NHN Corporation (A181710) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is [ Hanya Xi ], Head of IR team at NHN. Thank you very much for attending our 2021 full year and Q4 earnings conference call. We have NHN's CEO, U-Jin Chung; CFO, Hyun Shik Ahn; Head of the Cloud business, Do-Min Baek, as well as the CEO of NHN PAYCO, Yeon-Hun Jeong; 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 audit 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 sharing your valuable time to join our earnings conference call. During Q4, NHN launched many new services and further strengthened its position as a comprehensive IT service company. In our game business, Dragon Quest Keshikeshi developed by NHN PlayArt was successfully launched in Japan on December 1, and Hangame Poker Classic officially released its iOS version in Korea early December. PAYCO opened its MY DATA service, PAYCO Asset Management on December 21, and NHN Global in the U.S. launched the beta of its drop shipping service on February 7. In the tech business, NHN Dooray! launched Dooray 2.0, which includes the electronic document approval and work management functions. Next, I would like to go over the key highlights of each business in the order of games, PAYCO, commerce and tech. First, our game business, our webboard game strategy of focusing on increasing the fun factor with stronger content, including club service has delivered a 12% growth in the webboard game revenue year-over-year on a full year basis rather than remaining satisfied with its #1 webboard game position in Korea on both PC and mobile platforms. NHN is turning towards the global market. We plan to expand our lineup by launching AA Poker within this year, which is a mobile Hold'em game incorporating Hangame's webboard game, operation know-how and also plan to enter the global Hold'em game market, which is established as a mine sports by combining the elements of Play and Earn, that's P&E. During the second half, we plan to globally launch Slot Marvel, which is a social casino P&E game. Q4 mobile game revenue increased by 16% Q-o-Q, thanks to the effects of Dragon Quest Keshikeshi launched in December and the positive effects from the successful event campaign by COMPASS, the mobile game in Japan. Dragon Quest Keshikeshi was positively received by users who particularly enjoyed how the key points of the Dragon Quest IP was effectively captured into a puzzle game. It ranked #1 in downloads in both main app stores in Japan during the first couple of weeks. COMPASS successfully ran its fifth anniversary event in December and collaborations with Sword Art Online, a famous Japanese IP, and recorded over 40% revenue growth Q-o-Q. We have a total of 7 new games lined up for '22. In addition to AA Poker and the Slot Marvel games I already mentioned, we plan to launch GUNS UP! Mobile, a strategic defense mobile game and COMPASS Live Arena, a mobile rhythm game. For the Play and Earn, the P&E games, the recently unveiled Project WEMIX Sports is preparing a global launch through the WEMIX platform and Project NOW, which is a looter-shooter game, targets a soft launch within the year with P&E elements. We are also planning to launch the WOOPAROO NFT project, which is based on the WOOPAROO Mountain IP launched back in 2013. Next about PAYCO, despite the return of social distancing during fourth quarter, PAYCO transaction volume recorded an upward trend overall based on increase of PAYCO Points payments, PAYCO and PAYCO fourth quarter transaction volume was KRW 2.1 trillion, which is a 14% increase Y-o-Y. This year, PAYCO will continue to focus on expanding both the off-line and PAYCO Points-based volume. During Q4, PAYCO off-line transaction volume increased by 79% year-over-year. PAYCO order volume increased by 84% Y-o-Y, reflecting the positive effects of successful promotions run with key franchises such as Mexicana. The mobile Meal Coupon! and the Campus Zone volume increased by 76% and 111% year-over-year, respectively, thanks to increase in participating merchants and users. PAYCO Points in Q4 grew by more than 3x year-over-year in terms of both point charging and point payments. In particular, appreciating the benefit intuity of the PAYCO Points Plus, 70% of the users have gotten physical cards, which is expected to positively drive both the increase of offline payments and our profitability. The PAYCO Coupon business, which is another key business model, has been leveraging its years of know-how in customized coupon service and coupon partners to develop more diverse profit models that offer a wider range of benefits to users. Next, COMMERCE. COMMERCE business revenue in 2021 was KRW 350.5 billion, which is 26% year-over-year growth gaining a stronger position in the B2B COMMERCE market in China and U.S. Despite the rapid changes in China's e-commerce environment, NHN COMMERCE hit new GMV highs on Singles' day and delivered a total of KRW 4 trillion in GMV for full year 2021, which is also another record high. With the launch of Shopby Pro in January, the Shopby lineup was completed with an optimized hosting solution targeting e-commerce partners of various sizes. Accommate will focus on expanding its brand and product coverage, using its insights into the Chinese market for greater business competitiveness. Despite the global supply chain disruption, NHN Global has seen an increase in wholesale and retail partners and recorded record-high order volume in 2021, surpassing USD 1 billion, which is a growth of 27% year-over-year. This year, NHN Global is planning an active new service launch to develop new sources of growth. FashionGo is planning the launch of a Dropshipping service during February. And the FashionGo Week Palm Springs, which is an offline trade show in May to attract new retailers and wholesalers and to plan new product categories -- to add new product categories during the second half. Next is the tech business, our CSP business around NHN Cloud and NHN Dooray! and the MSP business around Japan NHN Techorus have shown rapid growth, driving up the full year revenue of our tech business to KRW 219.7 billion, which is a 65% year-over-year growth. NHN Cloud service was chosen by the largest number of end-user public institutions in the first and second round of the cloud migration project for public institutions, which is led by the Ministry of Interior and Safety and this proves our competitiveness in the public sector. NHN Dooray! which is an integrated enterprise collaboration service, started official service for Bank of Korea last January and continues to add new key public institutions into its user group. This year, we expect to see tangible synergies from the collaboration with Hong Kong. In the MSP business, NHN Techorus continues to expand its position in Japan as a AWS premium partner. Our Q4 MSP revenue grew by 80% year-over-year, and we expect strong growth to continue this year. Our Cloud business is planning to separate into an independent entity pending approval by the General Meeting of Shareholders on March 29. This is a strategic choice to structurally prepare for strategic partnerships to fund future growth and to enable nimble decision-making, a focus on the Cloud business. As a cloud service specialist, NHN Cloud will be well positioned to become the #1 domestic CSP company and aim for the global market based on a well-balanced CSP and MSP business portfolio. That completes the update on the main businesses. And now our CFO, Hyun Shik Ahn will take you through the detailed results for full year and Q4.

[Interpreted] Good morning. This is CFO, Hyun Shik Ahn. I would like to go over the 2021 full year and Q4 results. '21 full year revenue was KRW 1,920.4 trillion, which is a 17% year-over-year growth and operating profit was KRW 98.1 billion, which is a 14.4% year-over-year growth. Net profit was KRW 130 billion. Q4 revenue was KRW 542.6 billion, which is a 22% Y-o-Y and a 14.8% Q-o-Q increase. Operating profit in Q4 was KRW 25.2 billion, which is 66.1% year-over-year increase, but a 9.9% decrease Q-o-Q. Net profit was KRW 46.5 billion, recovering a positive quarter from -- on a year-on-year basis and increasing by 4.4% Q-o-Q. Total game revenue was KRW 103 billion, which is a 4.6% increase Y-o-Y and 7.8% increase Q-o-Q. PC online game revenue was KRW 39.6 billion, which is an increase of 1.6% year-over-year but decreased by 2.7% Q-o-Q due to the base effect against Q3 that had enjoyed the Chuseok holiday effects. Mobile game revenue was KRW 63.4 billion, which is an increase by 6.5% year-over-year and 15.6% Q-o-Q, thanks to the strong performance of mobile webboard games as the launch effect of Dragon Quest Keshikeshi in Japan and positive effects of events run by existing games, including Campus. Share of PC game revenue within total game revenue was 38%. Mobile game was 62%. For the Payment & Advertising business, revenue was KRW 217.8 billion, which is a 14.1% increase Y-o-Y and 4.5% increase Q-o-Q, thanks to increase in PAYCO and NHN KCP volume and positive seasonality of our ad business. COMMERCE revenue was KRW 116.6 billion, which is a 56.3% growth Y-o-Y and 51% -- 51.6% growth Q-o-Q. The key driver for growth of the COMMERCE business was Accommate, which is a subsidiary of NHN COMMERCE, recording 24% Y-o-Y growth in GMV during the Singles' day period. Our Tech business revenue was KRW 66.1 billion, which is a 62.4% Y-o-Y growth and 15.5% Q-o-Q growth. The CSP business of NHN Cloud and NHN Dooray! grew by 43.8% Y-o-Y by adding new public sector customers. And the MSP business, including NHN Techorus in Japan achieved 80.1% growth Y-o-Y. Content revenue was KRW 51.9 billion, which is a 16.4% growth Y-o-Y and an 18.3% growth Q-o-Q, thanks to increase in B2B revenue of NHN BUGS and positive concert ticket sales from Ticketlink. About our operating expenses and profits, total operating expense was KRW 517.4 billion, which is an increase by 20.4% year-over-year and 16.4% Q-o-Q. Commission expense was KRW 358.7 billion , which is a 19.8% Q-o-Q increase due to increase in cost of sales and commissions tied to revenue of key subsidiaries such as Accommate. Labor cost was KRW 96.7 billion, which is an 8.1% increase Q-o-Q, reflecting the effect of year-end bonuses. Advertisement and Marketing was KRW 23.3 billion, which is a 28.6% increase Q-o-Q due to increase in marketing for key games, including the new launches. Depreciation was KRW 19 billion, which is a 2.4% increase Q-o-Q due to server expansions tied to the Cloud business. Other operating expenses was KRW 13.4 billion, which is a 7.2% Q-o-Q increase due to increase in transportation costs related with the COMMERCE business. Operating profit was KRW 25.2 billion in Q4, which is a 66.1% year-over-year increase but a 9.9% Q-o-Q decrease. Net profit was KRW 46.5 billion, returning to a positive net profit quarter compared to the last year's loss-making fourth quarter and a 4.4% increase in net profit on a Q-o-Q basis, reflecting increase in financial asset valuation gains and gains on disposal of related company investments despite the KRW 13.4 billion on goodwill impairment recognized at the end of the year. Next is about our future shareholder return policy to respond to the increased volatility in share price. And also as part of shareholder return, NHN has been making a share buyback of a total of KRW 86.9 billion during the period of 2018 to 2021. To further enhance shareholder value and to increase float, the company decided on December 16 to execute an increase of capital without consideration of issuing 1 new share per common share. This had the effect of canceling treasury shares of corresponding to around 4.3%. This year, we will announce more detailed shareholder term policies and execute various shareholder return plans within resources available. For the next 3-year period starting this year, NHN plans to use at least 30% of the previous fiscal year's nonconsolidated parent level EBITDA for shareholder return in the form of share buyback or dividends. According to this formula, the fund available for shareholder return this year in '22 is at least KRW 18.4 billion. That completes our presentation on the '21 full year and Q4 results, and we will now start the Q&A session.

[Interpreted] The first question will be presented by Dong-hee Kim from Meritz Securities.

[Interpreted] I'll ask 2 questions about the Cloud business. Can you share with us the operating profit and loss of the Cloud business for 2021 and give us some guidance on your Cloud business revenue and profit for year '22. Also, the information is that you're currently building out 3 IDCs. What is the size of CapEx for these 3 projects? And can you give us a breakdown of the CapEx execution on a year-by-year basis?

[Interpreted] To answer your question, our Cloud business, which largely consists of our CSP and MSP businesses. In '21, overall, recorded a small operating loss, but we are expecting that to pass the breakeven point during the second half of this year. About the CapEx that you asked about, actually, the CapEx plan is continuously being updated. So we're a bit careful on sharing numbers that are still fluid. IDC by nature does require a large upfront investment, so we are expecting to go through a large investment program for the next 3 to 4 years, probably above KRW 100 billion, but we probably will be able to share with you details about the CapEx plans after the company's spin-off.

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

[Interpreted] I have 2 questions. First question is about the game. You've actually shared with us your P2E or P&E pipeline. This is an area that's going through a rapid change. So I'm sure the company is still thinking through and studying. But can you give us, for example, at this point, what business model the company is thinking of, for example, how is NHN planning to recognize revenue from its P&E gains. Also, do you think that overall, the P&E trend will benefit certain types of games or certain players? Or will it be something that the entire game regardless of category, we'll be able to leverage? If it's the former, how is NHN planning to raise its competitiveness in that particular type of player or category of game that is better positioned to benefit from the P2E or P&E trend. Second question is about your Cloud business. Of your many businesses in your portfolio, the Cloud business is where there's strongest growth in revenue. But I think also as a business, it's one of the least resides or understood by the market. So in that context, can you give us your view of the Cloud market size, the business model, what is the market structure for the key players? What kind of dynamics is there?

[Interpreted] To answer your first question about the Play to Earn or Play and Earn games, since your question was whether at a conceptual macro level, I think I have to start the answer with explaining how we understand the concept of Play 2E and Play &E. Play to Earn, P2E, focuses more on the earning of assets through gameplay rather than the fun elements to it. Basically, P2E has the players run some sort of activity in the game, gains coin, blockchains, which then can be converted to an economic value. Actually, we want to refer to Play &E. This gives us the opportunity to leverage the webboard game, operation know-how that we have accumulated over years of doing that. And so we want to create games that actually emphasizes the play, the fun element as well as the earn so that items that players earn through gameplay can then be recognized its value through blockchains. So this will create a system whereby without the companies, the game companies having to sell items, the users will be able to get their game items value recognized outside the game from other users, for example. And this relies on the nature of the blockchain, which is based on the distributed leisure system, which allows democratic decision-making. We believe that this, we'll be able to create a system where game items are recognized their fair value through this democratic process among multiple users and prevent for example, a single company from determining the value of a specific points or blockchains.

[Interpreted] To answer your second question about the Cloud. In terms of Cloud market outlook, the Korean Cloud market in '21 is estimated to have been KRW 3.3 trillion. 90% is public cloud, 10% is cloud services serving public institutions in Korea. It's expected to grow around 30% this year, reaching a KRW 4 billion to KRW 5 trillion market in '22. Of course, still, it's mainly dominated by the 3 top global companies, AWS, Microsoft and Google, which is estimated to account for about 90% of the public cloud market share. NHN's competitiveness is the fact that we have been able to build our own OpenStack with our proprietary technology for the entire stack from IaaS, PaaS and SaaS. We've also received the security certification, the CSAP for the entire stack. And this gives us quite a strong position, especially in the market for Cloud for Korean public institutions. That public institutional market is mainly competition among 3 players, including us, it's us, NAVER and KT. And we expect there to be continued competition between the 3 companies. But for example, some opportunities would be the cloud conversion, the cloud migration project that is going through with public institutions in Korea that's led by the Ministry of Interior and Security. Currently, according to our information, the Ministry has budgeted KRW 240 billion for '22 this year. And we are expecting to win around 1/3 of that size this year.

[Interpreted] I've also been told that in the previous -- the first set of questions and answers, the connection wasn't very good during my response to the CapEx question about the Cloud business. So just to recap the key points, the CapEx plan for our key -- our Cloud business includes not only the 3 IDCs that you mentioned, including the one in Kenya that we're preparing to build-out. Actually, we're looking into additional sites. So for the Cloud business, roughly at this point, we're thinking about KRW 300 billion of CapEx over a 4 to 5-year period. Due to the nature of the CapEx Cloud business, it does require upfront investments. That is recovered over the long period. But I think another nature that you need to keep in mind is that our Cloud business mainly focuses on public institutions in Korea which does provide a stable source of revenue. So compared to the upfront investments, the risk we think are not high. And because we do need to make upfront investments, we are thinking -- that's why we have planned the spin-off of the Cloud business, which will make the structure more convenient to attract strategic investors to share that upfront investment.

[Interpreted] Also, just to add the CapEx figures that we just shared for the Cloud business is still a high-level fluid number. The details, especially the breakdown by IDC will have to wait until, for example, the BOD approval and decision.

[Interpreted] Since there are no further questions, we will end the conference call here. Please forward any additional questions to our IR team. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]