First Quarter Fiscal 2012 Results

Transcription

1 Dear Fellow Shareholders: Today, we are very happy to share with you our strong first quarter results. NEXON Co., Ltd. ( Nexon ) delivered record revenue, operating income and net income, and these results come on the back of a very strong Nexon s solid performance in Q1 underscores yet again that our unique free-to-play business model and focus on immersive online games together are a robust engine for growth and profitability at scale. We experienced growth across all of our key financial metrics, which we will discuss in more detail below. Our performance in China was particularly robust during the quarter, and Korea delivered very strong growth as well. Performance in North America suffered as a result of certain operational challenges from Q4 that continued in Q1. Overall, our performance exceeded our revised guidance for the first quarter. As we mentioned in our previous shareholder letter, our approach to financial reporting is different from many public companies. Each quarter, we post a shareholder letter like this one, along with our financial statements, on our website at We host a question-and-answer conference call the same day with our management team, on which we answer as many questions as we have time for. We ask that interested analysts and investors please submit questions for management prior to the earnings conference call via the following address: nexon-ir@nexon.co.jp. We believe this approach ensures that we are providing the information shareholders want in order to gain a deeper understanding of our business. First Quarter Fiscal 2012 Results Our Q1 results were better than the upwardly revision in guidance we provided in March. The table below summarizes these results, along with the previous four quarters for comparison: Selected Consolidated Operations Data (Millions of yen, except per share data) FY Ended FY Ended December 31, 2011 December 31, 2012 Percent Change Q1 Q2 Q3 Q4 Q1 YoY Revenues 20,809 20,456 24,156 22,190 30,377 46% Operating income 9,340 8,605 10,948 9,354 17,384 86% Net income 7,586 5,120 7,232 5,815 12,377 63% Adjusted net income¹ 7,968 5,507 7,582 6,153 12,738 60% Earnings per share 2 : Basic EPS Adjusted EPS Cash and deposits 33,341 44,291 44, , ,977 1

2 Footnote: * Amount is prepared in accordance with Japanese GAAP, which is rounded down to the nearest million yen, and therefore might slightly differ from what we disclosed in the Offering Circular, which was prepared in accordance with Western rounding conventions. 1 Adjusted net income is a non-gaap measure that excludes the non-cash amortization of goodwill (and negative goodwill in the case of acquisitions occurring before April 1, 2010) related to our acquisitions, which is required under Japanese GAAP. We provide this information to investors for the purpose of comparing our Net Income with that of companies that do not amortize goodwill or negative goodwill associated with acquisitions in their financial results, including those reporting in accordance with U.S. GAAP. 2 Adjusted to reflect the 1:100 stock split that occurred on July 21, The following table presents our revenue results on a constant currency basis (i.e., applying the average exchange rate from Q1 2011) in order to show the growth rates without the effect of fluctuating exchange rates during the quarter. We generated approximately 90% of our revenue in Q1 from non-yen currencies, of which the U.S. dollar and Korean won make up the vast majority. Revenue for the Quarter Ended March Q Q1 Major Territories 1 As Reported Percent Change Constant Currency Percent Change 3 Korea 6,631 8,856 34% 40% China 8,014 15,175 89% 98% Japan 2,654 3,096 17% 17% North America 1,718 1,397-19% -15% Europe and Others 2 1,790 1,850 3% 9% Nexon Total 20,809 30,377 46% 52% Footnote: 1 The above table represents a breakdown of our revenue based on the region in which revenues originate. It is not a presentation of our revenues according to Nexon entities. 2 Others: United Kingdom, other Asia countries, and South American countries. 3 Constant currency percent change is the growth rate had the currency rate not changed from Q1 2011: Korean Won/ Yen, and Yen / US Dollar. In Q1, total revenues were billion, an increase of 46% over Q1 2011, or 52% on a constant currency basis. This was driven by the continued strong performance of our existing titles particularly in China and the introduction of several new titles. Consolidated operating income was billion in Q1, an increase of 86% year-overyear. Our operating income margin was 57% in Q1 of this year, up from 45% last year. 2

3 As previously reported, in 2011 we launched several new titles. In Korea, we launched Cyphers and SD Three Kingdoms. We also launched Mabinogi Heroes in Japan, Europe and China. Lastly, we launched Kartrider Rush on ios and Android in Korea and North America, which has been downloaded more than 8.2 million times to date. As we went through Q1, these 2011-vintage games have maintained a trajectory of growth in line with our expectations. As with all newlylaunched games experiencing such growth, we plan to invest in development and marketing to drive them going forward. Cyphers We also saw growth in several of our key monetization metrics in Q1. Average Monthly Active User count ( MAUs ) for Q declined slightly to 82.8 million from 86.2 million in Q (and was up from Q MAU count of 80 million.) Our paying user rate was up year-over-year, with 10.9% of our users paying ( pay rate ) in Q1 2012, up from 8.3% in Q As a result, our total number of paying users increased from 7.1 million to 9.1 million. Our Average Revenue Per Paying User ( ARPPU ) worldwide, calculated using month-end exchange rates, was 1,761 for Q1 2012, up from 1,427 in Q Worldwide, eight of our titles have delivered more than $100 million in lifetime revenue. We have listed them here for your reference as you read about their contributions by region. 2 Service Since Genre Lifetime Gross Sales 1 ($millions) D Action 2D Action 3D Action Arcade-style Action Turn-based FPS FPS MMORPG MMORPG MMORPG racing game MMORPG MMORPG >$1,500 >$100 >$300 >$500 >$2,000 >$300 >$400 >$100 Footnote: 1 Estimated lifetime gross sales collected from end-users, inclusive of revenue share retained by publishing partners in geographic markets where Nexon does not self-publish (e.g., China) and revenue prior to acquisitions by Nexon (MapleStory in 2004, Dungeon&Fighter in 2008, Sudden Attack in 2010 and Atlantica in 2010). 2 Co-developed by Nexon and Valve; Nexon and Valve co-own the franchise. 3

4 We manage our global business and present our results by major geographic regions, each of which has different user and growth characteristics. Below, we discuss each territory s performance for Q and the driving factors that support the results. Korea During Q1 2012, Korea continued to deliver consistent growth: 8.85 billion in revenue, growing 34% versus Q On a constant currency basis, revenue increased 40% over Q Korea represented approximately 29% of our total revenue for the quarter. Our growth came from strong performance in our live titles, accelerated by content updates timed for the Lunar New Year season. Sudden Attack, a leading first-personshooter game ( FPS ), and Mabinogi Heroes, an action role-playing game ( RPG ) developed by our internal studio, DevCat, were both standout titles in the quarter. Our newer titles (those launched in the last one to three years) such as Cyphers and Dragon Nest also made meaningful contributions. We launched multiple content updates and various in-game promotions for most of our major games in Korea, several of which were timed to leverage the aforementioned Lunar New Year season. For Dungeon&Fighter, growth was driven by the continued success of last quarter s New Male Mage update, which carried into Q1. For Sudden Attack, our teams launched new maps, weapons and characters along with special ingame events. The game subsequently achieved the top spot in Korea s PC Café rankings in late January, and has continued to rank among the top three games since Mabinogi Heroes (also known as Vindictus in Western markets) introduced a new character called Kay, a male archer. MapleStory s performance was mainly driven by the Lunar New Year holiday and the addition of a character class called Mysterious Phantom. MCCUs for the game reached 404,981 during the quarter. In addition, we ran several other in-game promotions in KartRider. On February 23, we also began servicing Heroes Generation 30, a massively multiplayer online role-playing game (MMORPG) developed by Chinese Gamer International Corp. Additionally, we signed several agreements for mobile and social games that we will discuss in more detail below. BattleStar: Reload, a casual sidescrolling shooter game, entered its first closed beta on March 23, and is currently slated for launch in the second half of China Our China business again delivered very impressive results: in Q1, revenue reached billion in the region, an increase of 89% year-over-year, or 98% on a constant currency basis. China was our largest region for the quarter at approximately 50% of total revenue. 4

5 Dungeon&Fighter, Counter-Strike Online and KartRider all posted particularly strong performances during the quarter. Dungeon&Fighter, our largest game in China and the number two game by users in China overall, delivered record results, driven by a content update and promotional items timed for Chinese New Year. Counter-Strike Online also saw record monthly revenue in January 2012 and MCCUs of 281,746, due in part to promotional events and limited time in-game items available during the Chinese New Year. KartRider received a boost from the Valentine s Day in-game mission and event, a new Kart body called Seber Z7, and a sixth-anniversary promotional event in March. MCCUs for the franchise reached 219,156. Mabinogi Heroes has made a solid start since its launch in December. During Q1 we released a major update to the franchise, which included the introduction of Karok, a new character class. We remain encouraged by the performance of the Mabinogi Heroes open beta. China has emerged as a very large and dynamic market for free-to-play online games. The Ministry of Culture released statistics during Q1 reporting that the online game market grew 34.4% year-over-year in 2011, delivering RMB 46.9 billion in sales (roughly 579 billion, or $7.3 billion). PC-based online games accounted for 92% of that growth. We believe that China is well-suited for Nexon s online games and plan to continue to invest alongside our partners to serve our customers there. Japan For the first quarter, revenue in Japan was 3.09 billion, an increase of 17% year-overyear. This growth was primarily driven by MapleStory, Counter-Strike Online and Sudden Attack. Our live game development teams launched updates for most of our major titles over the course of the quarter. MapleStory received the Extreme Adventurer update, which allows players at high levels to create a subclass of explorers with new and special skills. We also held a co-promotion with Yattaman, a popular Japanese Anime television series, in which players can purchase items related to the show. In Mabinogi, we released Episode 7: Another Oracle, which includes a new Japanese fighter character and accompanying storyline. This update resulted in 17,137 MCCUs during March. Sudden Attack showed robust growth, achieving a monthly revenue record in January and MCCUs of 10,334, driven in part by an online tournament and several updates to the game. These included a new hostage rescue mode and several new maps. We also announced several new publishing contracts, including NAVYFIELD 2, a realtime strategy (RTS) game developed by SDEnterNet; and Shadow Company: The Mercenary War, a FPS game developed by Doobic Co., Ltd. Shadow Company will 5

6 also be published in North America and Europe. We expect to launch both titles within North America Revenue in North America was 1.39 billion, a decrease of 19% from the first quarter of On a constant currency basis, revenue declined 15%. Clearly it was a challenging quarter in North America. Our team there has been working hard to get the business back on an upward trajectory after the hacking attack and stability issues that we experienced in late Q4. Our focus has been on aggressively addressing the security issues and stabilizing the server environments. As this work is being done, we plan to spend more again on customer acquisition marketing and refocus on our growth strategies in this expanding market. Fundamentally, North America is a region with great opportunities for Nexon and we intend to continue to invest to build our presence in this growing market. Despite these challenges, we delivered new content and updates to most of our games in Q1, which were well-received by our players. The new updates for MapleStory included character classes and the first two parts of the three-part Alliance update, which introduces new quests and characters. MCCUs for the game were 109,757. Combat Arms added the first player-designed map, Rural Estate, and a Quick Start functionality that allows players to quickly jump into games. Mabinogi, Atlantica Online, Dragon Nest and Sudden Attack all added new gameplay content during the quarter as well. Europe, Southeast Asia and Other Regions Our revenue in Europe, Southeast Asia and our other regions was 1.85 billion, an increase of 3% year-over-year. On a constant currency basis, revenue increased 9%. During the quarter we made several content updates in Europe. MapleStory launched the Jump update, which introduced multiple skill upgrades and rebalances across all job classes. In January, Combat Arms added the Nemexis Map, in which players must infiltrate the Nemexis headquarters and neutralize a hostile territory. Additionally, we introduced the Karok update to Vindictus. Over time, there are instances when the style of a game is not popular with a particular culture. On April 25 we made the decision to discontinue service for Mabinogi in Europe based on low penetration in that market. This is consistent with our strategy to stop allocating resources to those games we conclude will not thrive in a market. We signed three new publishing contracts that will bring Shadow Company, Dekaron and WarRock to market over the next months. As previously mentioned, we plan to publish Shadow Company, a FPS developed by Doobic Co., Ltd., in several of our territories including Japan, North America and Europe. For Dekaron, an action 6

7 MMORPG developed by Gamehi Co., Ltd., we signed an agreement bringing us the rights to publish the game in Europe. On March 15, Nexon Europe signed a publishing contract for WarRock, an online FPS developed by Dream Execution Technology Co., Ltd., targeted for launch later this year. In Southeast Asia, where we currently operate in seven countries, we launched several games during the quarter. We launched KartRider in Indonesia and we released updates to our games in both Indonesia and Singapore. We also announced a new publishing agreement for Cyphers in Taiwan and Hong Kong, following its successful launch in Korea in early Components of Growth Unlike the traditional games business, user and revenue metrics of free-to-play game launches typically start small and ramp up over time as the community develops. As a result, most of our revenue in any particular quarter or year comes from games that were launched two or more years earlier, a common pattern that we have seen throughout our history. Our objective is to launch new games that grow over time and ultimately become major revenue contributors. The chart below shows a breakdown of games that existed in 2008 (the blue component) and games that launched after 2008 by year (the red, yellow, green and brown components). As you can see, each vintage starts small and grows over time. (JPY billion) 87.6 New Titles in New IP 9.6 New Titles in 2011 New Titles in New IP 3.8 New Titles in 2009 Existing Titles in New IP New IP 4.1 FY2008 FY2009 FY2010 FY months ended March 31, 2011 Titles lauched through 2008 : Titles from : 91% 9% 3 months ended March 31, % 14% 7

8 Our operational focus is: (1) to build long-lived games that we grow over time through constant updates and gameplay refinements, and (2) to launch new games that break new creative ground. When those creative risks resonate with users, the market tends to be large, because our games are differentiated from the competition. Platform Expansion In addition to our PC game business, we remain focused on building our position in mobile and social games. Last quarter, we announced the consolidation of our various mobile and social development efforts into one Korea-based team. We also discussed launch plans for 20 new mobile and social games over the course of To start off the Lunar New Year holiday, we released Empire Online in Korea, on the Android platform, where players can build their own empire MapleStory Live and chat real-time with other players. We also launched Maplestory Live, an action smartphone game developed by Lakoo, for the Android and ios platforms. During the first quarter, we further strengthened our mobile and social business through a 19.99% investment in MOYASOFT Co., Ltd., a mobile game developer best known for its leading social RPG GodWarz. Through this investment, we will work together to co-develop mobile games that leverage our existing franchises. Another of our equity affiliates is JC Entertainment Corporation in Empire Online Korea, developer of popular online street sports games Freestyle and Freestyle Football. The company has expanded into mobile, where their title Rule the Sky has consistently ranked as the number one top grossing game on the Korea ios App Store. Our plan is to leverage our global presence and localize Rule the Sky for other regional app stores. On the social games front, we launched MapleStory Knights Edition, a browser-based game, via Yahoo! Mobage in Japan on March 12. In North America, we began an initial closed beta phase for KartRider Dash on Facebook on March 28. Other Recent Developments From ChoiRock Games Corporation, we acquired Shaiya Online, a popular threedimensional fantasy MMORPG played in 16 countries, which will enhance our current portfolio of gaming properties and provide additional opportunities to strengthen our North American and European businesses. We remain very active in our review of M&A opportunities around the world. 8

9 Business Outlook We are raising our business outlook for 2012 given our strong performance in Q1. Our updated business outlook for the full fiscal year 2012 is for an increase in revenue of 24% year-over-year, or approximately 28% on a constant currency basis. In the second quarter of 2012, we expect revenues of 22.5 billion, an increase of 10% versus the second quarter of 2011 (18% on a constant currency basis). Business Outlook (Millions of yen, except per share data) For the Year Ended December 31, 2012 Q2 (E) Period from Jan 1 - June 30 (E) Full-Year (E) Revenues 22,595 52, ,338 Operating income 9,295 26,679 52,234 Net income 6,843 19,221 37,800 Adjusted net income 1 7,193 19,932 39,210 Basic EPS Adjusted EPS Footnote: 1 Adjusted Net Income is a non-gaap measure that excludes the non-cash amortization of goodwill (and negative goodwill in the case of acquisitions occurring before April 1, 2010) related to our acquisitions, which is required under Japanese GAAP. We provide this information to investors for the purpose of comparing our Net Income with that of companies that do not amortize goodwill or negative goodwill associated with acquisitions in their financial results, including those reporting in accordance with U.S. GAAP. Exchange Rate Impact The exchange rate assumptions we have used in our business outlook are presented below. FX Rate Assumption 2012 Q1 Average 2012 Assumed Variance Korean Won / Yen 100 1, , % US Dollar (USD) % Chinese Yuan (RMB) % The impact of these rates varies by region given the composition of our revenue and cost bases in those regions. Given the assumptions in the table above, every 100 of change against KRW100 would have a corresponding 2.6 billion revenue impact and a 1 billion operating income impact. For example, a 100 weakening against KRW100 would add about 2.6 billion of additional revenue and about 1 billion of operating income. A change of one Japanese yen in the U.S. dollar exchange rate would have an inverse impact on both revenue and operating income of approximately 700 million. 9

10 For example, a five yen weakening of the yen against the dollar would add about 3.5 billion in additional revenue and about 3.5 billion in additional operating income. Changes in the exchange rate of the Japanese yen against the Chinese yuan (RMB) do not have material impacts on our yen-denominated results since most of our royalties from our Chinese partners are paid in U.S. dollars. Our Opportunity As we progress through 2012, we see the same forces at work that we discussed in our offering documents last fall. Clearly, a massive change is happening in the global games industry the same fundamental shift that has affected other segments of consumer entertainment: as online connectivity becomes fast and ubiquitous, packaged goods business models are being swept away and replaced by companies with revolutionary new ways of doing business. Around the world we ve observed this in music, news, media, movies, books, and retailing, and the same shift is coming to games. Nexon s goal is simple: to be the leader in online games. We have found a massive audience of players who engage with our immersive online games for months or years on end, and the free-to-play model we pioneered has proven year after year to be a powerful engine for growth and profitability. In Q1 we ve shown yet again that our approach is delivering very strong growth and profitability at scale to our fellow shareholders. Sincerely, Seung Woo Choi, CEO Owen Mahoney, CFO Tokyo, Japan 10

11 Glossary of Terms Term / Abbreviation FPS (first person shooter) RTS (real-time strategy) MMORPG (massively multiplayer online role playing game) MAU (monthly active user) ARPPU (average revenue per paying user) Pay Rate MCCU (maximum concurrent users) Closed Beta Open Beta Meaning A game in which the player plays from the point of view of the game character in three-dimensional graphics. A game which is usually played from a third-person perspective, where the player controls vast numbers of in-game characters in a tactical scenario. An online role-playing game that has a massive number (usually several hundred or more) of players who play concurrently. The total number of accounts of users who log in and play a particular game in a given month. Online game net revenues for any given period divided by the average number of paying players of such games during the period. The number of paying users divided by monthly active users for any given period of time. The maximum number of users concurrently accessing a game at a particular moment. MCCU is used to measure the popularity of a game. A trial period during which a trial model (beta version) of a game is tested by a limited number of users or groups. A trial period during which a trial model (beta version) of a game is tested without restrictions on participation. 11

12 Cautionary Statement regarding Forecast of Business Results The forecast of business results is based on information available as of the date these data were released and, due to various risks, uncertainties and other factors arising in the future, actual results in the future may differ largely from the estimates set out in this document. These risks, uncertainties and other factors include, without limitation: the continued growth and popularity of our key titles; our ability to maintain favorable relationships with key licensing partners; our continued ability to offer games in China, through local partners or otherwise; our ability to compete effectively in the online games industry; our ability to address hacking, viruses, security breaches and other technical challenges; fluctuations in currency exchange rates; our ability to maintain and further develop our brand name; our effective acquisition of new companies, businesses, technologies and games from third parties and the possibility of recognizing impairment losses; continued growth of the online games market, including the underlying infrastructure, and free-toplay/item-based revenue generation model; our ability to adapt to new technologies; our ability to enter into licensing arrangements for third-party titles on terms favorable to us; effective defense of our intellectual property; legislative, regulatory, accounting and taxation changes in the countries in which we operate; and any risk or uncertainty as listed from time to time in our press releases, earnings reports or annual reports. Cautionary statement regarding unaudited consolidated financial information All financial information prior to and including the second quarter ended June 30, 2011 is unaudited and has not been reviewed, as we began filing our consolidated financial report in the third quarter ended September 30, In addition, the fourth quarter ended December 31, 2011 financial information is unaudited and is calculated as the difference between the full year amount and the nine months ended September 30, 2011 amount reviewed by our auditor. We prepared the unaudited consolidated financial information on the same basis as our audited consolidated financial statements. 12