NHN Corporation (A181710) Earnings Call Transcript & Summary

[Interpreted] Good morning. This is [ Hanya Xi ], Head of IR at NHN. Thank you very much for attending our third quarter earnings conference call. NHN's CEO, U-Jin Chung; CFO, Hyun Shik Ahn; and Head of Cloud business, Do-Min Baek; as well as the 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 an IFRS consolidated financial statement and the business performance of NHN PNP SECURE under the technology business has been classified as net income from discontinued operations. The earnings announced today are subject to change depending on the results of the external auditor's review currently underway. CEO U-Jin Chung will start off today's call with a look at major business topics.

[Interpreted] Good morning. This is U-Jin Chung, CEO of NHN. Thank you for joining our conference call. NHN has been focusing on strengthening its position as Korea's #1 webboard game powerhouse while also forging new partnerships with leading Korean and global companies in other business areas. These efforts have started to deliver tangible results. In the technology business, Japan's NHN Techorus became an AWS Premier Consulting Partner, which is the highest partner level. This is expected to further accelerate our MSP business growth in Japan. NHN Dooray! continues to expand its public sector coverage, levering its partnership with Hancom. Major customers, including Seoul National University and Hyundai Development Company, have started to use Dooray! for a wider range of tasks showing that Dooray! is Korea's best all-in-one collaboration platform. NHN KCP has continued to add new overseas merchants and is about to announce some major new merchant adds. At the end of October, NHN signed an MOU with Wemade Tree and have started to discuss cooperation in blockchains and collaboration in various IT services, including game and content. We will continue to focus on enhancing the business capabilities of our key businesses and build close connections with leading companies to become a global IT leader. Next, I would like to go over the highlights of our game business, PAYCO, COMMERCE and technology business, respectively. First for the game business, our webboard game revenue increased by about 12% year-over-year thanks to the Chuseok holiday falling in September and also the effects of our continuous service enhancements. Hangame reaffirmed its position as Korea's #1 webboard game service across both the PC and mobile platforms. In August, we launched the cloud service that adds a social and yield aspect to the mobile hand game poker, and so new content has created synergies of stronger user immersion. Hangame Poker Classic is popular not only among users who prefer the PC and mobile cross-platform play but also more mobile-focused users and has delivered positive growth in terms of both revenue and user numbers. NHN will continue to enhance service quality and competitiveness of its webboard game service to deliver even greater entertainment to users and to expand our user base, including the launch of Hangame Poker Classic on iOS within the year. Our mobile games carried out various events including collaboration with popular IPs, which helps increase NHN player game revenue by 20% quarter-over-quarter. LINE: Disney Tsum Tsum ran a collaboration with Disney Twisted Wonderland, a famous mobile game. And COMPASS successfully executed the event with a famous animation Overlord Season 4. There was also the first offline event since COVID-19, and we were able to see positive results from the offline event. Such success shows that even with our older games, events designed to appeal to the user base, thus deliver positive results. And we will continue to run various events and changes to add new elements of fun to the game. Dragon Quest Keshikeshi developed by NHN PlayArt and serviced by SQUARE ENIX, is scheduled for launch on December 1. It is currently in pre-registration in Japan and will showcase NHN's distinctive know-how in the puzzle game category. We are also preparing a mid-core game GUNS UP! Mobile, Project NOW and a new game based on a famous IP. We also plan to launch blockchain-based games through collaboration with partners. For PAYCO, even though social distancing was actually strengthened during the third quarter, off-line payment continued to grow, and online payments also increased especially with the steady growth of our PAYCO Point transaction volume. Off-line payments increased by 56% in third quarter on a year-on-year basis and accounted for 21% of all PAYCO payments. PAYCO ORDER launched delivery services with major franchises such as chicken and pizza stores. And payment volume increased by 2.2x year-over-year. For Campus Zone, universities continue to have classes online, but our strategic expansion on on-campus merchants has driven up volume by 2.6x year-over-year. Once colleges increase in-person classes, the Campus Zone is expected to rapidly pick up volume. And we're preparing various promotions designed to help students experience the convenience of PAYCO on campus. PAYCO Points saw a more than 4x growth in the amount of points charged directly from user bank accounts. The PAYCO Point special promotions tied to major merchants such as Yu-Gi-Oh! and [ Kurel ] generated very positive responses from users. And the increased number of physical PAYCO Point Plus Cards is contributing to increase in volume and profitability. During December, we plan to launch the MY DATA service targeting users in the 20 to 30 age group and will focus on expanding financial services while complying with the guidelines of the FSC. Next, about our COMMERCE business. With China's largest shopping event Singles Day approaching, NHN COMMERCE recorded a GMV increase of 20% year-over-year. On a consolidated basis, with Accommate, thanks to the steady growth of the Korean online commerce, which offset the extremely low seasonality of the Chinese commerce market in third quarter. Even against third quarter last year, which was a strong quarter, NHN Global continued to show strong results of 10% year-over-year growth in shipping volumes with increase in both wholesale and retail merchants. NHN is currently focusing on developing new services and business models to grow beyond its current position of #1 player in the China-Korea cross-border commerce and #1 B2B fashion platform in the U.S. NHN COMMERCE is preparing the official launch of its Shop by pro service, which is currently in beta service. And NHN Global's FashionGo is working on becoming a marketplace that also caters to smaller-scale retailers by introducing drop shipping service early next year. Next is the technology business update. NHN Cloud recorded external revenue growth of more than 2x year-over-year driven by new public sector contracts generating external revenue. NHN Dooray!, which provides an integrated collaboration service, has continued to increase its public sector business by taking advantage of the government's private cloud business initiative. And in October, it newly added the e-payment service, which was adopted successfully by HDC, an existing customer. Dooray! is an all-in-one collaboration tool, and we'll be adding various new functions to enhance greater convenience and utility. NHN aims to become a leading CSP that helps Korean public sector institutions transition to the cloud and will grow into a global MSP accredited with the highest partnership rate by AWS and top capabilities in both Japan and the U.S. NHN's long-term goal is to become a global core cloud company. Now that completes my update on major businesses. And now CFO Hyun Shik Ahn will take you through the third quarter results in detail.

[Interpreted] Good morning. This is CFO Hyun Shik Ahn. Before I go into the detailed financials, I would like to mention that from third quarter, PNP SECURE was classified as an asset held for sale and that its earnings has been classified as net income from discontinued operations. The revenue and P&L for the comparable periods have been re-prepared accordingly. Third quarter revenue was KRW 472.5 billion, which is a 14.8% year-over-year increase and a 4.2% quarter-over-quarter increase. Operating profit was KRW 27.9 billion, which is an 18.6% Y-o-Y increase and a 40.5% increase Q-o-Q. Net profit was KRW 44.5 billion, which is a 38.7% increase Y-o-Y and 193% increase Q-o-Q. Total game revenue was KRW 95.5 billion, which is a 4.9% decrease year-over-year but a 10% increase Q-o-Q. PC online revenue was KRW 40.7 billion, which is an increase of 15.5% year-over-year with the continued effects from the mobile PC cross-platform account linking for Hangame Poker Classic and increased by 2.2% Q-o-Q due to the Chuseok holidays. Mobile game revenue was KRW 54.8 billion, which is an increase by 16.5% Q-o-Q thanks to the new content in the mobile webboard games and IP collaboration of Japanese mobile games. Share of PC game revenue within total game revenue was 43%; and mobile games, 57%. For payment and advertising business, revenue was KRW 208.4 billion, which is a 23.4% increase Y-o-Y and a 6.2% increase Q-o-Q, thanks to NHN KCP's revenue growth, PAYCO's payment volume increase and coupon adds increase. COMMERCE revenue was KRW 76.9 billion, which is a 4.1% growth Y-o-Y thanks to the continued increase in wholesalers and retailers using NHN Global and also increase in shipping volume but a 3.4% decrease Q-o-Q due to the negative seasonality of the Chinese commerce market impacting Accommate's performance. The tech business revenue was KRW 57.2 billion, which is a Y-o-Y 82% growth and an 11% growth Q-o-Q, thanks to growth in the domestic cloud business with new public sector contracts and the MSP business growth recorded by Japan NHN Techorus. Content revenue was KRW 43.8 billion, which is a 3.2% growth Y-o-Y thanks to continued revenue improvement by NHN Comico, but decreased by 4.6% Q-o-Q due to decrease in sport event ticket sales with stronger social distancing measures introduced in third quarter. Next, about our operating expenses and profits. Total operating expense was KRW 444.6 billion, which increased by 14.5% Y-o-Y and 2.6% Q-o-Q. Commission expense was KRW 299.5 billion, which is a 4.7% Q-o-Q increase due to increase in commissions tied to revenue of NHN KCP. Labor cost was KRW 89.5 billion, which is a decrease of 3.4% Q-o-Q, reflecting the base effect against second quarter when some of the related companies had paid out bonuses. Advertisement and marketing was KRW 18.1 billion, which is a 13.9% decrease Q-o-Q due to a decrease in marketing expenses for Comico. Depreciation was KRW 18.6 billion, which is a 3% increase Q-o-Q due to server expansions tied to our Cloud business. Other operating expenses was KRW 12.5 billion, which is a 30.1% Q-o-Q increase due to write-offs related with bad receivables of some of the related companies. Operating profit was KRW 27.9 billion, which is an 18.6% Y-o-Y increase and a 40.5% Q-o-Q increase. Net profit was KRW 44.5 billion, which is a 38.7% increase Y-o-Y and a 193% increase Q-o-Q, reflecting the nonoperating gains of KRW 24.6 billion from sales of financial assets and the KRW 5 billion in net income from discontinued operations related with PNP SECURE. That completes our presentation of our third quarter results, and now we will start the Q&A session.

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be provided by Jingu Kim from KTB Investment & Securities.

[Interpreted] I have 2 questions. First question is about the company strategies regarding NFT business. Also, can you share with us if you have any plans of introducing play-to-earn model games? Second question is about your OP margin. Can you break down your OP margin in third quarter by each line of business and compare that on a year-on-year and a quarter-on-quarter basis?

[Interpreted] To answer your first question, we have been internally studying the use of NFT technology, but I think we took on a rather conservative approach to NFT technology given the fact that there was limited access by users. And also, it does fall under a gray area in terms of regulation in Korea. But I think the huge success of Wemade is an encouraging phenomenon. And so we are collaborating, especially with the idea of us collaborating on the category of games that NHN does best. So the details, it's a bit early for us to announce. But for example, a category such as sports-related games would be an area where NHN has always been strong, so we're talking about possibly launching a global service of these categories. We are currently working out the detailed plans and possibly may be able to introduce global service of these games during first half of next year.

Well, you asked about our operating profit on a year-on-year and a quarter-on-quarter basis. As we mentioned during the presentation, on a quarter-on-quarter basis, our operating profit increased by around 40%. On a year-on-year basis, it increased by about 18.6%. Our games on a year-on-year basis, operating profit increased by about 8%. Our payments and advertisements saw an increase of operating profit by around 418% on a year-on-year basis. On a Q-o-Q basis, games operating profit increased by 23%, whereas payment decreased by 17%. COMMERCE saw an increase by around 41% on a Q-o-Q basis. In terms of the technology and content businesses, I can say that for the technology side, definitely the size of our losses has been decreasing. It's about half of what we saw before. In terms of the content, operating profit is flat on a year-on-year basis mainly due to the impact of COVID-19.

[Interpreted] The following question will be presented by Eric Cha from Goldman Sachs.

[Interpreted] I have 2 questions. First question is about the Cloud business. Can you share with us a bit more detail of what do you see as the entire size of the Cloud business and also what is your market share within that -- in that entire market? Also, what is your competitive advantage in the Cloud business, do you think? Also you've highlighted that you received the highest partner grade from AWS. Can you give us a bit more background to that and what implications or impact do you expect that to have in your Cloud business going forward? Second question is about your payment business. The market, obviously, is looking very much forward to that new overseas merchants that you will be adding. Maybe even though you may not be able to mention new overseas merchants by name, can you at least give us some trends that you expect in terms of overseas merchants and some more color of the new merchants that you expect to add on to your payment business?

[Interpreted] Well, first of all, regarding our Cloud business, I think one of the greatest competitive edges that we have is the fact that we are open stack, which means that we can be implemented in a plug-in manner with not only other cloud services but any service that has an API. This is especially strong given the fact that multi-cloud and containers are becoming widely used.

[Interpreted] To give more detail about the Cloud business, it's difficult for us to say what the entire size of the cloud market is, but it is true that AWS does account for the absolute share of that market. So if we just narrow down to the CSP side of the market, I think it boils down basically to a competition between us, NAVER and KT. It's a 3-party market. If you just look at the revenue that is being announced, our revenue seems to be at around 1/3 of NAVER's CSP revenue. But if you take out some of the internal revenue, adjust for that, we think that we have at least caught up to around 1/2 of NAVER's revenue. Regarding the significance of us being designated as an AWS Premier Consulting Partner, actually, this is quite significant. We had to go through fierce competition to win that appointment. We are the 11th company in Japan to win that grade. And that is quite an achievement given the fact that Japan has already had quite a lot of cloud-related business activity. The immediate significance of that Premier Consulting Partnership will be the fact that we will see an increase in both customer base and revenue. Basically, this will enable us to play in a much larger business base.

[Interpreted] Regarding the overseas merchants for our payment business, we are talking actually to a large number of global players in different sectors. I hope you will understand that they are quite sensitive to confidentiality, so we're not able to disclose details. But actually, we may be able to open some of these merchants within the year, maybe some OTTs or e-commerce merchants. There could be some delays in the actual service open, but I think we have been received quite positively by major global players and so we have many of these global merchants in the pipeline, some of it coming on in this year, some large of that coming on next year to drive faster growth.

[Interpreted] The following question will be presented by Dong Hwan Oh from Samsung Securities.

[Interpreted] I have 2 questions. First question is about PAYCO. Can you give us your monthly active paying user or users who make payments with PAYCO and also the trend in the volume? Also, can you give us some details of how you plan to increase the offline volume of PAYCO? Second question is about the games. Can you share with us a bit more detail about your fourth quarter and next year new game lineup?

[Interpreted] Regarding your first question, third quarter volume for PAYCO was around KRW 1.9 trillion, a bit above KRW 1.9 trillion. MAU was steady around 4 million to 4.5 million users. The PAYCO grew by around 12% on a quarter-on-quarter basis and about 8% on a year-on-year basis. The key piece to our off-line expansion strategy would be the Campus Zone. As you know, we have been steadily working on Campus Zone. We have now reached around 80% coverage in terms of merchants, so we are very well positioned for the in-person classes at universities that would start from at least next year. And so next year, we're planning to use the Campus Zone as the foothold to expand further in the off-line. You also asked about our new game lineup. Well, first of all would be the Dragon Quest Keshikeshi, that's scheduled for launch on December 1. For those who would know, Dragon Quest is one of the most famous IP in Japan. We've taken that and we interpreted that into a casual game. It's currently going through marketing with a target of having 1 million preregistered users before December 1. Another game that we're preparing is GUNS UP! Mobile. It is based on the GUNS UP! console game IP which has been reinterpreted for the mobile format. We're actually going through development and soft launch at the same time. And according to our schedule, we will be introducing GUNS UP! Mobile, which is a strategy defense game, around early next year, maybe January, February time frame. We're also preparing a shooting RPG as a new project. Also, the timing of that will depend on, for example, timing of outside investments and also a reliance on the blockchain side. And at the same time, as I mentioned previously, we are actively looking into launching a cryptocurrency-based game especially in the categories that we have always been very strong.

[Interpreted] The following question will be presented by Jong Hwa Sung from eBest Investment and Securities.

[Interpreted] I have some questions. First of all, about the NFT alliance that you've announced with Wemade Tree. First of all, can you give us a bit more detail of the technical configuration of how that will work? Will these NFT coin-based games be developed by any chance separately? Or would it be developed together with Wemade and NHN? Or is it more technically NHN developing the games, and then there being a simple technical connection to launch that on the Wemade platform? Also, does that mean that the NFT-based games will be developed and launched separately from the original plan of launching 3 to 4 games next year, which now seems to be 4 to 5 games since GUNS UP! Mobile has been pushed back from fourth quarter this year to around January, February next year? Or would some of these existing game pipelines also then incorporate NFT-related features and become available for the NFT platform? Second question is about PNP SECURE. You mentioned that KRW 5 billion was the net earnings, net profit on PNP SECURE for discontinued operation. But can you also share the opposite of what the revenue and operating profit of PNP SECURE was, and therefore, what would have contributed to the company's revenue at top line and OP margin had PNP SECURE not been sold?

[Interpreted] To clarify regarding our new game lineup and the NFT collaboration, to just clarify, our new game lineup for next year, including Dragon Quest Keshikeshi, there's the GUNS UP!, COMPASS, Project NOW, which is an RPG game. Also, I didn't say, but we are currently talking to sign a famous Japanese IP that will be developed into a game similar in format to COMPASS. In these new game lineups for next year, currently, we're approaching them as a non-NFT game. However, for example, for the shooting RPG games such as Project NOW, we do see a possibility of developing that with, for example, the NFT or the WEMIX platform. That's a possibility. But actually, we've only signed an MOU with Wemade Tree. We have not, for example, signed specific contracts for specific games, and so that's why we're cautious in saying that. So for our existing games, we're currently approaching as an [indiscernible] basis. At the same time, we're seriously looking into launching games in the traditional categories that NHN has always been strong in through the WEMIX platform for global service.

[Interpreted] You also asked about the PNP SECURE numbers. In third quarter, PNP SECURE's revenue was KRW 9.3 billion. Its OP was KRW 4.6 billion. And as I mentioned in the start of my presentation, even the past period numbers have been adjusted to take out the PNP SECURE effect. So they are an apple-to-apple basis. Just for reference, if I give you the full year PNP SECURE revenue last year, 2020 full year revenue for PNP SECURE was around KRW 35 billion; operating profit, around KRW 16 billion. And so this quarter, it's come on -- come in, in a range that we had expected.

[Interpreted] The following question will be presented by So-Hye Kim from Hanwha Investment & Securities.

[Interpreted] I have 1 question about the COMMERCE. With the Singles Day coming up in fourth quarter, can you give us a bit more guidance in the expected growth that you see for fourth quarter? Also compared to your competitors, what would you say is your strength in the COMMERCE side?

[Interpreted] Well, to answer your question, well, we have been receiving preregistrations or reservations for the Singles Day even until today. And looking at our presale status, it seems that this year, Singles Day will only see about a slight increase on a year-on-year basis. That seems to be the case for the entire Chinese market. So we're expecting to see around 5% to 10% growth for Singles Day on a year-on-year basis. And probably the Chinese market will be around that range even though each store is giving out different projections. So we'll have to wait and see after the day passes to see the actual results. Regarding our competitiveness versus competitors, at least in the Chinese market, Accommate doesn't really have a Korean company that it competes against. We're mainly competing against Chinese companies that also would sell Korean-based products. The margins are, therefore, being squeezed, and so we're actually looking towards other geographies such as Europe and the U.S. to source higher end products in a couple of years' time.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions]

[Interpreted] Well, since there are no further questions, we will end the call here. If you have any further questions, please forward them to the IR team. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]