Nexon Investor Presentation Q3 2012 NEXON Co., Ltd.
Q3 2012 Results 2
Highlights Quarterly revenue of 24.2 bn and operating income of 10.0 bn Revenues flat YoY, up 3% on constant currency basis, slightly below (-2.8%) management outlook Operating income down 8% YoY, above (+8.5%) management outlook; operating margins of 41% China continues to grow, with revenues of 11.4 bn (+31% YoY, +36% on constant currency basis) High level of competition in Korea in Q3 relative to Nexon s release and update schedule Transformative acquisition of gloops, Inc. Establishes Nexon as the #1 independent mobile game developer 1 by revenue Immediately accretive to Nexon Strong growth opportunities in Japan and internationally Diversifies revenue base significantly Entering 2013 with strongest pipeline to date Dota 2 reinforces our competitive position in Korea and Japan; expected launch mid-2013 FIFA Online 3: positive feedback/engagement metrics collected from first closed beta Q4 pipeline also includes Counter-Strike Online 2, Warface, Epic of the Three Kingdoms Revising Q4 outlook to reflect competitive environment, gloops acquisition and pipeline 1 Based on publicly available information 3
Summary of results 1 and key operational metrics (in millions, except per share data and metrics) Prev. vs. Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Outlook QoQ YoY Outlook Revenues 24,156 22,190 30,377 22,876 24,256 24,943 6.0% 0.4% -2.8% Operating income 10,948 9,354 17,384 10,678 10,032 9,249-6.0% -8.4% 8.5% Ordinary income 10,170 8,627 17,677 9,368 9,057 9,191-3.3% -10.9% 1.5% Net income 7,232 5,815 12,377 6,768 6,348 6,598-6.2% -12.2% -3.8% Adjusted net income 2 7,582 6,153 12,738 7,148 6,791 7,007-5.0% -10.4% -3.1% Earnings per share 3 Basic EPS 20.39 15.59 28.82 15.63 14.63 15.30 Adjusted EPS 21.37 16.49 29.66 16.51 15.65 16.24 Customer metrics MAU (millions) 87.3 80.0 82.8 77.4 78.8 Pay Rate 9.3% 9.9% 10.9% 10.3% 9.6% ARPPU 1,486 1,350 1,761 1,521 1,729 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 related to our acquisitions and negative goodwill in the case of acquisitions occurring before April 1, 2010, 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, 2011. 4
Quarterly revenues and operating income (Unit: millions) Revenues Operating income 35,000 35,000 30,000 30,377 30,000 25,000 24,156 22,190 22,876 24,256 25,000 20,000 20,000 17,384 15,000 15,000 10,000 10,000 10,948 9,354 10,678 10,032 5,000 5,000 0 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 0 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 5
Q3 2012 Regional Highlights 6
Revenue by region 1 Q3 2012 revenue by region North America 6% Others 7% Japan 13% China 47% Korea 27% (in millions) YoY YoY Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 As-reported Constant currency 3 China 8,684 8,281 15,175 10,737 11,404 31% 36% Korea 8,521 7,224 8,856 6,251 6,578-23% -20% Japan 3,459 3,687 3,096 2,826 3,231-7% -7% North America 1,700 1,407 1,397 1,515 1,340-21% -22% Europe and others 2 1,791 1,590 1,850 1,545 1,701-5% 1% Total 24,156 22,190 30,377 22,876 24,256 0% 3% 1 Based on the region in which revenues originate. Not a presentation of our revenues according to Nexon entities. 2 Others: United Kingdom, other Asian countries, and South American countries. 3 YoY Constant currency is the growth rate had the currency rate not changed from Q3 2011. Rates used: 1,344 Korean won/100 Japanese yen, 12.39 Japanese yen/chinese yuan, and 80.66 Japanese yen/u.s. dollar. 7
China Highlights Continued strength; largest portion of revenue Growth driven primarily by top 2 titles Dungeon&Fighter and Counter-Strike Online both launching successful updates for summer and national holidays (Unit: millions) 16,000 14,000 15,175 YoY% change As-reported: +31% Constant currency: +36% 12,000 10,737 11,404 10,000 Upcoming pipeline: Cyphers Award winning action MMO gaining traction in Korea Alpha test: Q4 2012 Commercial launch: 2013 8,000 8,684 8,281 6,000 4,000 2,000 0 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 8
Korea Highlights As anticipated at last quarter s update, a competitive quarter in the region s peak season for games (Unit: millions) 10,000 Several blockbuster releases by global competitors impacted the hardcore market Our key titles MapleStory, Dungeon&Fighter, Sudden Attack maintained top positions No major Nexon releases or updates 9,000 8,000 8,521 7,224 8,856 YoY% change As-reported: -23% Constant currency: -20% Nexon updates for the quarter prioritized user retention rather than monetization 7,000 6,251 6,578 Strengthened gameplay elements to keep players engaged and extend game lifetimes Short-term impact on revenue as a result 6,000 5,000 Solid slate of new games for Q4 and 2013 Dota 2, FIFA Online 3, Counter-Strike Online 2, Warface, Epic of the Three Kingdoms, and others Mabinogi 2: first collaborative project with NCsoft 4,000 3,000 2,000 1,000 Epic of the Three Kingdoms 0 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 9
Japan Highlights Continue to be a market leader in PC online Dota 2 expected to grow existing PC business Transformative acquisition of gloops, Inc. Japan now 33% of worldwide revenue 1 Growth opportunities: 1) Leverage Nexon s IP on mobile 2) Leverage Nexon s live development expertise to extend gloops games user lifetimes 3) Leverage Nexon s international footprint to expand gloops globally (Unit: millions) 4,000 3,459 3,500 3,000 2,500 2,000 3,687 3,096 YoY% change As-reported: -7% Constant currency: -7% 2,826 3,231 Positioned to return to double digit growth 1,500 1,000 500 0 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Note: Q3 2011 results include contribution from inblue Inc. 1 Based on illustrative Q3 2012 pro forma 10
North America/Europe and others Highlights North America Hacking and server issues under control Focusing on customer acquisition and retention to rebuild our userbase Made changes to management team and added key live operations personnel from Korea (Unit: millions) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1,700 1,407 1,397 YoY% change As-reported: -21% Constant currency: -22% 1,515 1,340 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Europe and others (Unit: millions) 2,500 YoY% change As-reported: -5% Constant currency: +1% Europe up 12% YoY on a constant currency basis Continue to build out team in our new Luxembourg office 2,000 1,500 1,791 1,590 1,850 1,545 1,701 Focused on establishing the infrastructure needed to support larger games in the market 1,000 500 0 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 11
Q4 2012 and Full Year Business Outlook 12
Summary of business outlook (in millions) Prev. Outlook Revised Outlook Nexon Group (excluding gloops) gloops (standalone) Nexon Group (including gloops) 3 Full year 2012 Q4 2012 Full year 2012 Q4 2012 Full year 2012 Q4 2012 Full year 2012 Revenues 104,334 21,263 ~ 24,000 98,773 ~ 101,510 6,200 ~ 6,700 6,200 ~ 6,700 27,463 ~ 30,700 104,973 ~ 108,210 Operating income 47,082 5,580 ~ 8,102 43,676 ~ 46,198 1,500 ~ 1,800 1,500 ~ 1,800 6,335 ~ 9,157 44,431 ~ 47,253 Ordinary income 46,043 5,770 ~ 8,292 41,873 ~ 44,395 1,500 ~ 1,800 1,500 ~ 1,800 6,525 ~ 9,347 42,628 ~ 45,450 Net income 32,737 3,188 ~ 5,099 28,684 ~ 30,594 900 ~ 1,080 900 ~ 1,080 3,381 ~ 5,471 28,876 ~ 30,966 Adjusted net income 1 34,294 3,597 ~ 5,507 30,275 ~ 32,185 900 ~ 1,080 900 ~ 1,080 4,441 ~ 6,531 31,119 ~ 33,210 Earnings per share 2 Basic EPS 75.88 7.34 ~ 11.74 66.31 ~ 70.72 7.78 ~ 12.59 66.75 ~ 71.59 Adjusted EPS 79.49 8.28 ~ 12.68 69.99 ~ 74.40 10.22 ~ 15.03 71.94 ~ 76.77 Tier 2 content updates focused on supporting game community rather than bolstering near-term revenue Lowered guidance reflects reduced expectations in North America and Europe regions for the upcoming holiday season and focus on engagement over near-term monetization for Korea and China Japan expected to return to double digit growth in Q4 with gloops 1 Adjusted net income is a non-gaap measure that excludes non-cash amortization of goodwill related to our acquisitions and negative goodwill in the case of acquisitions occurring before April 1, 2010(, 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, 2011. 3 Business outlook includes amortization impacts resulting from consolidation 13
Acquisition of gloops 14
Overview Immediate and significant opportunities in the Japanese mobile games market Mobile is now the largest market by revenue in Japan Mobile games market estimated to be 425 billion 1 in 2012 Overview of gloops, Inc. Founded: 2005 Located: Tokyo, Japan Financials for 12 months ended June 30, 2012 2 Revenue: 23.7 billion Operating income: 5.8 billion Robust IP portfolio (Unit: billions) 2012 Japanese game markets size estimates 1 500 425 400 281 300 200 80 100 - Mobile Console PC online Guardians of the Royale Three Kingdoms Guild Battle Transaction details Transaction amount: JPY 36.5 billion Financed from cash on hand Transaction closed October 1, 2012 Warriors of Odin Japan Pro Baseball Card Battle 1 Sources: Nomura Equity Research (Mobile), Enterbrain, Inc. (Console). Console revenue excludes hardware sales. 2 Unaudited. 15
Transformative deal driving Nexon s mobile expansion Strong financial contribution 36.5 billion purchase price: 5.5x EV/EBITDA 1 Immediately accretive to Nexon Substantial opportunities for growth 1) Combine Nexon s popular IP with gloops world-class mobile development 2) Leverage Nexon s live game development expertise to extend user lifetimes of gloops games 3) Leverage Nexon s substantial international footprint to expand gloops business globally Transform Nexon s base of business #1 independent mobile developer 2 20-25% of revenues now from mobile Japan now contributes 33% to revenues 3 1 Based on gloops balance sheet and financials for most recent fiscal year ended June 30, 2012 2 Based on publicly available information 3 Based on illustrative Q3 2012 pro forma 16
Illustrative pro forma: Q3 2012 Nexon Group Q3 2012 Pro Forma 1 31.1 24.2 Financial impact (Units: billion) Revenue Operating income 10.0 11.5 gloops Nexon group Regional diversity North America 6% Others 7% China 47% Japan 13% Korea 27% North America Others 5% 4% Japan 33% China 37% Korea 21% Mobile 3% Platform expansion PC Online 97% PC Online 76% Mobile 24% 1 For illustrative purposes only. Based on Nexon s Q3 2012 revenue and gloops unaudited quarterly revenue for the 3 months ended September 30, 2012. 17
Key Titles Three Kingdoms Guild Battle XXX Online real-time synchronous battles among player guilds. Features characters from Three Kingdoms lore. Japan Pro Baseball Card Battle Card battle game based on Japan s official professional baseball league. Over 1,200 cards available based on real life players. Warriors of Odin Online real-time synchronous battles among player guilds. Set in a fantasy world, players fight alongside Odin to defeat the dark forces of Ragnarok. Guardians of the Royale Evolutionary step in synchronous gameplay, with battles between guilds taking place on interactive maps adding freedom of movement to gameplay 18
New and upcoming launches New title launches Warriors of Odin (Global Launch) Released: October 2012 Regions: Global Platforms: ios, Android Global version of highly popular game in Japan which pioneered real-time battle game featuring synchronous PvP combat between guilds MLB Winning Streak Released: October 2012 Regions: Global Platforms: ios, Android Trading card battle game based on the MLB franchise Upcoming releases Several titles for Mobage (Japan) currently in development for launch in Q1 2013 Planning to launch 10 titles in 2013 Titles targeting overseas markets currently in development 19
Upcoming Pipeline 20
Key upcoming titles: Dota 2 and FIFA Online 3 Regions: Korea, Japan Expected launch: mid-2013 Sequel to the pioneer of multiplayer online battle arena games which inspired League of Legends 172,000 MCCU 1 generated in North America s OBT Regions: Korea Launch schedule 2 nd CBT: November 27 OBT: December Commercial launch: 2013 Extremely positive feedback and high retention rates from 1 st CBT held in September 1 Maximum Concurrent Users 21
Strong pipeline Epic of the Three Kingdoms Regions: Global Launched October 25, 2012 (OBT) High quality cross platform game targeting tablet, mobile, and PC Counter-Strike Online 2 Regions: Global Expected launch (Korea): Q1 2013 (2 nd CBT in November, OBT in December) Co-developed with Valve Sequel to one of Nexon s top global FPS titles Warface Regions: Korea Expected launch: Q1 2013 (2 nd CBT in November, OBT in January) Triple AAA military MMOFPS Partnered with Crytek, developer of the critically acclaimed Crysis series Mabinogi 2: ARENA Regions: Global Expected launch (Korea): 2013 First collaborative project with NCsoft Large scale fantasy MMORPG 22
Introduction to Nexon s Business 23
Nexon overview 1.3 billion+ cumulative player registrations 60 titles+ in games portfolio 100 countries+ serviced 10 years+ of revenue growth Other North America Japan Korea China 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Note: 2001 to 2007 revenues from audit reports of NXC, Nexon s parent company. 2008 revenues from Nexon s unaudited Consolidated Financial Statements. Revenue breakdown by region is available from 2009. 24
Pioneers of the Free-to-play (F2P) business model Free-to-play (F2P): Users play games for free and use virtual currency to purchase in-game items to enhance their playing experience MapleStory Gameplay MapleStory In-Game Item Shop Counter-Strike Online Gameplay Counter-Strike Online In-Game Item Shop 25
F2P: Revenue model MASSIVE AUDIENCE (MAU 1 ) Pay rate ARPPU 2 Retention As of Q3 2012: - MAU: 78.8 million - Pay rate: 9.6% - ARPPU: 1,729 FY2011 Consolidated Revenue: 87.6 billion 1 Monthly Active Users 2 Average Revenue per Paying User 26
Development Cost Development Cost Revenues F2P: Revenues and development costs Packaged Goods F2P Online Revenues Time Packaged Goods F2P Online Product Development Revenue Generating Product Development Revenue Generating Development costs Period 2 5 years Period 1 2 years Period 1 3 years Period Over 10 years Initial Costs Initial Costs Continuous Development Time Time 27
Key franchises Title Year of Launch Cumulative Gross Revenue 1 2005 $2,000,000,000+ 2003 $1,500,000,000+ 2004 $500,000,000+ 2 2008 $400,000,000+ 2004 $300,000,000+ 2006 $300,000,000+ 2008 $100,000,000+ 1 Cumulative gross revenue over the life of each game as of March 31, 2012 includes revenue received from local publishing partners in areas where Nexon doesn t publish directly (e.g. China), and those generated prior to acquisition by Nexon (MapleStory in 2004, Dungeon&Fighter in 2008, Sudden Attack in 2010, and Atlantica in 2010). 2 Shared franchise jointly developed by Nexon and Valve. 28
Growth drivers Growth of existing titles Introduction of new IP Epic of the Three Kingdoms Expansion to new geographies Expansion onto new platforms 29
Growth drivers: Growth of existing titles Mabinogi : Revenue by Geographic Market North America (2008) Europe (2010) China (2005) Japan (2005) Taiwan (2005) Korea (2004) ( ) indicates year of launch 2004 2005 2006 2007 2008 2009 2010 2011 30
Growth drivers: Introduction of new IP Epic of the Three Kingdoms 31
Growth drivers: Expansion to new geographies 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (Kingdom of the Winds) Q3 2012 revenue breakdown by region North America 6% Others 7% Japan 13% China 47% Korea 27% 32
Growth drivers: Expansion onto new platforms 33
Worldwide leader in immersive F2P games Offline Online Single Player Multiplayer Pay-to-play Free-to-play 34
Disclaimer This presentation is prepared to offer reference information about NEXON group to the investors. NEXON Co., Ltd. ( Nexon ) has not verified and would assume no responsibility for the accuracy, appropriation, or completeness thereof. This presentation does not contain all relevant information relating to Nexon or the sale of its shares, including, without limitation, the information that would be stated under the captions Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations and Business in an annual report. Any investment decision with respect to any shares of Nexon should be made solely upon the basis of the information contained in the disclosure documents and is qualified in its entirety by reference to the detailed information appearing in the disclosure documents. This presentation includes forward-looking statements. In some cases, you can identify forward-looking statements by terms such as anticipate, assume, believe, estimate, expect, forecast, may, plan, potential, predict, seek, should, or will, or by other similar terminology. These statements discuss expectations, identify strategies, contain projections of Nexon s financial condition or results of operations or state other forward-looking information. The forward-looking statements in this presentation are subject to various risks, uncertainties and assumptions about Nexon s business and results of operations. The expectations expressed in these forward-looking statements may not be achieved, and actual results could differ materially from and be worse than expectations. Potential risks and uncertainties that could cause actual results to differ materially from expectations include, without limitation: Continued growth and popularity of Nexon s key titles; Nexon s ability to maintain favorable relationships with key licensing partners; Nexon s continued ability to offer games in China, through local partners or otherwise; Nexon s ability to compete effectively in the online games industry; Nexon s ability to address hacking, viruses, security breaches and other technical challenges; Fluctuations in currency exchange rates; Nexon s ability to maintain and further develop its brand name; 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; Nexon s ability to adapt to new technologies; Nexon s ability to enter into licensing arrangements for third-party titles on terms favorable to it; Effective defense of Nexon s intellectual property; and Legislative, regulatory, accounting and taxation changes in the countries in which Nexon operates. Nexon does not intend, and disclaims any duty, to update or revise any forward-looking statements contained in this presentation to reflect new information, future events or otherwise. We caution you not to place undue reliance on the forward-looking statements contained in this presentation. 35