NHN Corporation (A181710) Earnings Call Transcript & Summary

[Interpreted] Good morning, and good evening. Welcome to the conference call for the Fiscal Year 2021 Second Quarter Earnings Results by NHN. Now we shall commence the presentation by NHN.

[Interpreted] Good afternoon. This is [ Ahn Hyuk Lee ] of the IR team here at NHN. Thank you for joining our second quarter earnings conference call. Our CEO, U-jin Chung; CFO, Hyun Shik Ahn; Head of Cloud Business, Do-Min Baek; CEO of NHN PAYCO, Yeon-hun Jeong; and CEO of NHN Commerce, Yoon-sik Lee are also present. The earnings announced today have been prepared based on IFRS consolidated financial statements and are subject to change depending on the results of the external auditor's review that is currently underway. CEO, U-jin Chung, will start off today's conference call with a look at major business topics.

[Interpreted] Good morning. This is U-jin Chung, CEO of NHN. Thank you for joining our second quarter earnings call. On August 1, to mark the eighth anniversary of NHN, the company announced its vision of becoming a global top-tier tech company by year 2030. Everyone at NHN are fully committed to achieving that goal. NHN has been focusing particularly on building its own technology expertise, including advances in its cloud business and also the commercial use of AI technology. Last June, NHN Cloud became the first to pass the public sector cloud pass security certification becoming the only Korean cloud company to receive security certifications for infrastructure, platform and software-based cloud services. Also during second quarter, NHN started to offer commercial services based on its AI technology. For example, NHN Edu held the first AI academic ability test featuring an AI test supervisor to assess basic academic capabilities safely in the age of COVID-19. NHN also launched an AI-based facial recognition service. The facial recognition service recorded a 0% error rate and received a biorecognition certification from the Korea Internet & Security Agency. Our facial recognition service is expected to generate meaningful synergies with our cloud business, for example, with the planned adoption of facial recognition at the Guangzhou IDC of NHN Cloud. We have been busily establishing separate entities dedicated to each technology area as the basis for business growth in each of these areas. And on May 1, NHN DATA was launched as a data technology specialist, targeting the global CDP market. And on August 1, NHN Dooray! was established as a provider of Korea's best all-in-one collaboration solution. At the same time, we have been making bold decisions to stop investments in companies that have become less relevant to the expansion of NHN's own technology expertise, which is part of the global -- which is part of the bigger vision of becoming a global tech company. Next, I would like to go over the highlights of our game business, PAYCO, Commerce and Technology, respectively. First, if we look at our game business, our web working business was able to maintain its revenue on a year-on-year basis despite negative seasonality versus last quarter and also the negative base effect against last year's second quarter when regulations were eased. PC webboard games continued to benefit from the cross-platform linking of the PC and mobile accounts and recorded a 6% growth in revenue year-over-year. As Korea's #1 webboard game company, NHN has continued to explore new ways of creating a better gameplay experience within the requirements set by relevant regulations and government policies. For example, to add diversity to gameplay in the Hangame app, we recently added the Matgo mode in the mobile Seotda and also plan to release new content that would increase communication between users. Hangame Poker Classic, which has been delivering solid performance since its launch on Google is scheduled to launch on iOS within this year, making the game available to a wider audience. For mobile games, business performance was rather weak this quarter with the absence of offline events due to COVID-19 and delays in some IP collaborations. However, COMPASS, which started service in Japan from late July, resumed offline events for the first time since COVID-19 while abiding by all health and safety requirements. LINE: Disney Tsum Tsum and Yo-kai Watch: Puni Puni will focus in the second half of this year on turning around its revenue momentum using collaboration with popular external IP. In terms of a new game lineup, we are planning to launch 2 new mobile games based on popular IP within the year. First will be GUNS UP! Mobile, which is a strategic defense game that is a mobile remake of the Sony PC and console game. The global launch of the game, including North America, is scheduled during October, and preregistration has already opened since August 10. Dragon Quest Keshikeshi is a mobile puzzle game that incorporates the features of the Dragon Quest IP, and our plan is to launch the game in Japan within the year by collaborating with SQUARE ENIX, which is the publisher and IP holder. Next, our PAYCO. The focus has been on the offline services that differentiate PAYCO, such as PAYCO ORDER, mobile meal coupons and campus zone. Synergies across various services offered by PAYCO are becoming tangible as users -- utilization of these PAYCO services are increasing. For example, students that use campus zone on-campus are now using PAYCO ORDER to pick up coffee from a nearby off-campus cafe, and people working from home are using their PAYCO mobile meal coupon from work to order delivery food using PAYCO ORDER. In the case of PAYCO ORDER, more than 60% of the stores that signed up have already launched the service, and we have been redesigning the app screen to make delivery orders more intuitive to expand PAYCO from pickup to delivery. We have also attracted major franchise teams, including the CU convenience stores and BBQ Chicken to PAYCO ORDER. Such efforts have delivered a 3x year-over-year growth in PAYCO ORDER volume. And with delivery spread service scheduled to roll out to the entire country area within the year, we expect that the number of stores that use PAYCO ORDER will also continue to increase. For the PAYCO mobile meal coupons, 59 companies, including NCSOFT and Netmarble were newly added during the second quarter, making it now a total of 860 companies using the service. Transaction volume grew by 27% quarter-on-quarter and 65% year-over-year. In particular, upon request by the companies, our employees can now use our PAYCO mobile meal coupon, not only the PAYCO offline merchants, but also delivery apps or PAYCO ORDER online merchants, which is a differentiating service that can only be provided by PAYCO, which has the Easy Pay experience and also the O2O business know-how. For the Campus Zone, even though most college classes are still being offered online, by offering stronger benefits and adding more outside franchise merchants, Campus Zone has been seeing an increase in the number of active users, GMV and number of orders by more than 2x versus the previous quarter. PAYCO second quarter off-line payments increased by 41% year-over-year. And as of July, the share of offline payments reached 18.5%, which is a 5 percentage point gain versus the same time last year. The focus of PAYCO in the second half will be on increasing payments using PAYCO Points. With the point-to-reward promotions offered by major merchants and the introduction of auto recharging, the second quarter point charging amount increased by 2.5x versus the same period last year. And in the second half, we will promote the PAYCO Points Plus, which comes in both mobile as well as physical card form to drive up the PAYCO Point payment volume. Meanwhile, My Data business is about to undergo service changes within December according to the FSSC guideline. Next, about our Commerce business. NHN Commerce changed its name from NHN Godo to NHN Commerce as of late July. And the name change was to communicate that the company aims to grow beyond the Korean hosting market to become a major player in the cross-border commerce business connect in Korea, China and Japan. NHN Commerce is the leading tech-based commerce service provider in Korea and has rebranded its service lineup under the name of shop by and is on track to an IPO schedule for year 2023. On a consolidated basis, NHN Commerce's GMV increased by 19% year-over-year in second quarter despite soft consumer sentiment in China. In the case of the U.S. commerce business, U.S. retail market overall continues to recover with the effect of wider vaccinations and the U.S. economic stimulus package. And NHN Global's revenue increased by 68% year-over-year and GMV increased by 34%. NHN Global FashionGo successfully held an online trade show, the FashionGo Week in early August, and continues to expand its B2B partner network and market reach, which will be the foundation for its future IPO. Regarding our tech business, NHN Cloud continues to record a high pace growth, and its MSP business in Japan and the U.S. are recording promising growth. NHN Cloud continued to win new contracts from the public sector and recorded an 87% year-over-year growth in the second quarter. In particular, Dooray!, which is an all-in-one collaboration solution, is being provided to various key public institutions such as Seoul National University, [indiscernible] and the government employee pension service as well as private companies, including the 20 affiliates under the Hyundai Development Company Group, Hyundai Oilbank and NS Home Shopping. On August 8, we signed an agreement giving exclusive sales rights of NHN Dooray! to [ Hankyung ] Group. And considering the strong presence of [ Hankyung ] office in the public sector market, the agreement is expected to further accelerate Dooray!'s gain of public sector market share. The global MSP business revenue increased by 22% Q-o-Q and 62% Y-o-Y. Techorus in Japan and Cloudnexa in the U.S. are currently closely sharing their MSP business know-how to maximize synergies. Now that completes the update on the main businesses. And now our CFO, Hyun Shik Ahn, will take you through the second quarter results in detail.

[Interpreted] Good morning. This is CFO, Hyun Shik Ahn. Second quarter revenue was KRW 461.7 billion, which is a 14% Y-o-Y increase and a 0.4% Q-o-Q increase. Operating profit was KRW 23.8 billion, which is a 10% year-over-year decrease and an 18.3% decrease Q-o-Q. Net profit was KRW 15.2 billion, which is an 18.6% increase Y-o-Y and a 36.3% decrease Q-o-Q. Total game revenue was KRW 86.9 billion, which is a 17.6% decrease Y-o-Y and a 22.2% decrease Q-o-Q. PC online game revenue was KRW 39.8 billion, which is an increase of 5.2% Y-o-Y with the continued effects from the mobile and PC account linking for Hangame Poker Classic, but decreased by 12% Q-o-Q due to seasonality. Mobile game revenue was KRW 47 billion, which is a decrease by 30.4% Y-o-Y and 29.1% Q-o-Q due to seasonality of webboard games and overall weak revenue from Japanese games in the absence of events. Total webboard game revenue, which combines both PC and mobile increased by 1% Y-o-Y. And the share of PC game revenue within total game revenue was 46% and mobile games accounted for 54%. The nongame business, including payment and advertisement, commerce as well as the tech business all recorded the highest quarterly revenue. The revenue for the payment and advertising business was KRW 196.2 billion, which is a 25.1% increase Y-o-Y and an 8.3% increase Q-o-Q, thanks to increase in NHN Kcp's PG revenue and also overall increase in the ad execution volume from the ad business. Commerce revenue was KRW 79.6 billion, which is a 19.2% growth Y-o-Y and 2.9% growth Q-o-Q, driven by NHN Commerce's PG as well as solution revenue increase and increase in retail market activity, driven by vaccinations and the U.S. government stimulus package. Tech business revenue was KRW 60 billion, which is a Y-o-Y 51.3% growth and 13.7% Q-o-Q growth, thanks to growth in NHN Cloud and MSP business. The decision to sell PNP Secure was reached on July 1. And so it will be classified as a discontinued operation profit and loss from the third quarter. And the sales of PNP Secure is expected to be completed during the fourth quarter. Content revenue grew by 15.9% Y-o-Y and 7.9% Q-on-Q, thanks to increase in B2B revenue of NHN BUGS, contribution by NHN Ticketlink content production revenue and growth in comico revenue. Next, about the operating expenses and profits. Total operating expense in Q2 was KRW 437.8 billion, which increased by 15.6% Y-o-Y and 1.6% Q-o-Q. Commission expense was KRW 287.5 billion, which is a 3.2% Q-o-Q increase due to increase in commissions tied to revenue for the payment business. Labor cost was KRW 95.3 billion, similar to the previous quarter. Advertisement and marketing was KRW 12 billion, which is a 6.6% decrease Q-o-Q due to decrease in marketing expense for Japanese mobile games and comico. Depreciation was KRW 18.1 billion, which is a 3.1% increase Q-o-Q due to server expansions tied to the cloud business. Other operating expenses was KRW 9.8 billion, which is 11.2% Q-o-Q decrease due to the base effect against Q1, which included certain tax payments and decrease in other expenses for items such as consumables. Operating profit was KRW 23.8 billion, which is a 10% Y-o-Y decrease and an 18.3% Q-o-Q decrease. Net profit was KRW 15.2 billion, which is a 36.3% Q-o-Q decrease against the first quarter, which has seen gains on financial assets and gains from disposition of investments in subsidiaries. That completes our presentation on our second quarter results, and we will now start the Q&A session.

[Interpreted] [Operator Instructions] The following question will be presented by Kim Jin Goo from KTB Investment and Securities.

[Interpreted] I have some questions about your technology, cloud and commerce business. If we look at your second quarter consolidated top line, it had recorded growth both on Y-o-Y and Q-o-Q basis. But for your operating profit level, the operating profit margin has decreased on both Y-o-Y and Q-o-Q basis. This appears to be because the contributions from your game business has decreased, and this is showing up on a decline on your operating level performance. So in that context, 2 questions regarding these new businesses is, when do you think will be the time when the top line contributions from these technology, cloud and commerce businesses will start to show up on your operating profit level? And the second question is then, what is the mid- to long-term recurring or a routine or ordinary operating profit margin that you target internally for each of the technology, cloud and commerce businesses?

[Interpreted] To answer your question. In terms of the top line growth momentum and contributions to our OP profit, I think that would mainly pertain to our technology business and the commerce business. In terms of the commerce business, as you know, it is already making a profit and the profit size is continuing to grow. We have mentioned previously that we're planning to IPO NHN Commerce around 2023 time frame, and that would also be the time when the leverage of the business on our profitability will also be maximized. For the technology business, we are expecting the technology business to pass BEP around the second half of next year. But given the fact that there is a lot of efforts going into the IBC management and also the expansion of the commerce technology business in the regional parts of Korea, we think that it will be around the '23 to '24 time frame when the technology business starts to grow in size and also in profits.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] The following question will be presented by [ Kim Soo-Hee ] from Hanwha Investment Securities.