 1.3%.
Growth potential from new games seen limited in 2024
Adding to the disappointing performance of Throne and Liberty since its domestic release in December 2023, the outlook does not look good for strong sales growth from the next three titles (Blade & Soul S, Battle Crush, and Project G) scheduled for release in 2024. Amid the polarization of the global market into easily-handled casual games and story/IP-focused AAA- grade games, we fear that NCsoft's upcoming games lack clear positioning strategies. Amazon Games has secured overseas publishing rights for Throne and Liberty, but the game will likely need major content upgrades in order to attract initial users upon global release.
Maintain HOLD rating
We maintain our HOLD rating on NCsoft. The company falls short vs. peers on the number of new releases relative to top-line earnings and workforce, but investors have waited patiently for new games given the high success ratios and large sales of games launched in the past. However, a string of failed attempts at expanding beyond the Lineage IP and negative reviews for Throne and Liberty despite massive investment have led to a downturn in both earnings and share valuations for the company. In our view, the absence of significant sales growth is due to NCsoft’s failure to provide in- game items/skins and content that meet user needs, rather than the small population of the domestic market. Thus, we have low expectations for the game's performance in overseas markets. The recent global success of Lost Ark owes much to its entertainment value, quality and operational capabilities, instead of the publishing ability of Amazon Games. In order to regain investor sentiment, NCsoft will need to show efforts to: 1) release or publish a larger number of new games; 2) improve workforce management; and 3) increase overseas sales share.