NHN Corporation (A181710) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. Welcome to the conference call for the Fiscal Year 2022 Second Quarter Earnings Results by NHN. Now we shall commence the presentation by NHN.

[Interpreted] Good morning. This is Ji Hye Kim, Head of IR at NHN. Thank you very much for attending our second quarter earnings conference call. NHN's CEO, U-jin Chung; CFO, Hyun Shik Ahn; CEO of NHN PAYCO, Yeon-Hun Jeong; CEO of Energy and Commerce, Yoon-Sik Lee; and CEO of NHN Cloud; Dong-Wook Kim, 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 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, analysts and investors, for joining our conference call. On July 13, NHN decided to merge its game subsidiary NHN Bigfoot. The merger was a strategic decision in order to maximize the business performance by concentrating our game resources in one place, given the positive improvement in web-board game regulation and also the powerful position of Hangame as the #1 web-board game service. The basic approach of NHN is to have the mother company NHN focus on web-board game and blockchain games and to also lead a balanced growth across all of our 5 key businesses, that is Payment & Advertisement, COMMERCE, Technology and Content based on a solid game performance. We are in the process of reexamining the profit structure of each business and enhancing group-level efficiencies through selection and concentration. In addition to the merger of NHN Bigfoot, during second quarter, NHN PAYCO redesigned its organization around PAYCO's differentiated services, such as coupons and corporate welfare benefit solutions. By concentrating the human and physical resources around key businesses, we plan to reduce the number of subsidiaries that are subject to consolidation from 85 as of end of second quarter to around 60 by 2024. Offer any term plans to cancel treasury stock is equivalent to 10% of its total outstanding shares by year 2024. During the first quarter earnings conference call, you would recall that we announced a 3-year shareholder return policy. And year-to-date, we have already completed 2 rounds of share buybacks consisting of 1.48 million shares or approximately KRW 43.3 billion. This is already about 2.4x the shareholder return amount that is set aside for this year. But considering factors, including the current stock price, the company has decided to carry out additional shareholder return through cancellation of our treasury shares. Currently, the company owns 8.2% of treasury shares and will cancel approximately 1.5 million shares, which is around 4% of total issued shares as of August 17. The BOD is expected to resolve on further buyback and cancellations with the goal of canceling a total of 10% of these shares by year 2024. That was a brief update on recent corporate strategy and shareholder return. And now I would like to go over some key business topics. First, our Game business. In the second quarter, our web-board game revenue increased 22% year-over-year despite the seasonality. The solid revenue growth is attributed to strong game content with a unique Hangame color and also the success of rebranding and marketing of Hangame. The Hangame rebranding marketing, which started on May 2, featured well-recognized celebrity models to promote the positive game culture image of Hangame. Also, the club tournament held for Mobile Poker and the Poker League launched for PC Poker in early July have both generated strong support from our user base. The amended game app entered into effect as of July 1, and we have continued to see positive trends, including our major mobile web-board game setting new records in gross revenue rankings. The higher monthly payment ceiling has enabled greater freedom and fun in gameplay. And in June, web-board game revenue increased 40% year-over-year and 22% month-over-month. The full effect of the eased web-board game regulation will be reflected in third quarter, and we are preparing to launch AA Poker during the second half to attract a younger user base. As the #1 web-board game company, NHN is looking forward to reaping the greatest benefit. GUNS UP! Mobile, the strategic defense game launched globally on April 1, has been generating meaningful results in the U.S. and Korea by consistently attracting new users despite the scaled down marketing given the international political situation. On July 22, NHN PlayArt launched the new Mobile Rhythm Game COMPASS Live Arena in Japan. And during the first week of launch, the game ranked #1 in downloads on the top 2 app markets in Japan and has attracted the core users with well-polished content based on the COMPASS IP. This has led to a significant increase in users returning to COMPASS and the synergistic effect of a jump in the revenue ranking of COMPASS itself. COMPASS and LINE: Disney Tsum Tsum have both demonstrated their strength by ranking #1 and #2, respectively, as the top grossing game in iOS during Q2, thanks to the effects of the collaboration and offline events. During the year, we're planning to launch many new games, including the new web-board game, AA Poker, a triple match puzzle game targeting the global market; Darkest Days, which is an open world zombie survival game; and blockchain games such as WOOPAROO Odyssey, Slot Marvel and Project WEMIX Sports. By concentrating the game capabilities of NHN and Bigfoot, a total of 7 new games are lined up for release this year, and I will share the details once they are decided. Next is PAYCO. Second quarter PAYCO transaction volume was KRW 2.3 trillion, which is a 36% Y-o-Y growth, thanks to listed social distancing measures and also gradual return to normal. Second quarter offline payment volume increased by 75% Y-o-Y, increasing to 22% of total transaction volume. Acquisition of large offline merchants such as OLIVE YOUNG and the rapid growth of Campus Zone and the B2B corporate welfare solutions were the major drivers of volume growth. For Campus Zone, the number of orders increased more than 4x year-over-year as college students return to campus and the PAYCO Corporate Welfare Solution, including mobile meal coupons, is becoming an essential service for office workers with about 120,000 people working -- using it at more -- working at more than 1,600 companies using it on a daily basis. In particular, PAYCO ORDER is being rapidly adopted by in-house cafes and second quarter transaction volume increased by 74% Y-o-Y. The revenue of PAYCO Coupon, which incorporate PAYCO's unique know-how, increased by 72% Y-o-Y in second quarter, thanks to steady increase in the number of advertisers. We have collaborations with major credit card companies prepared in the second half and expect our coupon revenue to continue to grow. So PAYCO Point payments also grew by 2.8x Y-o-Y, maintaining solid growth. And the growth of PAYCO Coupon and also PAYCO Point payments are contributing to better profitability of NHN PAYCO. Now for the Commerce business, external environment worsened and uncertainties increased due to the lockdown in China and weaker U.S. consumer sentiment. However, despite the weak Chinese market, Shopby Pro of NHN Commerce maintained stable growth based on its cloud environment. And NHN Global also continued to add users and proved the business potential and feasibility of the drop shipping service launched in April. Despite the difficult market situation, NHN will focus on building stronger fundamentals and nimbly responding to changes in the external environment. In the tech business, NHN Cloud was selected as a service provider for 3 out of 6 local governments. The 3 governments being Gyeongsangnam-do, Jeollanam-do and Gwangju Metropolitan City in the cloud computing service model, Tyler Project, organized by the Ministry of the Interior and Safety. In the second half, the tech business will also focus on expanding to the private sector, including finance to build a service portfolio across both public and private sectors and to further enhance its competitiveness. Late last June, NHN Cloud Make IT conference, which was held for the first time since the establishment in NHN Cloud Corporation, was successfully completed. And as of end of second quarter, NHN Cloud has about 4,100 corporate members and since the conference has been receiving inquiries from new customers. Meanwhile, the AWS reselling business revenue of NHN Techorus increased by 19% Y-o-Y, continuing solid growth. And NHN Techorus is adding new customers throughout Japan. In the case of our Content business, the global webtoon platform, Pocket Comics, continued to deliver positive achievements in the U.S. as well as in France, where it launched service earlier this year. Pocket Comics has ranked #1 in webtoon app revenue under the book category of iOS for more than 10 days and is building stronger awareness in both U.S. and Europe. As a result, second quarter Pocket Comics MAU increased by 48% Q-o-Q and total Comico revenue increased by 17% Q-o-Q. In addition to the popular original series, another typical fantasy romance, Comico has a strong line in the second half around romance fantasy as a part of its strategy of becoming the leading global webtoon platform targeting the female audience. In Q2, NHN Links revenue increased 87% Q-o-Q, thanks to easing out our face mask requirements and saw revenue growth in all areas, including sports tickets, such as professional baseball and soccer as well as concert and exhibits. Despite the low seasonality of the web-board game market, we were able to deliver market-leading results because we have been focusing on highlighting Hangame's web-board game as a positive mind sports that users can enjoy and also focus on attracting the interest from a wider audience. Also, NHN Comico's Pocket Comics successfully rolled out into Western markets and is becoming known as the leading webtoon app for romance-fantasy comics because we have been working hard to create and promote great content. This quarter, expenses had to be executed to promote NHN's outstanding services in the market and to reboost some services to take advantage of eased social distancing. However, these preemptive investments in the first half are coming back in the form of visible results from third quarter such as increase in web-board revenue and increase in Pocket Comics' monthly active users. NHN continues to reexamine the business of Justice at a group level to improve profitability, and we look forward to a gradual turnaround in our profitability during the second half through strategic use of our expenses. I have no doubt about this turnaround of NHN's performance and ask for your continued support as NHN works through various challenges and changes during the second half. That was my update on key business topics. And now CFO, Hyun Shik Ahn, will take you through the second quarter financial results.

[Interpreted] Good morning. This is CFO, Hyun Shik Ahn. I would like to go over our second quarter financial results. Second quarter consolidated revenue was KRW 511.3 billion, which is a 12.8% Y-o-Y growth but a 1.8% decrease Q-o-Q. Operating profit was KRW 5.2 billion, which is a 73.9% decrease Y-o-Y and a 66.5% decrease Q-o-Q. In second quarter, we recorded a net loss of KRW 5.3 billion. Total Game revenue was KRW 104.1 billion, which is a 4.3% decrease Q-o-Q and a 19.9% increase Y-o-Y. PC online revenue was KRW 41 billion, which is an increase of 3% Y-o-Y, thanks to the Hangame rebranding marketing effect, but a decrease by 4.3% Q-o-Q due to seasonality. Mobile game revenue was KRW 63.1 billion, which is an increase by 34.2% Y-o-Y with strong performance of mobile web-board games continuing. But this is a decrease 4.2% Q-o-Q against first quarter when there were events held in Japan. Share of PC game revenue within total Game revenue was 39% and mobile games accounted for 61%. For the Payment & Advertisement business, revenue was KRW 216.5 billion, which is a 10.3% increase Y-o-Y and a 3.5% increase Q-o-Q, thanks to increase in NHN KCP's transaction volume and overall growth of ad volumes. Commerce revenue recorded KRW 81.7 billion, which is a 22% Q-o-Q decrease due to lockdown of major Chinese cities. But despite external uncertainties and overall weaker consumer sentiment, revenue grew by 2.6% Y-o-Y, reflecting the Chinese B2B revenue and also the effects of NHN Global's drop shipping service launched in the U.S. Tech business revenue was KRW 69 billion, which is a Y-o-Y 33.8% and a Q-o-Q 8.4% increase. CSP business, including NHN Cloud, continued to grow, especially around public sector accounts. And CSP business revenue increased by 54.5% Y-o-Y. And NHN Techorus in Japan achieved solid performance despite the effects of the weak drop in yen. Content revenue was KRW 50 billion, which is 8.8% Y-o-Y and 6.5% Q-o-Q growth. NHN Comico saw positive effects from its original series and NHN Links revenue increased by 2.4x Y-o-Y and recorded the highest revenue in its history, thanks to the lifting of social distancing measures. Next, about our operating expenses and profits. Total operating expense was KRW 506.1 billion, which is an increase by 16.8% Y-o-Y and a 0.2% increase Q-o-Q. Our commission expense was KRW 327.4 billion, which is a 3.2% Q-o-Q decrease tied to decrease in Commerce revenue. Labor cost was KRW 100.5 billion, which is a decrease of 1.3% Q-o-Q versus first quarter when some of our subsidiaries, such as NHN KCP, had paid out bonuses. Even though on a consolidated basis, total headcount has increased. Advertisement and Marketing was KRW 37.4 billion, which is a 36.4% increase Q-o-Q due to increase in marketing for web-board games and also new game releases as well as marketing for Comico's service launch in France. Other operating expenses was KRW 15.9 billion, which is a 27.8% Q-o-Q increase due to the one-off expense for NHN Global FashionGo week offline show. Operating profit was KRW 5.2 billion, which is a 73.9% Y-o-Y and a 66.5% Q-o-Q decrease. And on a net basis, despite the increase in financial asset valuation gain Q-o-Q, a net loss of KRW 5.3 billion was recorded due to decrease in operating profit. Since second quarter, subsidiaries such as NHN Cloud and NHN Bigfoot, which are continuing to grow their business, have continued to hire new people. As of end of June, NHN's consolidated headcount was around 5,000 people, which is 121 people more on a quarter-on-quarter basis. However, during the second half, we will reexamine our hiring plan. So that on a full year basis, consolidated labor cost is kept within 19% of consolidated revenue, which is lower than the 23.8% in 2019, 20.7% in 2020 and 19.3% in 2021. In the case of marketing, during the first half, there was Hangame's rebranding marketing. And there are also a large number of new games lined up for the second half. However, we plan to wane in the marketing spend with second quarter being the turning point and start to wane in marketing expense from the second half and plan to lower the marketing spend to revenue ratio back to previous year levels from next year. On a long-term basis, we will focus on improving group level profitability through active cost management and greater emphasis on efficiency. When announcing the treasury stock cancellation today, the company announced not only a short-term shareholder return policy, but a target for a 3-year period to provide greater reliability and consistency of our shareholder return policy and also to show you our commitment to profitability improvement. We will do our best to meet the expectations of many investors who have always supported NHN. That completes our presentation on second quarter results, and we will now start the Q&A session.

[Interpreted] [Operator Instructions] The first question will be provided by Oh Dong Hwan from Samsung Securities.

[Interpreted] Well, I have 2 questions about marketing. The first question is your marketing expense in the second quarter increased quite significantly. Can you break that down by line of business, such as games, PAYCO, Comico and Cloud? Second question is, when we look at your investments, your spending, a lot of it is for your new group businesses such as PAYCO, Cloud and Comico. I assume that these businesses are in #3 or below positions in their respective markets. As a company, are you happy with where they are currently? Or does the company have plans of spending, investing more in these businesses to bring up their ranking?

[Interpreted] Well, to provide a breakdown of our second quarter marketing. Of the different businesses, the game did account for the larger share of our marketing. Second quarter marketing, total was around KRW 37 billion and Game accounted for around KRW 23 billion. Out of that, Content accounted for around KRW 8 billion of our marketing spend and the rest was mainly in the Payment & Advertisement, which had about KRW 4 billion of marketing spend. Why don't I answer your second question as the CFO first and then give the heads of each businesses an opportunity to follow up. You've asked about our strategy and approach regarding the new businesses. You've pointed out 3, which is PAYCO, Comico, the Comics business and our Cloud business. You've had -- you've assumed that they're not in #3 or above positions in their respective markets, and I guess that's highly dependent on how you define their market. For example, in the case of Comico, actually, we are focusing on creating, producing our own original content, which does have positive effects in not only giving us better profitability, but also in expanding the market. As you know, webtoon is a business that is very sensitive to whether you have a hit content. And so the present ranking itself is not as relevant especially given the fact that Comico is more of a content business rather than a mere platform provider. And so our approach for Comico is to focus on increasing our production capabilities as a differentiating factor. In the case of PAYCO, we have actually shifted most slightly so that we're now spending advertising spend in order to drive up transaction volume. This means that you will be seeing a larger degree of growth, a greater magnitude of growth in PAYCO transaction volumes than before. Also, you have noticed -- you would have noticed the way we're differentiating PAYCO versus other payment services is to target more of the B2B markets such as companies or schools that are larger accounts and have users attached to them. This we believe will be a way for us to secure long-term expansion of the PAYCO user base. Regarding the Cloud, if you include CSP and MSP and also if you define the market to include the global CSP providers, yes, we would not be in the top 3 because of this huge presence of companies such as Amazon, Google and Microsoft. But if you define the market as a cloud service provider for Korean public sector institutions, we would definitely be in the #3 and also in a very good position to expand our market share. So as I have provided the breakdown, we are spending marketing for Comico and PAYCO in order to raise the ranking of these 2 services. For PAYCO, the reason why we have shifted gears towards spending marketing is because we think that with social distancing measures, we know this is a good time for us to make the marketing effort to increase all fine transactions for PAYCO. In the case of Comico, our marketing spend is in order to highlight the original content that we have been focusing on Comico. So as we introduce more original content, we will be supporting it with marketing spend.

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

[Interpreted] I have two questions. So first of all, a question is about the Commerce business. Can you share with us your second half outlook for Commerce or Singles' Day in the second half? Do you think that, year-over-year, the performance would be better than last year? Second question is about the Cloud business. Can you give us an update on talks about attracting outside investment for your Cloud business? And will it be possible to share a range of the valuation that is being discussed? Also, we do notice that a lot of competitors are also concentrating on the Cloud business. Overall, this year, do you think that you will have a good outlook? Can you give us some guidance in terms of, for example, the contract wins that you're expecting this year?

[Interpreted] This is Yoon-Sik Lee of NHN Commerce. I would like to answer the first question. The Chinese lockdown has been removed, but it's not -- the situation in China is not what we can describe normal. Also, third quarter, that July and August, has always been traditionally the slow season. So seasonality is slow in third quarter. Now in the second half, as you mentioned, Singles' Day would be in the fourth quarter. And our outlook, it's difficult to give you a specific outlook given the limited visibility of what the situation would look like come November. But assuming that things do become normal by then, we're expecting that our business in Single's Day will report around a 10% Y-o-Y growth. Many numbers are being projected regarding the Chinese market. And overall, I think average is that we are expecting a 6% to 7% growth Y-o-Y for the entire Chinese market. And -- but -- and we are expecting to outgrow the market on Singles' Day, but that is -- given the limited visibility that we have on second half, for example, logistics or what the lockdown would look like in the second half.

[Interpreted] I'll add to the first part of your second question, which was about the investment talks about NHN Cloud. We are finally talking at a valuation of around KRW 1 trillion -- plus/minus KRW 1 trillion. We are considering to attract around KRW 100 billion to KRW 200 billion of investments. Of course, that would depend on the valuation as well as other conditions. We're currently talking with about a handful of companies and expect to complete the talks by early mid-October or around November, but at least before the end of the year.