[Into the Stocks] "Netmarble Struggled in 1Q, Urgent Need to Prove New Releases and Earnings Momentum Simultaneously"

Major Game Revenue Decline Including 'Seven Knights 2'... 'Structural Slump'
New Release Effects Expected Only in Second Half... 2Q Also Expected to Be Weak
'Second Country' and 'Seven Knights Revolution' Success in Second Half Is Essential

Kwon Young-sik, CEO of Netmarble, announced the launch plan at the 'Ni no Kuni' media showcase held at the headquarters in Guro-gu, Seoul, on the 14th of last month.
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Netmarble experienced a first-quarter 'earnings shock'-level slump. The growing sense of crisis stems from the fact that this is a structural downturn rather than a one-time cost issue. It is pointed out that a rebound meeting both earnings and new release expectations is essential.

1Q Earnings Shock... Painful 'Structural Downturn'

Netmarble recorded consolidated sales of 570.4 billion KRW and operating profit of 54.2 billion KRW in the first quarter of this year. Compared to the same period last year, sales increased by 7.04%, and operating profit rose by 165.69%. Although this shows growth compared to last year in simple comparison, the securities industry points to it as an 'earnings shock.' Operating profit sharply declined by about 35% compared to the previous quarter's 82.5 billion KRW. Sales and operating profit also fell short of market consensus by 11.90% and 37.60%, respectively.

The particular problem is that the slump is structural, caused by sluggish sales of major games rather than one-time cost impacts. Researcher Jonghwa Sung of Ebest Investment & Securities said, "The impact of one-time costs on this earnings slump was not significant," adding, "Although Seven Knights 2, released on November 18 last year, exceeded market expectations significantly with an average daily sales of 1.66 billion KRW in its first quarter, its sales dropped by 58% compared to the previous quarter in the first quarter of this year, falling far below market expectations, which is very disappointing."

Additionally, sales of the flagship game 'Marvel Contest of Champions' decreased by 26.9% compared to the previous quarter. Sales of the existing popular title 'The Seven Deadly Sins' increased by 12.5% quarter-on-quarter due to update effects, but it was insufficient to prevent the overall company sales decline. Despite maintaining an efficient marketing stance, operating profit margin fell by 3.7 percentage points from the previous quarter to 9.5%, affected by sales decline and increased labor costs.

New Release Effects from Second Half... Second Quarter Also Expected to Be Weak

The second quarter is also expected to be weak due to increased costs. According to financial information provider FnGuide, the second-quarter consensus is sales of 638.5 billion KRW and operating profit of 64.4 billion KRW. Although this would be a recovery compared to the previous quarter, it is expected to fall short by 6.88% and 21.18%, respectively, compared to the same period last year. The mobile MMORPG 'The Second Country,' based on Studio Ghibli's IP, will be released on the 10th of next month in Japan, but since it is late in the second quarter, only part of the sales will be reflected. Due to large-scale marketing and increased labor costs before release, operating profit is expected to decrease.

Due to consecutive slumps, securities firms are lowering target prices. Ebest Investment & Securities lowered the target price by 7.7% to 120,000 KRW. NH Investment & Securities (136,000 KRW, -8.3%), KB Securities (146,000 KRW, -8.8%), and Samsung Securities (150,000 KRW, -6.3%) also lowered their targets. Ebest Investment & Securities and KB Securities also issued a 'Hold' investment opinion. As of 11:30 a.m. that day, Netmarble's stock price recorded 133,500 KRW, down 1.84% from the previous day.

'From The Second Country to Seven Knights Revolution... Success of New Releases in the Second Half Is Essential

For a rebound, the success of 'The Second Country' is essential. Pre-registration began on the 14th of last month, and the release is confirmed for the 10th of next month. It will be simultaneously released in major Asian regions such as Korea, Japan, and Taiwan, and if successful, sales could increase significantly. In the fourth quarter, Netmarble plans to release works using popular IPs such as 'Seven Knights Revolution,' its own IP title, 'Marvel Future Revolution,' and 'BTS Dream.' The success of 'The Second Country' and 'Seven Knights Revolution' is particularly noteworthy. Jinman Lee, a researcher at SK Securities, said, "Since both titles are core works of Netmarble, if they settle in major markets such as Korea, Japan, and Taiwan and enable long-term service, the sales level, which currently remains around 500 to 600 billion KRW, could rise to the next level."

However, attention should be paid to whether existing titles will slump as in the past. It is necessary to observe how the efficiency between the success level of 'The Second Country' in Korea, Japan, and Taiwan and the marketing costs invested will be achieved, and how sales of existing major titles will be defended in the second and third quarters.

Researcher Jonghwa Sung said, "'Even if 'The Second Country' itself achieves a considerable level of success, it is important to watch whether the situation of earnings falling short of expectations due to a sharp decline in existing game sales and excessive marketing costs compared to 'The Second Country' sales will repeat as in the fourth quarter of last year.' He emphasized, "Moreover, for the stock price to breathe a little, the great success of the three highly anticipated new releases in the second half?'The Second Country,' 'Marvel Future Revolution,' and 'Seven Knights Revolution'?is an essential prerequisite."

This content was produced with the assistance of AI translation services.