BUSINESS NEWS

NEXON Co., Ltd. (NEXOF) CEO Owen Mahoney on Q2 2022 Results – Earnings Call Transcript


NEXON Co., Ltd. (OTCPK:NEXOF) Q2 2022 Earnings Conference Call August 9, 2022 4:00 AM ET

Company Participants

Takanori Kawai – Investor Relations

Owen Mahoney – President and Chief Executive Officer

Shiro Uemura – Chief Financial Officer

Conference Call Participants

Junko Yamamura – Citigroup

Seyon Park – Morgan Stanley

Yoshitaka Nagao – BofA Securities

Yijia Zhai – Macquarie Capital Limited

David Gibson – MST Financial Services

Kenji Fukuyama – UBS Securities

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 of 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 stuff 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 welcome everyone to NEXON’s second quarter 2022 earnings call. On today’s call, we will update you on our Q2 results, including a strong top line performance from MapleStory in Korea, improved player metrics from Dungeon&Fighter in China, and another outstanding quarter from FIFA ONLINE 4 and sustained success from Dungeon&Fighter Mobile in Korea.

NEXON is a loaded spring, coiled for step change improvement in our earnings profile as we grow our existing virtual worlds and bring new virtual worlds to the global market. Our foundation of existing franchises continues to deliver a steady revenue growth. Our unique portfolio of long-lasting virtual worlds, anchored by our world class live operations allows us the time and the creative freedom to perfect new titles for release as we grow our portfolio in the coming quarters. Many elements contributed to our success in the second quarter, but one common denominator stands out in the performance of each of these games, live operations. NEXON pioneered the art and the science of live operations in the 1990s and invested heavily in the decades that followed.

Today we are best-in-class, enabling continued growth in massive virtual worlds, some of which began nearly 2 decades ago. Knowing how to operate and grow a massive virtual world is the backbone of NEXON’s business. It provides a steady stream of content that keeps games fresh and fun. It handles the match, the matching, ensures balance, discourages cheating, and encourages player engagement. It’s the difference between a game that lasts for 2 months and one that continues to thrive and grow for two decades or more.

To illustrate how live operations impacts game performance, I’ll start with MapleStory in Korea where second quarter revenues increased by 38% year-over-year after a relatively brief period of decline last year. This is another proof point in how our belief that well-managed virtual world games experience periods of flatter declining growth before entering a new period of dynamic growth. The MapleStory franchise launched in 2003 and has been on a steady if nonlinear growth trajectory ever since, including a near doubling of annual revenue in 2020. Over the last 3 years it has grown at a compounded annual growth rate of 25% and is now in its 19th year.

Growth in a live game over such a long period of time has never been done in the global games industry, not even close. In 2021, players voiced concerned about probability disclosures relating to the purchase of in-game items. The entire sector was put on notice. But NEXON was uniquely aggressive in responding. We expanded disclosures on in-game purchases and opened a new and ongoing channel of communication to get input from players. This process resulted in our prioritizing stronger relationships with players over short-term monetization. These initiatives meant slowing monetization while adding new content to excite the base and bring back players.

Net promoter score, or NPS, an important indicator of player satisfaction tells the story of how the team in Korea strengthened player trust. In July of this year, MapleStory recorded a net promoter score that’s actually higher than the great year we had in 2020. Throughout this period, our communication to investors has been clear and consistent. In 2021 we urged investors not to worry about short-term variance in monetization and that MapleStory’s best days are still in front of us. Our results in Q2 and early Q3 support that prediction.

Thanks to best-in-class live operations, MapleStory is back in position for dynamic growth in what will soon be its third decade of operations. Another example of prioritizing player retention for long-term growth is Dungeon&Fighter in China, where the live operations team recently executed a well-planned Level Cap release. A Level Cap increase which introduces new content to enhance engagement with players can dramatically change the end-game environment and requires careful management. The new content such as dungeons are generally well-received but it takes time to develop characters and new equipment. To maintain positive sentiment, we avoided aggressive monetization while players level up.

Returning to growth remains a long-term goal for Dungeon&Fighter. We are pleased with how it performed in Q2, capping a strong performance following the leadership change we made a year ago. Looking toward the future, we are excited with what is what this tremendous franchise can achieve. In the short-term, however, our focus is in driving user engagement rather than revenue growth as we manage this leading franchise for success over its next decade.

Next I want to highlight a spectacular performance by the team supporting FIFA ONLINE 4 for in Korea. In Q2, the combined revenue of our PC and mobile versions came close to doubling what we delivered last year on this franchise. Football is enormously popular in Korea but delivering results 24% above the high end of our Q2 estimates goes beyond excitement about the sport. In addition to starting with a great game from our partners at EA, the live operations team has been driving hard to keep the game fresh, balanced and fun. Our plan in Q3 is to stay close to players and keep them engaged as World Cup approaches in Q4.

Another demonstration of great collaboration between the developers and live operations is the ongoing success of Dungeon&Fighter Mobile in Korea. The game, our first major virtual world released in 2022, launched in March and quickly attained the number one position on both the Apple and the Google game rankings. In the second quarter, revenue from the game exceeded the high end of our expectations, driven by steady and high player engagement. Importantly, we’ve seen no negative impact on the PC version of the game, although the buzz on mobile serves to remind PC players to come back and play.

Clearly, D&F mobile benefits from being one of the largest entertainment franchises in Korea and in the world. Over 850 million people have played the game around the world and it has generated well over $20 billion in global revenue live-to-date. For the launch of D&F mobile and Korea, the IP’s success has been amplified by great development preparation and equally strong live operations.

Before launching, we took time to develop an extensive content plan that would ensure sustained engagement by players. And once in the market, we prioritized long-term player retention over short-term monetization. Dungeon&Fighter Mobile continues to exceed our expectations. And while it’s too early to make projections on how that successful scale in the years ahead, we are making plans to expand the game into new markets. The success of Dungeon&Fighter Mobile reaffirms our thesis on how to develop and sustain virtual worlds. These lessons can be applied to launches we’re planning for later this year and in 2023.

Moving to new games and development. KartRider: Drift is being developed on multiple platforms for a global launch later this year. In May we completed a successful internal beta test on the mobile version. Another new title is HIT 2, an MMORPG in development for PC and mobile. Pre-registration started in June, ahead of a launch in Korea on August 25.

Now I’d like to discuss two new virtual worlds from Embark studios in Stockholm, ARC Raiders and Project Discovery. We are pleased with the progress being made on both games and excited about sharing both with players in the months ahead. I will start with Project Discovery, a free to play team-based first-person shooter that is moving steadily through development. By way of background, the global first person shooter market is massive. But to be successful, a developer needs to not just be able to make a high quality game, but one that stands out from other games with something truly unique. Fortunately, the Embark team knows this market extremely well, since they are some of the most creatively and commercially successful developers in the first-person shooter space. It has become clear that the development team’s progress is faster than we previously thought. The team is planning a large scale beta test in the early fall, which will provide valuable feedback and help us decide on launch timing.

As it stands, Discovery will be Embark’s first game to make to market and we will be sharing more details about the game shortly. Simultaneously, we have decided to add a major new mode to ARC Raiders, an enhanced player-versus-player high intensity survival experience. ARC Raiders’ tech base, physics, environment character art and enemy AI are in great shape. We are bringing the new mode to maximize the game’s longevity. And with Discovery moving faster than we previously anticipated, we also don’t want to try to launch two major new AAA franchises at the same time. Net our plan is to launch Discovery around the end of this year and ARC Raiders next year.

The incredible success of D&F mobile and its sustained strength since its launch underscores the wisdom of launching new games only when we feel strongly that the game is thoroughly ready. Both Project Discovery and ARC Raiders are expected to launch on a trajectory that is common to virtual worlds. Revenue in the initial weeks is likely to be small as players register and explore the new game and then ramps up over time. The true test of a virtual world is reflected in the months and quarters that follow. The growth and stability of NEXON’s legacy franchise allows us the time and the creative freedom to get it right.

With that, I will turn the call over to Uemura-san.

Shiro Uemura

Thank you, Owen. Now I’ll review our Q2 2022 results. For additional details, please see the Q2 2022 investor presentation available on our IR website. We achieved record-breaking Q2 revenue. Group revenues were at ¥84.1 billion, up 50% year-over-year on as-reported basis and up 40% year-over-year on a constant currency basis. Our performance was driven by the growth of multiple major titles and a significant contribution from the recently launched Dungeon&Fighter Mobile.

Overall, our top line performance it was within the range of our outlook. FIFA ONLINE 4 and Dungeon&Fighter Mobile both exceeded our expectations while Dungeon&Fighter in China was lower than planned. While regional revenues from Korea, North America and Europe were within the range of our outlook, while revenues from the rest of the world exceeded our expectations, revenue from China and Japan came in lower than expected.

Looking at the total campaign performance by platforms, mobile revenues exceeded outlook, while PC revenues were below our expectations. Operating income was up 47% year-over-year and within Outlook at ¥27.7 billion. Following an adjustment to our Embark release schedule, in Q2 we recorded an impairment loss of ¥2.2 billion on the ARC Raiders game IP. Net income was up 176% year-over-year at ¥24.7 billion, which exceeded our outlook. The app performance was primarily driven by an FX gain of ¥27.7 billion related to the depreciation of the Korean won and Japanese yen against the U.S. dollar and its corresponding impact on U.S. dollar denominated cash deposits.

Let’s move on to results by region. Revenues from our Korea business were ¥51.2 billion, representing record-breaking quarterly revenues in Korea. This performance was within the range of our outlook. On a year-over-year basis, revenues increased by 57% and on a constant currency basis revenues increased by 49%. FIFA ONLINE 4 PC and Mobile combined revenue significantly exceeded our outlook, driven by successful events and sales promotions. MAUs, paying users, and ARPU, all increased year-over-year. As a result, its revenues more than doubled and mark the quarterly record-high for two quarters in a row.

MapleStory’s revenue grew by 38% year-over-year. MAUs, paying users and ARPU all increased year-over-year, driven by the well-received 19th Anniversary update in April and Summer Update in June. Dungeon&Fighter grew by 34% year-over-year, while certain attached revenue decreased as expected. Consequently, PC revenues in Korea increased by 52% year-over-year.

As per the mobile business in Korea, revenue from FIFA ONLINE 4 M exceeded our expectations. Dungeon&Fighter Mobile continued its strength as user engagement remained high, driven by the rich content and carefully managed live operations. On a year-over-year basis, mobile revenues in Korea increased by 65% contributions from Dungeon&Fighter Mobile and Blue Archive as well as growth of FIFA ONLINE 4 and were partially offset by revenue decreases in V4 and The Kingdom of the Winds: Yeon.

On a quarter-over-quarter basis, mobile revenues increased by 25%, primarily driven by revenue increases in Dungeon&Fighter Mobile and FINA ONLINE 4 M. Revenues from our China business were below our outlook, but increased by 43% year-over-year on an as-reported basis and 25% year-over-year on a constant currency basis. For Dungeon&Fighter, revenue increased year-over-year, driven by the well-received package offerings by the Labor Day update introduced on April 21.

We continue to focus on increasing user engagement rather than short-term monetization. As a result, while revenue was lower than planned, user metrics steadily improved, driven by the well-received 14th Anniversary update in the Level Cap Release introduced on June 16. Consequently, MAUs and pay users increased sequentially despite the seasonality. On the other hand, ARPU decreased as usual, quarter-over-quarter. Year-over-year, MAU slightly decreased while paying users and ARPU increased.

Revenues from Japan decreased by 1% year-over-year, while there was a contribution from CounterSide, this was offset by revenue decreases from TRAHA and V4. Revenues from North America and Europe increased by 30% year-over-year driven by the growth in MapleStory M and contributions from new games, despite revenue decreases from Choices and MapleStory. Revenues from the rest of the world increased by 77% year-over-year driven by the growth in MapleStory franchises and contributions for new games.

Moving on to our FY 2022 third quarter outlook, in Q3, we expect FIFA ONLINE 4, Korea MapleStory and Dungeon&Fighter Mobile to maintain their strong momentum and a significant contribution from HIT2 which is scheduled to launch in Korea on August 25. Consequently, we expect our Q3 group revenues in the range of ¥96 billion to ¥104 billion, representing a 27% to 37% increase year-over-year on an as-reported basis and a 13% to 22% increase year-over-year on a constant currency basis.

We expect our Q3 operating income to be in the range of ¥30.1 billion to ¥36.6 billion, representing a 1% to 23% increase year-over-year on an as-reported basis, and a 13% decrease to 6% increase year-over-year on a constant-currency basis due to increases in HR costs and making existing marketing expenses primarily associated with new titles. I’ll discuss the details on this shortly. We expect net income to be in the range of ¥21.6 billion to ¥26.4 billion, representing a 43% to 30% decrease year-over-year on as-reported basis, and a 52% to 41% decrease year-over-year on a constant currency basis.

While we recorded an FX gain of ¥16.1 billion in Q3 2021, we do not factor in the FX gain or loss in the guidance. In Korea, we expect growth from FIFA ONLINE 4 and MapleStory and contributions Dungeon&Fighter Mobile and HIT2, which is scheduled to launch on August 25. Consequently, we are looking for revenue in Korea to be in the range of ¥61.4 billion to ¥65.5 billion, representing a 32% to 52% increase year-over-year on an as-reported basis and in 38% to 47% increase year-over-year on a constant currency basis.

As for the PC business, while we expect revenue decreases from Dungeon&Fighter and Sudden Attack, which performed very well last year. We expect FIFA ONLINE 4 to contribute to grow significantly year-over-year. We also expect MapleStory to maintain a strong momentum and to grow year-over-year. And driven by the success of Summer Update introduced in the end of June, MAUs in July increased significantly compared to the same period of last year and reached a level Q3 2020 where we achieved record Q3 revenue. Consequently, we expect PC revenues in Korea to increase year-over-year.

Regarding the mobile business in Korea, we expect Q2 revenues to significantly increase year-over-year. We expect significant contributions from Dungeon&Fighter Mobile and HIT2. In addition, we expect the contribution from Blue Archive and a year-over-year growth in FIFA ONLINE 4 and we expect these to be partially offset by year-over-year revenue decreases in The Kingdom of the Winds: Yeon, KartRider Rush+ and V4.

Turning to China. Last year, we achieved 33% year-over-year growth on a constant currency basis, driven by the successful update of our popular characters as well as new initiatives for Dungeon&Fighter. Given the challenging comparison, we expect revenues from our China business to be down in Q3. And we are looking for revenue to be in the range of ¥20.3 billion to ¥22.9 billion, representing a 11% decrease to flat year-over-year on an as-reported basis and 25% to 16% decrease year-over-year on a constant currency basis.

For Dungeon&Fighter, we introduced the Summer Update which includes avatar package offerings on July 14. We are scheduled to introduce National Update in September as usual. In July – and use-and-pay users were at their lower level year-over-year due to a tough comparison with the strong performance in 2021 driven by the Anniversary and Summer Updates. And looking forward, we are focused on engagement of short-term monetization, particularly retaining existing players and attracting returning players.

In Japan, revenues are expected in the range of ¥2.5 billion to ¥2.9 billion, a flat to 16% increase year-on-year on as-reported basis. Then a 4% decrease to 11% increase year-on-year on constant-currency basis. Contributions from CounterSide and the Blue Archive are expected to be partially offset by decreases from TRAHA and V4. In North America and Europe, we expect revenues in the range of ¥5 billion to ¥5.5 billion, 10% to 21% increase year-on-year on as-reported basis and 6% decrease to 2% increase year-on-year on constant currency basis.

We anticipate contributions from new games, which are expected to partially offset a decrease from Choices. We expect revenues in the rest of the world in the range of ¥6.8 billion to ¥7.3 billion, 23% to 30% increase year-on-year on as-reported basis and 10% to 17% year-on-year on constant currency basis. We anticipate contributions from new games. In Q3 2022, we expect operating income to be in the range of ¥30.1 billion to ¥36.6 billion, increase of 1% to 23% year-on-year on as-reported basis, and decrease of 13% to increase of 6% year-on-year on a constant currency basis, as the increase in revenue is expected, which will contribute to an improvement in operating income year-on-year.

However, compared to Q3 last year, we expect cost increases due to business growth as well as upfront investments in talent and marketing associated with new releases. First is increased variable costs due to revenue increase. Second is increased HR costs related to headcount for development and loans of multiple and new virtual worlds as well as bonus accruals for contribution to great performances. Third is increased marketing expenses, primarily associated with promotions for new games such as HIT2. Lastly, we expect increased server costs related to expansion of our mobile business, including Dungeon&Fighter Mobile and HIT2. The high-end of operating income is expected to increase year-over-year on a constant currency basis, as revenue increase will be larger than cost increase due to upfront investment.

Overall, in Q2 2022, we leveraged our strength in live game operations to improve user engagement, which led to the growth of multiple major titles including FIFA ONLINE 4, Korea MapleStory and China Dungeon&Fighter. Dungeon&Fighter Mobile also maintained its strong momentum, resulting in record-high Q2 revenues. In Q3 2022, we will stably operate our major titles and new mobile games, including Dungeon&Fighter Mobile and HIT2 through appropriate update and carefully managed daily operations. This will further stabilize our business foundation for growth in 2022 and beyond.

In addition, we are making good progress in the development of KartRider: Drift and Embark Studios first title Project Discovery, as well as in the development of other highly anticipated new titles, including [indiscernible] Mobile by making upfront investments into new recruitment and talent. We remain confident that NEXON could maintain a strong growth in 2022 and beyond by leveraging our highly anticipated new titles on top of our stable existing business, all of which are backed by our strong live game operations.

Lastly, I would like to provide an update on the shareholder return strategy. Based on our 2022 shareholder return plan, the Board of Directors today approved a payment of ¥5 per share dividend for the interim period to those shareholders who are on the registry as of June 30, 2022. We are planning to pay the same amount for the year-end FY ‘22. Regarding our 3-year ¥100 billion share repurchase policy announced on November 10, 2020, we have completed all of repurchase operations by the end of Q2 2022. And today, our Board has approved a new ¥100 billion stock repurchase policy which is executed over the next 3 years. We plan to complete the operation by August 2025, while considering several factors, including investment opportunities, financial position and market conditions.

This concludes my remarks. Back to Owen, please.

Owen Mahoney

Thanks, Uemura-san. Before we take your questions, I thought it would be worthwhile to underscore a few points we’ve made before. In an increasingly volatile world of recession, collapsing supply chains, collapsing discretionary spending spurred on by ballooning inflation and collapsing advertising revenues, NEXON’s business stands out as a port in a storm, one of the few truly anti-fragile businesses in the world. This is due to the way we have decided to run our business.

First, we are undemanding on our customers. We are in the micro transactions business, not in the macro transactions business. We don’t monetize our users heavily or focus on so-called whales. As a result, our business does well, not just in times of economic growth, but also in times of contraction. Second, our content development focus is on customer retention over near-term monetization. Very much like exercising eating right, this approach can be harder in the near-term but makes for a much better long-term. Third, we invest our profits in technologies that benefit the long-term growth of our virtual worlds. This proprietary technology stack has enabled us to scale our virtual world while keeping a lid on costs. Fourth, our sustained investment in immersive virtual world has made them some of the biggest IP in the entire global entertainment industry with hundreds of millions of fans and with unmatched indeed unheard of longevity.

Finally, we have positioned ourselves to benefit from the work of the platform providers who have made mobile devices so powerful that we can deliver the same immersive virtual world’s experience on billions of mobile devices that were previously only possible on only hundreds of millions of game-playable PCs. That means our total addressable market is expanding by literally 10x. Our stable base of revenues sustained over many years means we don’t have to replace the current product at the end of its life cycle with a new product. We can instead obsess over making sure our new products deliver a great user experience, both at launch and for many years in the future. It also means we tend to do well even in – especially in times of great economic upheaval. This is the future that many other media and technology companies have tried to build. This is the power virtual world’s business that NEXON invented in the 1990s and continues to advance.

Operator, we are ready to take questions now.

Takanori Kawai

Thank you, Owen. Next, we would like to open up the lines to live Q&A. Q&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. Please hold for interpretation before you hear our answers. All 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.

Question-and-Answer Session

Operator

[Operator Instructions]

Junko Yamamura

So this is Yamamura of Citigroup speaking. Thank you very much for giving me this opportunity to ask you questions. There are three questions all together. So I would like to ask the first question. Looking at the constant currency basis in China, looking at your forecast as well as the actuals, it seems that you are trending favorably. In April you have the Labor Day package and it trended better than you have expected. And I understand that the core user was revitalized. And because of that ARPU went up. But in Q2, you mentioned that you tried to not work on further increasing ARPU and the actual figure actually shows that. But then looking at the ARPU number on a year-on-year comparison, I see an increase of about ¥1,800. And do you think I see this number in ARPU increase because of the mix of FIFA and also because of the FX impact? I know that in Q2 you conducted Level Cap release and you were able to further enhance the users to come play the game. And I want to know whether you have been impacted by the lockdown or not. So can you respond to the first question?

Shiro Uemura

Thank you for your question. I understand that your question pertains to the disclosed KPIs. And the numbers that you are looking are for the total PCI, so excluding exceeding the total PC. So it is a mix of different KPIs altogether. And it does not only pertain to Dungeon&Fighter. So if I may be more specific, the number that you are looking at contains an increase of ARPU in Korea, and also there is an impact on FX as well. Just talking about China Dungeon&Fighter as I mentioned last quarter, we did bottom out in Q1, and we are on a recovery trajectory. So we are not working on any short-time achievement, but rather we are operating with mid to long-term perspective. So having said that I believe that we are trending favorably as we are expecting. And so in Q1 and Q2, we were able to increase year-over-year. But in Q3, as you know, in the previous Q3, i.e. Q3 of 2021, the number was great. We were able to increase year-over-year 33%. So given that the high comp, I believe that in Q3 of 2022 we will be seeing some decrease. As to the lockdown in China, we can say that there was almost no impact on our business.

Junko Yamamura

Thank you very much for answering the first question. Let’s move on to the second question, which is on cost. And I understand that the cost is trending as budgeted, and you have already explained about that. But for me, it seems that the increase in HR cost is becoming quite conspicuous. I see that you are increasing the number of headcounts, but I thought that in terms of per head cost it will stabilize. But in actuality I am seeing some increase in the per talent cost as well. And I know that last year you’ve paid our bonus as well, and you are paying a bonus this year as well. But I really do not understand why this is the key, meaning that there is still an increase in per headcount cost. Do you think it is because of the FX impact? Or do you think that trying to hire new personnel in this market situation is becoming more costly than ever before?

Shiro Uemura

As you’ve mentioned, there is a big impact of FX. But more than that, since our titles did very well, we paid the bonus accordingly. So that’s another major factor. And the reason for the increase in the HR cost. And also, we are hiring new talent. So that’s another factor contributing to the increase of the HR cost. And our bonus scheme is such that the more the top line growth, we provide a bonus accordingly. And also in terms of hiring, especially in Korea, which is our major market, the labor market is becoming very competitive. So under that environment, we are trying to attract very high-caliber talents by appealing the merits of working for NEXON. And I believe that hiring new people and investing in people are upfront investments. We want to develop a very rich pipeline and also we want to maintain the current franchise. Therefore, in order to realize that, which will, in the end of the day, lead to greater revenue, we will be investing in HR costs. And we believe that even though at this point in time the HR cost is increasing, we will be seen in top line growth in the future as well. So once again, HR cost increase is an upfront cost or investment that we are making in human capital, and this is not becoming any burden on our business.

Junko Yamamura

My last question is on the rescheduling of ARC Raiders launch. My understanding of this title is that it’s going to be the brand that will indeed represent Embark Studios. And I understand that you were saying that Project Discovery is more challenging than our readers. But is the delay in our greatest launch just because of the progress difference between the two titles? And also, as far as I know, ARC Raiders is scheduled to be launched on PlayStation 5 and 5 is the only PlayStation that you are catering to. And do you think the delay in ARC Raiders has something to do with the platform? Or you decided on rescheduling the launch of these two titles after you’ve seen the test results of these two titles? And if there is any marketing input that I need to know, I want to know about that as well.

Owen Mahoney

Thanks for your questions. Yamamura-san, this is Owen. So first, let me clear up two points that I think I heard in your question. First of all, we never said that Discovery, Project Discovery was more challenging than ARC Raiders. The other thing that we have not said is anything about exact platforms. We have not made any announcements about what platforms they’ll be on or any announcement about PS5. Just to be clear, we have said it will be multi-platform on PC, Xbox and PS5. So to get to the crux of your question, let’s first remember that, as we said in our prepared remarks, that Discovery is going faster than we expected. And as we said, we don’t want to launch them right on top of each other.

Now as you know, bringing a virtual world to market is very different from traditional games. And we know from experience what works. So as we get ready for a launch, what we really do is we test among progressively larger groups of people. And then we take a look and we decide what’s needed for the game to succeed over years or decades. So in the case of our creators, what we decided to do is we like where the game is today. We like the tech base, we like the art, the back story, the content pipeline, but we wanted to add a major new mode. And that decision wasn’t for the short-term, it was for the long-term. We wanted the game to last for years and decades. Now a while back we made essentially the same decision with Mobile Dungeon&Fighter Mobile and it worked out great once we launched it. And our live ops people are thrilled with the retention rates that that game has had since we launched it. So we think it’s the right approach if you want to have a business that lasts. And I would just reiterate also that we’re enormously thrilled with both games, above Project Discovery which we’re planning on launching first now and with our creators.

Junko Yamamura

Thank you very much. I understood very well.

Owen Mahoney

Thank you.

Operator

The next speaker is Mr. Seyon Park from Morgan Stanley. Mr. Park, please.

Seyon Park

Hi, thank you for the opportunity. I have two questions. I’ll start with the first question, which is going to be on FIFA Mobile which I think is a name that a lot of investors typically don’t ask too much on, but I think the strength that we’re seeing this year, I did kind of catch my eye. Can you maybe explain some of the reasons behind this trend? I mean, obviously, it’s a game – a franchise has actually been out for some time. And I’m just kind of curious as to whether FIFA ONLINE 4 globally has been doing well or whether this is more of a Korea-specific phenomenon? And maybe is it being impacted by either the popularity of the Tottenham Hotspurs and the English Premier League among the Koreans or maybe an impact from the expected World Cup at the end of this year?

Shiro Uemura

Thank you for the question. For FIFA ONLINE 4, it is true, and also FIFA ONLINE 4 Mobile. There are multiple factors which is allowing this title to do so well at the moment, such as daily operation and successful content update as well as marketing activities, events and promotions and so forth. And this title is launched in the Korean market. So we are talking about the Korean situation at the moment. As you may know, in Korea, soccer is a major sport. And in that sport, FIFA ONLINE 4 is the most popular game for the soccer. So we hope that we can continue to provide enjoyment to the users and through great operations and have a good result in South Korea. So there are many factors, but the World Cup games at the end of the year, is one of the reasons there is excitement around it. And also, we are doing a good job in marketing, promotions and so forth. And also the player in Europe, their popularity is one of the reasons as well as you have mentioned. So it is not – the title is not doing well only on a single factor, reason. It is doing well because of many different factors combined together.

Seyon Park

Thank you for the answer. My second question is a bit hypothetical. And I know that either Owen or Uemura-san may not have the right answer for this. But just regarding the share buyback program, can you give a little bit of background as to why it concluded earlier and this new program has kind of been put in place. And then the reason I talked about this hypothetical question is given the situation at NXC, and I know there is a lot of uncertainty there. In the case, in the hypothetical case that NXC does end up selling a part of NEXON’S shares in the market, would the company be willing to use that buyback program to absorb any potential supply of the shares? Or could it actually be the case where that buyback program could be used to entirely insulate the impact of such a scenario?

Owen Mahoney

Hi, Seyon, it’s Owen. Thanks for your question. Look, as you anticipated, we’re not going to make any comments about what may or may not happen by one of our shareholders. So it’s just not something that we’re going to have anything to say about. But, as you can tell, we really like our future, and we’re feeling really confident about our future. So in that environment, when we’re feeling confident and good and we like our pipeline, we like what we’re doing, we like the way our live game operations teams are operating and we love our business model. All those things mean we are confident that the price at which we’re looking at our stock is a good use of our funds. And it’s a great way to return money to shareholders, and it’s a great way to invest in our own future. So in that environment, it’s a good time to do a share buyback to announce a re-up of our share buyback, and there is nothing more to it than that.

Seyon Park

I think that makes sense, Owen. I did think that the live ops or mastery of the live ops really shine this quarter and look forward to seeing that continuing this year. Thank you again.

Operator

The next question is from Mr. Nagao of BofA Securities.

Yoshitaka Nagao

Thank you very much. I am Nagao of BofA Securities. I have three simple questions. First question is on the revenue forecast for Korea in Q3. If possible, can you give me the breakdown between PC and mobile?

Shiro Uemura

Regarding the guidance policy, please do understand that we do not give you the breakdown between PC and mobile for each region. And I really appreciate your understanding.

Yoshitaka Nagao

And the second question is on ARC Raiders. I understand that its launch schedule has been delayed to 2023. If possible, can you give me details of your new launch schedule? Is it going to be in the first half of 2023 or the second half of 2023?

Shiro Uemura

As already mentioned by Owen, in ARC Raiders we have decided to add a new player versus player mode. And our new launch policy is such that internally we have to be satisfied with what we have. And therefore, that being the case, we will work on with the development further of ARC Raiders and try to head towards the longevity of this title. And once we become sure that the satisfaction level as well as the possibility of the gain, longevity is ensured, then the time will be right for us to make new announcement.

Yoshitaka Nagao

Thank you very much. And my third question is related to what Owen have mentioned in the opening remarks. You mentioned that you have a plan to launch Dungeon&Fighter Mobile in other new markets as well. So, if there is any progress in your plans vis-à-vis China, can you elaborate on that?

Owen Mahoney

Unfortunately, there is no update that I can provide to you today. So, the situation is the same as we have talked about it last time.

Yoshitaka Nagao

Thank you very much.

Operator

The next speaker is Ms. Yijia Zhai from Macquarie Capital Limited.

Yijia Zhai

I have only one question. That is about ARC Raiders and postponement about it. Sorry for asking this question many times. But originally, I think it was on TPS and project Discovery was on PS or FPS. So, between TPS and FPS, there are two different types of users or markets. That is my understanding. What is the understanding or perception of your company in this regard? And what are the expected revenues for each title, if you could share with us any. And Owen said that you don’t want to launch the two major AAA titles at the same time. But what will be the minimum necessary interval between two launches in your line? If you could give us any comment, that will be appreciated?

Owen Mahoney

So, I will take your first question first and then allow time for translation and then come back to your second question. So, you asked about – so just to be clear, yes, ARC Raiders has been shown as a third person shooter and Discovery, project Discovery has been shown as a first person shooter. It’s hard to answer your question in the games business. We do know that the first person shooter genre is massive. But as I said in the prepared remarks, you really have to bring something special to the table if you are going to win in it, meaning something that’s differentiated and a different look and approach to doing the genre. And I would underscore something that we said several times, we think that this is one of the most creative and bankable teams in the West, the Embark team. And we think that the work that they are doing in this area is phenomenal. And in fact, FPS is really where they started. It’s sort of their home. So, for all those reasons and the fact that we feel that the project they are working on is very differentiated and also incredibly fun, we feel very, very good about it. But it’s a little hard to answer your question directly because what happens over and over in the games business is when you do true innovation, you find that the market is much bigger than the existing rigid genres might suggest. And so market sizing before product launches and before you see how people respond to it and before you look at the retention numbers becomes a very challenging task. What we do believe is that both games will address a large market. And our objective is to make them incredibly fun and fun moreover for many, many years. That’s what we are building. I believe your second question was about what is a minimum interval in between launching games. It’s a good question, but again it doesn’t have an easy answer. I guess the short answer to your question is not in the same quarter. The slightly longer answer is when we launch a major new virtual world, remember, these are not packaged goods games, these are virtual worlds. So, you have got to do – you have got to think long and hard to do testing, you have to set up servers, you have a lot of player communication, you have got marketing. All those things happen when you launch a major new virtual world, and you want to make sure that you handle that smoothly and well. So, at a bare minimum, you don’t want to do that in the same quarter.

Yijia Zhai

Thank you very much for your answer. I have one follow-up question. You said that this is going to be a new virtual world and that’s why you need server testing, communication and marketing plans, taking enough time to make them perfect. But for the Discovery part, it seems that recently you have announced that the launch schedule will be put forward to the end of this year. And my question is whether you have done the beta test for Discovery already? And whether you have done any player communication, enough communication, whether it was done or not? And if you have already done a beta test, as a result of that, isn’t it possible that you may have to add another function later on? And is there a possibility that you may postpone the launch of this title again?

Owen Mahoney

Well, I can’t share anything beyond what we have said in our prepared remarks today, which is that we have been very happy with the progress of this game over a rapid period. Beyond that, we don’t have any additional details to share.

Operator

The next question is from Mr. David Gibson of MST Financial Services. Please.

David Gibson

Thanks very much for the question. Just one, actually a follow-up on project Discovery, I was just wondering, Owen, whether your confidence in that title has changed over the last three months. Now that it’s shifted up to being more sooner, is your expectations improved, the same, changed at all in terms of this particular title? Thank you.

Owen Mahoney

You are asking a really hard question. Look, I am a game fan as well, and what I can tell you is this is a game that I personally am really looking forward to playing and very excited about. And I think when we show the world what we are working on, the world will be as excited as I am. I think there is a lot of other people out there like me. So, I think that’s what I can tell you. That’s usually a pretty good guide for what works well financially in the video games business.

David Gibson

Okay. Thank you very much.

Operator

The next question is from Kenji Fukuyama-san from UBS Securities. This will be the last question because of the limitation of time.

Kenji Fukuyama

Thank you. I have two questions. The first question is the actual number for China. Because of the enhanced engagement, it looks like you are trying to improve, but the actual number has gone down in China. Is there anything unexpected during the quarter? Were there any changes to any KPIs that led you to make changes in your policy in China? So, could you give us more details about what was happening in the quarter?

Shiro Uemura

Well, as we have mentioned earlier, we thought that Q1 will be the bottom and that the business is improving since then. And that comment or view that our company has is unchanged even today. However, it is just that more than expected the impact of the actions that we are taking were short-lived more than we had expected. For example, we have taken various actions like level cap release, and that was impacting the KPI positively. But the impact was – did not last as long as we had expected. So, that was the reason. And even though in that case, the level cap release did have – gave a positive impact on the KPI. It went up at first, but it didn’t last as long as we had expected. So, for KPIs and the user behaviors, we would like to monitor these trends more closely than in the past, and that’s how we are operating the games at the moment and having said that, on a Y-o-Y basis, we believe that we still have a positive growing trend. And for the longer term, the trend is very positive. So, we are happy with that. And for the Q3, rather than focusing on the short-term measures, we like to keep focus on the medium to long-term perspective and try to ensure the continuous recovery in China.

Kenji Fukuyama

Thank you very much. My second question is for Owen-san. And this is about PC games and its competitive environment. The Japanese developers at the moment are announcing their focus, enhanced focus on the PC titles going forward. And I think that the PC games are the areas that your company has competitive advantages. So, I suppose that the market is becoming more competitive and competition is becoming more intense going forward. So, with the changing environment, what is your current stance towards the PC titles, what kind of view do you have towards the market?

Owen Mahoney

Thanks for your question. I think the first thing that I would say about your question is that, we are a very different company than a lot of gaming companies where we use the word virtual worlds to describe what we are, which is we, for 25 years now have made deeply immersive experiences in simulated virtual environments with thousands of other players in the same game world at the same time. And that’s very different than the type of single-player experiences that you see oftentimes in more traditional games. That would be a very, very important point, number one. The second thing that I would say is I am happy that more game developers, particularly Japanese ones are focusing on the PC business because that means there is more content, which – and the PC business has always been underserved in Japan, in our view, whereas it’s been very, very popular for many years in places like Korea, China and the United States. So, we – our observation is that the Japanese market has never really considered the PC as a content consumption device. It’s considered as an office automation tool or a content creation device. So, we think it’s terrific that more companies are going to get – more companies and therefore hopefully more consumers are going to see it as a content consumption device. The third thing that I would say is to put whatever is happening in PC in the context of mobile. I have said this in several quarters in the past, but the iPhone 13 that is likely in your pocket right now is an unbelievably powerful device. It’s what we would have called a workstation, meaning the kind of device that can only fit under your desk with a lot of power on it, just a few short years ago. The GPU measured in teraflops is exceedingly strong and the networking layer on that device is exceedingly strong. And essentially anything that’s an iPhone 10 or up or equivalent Android device is an extremely powerful workstation, that we can deliver a very deep immersive virtual world. Now that by itself is important, but the numbers are what you need to keep in mind. There are roughly, by our estimates, 300 million to 400 million game-playable PCs operating in the world today. There are roughly by our estimates, 3 billion to 4 billion, this isn’t publicly available information, 3 billion to 4 billion iPhone 10s or up being operated today, user base. So, that’s a total addressable market expansion of 10x. And so we think it’s important to deliver our unique virtual worlds on all those devices, on PCs, on consoles and on mobile devices. And we think that the TAM expansion is just an incredible force that works in our favor because now we can deliver deeply immersive virtual worlds to billions of people instead of just hundreds of millions of people. And then I am going to just add one point at the end or just one final point to conclude. I think it’s a very common analytical fallacy that you see in the video games business because we are in the consumer business to focus on competition and market and issues of market share. It’s common for a number of reasons. One of them is that we get a lot of people who come from a consumer packaged goods business. But it’s an analytical fallacy because what we are – in our view and in our experience, we are not suffering in the games business from an excess of competition. We are suffering from a scarcity of great new ideas and creativity. And I have spoken publicly about the reasons for this in the past. But our view, and it served us very well over the years, is that if we do something really special, especially in online virtual worlds, if we do something special, then we end up with a vast market, a vast market that grows over time. And that, for all the reasons that I have just said, dwarfs any near-term issues of potential competition, which may or may not exist.

Kenji Fukuyama

Thank you very much. Understood very well.

Operator

This concludes the question-and-answer session. Mr. Kawai, at this time I would 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.



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