Earnings Transcript for NEXOY - Q1 Fiscal Year 2023

Operator: Good day, everyone, and welcome to Nexon’s 2023 First Quarter Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Takanori Kawai, Team Leader of Investor Relations. Please go ahead, sir.

Takanori Kawai: Hello, everyone, and welcome to Nexon’s earnings conference call. Thank you for joining us today. With me are Owen Mahoney, President and CEO of Nexon; and Shiro Uemura, CFO. Today’s call will contain forward-looking statements, including statements about our results of operations and financial condition such as revenues attributable to our key titles, growth prospects, including with respect to the online games industry, our ability to compete effectively, adapt to new technologies and address new technical challenges, our use of intellectual property and other statements that are not historical facts. These statements represent our predictions, projections and expectations about future events, which we believe are reasonable or based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information on some of these risks and uncertainties can be found in our earnings-related IR documents. We assume no obligation to update or alter any forward-looking statements. Please note, net income refers to net income attributable to owners of the parent as stated in Nexon’s consolidated financial results. Furthermore, this conference call is intended to provide investors and analysts with financial and operational information about Nexon, not to solicit or recommend any sale or purchase of stock or other securities of Nexon. A recording of this conference call will be available on our Investor Relations website, www.ir.nexon.co.jp/en/ following this call. Unauthorized recording of this conference call is not permitted. I’d now like to turn the call over to Owen.

Owen Mahoney: Thank you, Kawai-san, and good afternoon, everyone. On today’s call we will review Nexon’s performance in the first quarter and our outlook for the second quarter. We’ll provide an update on the development of new Virtual Worlds and how the combination of existing franchises and multiple new games in development offer a unique asymmetric investment opportunity for Nexon shareholders. And we’ll conclude by looking a little farther out into the future, to how we are building a business to grow not just in the next several quarters, but over many years. To start, Q1 was another record-breaking quarter for Nexon, in revenue and operating income. Q1 revenue was up 36% and operating profit was up 46% year-over-year. Net income bolstered by a foreign exchange gain was up 31% year-over-year, exceeding our outlook. Results were driven by FIFA ONLINE 4, which maintained momentum even after last year’s World Cup, and Dungeon&Fighter in China, which grew both players and revenue year-over-year. We also saw solid results globally from Blue Archive, the mobile role playing game we launched in 2021. By platform, PC revenues were within our outlook, while mobile revenues were higher than expected. And on a regional basis, revenues from China and Japan exceeded the expected range, while revenues from Korea, North America, Europe, and the Rest of World were within our outlook. In Korea, MapleStory came in lower than our expectations, due in part to player perception of an imbalance in difficulty levels between the game servers. However, our live operations team was aggressive in addressing our players’ concerns, and we expect that a significant update in Q2 tied to the 20th anniversary celebration of our MapleStory franchise, along with other updates will drive further growth. The Q1 start of KartRider

Shiro Uemura: Thank you, Owen. Next, I’ll review our Q1 results. For additional details, please see the Q1 2023 Investor Presentation available on our IR website. In Q1, we achieved record breaking quarterly revenue. Group revenues were ¥124.1 billion, up 36% year-over-year on an as reported basis and up 28% year-over-year on a constant currency basis. Our performance was primarily driven by the growth of FIFA ONLINE 4 and FIFA MOBILE in Korea, Dungeon&Fighter in China and Blue Archive. Overall, our top-line performance was within the range of our outlook. FIFA ONLINE 4 and FIFA MOBILE in Korea, Blue Archive, and Dungeon&Fighter in China all exceeded our expectations, while revenues from MapleStory in Korea, Dungeon&Fighter Mobile, HIT2 and KartRider

Owen Mahoney: Thanks, Uemura-san. Before moving on to your questions, I thought we’d offer a bit more about how Nexon is building its business over the medium-term. As I mentioned earlier in the call, Nexon’s management team has been designing the business to deliver solid and stable cash flows, combined with strong potential for significant upside. Our base of live games has demonstrated unprecedented stability, which translates to the investor as downside protection. And in the coming quarters we are introducing several major new Virtual Worlds projects, any one of which could bring step-function growth to our revenue and operating income line. In short, for investors this means a significant asymmetric upside opportunity. We limit the downside, and we create large potential upside. The Nexon management team has been very intentional about this over the last several years. This is the type of company we want to own, and it is certainly the type of business we feel most comfortable operating. So let’s discuss how we see expanding on this idea in the coming years. Earlier I discussed MapleStory Universe, our extension to MapleStory that leverages blockchain technology. Why are we embarking on such a project, when merely continuing what we’ve been doing is demonstrably working? The answer is that we see projects like MapleStory Universe and MapleStory Worlds through the lens of franchise management. Great entertainment franchises merit careful cultivation, because that investment pays back so well over time. MapleStory is one of the largest and most enduring entertainment franchises in the world, loved by tens of millions of players. Our objective is to bring these players an even deeper entertainment experience, meaning they can both have richer experiences within the Virtual World, and benefit even more from contributing to the community. We build our Virtual World franchises to grow for decades into the future. There are multiple vectors in which we can and will build out our largest franchises. In the coming quarters you’ll hear much more from us on this topic, including ways we plan to bring many more people into our Virtual Worlds. By both opening up the experience to new fans, and by deepening the experience they have, we plan to make the next 20 years of growth in MapleStory and other key franchises even more astounding than the first 20 years. With that, we would be happy to take your questions.

Takanori Kawai: Thank you, Owen. Next, we would like to open up the lines to live Q&A. Q and A session will be conducted with Japanese-English or English-Japanese consecutive interpretation. Please be noted that interpretation will come between your questions and our answers. Please hold for interpretation before you hear our answers. Our answers will also be followed by interpretation, so please hold until the interpretation finishes before moving on to the next question. For those of you who have more than one question, we will take your questions one by one. Now, we’d be happy to take your questions.

Operator: [Operator Instructions] The first question is from Mr. Seyon Park from Morgan Stanley. Please ask your question, Mr. Park.

Seyon Park: Hi, thank you for the opportunity. I have 2 questions. The first is, I guess, regarding KartRider

Owen Mahoney: [Interpreted] Hi, Seyon, this is Owen. So I’ll take your 2 questions in turn. First, regarding KartRider

A: As we said in our prepared remarks, over 2 million people signed up for the beta. Even today, I was just talking to the Embark team the other night and they informed me that between 5,000 and 15,000 players are signing up to the beta a month after it closed every day. So that’s for a game that’s already – for a beta that’s already closed. However, as with any beta, we identified areas that need to be improved for the game to be successful in a commercial state. And I’ll wait for the translation and then I’ll just list through that in a little bit more detail. So, again, we’re really happy with how the beta went. But, as you know, the objective of beta is to figure out what we need to improve for the game to be successful for a commercial launch and we identified several, I would say a handful of things. First, we saw some performance problems, so we had a number of areas that need optimizing especially around movement and player control. We have some issues on performance and lower spec machines. There were some issues the way some players played together, especially in light of the destruction physics that we introduced into the game. And we came to the conclusion that we need more ways to play the game and to enter the game. What I would say is that for each one of these, the areas to improve are very clear. That’s what you hope to get out of a beta and that’s really what we want. So we got a very clear roadmap of what we need for it to be successful when the game is commercially launched and, again, that’s our point. Since the beta closed about a month ago, the team has been moving really fast pace and they are helped by the proprietary game development tech that they created before the development of the game started. So that’s making the iteration a lot faster than it would have before. So we’re really looking forward to launch and in the short-term I would caution or just highlight that our objective is to build a community of players and build up a very strong user experience that really works for players so that the community will build up a – will build the community, the Virtual World that lasts for many years. So that’s what we’re focused on right now.

Seyon Park: Thank you for that.

Owen Mahoney: [Interpreted] I hope that answers your question.

Seyon Park: Yeah. No, I think that gives a lot more background. Thank you.

Owen Mahoney: [Interpreted] Thank you.

Operator: The next question we will take from Bokyung Suh-san from Sanford C. Bernstein Limited. Please?

Bokyung Suh: Thank you for the opportunity. This is Bokyung from Bernstein. I have just one question also from many western investors especially. So my question is about the company’s longer term future in ex-Asia countries. So when we see the revenue contribution by the regions, the revenue from western countries have been around just like 3% to 5% over the last decades. So my question is, can you elaborate a little bit more about the future vision and key initiatives or some key hurdles you feel do you have for the global expansion toward the western countries? I think it will be also very useful for the potential western investors as well.

Owen Mahoney: [Interpreted] Thanks for your question. So this is a very important topic for us and this is something we have been working on for several years and you’re going to hear us talk a lot about this, a lot more about this in the coming 18 to 24 months. It really starts with product. And as you may recall if you’ve been covering us for a while, you’ve heard us talk about a major reorganization we did around the company in 2019, but that was really focused on our game development studios. And the general theme was sort of two-fold, but it was basically around doing fewer, bigger, better things, in other words, rather than doing many different smaller projects or offline games or more casual games. We just want to focus on what we do best, which is deeply immersive Virtual Worlds on all platforms around the world. And so that represented a major studio reorganization that we did in 2019. So that was a key step in that. And it takes several years for those games to come out of a studio. And since that was 2019 and we’re now in 2023, you’re starting to see, or you will be starting to see those games come out at a fairly rapid clip in the coming few months, as we’ve talked about. The second thing we’ve done around game development, as you recall, is we first invested in and then purchased all of Embark Studios in Stockholm, Sweden. And our view is that this is the premier set of developers in the West at this time. This is the team that their previous, basically the founder of the studio used to run studios for Electronic Arts until 2018, very, very successfully. And the team around him or the team that all created the Battlefield franchise. And they have been doing incredible work that we’re so excited to be showing to the world in the very near future. Starting with THE FINALS, followed on by our creators, and they’ve got more in the pipeline. So we think this is a fantastic studio that is in the West. And our objective is to combine their chops, their capability in AAA Western online game development with what we know best, with what Nexon has been doing for 25 years, which is to make a game an online virtual world last and grow forever. So that’s what we’re working very hard on now. So that’s about development. And the second leg in the stool is about marketing. And as you know, in the West, marketing is changing at a very rapid rate, especially in the video games business, how you reach the customers, what’s the best way to break through. And that whole science of marketing has been changing very, very rapidly over the last few years. We just actually hired a new Chief Marketing Officer, a CMO, reporting directly to me, and he focuses solely on western marketing. He works very closely with both our development teams in Korea and with our development team in Stockholm, and he’s actually in Korea this week and he’ll be heading to Stockholm, and he just started and he’s building up a team so that we have world class marketing in the West. And, third and finally, is about live game operations. And our view is that Nexon’s live game operations capability is among the very best in the world. And we have established that based off of a whole lot of experience, augmented more recently by a lot of advanced technology that we have put together. And so there’s a whole team of our most case live game operators, who is working with our regions around the world to bring that technology and that know-how and make sure everybody in around the world is as strong as our live game operations team in Korea. So that’s something that we haven’t been all that global about, but we think that’s very, very important in the coming years as we bring very high quality Virtual Worlds around the globe. This type of operational work on all three topics is probably something I’d enjoy spending all night talking about. But since our time is limited, I’ll cut off my answer here.

Operator: The next person is Mr. David Gibson of MST Financial Services Limited. Please, Mr. Gibson.

David Gibson: Thanks. Three very short questions. Firstly, on Q1, the HR and marketing costs were lower than planned. Have they been effectively deferred from 1Q to 2Q, if you would expand, please? Second question, do you feel that in China with DNF, have you over monetized in 1Q? Is there perhaps a blowback from the strong success in the first quarter into the second quarter? And the third question is on KartRider

Owen Mahoney: [Interpreted] So regarding the first question, why the marketing in HR cost was lower than expected? As I have mentioned in my prepared remarks, we were initially planning to conduct marketing as well as promotion activities for KartRider

David Gibson: Thanks very much.

Owen Mahoney: [Interpreted] Thank you very much.

Operator: [Operator Instructions] This concludes the question-and-answer session. Mr. Kawai, at this time, I’d like to turn the conference back over to you for any additional or closing remarks.

Takanori Kawai: Thank you. If there are no further questions, I would like to take this opportunity to thank you for your participation in this call. Please feel free to contact the Nexon Investor Relations at investors@nexon.co.jp, should you have any further questions. We appreciate your interest in Nexon and look forward to meeting with you, whether it is here in Tokyo or in your corner of the world.

Operator: Thank you. That concludes today’s conference. Thank you for your participation. You may now disconnect.