Second Quarter Fiscal 2012 Results

Transcription

1 Dear Fellow Shareholders: Today, we are pleased to report another solid quarter. We met our expectations for both revenue and operating income for the second quarter, driven by growth in our existing games, as we prepare to launch new games in the upcoming quarters. Q2 was also a very active quarter on the strategic front, with several announced acquisitions, partnerships and investments that will further strengthen our slate of robust franchises and help them to continue to grow year after year. Most recently, we announced our acquisition of Japanese mobile game developer inblue Inc ( inblue ), and our investment to become the largest shareholder of NCsoft Corporation ( NCsoft ). After the close of Q2, we also announced our partnership with Electronic Arts Inc. ( EA ) to publish FIFA Online 3 in Korea. Each quarter, we post a shareholder letter like this one, along with our financial statements, on our website at We host a question-andanswer conference call the same day with our management team, during 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. Second Quarter Fiscal 2012 Results The table below summarizes our Q2 results, along with the previous four quarters for comparison. Selected Consolidated Operations Data 1 (Millions of yen, except per share data) FY Ended December 31, 2011 FY Ending December 31, 2012 Percent Change Q2 Q3 Q4 Q1 Q2 YoY Revenues 20,456 24,156 22,190 30,377 22,876 12% Operating income 8,605 10,948 9,354 17,384 10,678 24% Net income 5,120 7,232 5,815 12,377 6,768 32% Adjusted net income 2 5,507 7,582 6,153 12,738 7,148 30% Earnings per share 3 : Basic EPS Adjusted EPS Cash and deposits 44,291 44, , , ,089 Footnotes: 1 Prepared in accordance with Japanese GAAP, which is rounded down to the nearest million yen. 2 Adjusted net income is a non-gaap measure that excludes 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. 3 Adjusted to reflect the 1:100 stock split that occurred on July 21,

2 The following table is a summary of our key metrics for the quarter. Selected Customer Metrics 2011 Q Q2 MAU 83.1 million 77.4 million Pay Rate 7.8% 10.3% ARPPU 1, 2 1,538 1,521 Footnotes: 1 ARPPU (Average Revenue per Paying User) is the average of monthly ARPPUs for the quarter. 2 ARPPUs are in current currency. On a constant currency basis (using 2011 currency exchange rates), ARPPU for Q would have been 1,524. MAUs for the quarter were down modestly from 83.1 million to 77.4 million, which was expected since we introduced no new major games in any of the last three quarters. In Korea, we think competition may have impacted usage and therefore MAUs of our games at some point during the quarter. This effect is difficult to gauge, but in looking at PC Café data, it appears that Nexon s market share of gameplay time for some of our products was temporarily impacted by the introduction of competitive products. Nevertheless, total hours of gameplay were up in both Nexon s games and the industry overall. That is, the launch of new games into the marketplace drove up aggregate usage of games overall, which also benefited Nexon s games in the quarter. This is a pattern that we have seen in the past. In the meantime, our products continue to set records. In June, Dungeon&Fighter set a new record for MCCUs, a measurement of both number of active users and engagement. Our Pay Rate was 10.3%, up from 7.8% a year ago. ARPPUs were in line with levels from a year ago, and up slightly on a constant-currency basis. The following table presents our revenue results on a constant currency basis (i.e., applying the average exchange rate from Q2 2011) in order to show the growth rates without the effect of fluctuating exchange rates compared to last year. 2

3 Revenue by Region (Millions of yen) Revenue for the Quarter Ended June Q Q2 As- Reported Percent Change Constant Currency Percent Change 3 Korea 6,237 6,251 0% 9% China 7,805 10,737 38% 49% Japan 3,214 2,826-12% -12% North America 1,511 1,515 0% 4% Europe and Others 2 1,688 1,545-8% 1% Nexon Total 20,456 22,876 12% 20% Footnotes: 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 Co., Ltd. ( Nexon ) entities. 2 Others: United Kingdom, other Asian countries, and South American countries. 3 Constant currency percent change is the growth rate had the currency rate not changed from Q Rates used: 1,340 Korean won/100 Japanese yen, Japanese yen/chinese yuan and Japanese yen/u.s. dollar. As you can see, the strong Japanese yen compared to a year ago reduced our asreported results. Had the yen not grown stronger, our revenues would have shown 20% growth over Q2 of last year. We generated approximately 88% of our revenue in Q2 from non-yen currencies, of which the Chinese yuan and Korean won make up the large majority. In Q2, total revenues were billion, an increase of 12% over Q2 2011, or 20% on a constant currency basis. In addition to continued growth from our major existing titles, our newer free-to-play titles such as Mabinogi Heroes and Cyphers are demonstrating the kind of growth we hope to see from recently launched games, and have the potential to join the ranks of our largest game franchises. Worldwide, Mabinogi Heroes revenue increased 60% year-over-year. Although it is still very early days for Cyphers, which launched in June 2011 in Korea, monetization appears to be taking hold, and paying users increased 36% over Q Consolidated operating income was billion in Q2, an increase of 24% yearover-year. Our operating income margin was 47% in Q2 of this year, up from 42% last year. Operating income margin was again above our long-term target range of 40-45%, but we expect it to come down over time as we continue to invest in new development capacity. 3

4 We manage our global business and present our results by major geographies, each of which has different user and growth characteristics. Below, we discuss each territory s performance for Q and the driving factors behind the results. Korea Revenues for the Korea region in Q were 6.25 billion, flat versus a year ago. On a constant currency basis revenues were up 9%. As we have mentioned in the past, Q2 is typically a seasonally softer quarter for Nexon, so our live game activity was focused on releasing small updates in most of our games, supported by marketing programs to promote engagement. MapleStory released two mini-games timed to coincide with its ninth anniversary event. In April, Sudden Attack released the Ace Mode update, which sets up a game of survival between teams of five players. The following month s Shoot Out Mode update for Sudden Attack enables the team with the last player standing to win. Dungeon&Fighter launched the Pincer Operation update in May, which gives players the ability to summon mercenaries in dungeons to battle by their sides. Mabinogi s Maestro of the Battlefield: Bard update in April included a new future job wish called Bard; several new events such as the Dynamic Battle System, which delivers instant spell casting; and other new in-game content. For Counter-Strike Online we released new massive weapons and special mode maps. Additional updates were also launched for Vindictus and Dragon Nest. Cyphers, our newest online game, released two new characters with supernatural powers, resulting in our second-highest MCCUs for the game, a major accomplishment in a seasonally slower quarter. As mentioned above, early results for Cyphers indicate to us that the game is on a solid growth track. As we enter the summer season, we have been releasing larger updates for all of our major games, supported by aggressive marketing plans to take advantage of what is traditionally an active quarter for gamers. Our newly reorganized team in Korea is hard at work on the mobile games front. We launched six new smartphone games during the quarter. Dungeon&Fighter Female Gunner was released for the Android Market and MapleStory Live s free version was released for the ios and Android Market. We also launched Shadow Move, a 3D puzzle game, on ios. Additionally, we published KartRider Rush Plus the Korean version of the MMORPG Empire Online, developed by Lakoo, on ios. KartRider Rush Plus, for the Android Market, based on the original KartRider game, was downloaded 2 million times within a month after its release. Lastly, Space Tanks, a tank battle game, launched on ios. 4

5 China Our China business again delivered strong results. In Q2, revenues reached billion in the region, an increase of 38% year-over-year, or 49% on a constant currency basis. China was our largest region for the quarter at 47% of total revenues. During the quarter we released updates for most of our games. In KartRider, we had several releases that contributed to year-over-year revenue growth of the game, including a Labor Day update that revealed a new Ghost Mode and the Shaeffer Z7 update that introduced a new kart body. We released several patches for Counter-Strike Online in preparation for a major summer update. These patches were designed to enhance gameplay and in-game communication between players. Smaller updates in the game delivered a new Shooting Star weapon, new mode maps and new quests. Dungeon&Fighter celebrated its fourth anniversary by offering players multiple tools and awards such as game coins and jewelry. We also released a large update called Revolution, which included a new Male Mage (Magician) character along with specialized classes known as Elemental Master and Glacial Master. For MapleStory players, we renewed certain popular character classes including Adventurer, Cygnus Knights and Extreme Adventurer. Our newer title, Mabinogi Heroes, released a new character, Kay, which drove a 200% increase in weekly registrations from the previous week. Japan For Q2, revenues in Japan were 2.82 billion, a decrease of 12% year-over-year. We launched updates for MapleStory, Dungeon&Fighter, Mabinogi and Mabinogi Heroes during the quarter. For MapleStory, we released the Justice update which introduced Phantom, a new character class with unique skills and a weapon called the Cane used to attack in-game monsters. In April, we released Innovation, one of our larger updates for Dungeon&Fighter. As part of the update, a new Male Mage character class provided an incentive for players that had previously played the game to log back in. To promote the update we partnered with Fate/Zero, a popular anime television show. On May 24 we launched the Genesis update for Mabinogi, adding Minstrel, a new job. Mabinogi Heroes kicked off the release of a three-part update that included new episodes (dungeons) and maps. In addition to our existing games, on April 26 we started service for KartRider, our popular online multiplayer racing franchise. To promote the launch, we partnered with Toyota and several Japanese celebrities. We also started a closed beta of NAVYFIELD2 on June 27. In Japan, the large majority of gamers have traditionally been either on console or mobile. Thus, the focus of our new game development in Japan is on mobile 5

6 platforms, with an emphasis on experimenting with new genres and new types of gameplay. During the quarter, we launched MapleStory Brave Monsters, a social card battle game on the GREE platform. The game accumulated 100,000 registered users within two weeks. On June 19, we published Ukishima Fuwarin, a localized version of Rule the Sky, the top-grossing ios game in Korea, which was developed by JC Entertainment. North America Revenues in North America were 1.51 billion, flat versus the second quarter of On a constant currency basis, revenues increased 4%. This quarter we delivered greater stability in our games, and thanks to the ongoing hard work of our live operations and security teams, we are starting to see an increase in our user base. As we achieved greater stability and consistent uptime in our games, we were able to release updates for all of our titles in North America. We supported these updates with strong marketing campaigns to promote the new content. We released two updates for MapleStory and celebrated its seventh anniversary with in-game events. The third phase of the Alliance update introduced new quests and allowed players to create a popular Legends character for a limited period of time. At the end of May, we released the Renegades update, offering an exclusive character to North America named Jett, a gun-wielding space bounty hunter. Mabinogi had a strong quarter supported by the release of the Fighter s Way update in May. The update added a fighter storyline with a new fighter class, as well as Macbeth, the final character in the game s Shakespearean content. In addition, we opened the Beauty Shop, another cash shop system. Earlier in the quarter, we released the Merchant class update which included a new class and commerce system, as well as new weapons. At the end of June, we released the Genesis update, renewing the combat system in the game. For Dungeon Fighter Online, we released the Omen of the Apocalypse update and introduced three new dungeons. Later in the quarter, we released a larger update called Revolution in which we introduced a new Male Mage, four new dungeons, a new quest system and improved the graphics resolution of the game. We had three updates for Combat Arms, which introduced new maps and an MVP leader board. The largest of the three updates was Spiders vs. Scorpions, which added two maps in Quarantine mode and kicked off the month-long Spiders vs. Scorpions event. We also introduced updates to Dragon Nest, Atlantica Online, Vindictus and Sudden Attack. At the end of the quarter, we launched Vindictus, Dungeon Fighter Online and Atlantica Online on the STEAM platform, making our games available to a broader audience. 6

7 We continue to manage the security and stability situation in North America, and while we feel we have made significant progress, that progress will ultimately be measured in our financial results for the region. Europe, Southeast Asia and Other Regions Our revenues in Europe, Southeast Asia and our other regions were 1.54 billion, a decrease of 8% year-over-year. On a constant currency basis, revenues increased 1%. We had several updates in Europe during the quarter. We launched the first part of the Legends update in MapleStory, which included a new Cannoneer character, a Pirate that wields a hand cannon, and a new map called Coco Island. We had several small updates for Combat Arms that provided a new map, a new MVP system and multiple weapons. We also released a number of new maps and skills to Atlantica Online, and Vindictus also received smaller updates throughout the quarter. On April 25 we completed our data center migration from Germany to Luxembourg. With this migration, Nexon Europe now has the capacity to maintain and support more publishing services and expand our servers for existing games at a lower cost. In Southeast Asia, where we currently operate in seven countries, we launched several updates during the quarter to MapleStory and Counter-Strike Online in Taiwan, and Atlantica Online in Indonesia. Upcoming Games Our new game development teams have been hard at work finalizing games for our upcoming launches slated for Q3 and Q4 of These games include: Epic of the Three Kingdoms, a 3D MMORPG based on the novel The Three Kingdoms, will launch in Korea later this year. The game is built on the Unity 3D engine and is therefore playable across multiple platforms, including PC and mobile devices. Epic of the Three Kingdoms 7

8 Counter-Strike Online 2, a sequel to our hit FPS Counter-Strike Online that we co-developed with Valve Corporation, is expected to launch in closed beta in Korea in Q Mabinogi 2 (final title TBA), based on the Mabinogi back-story, is an entirely new game with a completely different Counter-Strike Online 2 game world and game-play characteristics than the original. We believe it will unlock a new audience for our games. We are very excited about all three of these free-to-play games. They are designed to break new creative ground through significant gameplay innovations. As with all of our newly launched games, we will carefully monitor how these games are resonating with their audiences, and continue to invest in them through live game development should they prove successful. In addition to the games from internally developed studios, we are very excited about our upcoming games through our publishing relationships. These include FIFA Online 3, discussed in more detail below, Warface and Pro Baseball 2K. We feel the combination of our strong existing games business, plus our new games under development, forms a strong foundation for lasting growth. As we discussed above, we remain focused on building our position on mobile platforms. During the quarter we launched a total of 13 games on mobile platforms (ios, Android, GREE and Mobage), and plan to introduce 11 more before year s end. We see mobile as a logical extension of our strong and growing free-to-play business. As more mobile devices have the graphics and connectivity necessary for immersive, synchronous gameplay, we want to be positioned to deliver outstanding free-to-play games for those platforms. Our approach continues to be one of rigorous experimentation. We find that our best results happen when we push the creative boundaries of a genre and try new approaches. As a result, many of our games look and play differently than the current leading titles on a platform. Acquisitions and Partnerships In early June, we became the largest shareholder in NCsoft through the acquisition of 14.7% of the outstanding shares. This strategic relationship brings together NCsoft s strong pipeline of IP and our leading international publishing platform and free-to-play expertise. By becoming NCsoft s biggest shareholder, we believe the 8

9 agreement opens the door to future commercial relationships, such as codevelopment of games and leveraging NCsoft s IP in international territories. We are currently in active dialogue with NCsoft s team regarding a variety of mutually beneficial opportunities. FIFA Online 3 After the close of the quarter, we announced our partnership with EA to publish FIFA Online 3 in Korea, which will launch next fiscal year. FIFA is the world s premier sports franchise, as well as one of the biggest online franchises in Korea, and we believe we can further build on its success by leveraging our operational games expertise. In June, we acquired inblue, a developer of mobile social games primarily for the GREE platform in Japan, to further accelerate our efforts in mobile games development. inblue has grown rapidly since its establishment in 2010 to become an award-winning developer and their game Chouhakai! Barbarossa (Barbarossa Destruction) is currently ranked as one of the top games on the GREE platform. The company recently launched Zero Senki bydimension-zero (Chronicles of the Zero War), based on a highly popular Japanese collectible card game. We expect to continue the successful momentum of these titles by launching several new games over the coming months. We also increased our investment in JC Entertainment to 29.5%. JC Entertainment s mobile title, Rule the Sky, has consistently held the number one spot in Korea s Top Grossing chart in both the ios App Store and Android s Google Play. It also reached the number one spot among all free ios games in Japan approximately 10 days after its release. Lastly, we recently announced that we have raised 50 billion in debt financing. This capital enables us to leverage the very favorable borrowing rates currently available to us in the market and provides us with additional strategic flexibility, including potentially for M&A, should we decide to use it. Our approach to M&A, however, remains unchanged: we want to be prepared to move quickly and aggressively when opportunities arise, but we will do so only when we see ways to prudently build the business for the long-term. 9

10 Business Outlook We are reducing our business outlook slightly for the full fiscal year 2012 to revenue of billion and operating income of 47 billion. This equates to an increase in revenue of 19% year-over-year, or approximately 22% on a constant currency basis. In the third quarter of 2012, we expect revenues of 24.9 billion, an increase of 3% versus the third quarter of 2011 (5% on a constant currency basis). Our outlook reflects our internal plan, which is based on a rigorous bottoms-up review of our titles by region, and multiple planning scenarios for MAUs, pay rates, and ARPPU. As we write this letter we are currently in the very dynamic summer months, in which we are introducing content updates to several of our games around the world. While our titles are delivering solid results in revenue and operating metrics, based on very early indications we believe that a small downward revision in our full-year outlook is prudent. Business Outlook (Millions of yen, except per share data) FY Ended December 31, 2012 Q3 (E) Full-Year (E) Revenues 24, ,334 Operating income 9,249 47,082 Net income 6,598 32,737 Adjusted net income 1 7,007 34,294 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. The exchange rate assumptions we have used in our business outlook are presented below. Exchange Rate Assumptions Exchange Rate yen / Korean won 1,429.3 U.S. dollar (USD) 79.7 Chinese yuan (RMB) 12.6 Footnote: 1 The exchange rates we used in our business outlook are based on the average rates from January 2012 to the end of June

11 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 2.2 billion revenue impact and a negative 0.7 billion operating income impact in the fiscal year. For example, a 100 weakening against KRW100 would add about 2.2 billion of additional revenue but subtract about 0.7 billion of operating income. A change of one Japanese yen in the Chinese yuan (RMB) exchange rate would have a significant impact on both revenue and operating income. For example, a 100 weakening against RMB100 would add about 3.7 billion in additional revenue and about 3.6 billion in additional operating income in the fiscal year. Changes in the exchange rate of the Japanese yen against the U.S. dollar do not have material impacts on our yen-denominated results compared to Korean won or Chinese yuan since our U.S. dollar-denominated revenue and cost constitutes a small proportion of our total revenue and cost. Our Opportunity Nexon continues to deliver industry-leading growth at high scale and profitability. Nexon s goal is simple: to be the world leader in online games. To reach that goal, we have a straightforward strategy comprised of four major elements: - Enhance and extend our existing game franchises; - Broaden our portfolio through new game introductions; - Expand geographically; and - Bring our games to new platforms and devices We have focused on these four initiatives continuously and aggressively since our inception, and that focus has resulted in very consistent results: high growth and high profitability year after year. We think this clarity of vision and consistency of results makes us unique in the games business. Sincerely, Seungwoo Choi, CEO Owen Mahoney, CFO Tokyo, Japan 11

12 Glossary of Terms Term / Abbreviation AOS 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 AOS is a sub-genre of the real-time strategy genre, in which two teams of players compete with each other in discrete games, with each player controlling a single character through an RTS-style interface. A game in which the player plays from the point of view of the game character in threedimensional graphics. A game that is usually played from a third-person perspective, in which 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 generally 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. 12

13 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-to-play/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 With the exception of the first quarter ended March 31, 2012, all of our three month financial results, beginning with the fourth quarter ended December 31, 2011, are unaudited. We prepare the unaudited consolidated financial information on the same basis as our audited consolidated financial statements. 13