The speed of transition to a contactless society has accelerated due to the novel coronavirus infection (COVID-19). Significant changes are occurring across society, including work life and leisure activities. As people spend more time at home, the number of those enjoying online video services (OTT) and online games is also increasing. In the mid-2000s, Nike identified Nintendo as a competitor. This clearly illustrated the phenomenon where teenage boys who used to play basketball outdoors wearing 'Air Jordan' basketball shoes preferred playing Nintendo games indoors. A similar phenomenon is reemerging amid the COVID-19 pandemic. The number of new users engaging with games is increasing, and the average daily gaming time of existing users is also rising. Asia Economy examines the financial status and growth potential of leading domestic game companies NCSoft and Netmarble.
[Asia Economy Reporter Yoo Hyun-seok] NCSoft aims to achieve sales of 2.7 trillion KRW based on its mobile massively multiplayer online role-playing games (MMORPG) 'Lineage M' and 'Lineage 2M.' Although it has long operated games based on the PC platform, its performance has jumped recently with the release of mobile-exclusive new titles.
◆ NCSoft Levels Up with Lineage M in 2017 = The turning point for NCSoft was 2017. Before that, most of its revenue came from PC-based online games such as 'Lineage,' 'Lineage 2,' 'Aion,' 'Blade & Soul,' and 'Guild Wars 2.' Although PC games were the foundation, its performance steadily increased. On a consolidated basis, it recorded 838.7 billion KRW in 2014, 838.2 billion KRW in 2015, and 983.6 billion KRW in 2016.
With the full-scale release of mobile games in 2017, its performance took a leap. NCSoft first released a mobile game in 2016, but the significant impact came in 2017. Starting with 'Lineage Red Knights' in December 2016, NCSoft launched various mobile games such as 'Final Blade' in February 2017. Notably, in June of the same year, it released Lineage M, the mobile version of Lineage. At that time, concerns outweighed expectations because the mobile game market had already entered a stable phase, and NCSoft was a latecomer. Many questioned whether NCSoft could succeed in mobile gaming.
These concerns vanished after the release of Lineage M. Pre-registrations surpassed 5.5 million, and it immediately topped Google Play's revenue charts. The ranking remained unchanged for two years and five months. That year, NCSoft recorded sales of 1.7587 trillion KRW, surpassing 1 trillion KRW for the first time. Although Lineage M propelled NCSoft's sales to a new level, its performance stagnated in the past two years due to the absence of new titles. Sales were 1.1715 trillion KRW in 2018 and 1.7012 trillion KRW in 2019.
◆ 2020 'Untact + New Titles' Once Again = NCSoft posted 731.1 billion KRW in sales and 241.4 billion KRW in operating profit in the first quarter, increases of 103.8% and 203.6% year-on-year, respectively. Operating profit fell short of the expected 275.1 billion KRW due to incentive payments related to the success of new titles. The second quarter is expected to see sales of 650 billion KRW and operating profit of 258 billion KRW due to the absence of large-scale updates.
Nonetheless, sales are projected to exceed 2 trillion KRW this year, supported by new titles and benefits from the untact era. According to financial information provider FnGuide, NCSoft's expected sales this year are 2.794 trillion KRW, with operating profit reaching 1 trillion KRW. The sales forecast has increased by 14.38% compared to six months ago.
This year, the full sales of the mobile game Lineage 2M will be reflected throughout all four quarters. Lineage 2M is a mobile MMORPG that reinterprets the PC online game Lineage 2, released in 2003, for the mobile platform. Released on mobile, Lineage 2M has broken most of the records held by Lineage M. It attracted 7.38 million pre-registrations and claimed the top spot on Google Play, previously held by Lineage M. Notably, Lineage 2M was released on November 27 last year and is expected to contribute to NCSoft's performance starting this year.
Additionally, being a beneficiary of the untact era supports this year's performance expectations. As social distancing and reduced outdoor activities continue, the usage of online content such as games has increased relatively. According to App Annie, the average usage time per user for Lineage M was 69 minutes and 65 minutes in January and February, respectively, but rose to 92 minutes in March, 77 minutes in April, and 91 minutes in May. Similarly, Lineage 2M's average usage time increased from 112 minutes and 116 minutes in January and February to 124 minutes in March, 110 minutes in April, and 120 minutes in May, showing increased usage after COVID-19 spread significantly in February.
Performance improvement is also expected in the second half of the year. In the third quarter, the effects of Lineage M's third-anniversary promotion and a large-scale update for Lineage 2M, both conducted in the first half, are anticipated to boost results. Sung Jong-hwa, a researcher at Ebest Investment & Securities, said, "Both sales and operating profit in the third quarter are expected to increase compared to the previous quarter. While PC games are generally rebounding slightly compared to the previous quarter, mobile games Lineage M and Lineage 2M will show significant growth due to the third-anniversary promotion in June and the Chronicle III update."
Expectations for performance improvement from new title releases remain strong. NCSoft plans to steadily release new titles utilizing existing PC game intellectual properties (IP), including the overseas launch of Lineage 2M and the release of 'Blade & Soul 2' in the fourth quarter. Lee Moon-jong, a researcher at Shinhan Financial Investment, explained, "Starting with the overseas launch of Lineage 2M at the end of this year, several new titles including Blade & Soul 2 are waiting in line. The mobile version of Aion is also expected to be released in 2021, and through the entry of hit titles like Lineage 2M into big markets, sales, which have been relatively concentrated domestically, are expected to diversify."
Meanwhile, NCSoft's financial condition is also excellent. Its quick ratio exceeds 200%, and its debt ratio is around 30%. The quick ratio is calculated by dividing quick assets (current assets minus inventory) by current liabilities. A higher ratio indicates better cash mobilization ability, and generally, a ratio above 100% is considered stable.
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