NHN Corporation (A181710) Earnings Call Transcript & Summary

[Interpreted] Good morning. This is Sang Lee, Head of IR team at NHN. Thank you very much for attending our 2022 First Quarter Earnings Conference Call. We have NHN's CEO, U-Jin Chung; CFO, Hyun Shik Ahn; CEO of NHN Cloud, 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 auditors review that is coming 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, analysts and investors for joining our earnings conference call this morning. In order to better concentrate on our core businesses, last year, NHN disposed of some noncore affiliates, and in the first quarter, we designed the organization of its game and cloud businesses to enhance our long-term business growth and competitiveness. On February 1, the domestic game business was consolidated under the umbrella of NHN Bigfoot, which is focusing on growing beyond today's #1 mobile web-boarding company and becoming a global P&E game developer. On April 1, NHN Cloud became an independent legal entity and will focus on leading the government and public sectors cloud migration projects and become a global top-tier cloud service provider using its technology advantage and connections with our new AI businesses. Recently, the COVID-19-related conditions have significantly changed and social distancing measures have been completely lifted in Korea. In response, NHN has prepared an active marketing program and an R&D investment plan this year to focus on volume growth, particularly by entering the P&E game market as means to scale, acquiring more PAYCO users and improving PAYCO's business fundamentals and strengthening the market position of our cloud business. I hope you will closely watch NHN's journey this year as we take new opportunities and expand our business foundation. Now let me touch upon the key business topics. First, for our game business, the web-board game revenue increased by 4% Y-o-Y and 14% Q-o-Q, particularly [indiscernible] is that our mobile web-board game has set a new quarterly revenue record, thanks to strong response from users to our differentiated content such as Poker Clubs and regional team competitions. The lifting of the COVID-19 social distancing restrictions is likely to lead to a rebound of PC café-related revenue and the amendment to the enforcement decree of the Game Industry Promotion Act and only being prepared by the government, it is expected to have a positive effect on web-board game business once finalized. On May 2, NHN launched a new brand marketing campaign deemed the largest game in Korea, Hangame, to further strengthen its position and competitive lead as the absolute #1 in the Korean web-board game market. The new marketing campaign aims to highlight how web-board games are mind sports that is enjoyed by a wide audience and also to create a stronger awareness of web-board games using widely recognized celebrity models. The mobile game revenue grew by 4% Q-o-Q, thanks to strong web-board game performance and the effect of LINE: Disney Tsum Tsum and Yokai Watch PuniPuni's events earlier in the year. This year, we plan to launch a total of 7 new mobile games, including GUNS UP! Mobile, which is a strategic defense simulation game that was officially launched globally on April 1. We have confirmed positive user responses in key countries, including the U.S. and Korea from the start of service. And in order to attract more users, we will gradually roll out marketing while carefully watching for any global service issues. In the third quarter, we are planning to launch COMPASS Live Arena in Japan and AA Poker in Korea and also have WEMIX Sports and WOOPAROO NFT projects lined up, targeting the global audience. Project NOW, which is the much-awaited looter-shooter game development was officially named Darkest Days, and we plan to self launch Darkest Days together within the year together with Slot Marvel, which is a P&E social casino game. NHN has a long history of creating a positive feedback loot of goods and wealth being used in web-board games and casual games, which we will leverage to develop leading and stable P&E games and gain market leadership. Next, on PAYCO. PAYCO's Q1 transaction volume was KRW 2.1 trillion, which is a 23% growth Y-o-Y. While off-line payment volume growth leveled off a bit due to the surge of the pandemic in Korea during first quarter, our PAYCO usage through online strategic merchants, including [ O2O ], helped drive a 17% increase quarter-over-quarter in terms of number of paying users. PAYCO Points payments continued strong growth, increasing 2.9x Y-o-Y. The [indiscernible] of user environment covering both on and off-line across the mobile phone and physical PAYCO Point plus cards appears to be the main driver of strong growth. In the second half, the focus will be on improving PAYCO's profitability using PAYCO Points and customized coupon service. PAYCO has been expanding its off-line business using an employee benefit solution that covers new coupons, gift cards and employee benefits points in addition to the existing Campus Zone and PAYCO ORDER services. More than 1,500 companies have already signed up for the PAYCO Employee Benefit solution and users of the mobile meal coupon service increased 35% year-over-year in first quarter. Specialized promotions, including the breakfast for KRW 100 helped increase Campus Zone paying users 3.2x year-over-year, and we expect even steeper growth in the second half when college students will be returning to campus. PAYCO ORDER has been creating synergies with PAYCO off-line service including office cafes. And in the first quarter, the PAYCO Order transaction volume decreased by 49% year-over-year. Our commerce business recorded stable performance despite the global logistics disruption, better-than-expected Chinese [ CMB ] numbers and U.S. user numbers. For the Tech business, NHN Cloud had 3,930 corporate accounts as of end of first quarter, which is roughly a 10% quarter-over-over quarter growth and recently selected a site in Suncheon, South Jeolla Province as the new site for its public cloud data center. To further strengthen its position as the leader of government cloud migration businesses, NHN Cloud will actively need investments to build data centers in core locations, including [indiscernible] and Gwangju to attract key talent. NHN Dooray! recently attracted KRW 20 billion of outside investments and acquired new customers, including public institutions and many SMEs resulting in a 30% increase in paying corporate customers quarter-over-quarter and continuing its growth of collaboration work tool service. NHN Techorus, which received the AWS premier partner license in the fourth quarter saw a 2.5x growth in new contracts in Q1 year-over-year and a 5x increase in new customer consultation. NHN Techorus has expanded its resale service business beyond its existing territory around Tokyo, also Japan Nationwide and looks to acquire a large number of new customers. In addition to NHN Dooray!, NHN Edu, which is the leading education technology company also attracted investment of KRW 32 billion and NHN Cloud is discussing investments with various strategic and financial investors. That completes the update on the main business topics. And now CFO, Hyun Shik Ahn, will take you through the first quarter results in detail.

[Interpreted] Good morning. This is CFO, Hyun Shik Ahn. I would like to go over the first quarter results. First quarter consolidated revenue was KRW 520.5 billion, which is a 15.2% Y-o-Y growth, but a 4.6% decrease Q-o-Q. Operating profit was KRW 15.5 billion, which is a 38.2% decrease Y-o-Y and a 37.8% decrease Q-o-Q. In first quarter, there was a net loss of KRW 4.5 billion. Total game revenue was KRW 108.8 billion, which is a 2.5% decrease Y-o-Y and a 5.6% increase Q-o-Q, PC online revenue was KRW 42.9 billion, which is a decrease of 5.3% Y-o-Y, but increase by 8.2% Q-o-Q despite decline in PC café-related revenue due to social distancing restrictions during the first quarter. Mobile game revenue was KRW 65.9 billion, which is a decrease by 0.7% year-over-year, but a 4% increase Q-o-Q. Thanks to record-setting revenue from our mobile web-board services quarter and the effects from the Japanese LINE: Disney Tsum Tsum and Yokai Watch PuniPuni events in the start of the year. Share of PC game revenue within total game revenue was 39% and mobile games accounted for 61%. For the Payment & Advertising business, revenue was KRW 209.2 billion, which is a 15.5% increase Y-o-Y, thanks to increase in PAYCO transaction volume and NHN KCP overseas transaction volume, but this is a 7% decrease Q-o-Q due to seasonality of the online commerce market. Commerce revenue was KRW 104.7 billion, which is a 35.3% growth Y-o-Y, but a 6.4% decrease Q-o-Q. Accommate once again proved its solid position in the Chinese market in first quarter, running the Lunar New Year event in January and the Women's Day event in March and delivering yet another strong growing quarter even against fourth quarter when it has [ recorded explosive ] growth with Singles' day. Our global commerce business, which covers China and U.S., does face a higher level of uncertainty from outside factors, including the lockdown of some tiny cities, but despite these difficulties, we are pushing ahead with new services, including the launch of drop-shipping in April by NHN Global in the U.S. The tech business revenue was KRW 63.7 billion, which is a year-over-year 42.3% growth, but a 3.7% decreased QoQ. The [ CSP ] business of NHN Cloud and NHN Dooray! grew by 37.7% Y-o-Y and [ decrease by 10% ] Q-o-Q due to seasonality of the government's public sector projects. The MSP business, including NHN Techorus in Japan achieved a 46.3% revenue growth Y-o-Y driven by new contracts attracted by leveraging the higher [ reputation ] as the AWS premium partner. Content revenue was KRW 47 billion, which is a 10.2% growth Y-o-Y. Thanks to new revenue sources such as NHN Bugs drama, original soundtrack revenue and NHN Links originally produced concerts, but this was a decrease of 10.2% Q-o-Q due to a base effect against Q4, which is the peak season for concerts and performances. Next about our operating expenses and profits. Our total operating expense in Q1 was KRW 505 billion increased by 18.3% Y-o-Y, but this is a decrease by 3.1% Q-o-Q. Our commission expense was KRW 338.2 billion, which is a 5.9% quarter-on-quarter decrease tied to decrease in payment, advertisement and commerce business revenue. Labor cost was KRW 101.8 billion, which is an increase of 5.3% Q-o-Q versus the fourth quarter, which is the period when we recognize year-end bonuses. And this reflects the increase in head count, annual salary levels as well as additional employee benefits that were recognized. Advertisement and Marketing was KRW 27.4 billion, which is a 2.6% increase Q-o-Q due to increase in marketing for web-board games and PAYCO strategic merchants. Depreciation was KRW 18.8 billion, which is a 1.3% decrease Q-o-Q, mainly attributed to a slight decrease in tangible asset amortization. Other operating expenses was KRW 12.4 billion, which is a 3% Q-o-Q decrease against fourth quarter that has seen an increase in commerce-related transportation costs and an increase in taxes. Operating profit was KRW 15.5 billion, which is a 38.2% Y-o-Y and a 37.8% Q-o-Q decrease due to increase in labor costs tied to R&D and increase in advertising to drive volume growth. In Q1, the company recorded a net loss of KRW 4.5 billion due to a decrease in operating profit, increase in financial asset valuation laws are tied to the weak stock market and intangible asset impairment due to discontinuation of certain game services. That completes our presentation on our first quarter results, and we will now start the Q&A session.

[Interpreted] The first question will be presented by [ Jin-goo Kim from Kim Securities ].

[Interpreted] I have few questions. The first question is about PAYCO. Can you share with us the share of your off-line transactions within PAYCO? And also, can you share with us your strategy for increasing volume of payments and services for offline and offline -- online and offline, respectively? The second question is about your commerce business. I'm assuming that your commerce business in China is being affected by the lockdown in China, can you give us an update on the situation for Accommate? And how Accommate plans to respond?

[Interpreted] To answer your question about our PAYCO. As you know, our strategy in terms of growth has been to achieve a balanced growth across both on and off-line services. Of course, up till now, we have been putting a relatively stronger emphasis on growing the offline side of the business. We are, in terms of the online side, the key point of our growth strategy is to drive growth in both user numbers and volume by leveraging merchants that have a high synergy on the online channel, such as [ O2O ], Market Kurly or [ KTX ]. The share of our off-line is around 21% of our transaction volume. We did see a slight dip in offline transaction volume share during February and March in Korea. When you recall we had a high confirmed case -- COVID case numbers of around 600,000 to 700,000 per day. But things have settled down, and we are seeing our off-line transaction volume share recover. We're seeing in April around the 21% share of off-line transaction volume. Our strategy for driving our off-line PAYCO business, is, number one, to continue to drive the Campus Zone service. It is a key piece of our offline strategy. In the current semester, colleges are only asking the students to come to campus on a partial basis. We expect that college students will be full on campus from the second half of this year. And we are actually looking forward to a strong drive in growth from Campus Zone in the second half of this year. Well, in addition to that, we are currently preparing to onboard a major-sized merchants that has very strong appeal to the 20 and 30 age group, and I hope to open that service soon within the next 1 to 2 months. And so this is how we plan to create better synergy on both on and off-line. In addition to driving the growth in terms of volume, we also have a key strategy in using our PAYCO Points plus service, which has a strong contribution to our profitability to continue to issue a larger number of physical cards for our PAYCO Point plus service to further enhance our profitability overall. Your second question was the impact of the Chinese lockdown on our commerce business. And as you would see that the lockdown in China is posing quite serious challenges for not only us, but all companies that are involved there. We're seeing the logistics basically coming to a stop. This is increasing, number one, our overall cost in addition to driving down volume. And so there's a profitability impact due to the lockdown. So we are off of our original business plan that we had originally established at the start of the year. To give you a bit more detail on how we plan to respond to this situation, while the third-party logistics or 3PL that we use to ship the goods that we sell directly -- Accommate sells directly to the customers. Even though the third-party logistics have come to a stop in China, we own the directly operated logistics networks by the key platforms in China are still up and running. And so our strategy is to focus more on increasing our business through the major platforms in China. So to increase the share of the B2B business to weather through the current situation. And so by doing that, while we do expect that we will be able to closely deliver the GMV and revenue targets that we had at the start of the year, our operating profits would suffer. And so right now, looking at the situation, probably a reasonable estimate would be that our operating profit will be close to half of what we had originally targeted at the beginning of the year.

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

[Interpreted] I have 2 questions. First question is about the web-board game. I think we are all expecting the regulation of our web-board games to ease soon. When does the company expect these regulations to come into effect? And if so, how much of an impact the company anticipates? Second question is more of a long-term business strategy from the entire company perspective, I think NHN compared to its market cap does have a widely diversified business portfolio. It is engaged in multiple businesses, so does the company have plans of, for example, streamlining its business portfolio according to a strategy of selection and concentration? And if so, if it does streamline its business portfolio, which of the businesses would be the key pieces for driving its growth.

[Interpreted] Regarding your first question about the web-board game regulation being revised. The company expects that the revised web-board game regulations was coming to effect during the first half, that's what we are expecting. And with the reformed regulations rather than expecting a dramatic increase in our revenue, what we think is that under the new regulation, we'll probably be able to significantly improve the playability, the enjoyability of our games and so we're expecting a 10% to 20% upside on our key performance indicators under the new regulation. Regarding your second question about our long-term business strategy. As you know, we have a business portfolio that's mainly consisting of 4 areas that's game content, payment, advertisement and commerce. These 4 areas actually are quite organized. And as we mentioned during the script, we've already gone through a divestment disposal of some noncore affiliates that we have as part of our selection and compensation strategy. That is not the end. We will continue to look into divesting noncore affiliates. While that goes on, we also have a strategy of the businesses that we expect would take a longer time frame to achieve profitability. We are actively looking into leveraging outside alliances, whether that be an alliance of capital or an alliance of strategy, and also what we are doing to enhance the overall competitiveness of the business is to consolidate some of the resources that we think were scattered within our organization, and that would be -- a good example of that would be the establishment of Bigfoot.

[Interpreted] The next question will be presented by from SeokO Kang from Shinhan Investment.

[Interpreted] I have 2 questions about the game business. First of all, you mentioned that the web-board game is running a major campaign, marketing campaign, what kind of effects are you expecting from marketing? And what kind of expenses would that incur? And how much of a further increase in your market share are you expecting from this marketing for the web-board game. The second question is about the launch of GUNS UP! Mobile that was launched in April. Can you share with us some of the initial performance numbers for the global service?

[Interpreted] First of all, recording the branding marketing behind Hangame. As you know, Hangame is one of the oldest and also well-recognized game portals and game brands in Korea. So it has always had a very strong awareness in terms of a board game brand. But it has the image, a perception of being perceived as a relatively old accessibility. And so the strategy of our marketing is to actually own that and to actually celebrate the history that Hangame has as one of the oldest web-board game services and in order to do that, we have hired a well-known celebrity models to actually do that. So it was sort of an unexpected approach to enhancing the branding and awareness of Hangame. In terms of the expense side of it, we expect that this marketing for web-board games would be executed within the 10% overall marketing budget that we roughly have versus the company revenue. And with the expected effects of this rebranding campaign, we think that we will not have to see additional expenses because of it. Regarding the GUNS UP! Mobile service, unfortunately, due to the Ukraine-Russia situation, it hasn't been able to, for example, leverage being a featured game in terms of marketing. And we're also, in terms of marketing the game remaining sensitive to the Ukraine situation and refraining from aggressive marketing of the game itself. Despite these limitations, actually, the game is receiving very strong responses in terms of playability. D1 retention is above 50%. And at the current rate of revenue, we're expecting around KRW 10 billion quarterly revenue from the game.

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

[Interpreted] Yes. I have a question about the Cloud. NHN Cloud was split into a separate legal entity. Can you give us an update post the spin-off, what's going on at NHN Cloud. Also, you've announced that it's actually going through quite a steep growth phase. Can you give us an overall guidance for this year for NHN Cloud, and also, can you give us some updates about the talks of attracting outside investment?

[Interpreted] To answer your question about the NHN Cloud, as you know, NHN Cloud was spin off as a separate entity as of April 1, and around 80% of our people at NHN Cloud are actually engineers and software developers which enables us to successfully implement and operate an open source SaaS-based cloud service. Some of the growth targets that we have at NHN Cloud Mobile is about a 50% year-over-year noncaptive revenue growth this year. Overall revenue growth target this year is around a 30% to 40% year-over-year growth. And to give you a bit more color of our revenue trend, you would notice that on a quarter-on-quarter basis, so that versus fourth quarter last year, our first quarter cloud revenue appears to decrease. But that's number one, mainly due to the seasonality of public sector accounts, it seems due to the nature of government and public institutions. A large part of the revenue is recognized in fourth quarter. There were also some accounting recognition. So even though in terms of accounting number, it appears that there was a quarter-on-quarter decrease, actually, in the actual business, we're seeing first quarter as moving on from fourth quarter and do expect revenue to increase as we move through the year from second quarter and onwards. You both asked about an update on talks of outside strategic investments. Currently, the company is talking to a large number of potential investors. We're still in the initial phase of these talks. So it's more of a tapping phase. Our basic approach is that actually, because the valuation will become better with time, time is on our side, there is no reason for us to rush through these talks. We have enough funding for the operation. And so we will take our time, but hopefully, we'll be able to close within the year.

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

[Interpreted] Yes, I have a question, mainly on the cost side of the business. It's similar to a manufacturing company having to be sensitive to manufacturing costs. For your sector, the labor cost is a key component that determines the profitability of the company. And this is an increase in labor costs, salary levels is something that we're seeing not only in your company, but other companies in the same sector. It seems that when we look at your revenue, your main business has actually delivered revenue fairly according to plan, but it was the increase in the costs that contributed mainly to the decrease of your operating profit. And so in that context, I would like to ask a bit more color about the company's policies regarding labor costs and marketing costs, which are the 2 key components of your operating expenses. Number one, so in terms of the labor cost, what's your salary level increase in Q1 higher than your usual salary increase level and if so, how much? Also, I think during the presentation, you mentioned that in the first quarter, there was some one-off employee benefit-related expenses that were recognized. If we take out these one-offs on a running basis, how much of a lever cost on a quarterly basis, should we expect the company to report going forward? And also tied to the hiring policy, how does the company plan to manage a balance between driving growth and also maintaining profitability through its hiring policy? Second question about the marketing side. I think during the first quarter, the marketing mainly increased due to the PAYCO-related campaigns and also web-board game marketing, even though there wasn't a serious game launch in the first quarter. So going forward, would it be fair to expect there to be a significant increase in marketing expenses as the company goes through several new game launches on top of the PAYCO and web-board game marketing? Or would actually you decrease -- would you be decreasing the marketing spend on PAYCO or web-board games so that despite additional marketing for the new game launches, there would be either a flat or a slight increase in marketing going forward?

[Interpreted] First of all, in terms of labor cost, if we take out, for example, the bonuses and these effects on an unusual basis, there was about a 10% increase on our labor cost. The employee benefits that we mentioned, that is mainly a one-off nature. That was around the KRW 2 billion increase. This is mainly in order to hire and also retain the people that we have. As you know, there's quite difficulty in hiring developers on the IT side. There's quite a strong competition. So it's not only a challenge in hiring, but also retaining is another major issue in terms of our people. And so the benefit, the onetime welfare benefit that I mentioned mainly was geared towards enhancing, improving our retention. So that was provided to our long-term tenure employees and were recognized as a long-term salary item on our accounts. In terms of advertisement, in first quarter, there was an increase. And actually, the advertisement and labor cost expenses in first quarter actually was above what we had originally expected. In terms of advertisement, that will continue. That spending will continue somewhat during the second quarter. But actually, the advertisement spending is not just the pure expense that goes out, but actually, it is necessary to drive our volume and revenue in order to improve our service indicators and also increase the user numbers. So in a sense, this is a necessary spending that we need to make in order to drive up the business. That also applies to our labor cost, the labor cost is necessary to hire the people to drive the development, the cloud service and the AI service. So in a sense, this does have an investment in nature, and we do expect there to be an increase in labor costs and head count somewhat in order to drive our R&D-related activities. So to give you a bit more color on what to expect, we do expect there to be a negative impact on our profit levels during the first and second quarters, but as we move on to the second half of the year with seasonality kicking in, we expect there to be an improvement in our profitability starting from the third quarter. Since there's no other questions, we will end the conference 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.]