NCSoft is expected to continue improving earnings in the second quarter this year. The result reflects the success of 'Lineage Classic', cost efficiencies from expanding direct-to-consumer (DTC) payments and the consolidation of JustPlay. Despite the earnings improvement, valuation remains low, drawing attention to whether the global launch of 'Aion2' scheduled for September will provide a catalyst to resolve undervaluation.

According to financial information provider FnGuide on July 21, consensus for NCSoft's consolidated second-quarter results this year is revenue of 681.2 billion won and operating profit of 129.4 billion won. That is expected to be up 78.1 percent and 758.3 percent, respectively, from a year earlier.

The earnings improvement is attributed to the strong performance of Lineage Classic, released in February, and lower payment fees from expanding direct payments. JustPlay, a casual game platform whose acquisition was completed in March, is also consolidated into results from the second quarter, supporting top-line growth.

Lineage Classic-led gains; Aion2 takes a breather

The MMORPG Lineage Classic, officially released on Feb. 11, gained traction in the market after posting cumulative operating revenue of 192.4 billion won within 90 days of launch. Securities firms commonly assess that the strong performance continued into the second quarter.

Ho-yoon Jeong (정호윤), an analyst at Korea Investment & Securities, estimated Lineage Classic's second-quarter revenue at 169.8 billion won, or 1.87 billion won a day on average. Jun-ho Lee (이준호), an analyst at Hana Securities, put it at 157.5 billion won, or about 1.8 billion won a day. Lee said it was sustaining better-than-expected results through updates to content and the business model (BM).

By contrast, Aion2, another new title based on a legacy IP, is expected to see second-quarter revenue decline from the previous quarter. Lee estimated Aion2's second-quarter revenue at 88.9 billion won, or about 1.0 billion won a day. Hye-young Kim (김혜영), an analyst at Daol Investment & Securities, put it at 102.6 billion won, a 25.0 percent drop from the previous quarter. Securities firms see the decline as reflecting content adjustments ahead of a large update in July and a September launch in global markets excluding South Korea and Taiwan. Unlike the existing South Korea and Taiwan version, which was a PC-mobile cross-platform title, the global version will be released as a PC-only title via Steam and NCSoft's own Purple platform.

Revenue trends for the three mobile titles - Lineage M, Lineage2M and Lineage W - are largely holding steady. Dong-woo Kim (김동우), an analyst at Kyobo Securities, estimated Lineage M revenue rose 1.9 percent from the previous quarter and Lineage2M increased 4.1 percent. But Hyo-jin Lee (이효진), an analyst at Meritz Securities, assessed that regional expansion has not yet translated into clear results for Lineage W, which entered Southeast Asia on May 27, and Lineage2M, released in China on June 24.

Variable costs rise 18 percent as revenue jumps 78 percent; direct payments take effect

The second-quarter operating profit growth rate of 758.3 percent far exceeds the revenue growth rate of 78.1 percent. The profitability improvement is attributed to base effects from low operating profit in the same period last year, the full-quarter reflection of Lineage Classic revenue and an expansion of direct payments on PC. The company reduced payment fee burdens by increasing the share of direct payments, moving away from existing methods that rely on mobile marketplaces such as Google Play and Apple's App Store. The shift accelerated with the launch of Aion2 in November last year. Ji-woon Choi (최지운), an analyst at Yuanta Securities, said Aion2's direct payment share is understood to be about 80 percent.

The change is also seen in the cost structure. Kyobo Securities said second-quarter variable costs and other expenses were 151.5 billion won, up only 18 percent from a year earlier. It said the level was less than one-quarter of the revenue growth rate of 79.8 percent, with the share of revenue down to 22 percent, 11.6 percentage points lower than a year earlier.

Still, there are cost pressures. Labor and marketing expenses are expected to rise on the back of JustPlay's consolidation and incentives related to Lineage Classic. Kyobo Securities estimated second-quarter marketing expenses at 132.8 billion won, up 468 percent from a year earlier, and labor costs at 252.8 billion won, up 32.5 percent. It attributed the increases to marketing spending to secure early users in the casual game segment and global marketing costs for new titles.

Undervaluation persists; September Aion2 global launch is key

Some analysts say the share price is not fully reflecting the clear earnings improvement. Securities firms put NCSoft's 12-month forward price-to-earnings ratio (PER) at around 11 times. Lee said the 12-month forward PER is below 11 times and judged the current share price to be in an undervalued range. The discount is seen as reflecting that the earnings improvement is based on new titles leveraging existing IPs such as Lineage Classic and Aion2, and that NCSoft has yet to prove a major hit in Western markets.

Securities firms see Aion2's global launch in September as a turning point for a valuation re-rating. Hana Securities said expectations are likely to rise as marketing effects become visible from August, and forecast results will be driven from the fourth quarter when revenue after the launch is reflected for a full period. Starting with Aion2 global, NCSoft is preparing new titles in shooting and subculture genres, along with 'Horizon Steel Frontiers' and 'Guild Wars 3', in sequence. It is a strategy to broaden revenue concentrated in existing MMORPGs and the domestic and Asian markets across both genres and regions.

FnGuide's consensus for NCSoft's full-year results this year is revenue of 2.66 trillion won and operating profit of 505.2 billion won. That is expected to be up 76.7 percent and 3,041.9 percent, respectively, from a year earlier.

Jeong said, "Since NCSoft has never achieved meaningful results globally, it is important that if it delivers results in the U.S. and UK markets through key new titles, it could lead to a meaningful re-rating in valuation."