NHN Corporation (A181710) Earnings Call Transcript & Summary

[Interpreted] Good morning. This is Ji Hye Kim, Head of IR at NHN. Thank you very much for attending our 2022 Third Quarter Earnings Conference Call. NHN CEO, U-jin Chung; CFO, Hyun Shik Ahn; CEO of NHN PAYCO; Yeon-Hun Jeong; CEO of NHN 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 auditor's 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. During third quarter, global inflation and the demand slowdown has become more prominent and economic uncertainty has been on the rise. Despite such headwinds among NHN's 5 major business areas, except for the commerce business, which is directly affected by the macro economy, all of NHN's major businesses have delivered Q-o-Q and Y-o-Y top line growth in the third quarter. Even though the external environment appears unlikely to improve in the near term, we will remain focused on delivering even better results during fourth quarter, when most of NHN's businesses will be benefiting from peak seasonality. Before going into the key topics of each of our businesses, I would like to explain the game business strategy of NHN and NHN Bigfoot, which became a single entity as of October 1. NHN aims to go beyond its current position as Korea's #1 web board game company and become a global game company that is strong in multiple game categories. And 2023 will be year 1 of NHN's global Game business, and we will focus on the following 3 goals: First, NHN's expertise in the Match 3 puzzle games, already proven in Korea and Japan, will be expanded to Western markets. Using our know-how gained from the success of Pop Friends and Line Pop, we have developed MBrick, which is an engine dedicated for the development of Match 3 games. The MBrick engine is expected to significantly reduce game development work and time, and we plan to launch a variety of puzzle games starting from the casino-themed Match 3 game puzzle and casino are scheduled for a soft launch within the year. Second, a successful lineup of mid-core games will be built starting from Darkest Days. Currently, we are concentrating on putting the final touches on Darkest Days and are picking up pace with the aim of unveiling it to global users during the first half of next year. Lastly, NHN will take on the global blockchain game market, leveraging its know-how in what it does best, that is web board games. By nature, betting is a key aspect of web board games and the ability to manage in the in-game economy is more important than any other type of game. As Korea's #1 web board game company for more than 20 years, NHN has more know-how in managing in-game goods than any other company. With this know-how, NHN is well positioned to build a highly stable [ tumponomics ] through its development and operation of blockchain games, and we plan to demonstrate NHN's in-game goods management capability in the new games lined up for launch, including a match prediction game Project WEMIX Sports and a social casino game, Marble Slot. NHN plans to build out a blockchain game lineup with a specialty in web board games and social casino games that highlight NHN's strengths in the era of Web 3.0. I hope you will continue to watch NHN as it rolls out its game business into the global market. Now I will provide the key updates for each of our businesses in the order of Game, PAYCO, Commerce and tech. So first, the Game business. The enforcement agreement to the revised game app went into effect as of July 1, and third quarter web board game revenue increased by 38% Y-o-Y and also 19% Q-o-Q. During third quarter, Hangame continued to add unique and differentiated content. And the Poker League launched in the PC Poker in July contributed to increase in game engagement with 45% of all users participating in the Poker League. Hangame Mobile Poker ranked #9 in Google Play's grossing charts, and it has been setting new revenue records and steadily adding market share. Japanese mobile games also continued a solid trend. First-time collaborations were executed between Yo-kai Watch Puni Puni and Japan's virtual YouTuber Hololive, as well as between COMPASS and NieR:Automata, which is an RPG game of SQUARE ENIX, both delivering positive results. AA Poker, which is a Texas Holdem-style mobile game, is preparing for launch in Korea in line with the year-end and year -- New Year's peak season. Given that Holdem is gaining popularity among young users, we anticipate that AA Poker will attract new users into the web board game market and further strengthen Hangame's brand competitiveness. Next PAYCO. PAYCO transaction volume in third quarter was KRW 2.5 trillion, 29% Y-o-Y growth, with the gradual spread of back to normal. In third quarter, Offline payments continued to grow, recording 45% Y-o-Y growth and increasing to 23% of total PAYCO volume. On September 30, Daiso, which is a major franchise retailer, was onboarded as a PAYCO offline merchant. Daiso has generated very positive responses from PAYCO users, and we expect PAYCO Offline payments to continue a solid growth trend in the fourth quarter. Transaction volume of Campus Zone and the B2B service Corporate Welfare Solution increased by 242% and 111% Y-o-Y, respectively. And Payco order transaction volume also increased 86% Y-o-Y, particularly from increase in use in company in-house cafés connected with the Corporate Welfare Solution service. A key focus of PAYCO is improving its profitability, especially by increasing the scale of its PAYCO Point Payments and Coupon business. PAYCO Point payment volume increased by 98% Y-o-Y and the share of retention user transactions is increasing, helped by the increase in physical PAYCO cards. Despite some advertisers cutting back marketing budgets, the PAYCO coupon business continues to add new advertisers who find PAYCO coupons to be a highly efficient means of advertisement. Our coupon revenue has increased by 55% Y-o-Y, and PAYCO coupon has expanded its business model to a card-linked offer business by providing coupon services for a major card company in Korea starting from third quarter. For our Commerce business, certain parts of China are still affected by the lockdown. And on top of this, the weakening global consumer sentiment and slow seasonality have aggravated the negative effect. As a result, in third quarter [ ACMI ], which engages in commerce business in China, and NHN Global, which engages in commerce in the U.S., both reported a double-digit decline in GMV year-over-year. Considering that the impact of the sporadic lockdowns under the Chinese government Zero COVID policy continues, near-term demand recovery is expected to be limited. NHN's global commerce business is focusing on developing new opportunities by increasing its collaboration with platforms that have high growth potential in China in order to diversify its product lineup and sales channels and by introducing new business models such as drop shipping in the U.S. In the case of our tech business, NHN Cloud continues to remain the #1 cloud service provider among Korean public institutions, reporting a 39% win rate in terms of user institutions and the cloud migration projects of public institutions that came to market thus far in 2022. Our prospective customer inquiries have continued to increase since the NHN Cloud Make IT Conference in late June. And as of end of third quarter, NHN Cloud has a total of 4,350 cloud user entities, which is a gain of around 250 entities since the second quarter. Considering the nature of public sector entities, we expect fourth quarter to see even more noticeable growth in volume. And by leveraging the MOU signed with Shinhan Investment Securities on September 20, we will use our financial sector experience to achieve growth in both public and private sectors. The global MSP business grew by 14% Y-o-Y despite the strong dollar and weak yen and NHN Tech Works plans to open 100 sales offices throughout Japan within the year to drive growth. That was my update on key business topics. And now our CFO, Hyun Shik Ahn, will take you through the third quarter financial results.

[Interpreted] Good morning, this is CFO, Hyun Shik Ahn. I would like to go over our 2022 third quarter financial results. Third quarter consolidated revenue was KRW 522.4 billion, which is a 10.6% Y-o-Y growth and a 2.2% Q-o-Q growth. Operating profit was KRW 8.3 billion, which is a 70.3% decrease Y-o-Y but a 59.7% increase Q-o-Q. In third quarter, we recorded a net profit of KRW 21.4 billion, which is a 51.9% Y-o-Y decrease, but a turnaround from last quarter's net loss. Total game revenue was KRW 115.9 billion, which is 21.4% Y-o-Y increase and an 11.3% Q-o-Q increase. Total web-board game revenue increased by 38.2% Y-o-Y driving the overall game revenue. As a result, PC online game revenue was KRW 44.6 billion, which is an increase of 9.7% Y-o-Y and 8.8% growth Q-o-Q. Our mobile game revenue was KRW 71.3 billion, which is an increase by 30.1% Y-o-Y and 13% Q-o-Q. In particular, mobile web-board game revenue increased by 64% Y-o-Y, continuing to win market share. And in the case of Japanese mobile games, Yo-kai Watch Puni Puni's revenue achieved double-digit growth, both Y-o-Y and Q-o-Q, thanks to the collaboration with Hololive. Of our game revenue, PC game accounted for 39%; mobile game, 61%. For the payment and advertisement business, revenue was KRW 227 billion, with an 8.9% increase Y-o-Y and a 4.8% increase Q-o-Q, particularly thanks to increase in NHN KCP's transaction volume from large domestic and overseas merchants. NHN PAYCO's revenue also increased by 40.9% Y-o-Y, supported by the 55% Y-o-Y gain in revenue by coupons. Commerce revenue recorded KRW 66.3 billion, which is a 13.8% Y-o-Y decrease and an 18.8% Q-o-Q decrease. Even though the low seasonality of the Chinese commerce business, and overall weak consumer sentiment had an impact, NHN Global in the U.S. was able to record revenue similar to the previous quarter, thanks to increased commission revenue tied to inflow of users. Tech business revenue was KRW 71.3 billion, which is a Y-o-Y 24.5% and Q-o-Q 3.3% increase. DSP revenue, including NHN Cloud, grew by 47.1% Y-o-Y, reflecting the additional public sector contract wins, and the MSP business revenue, including NHN techers in Japan, grew by 14.3% Y-o-Y. Content revenue was KRW 51 billion, which is a 16.4% Y-o-Y and 2% Q-o-Q growth. NHN Comico continued to enjoy positive results of Pocket Comics in both America and Europe, and NHN Links appears to have recovered pre-COVID sports ticket sales. Next, about the operating expenses and profits. Total operating expense was KRW 514.1 billion, which increased by 15.6% Y-o-Y and 1.6% Q-o-Q. Commission expense was KRW 335.5 billion, which is a 2.5% Q-o-Q increase, due to increase of revenue type commissions for the payment business and some onetime outsourcing fees for the COMPASS Live Arena launch. Labor cost was KRW 102.8 billion, which is a 2.3% Q-o-Q increase, due to increase in head count resulting from the new entities included in consolidation, so [ Cisco Sense ], and the regular bonuses of NHNKCP. Advertisement and Marketing was KRW 33.9 billion, which is a 9.3% decrease from second quarter when there was the Hangame rebranding-related spending, but an increase Y-o-Y effected by web-board games revenue-linked marketing and increase in PAYCO and Comico marketing expenses. Other operating expenses was KRW 15.6 billion, which is a 1.4% Q-o-Q decrease, including some one-off expenses for Japan Techorus network expansion. Operating profit was KRW 8.3 billion, which is a 70.3% Y-o-Y increase but a 59.7% Q-o-Q increase and the company turned around to a net profit of KRW 21.4 billion, including increase in gain from disposal of short-term financial assets and decrease in corporate income tax. That completes our presentation on third quarter result, and we will now start the Q&A session.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Jingu Kim from Kiwoom Securities.

[Interpreted] I have 3 questions. First question is, can you give us some comments on the fourth quarter new game lineup schedule? And also, can you give us your game launch schedule next year for each quarter? Second question is about the cloud investments. Can you give us an update on the thoughts regarding the attraction of new investments into the cloud business? Third question is your advertising and marketing. Can you give us some guidance to your advertising and marketing expenses for fourth quarter and 2023? And if possible, give us, for example, guidance in terms of share to revenue as well.

[Interpreted] To give you the information about our new game lineup, first of all, what we have lined up for launch before the end of the year would be puzzle and casino, which is a puzzle game but also has elements of a casino to it as well as a AA Poker. We are aiming to have a soft launch of AA Poker before the end of the year. This is a Texas Holdem-style poker game, which has a strong appeal to young users in their 20s. We are also talking with the publisher for the launch schedule of the sports betting-style game. We are talking with the publisher with the goal of launching that within the end of the year. For next year, we will be using the puzzle game engine that we mentioned during the presentation to develop puzzle games, and launch that during the first half of 2023. Also, we are preparing Marvel slot and other social casino style blockchain games for global launch first half of next year. Then there is Darkest Days, which is our mid-core game lineup. We are aiming for a global self launch May next year.

[Interpreted] Regarding your second question about an update on our cloud investment. As you know, we recently sent out a public disclosure regarding that. We hope -- we think that we will be able to meet another visible disclosure before the end of the year regarding that. The attraction of the investment into the cloud business is taking longer than what we had originally expected, but that is the result of us trying to get better terms and conditions on that investment given the market situation. Regarding your third question about advertisement and marketing spend. Yes, we also think that advertisement and marketing was one of the main causes of us coming below our original targets in terms of profitability this year. We did increase our advertising spend significantly versus last year. But this was in order to enhance our business competitiveness, given the strength -- increasing competition in the market. You've asked for guidance on advertising and marketing for next year. We're not able to do that now. Actually, we're going through the process of addressing our business plan for next year, so we do not have the numbers to provide you in terms of marketing spend next year. We think that we'll only get that around December time frame. So at this point, what I can share regarding our next year's marketing is that most likely, it would be a significant decrease versus this year's marketing spend in both -- in terms of amount as well as share to revenue, because we plan to take on a more efficient marketing effort next year.

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

[Interpreted] I have 3 questions. First question, actually, you've mentioned that you plan to focus on the game business, and I see that as quite positive. But then on the other hand, other than the change in the organization, I really don't see any substantial change in the company's game lineup or the game categories that the company is planning to focus on. While the company has gone through a lot of M&As in other lines of its business, I haven't seen much in the games business. Does the company consider any M&As related with its game business? Second question is about your plans of launching blockchain game. As you know, the blockchain game and the P2E games have been very weak recently. We haven't seen recently any major hit P2E games being released. At this point, given where the blockchain and P2E game market is, is it still meaningful to develop and release blockchain games? Third question is about your business strategy. Last time, I think you mentioned that you'll take a selection and concentration approach to your business. In that context, is the company planning to, for example, close off or dispose of any businesses or assets?

[Interpreted] Regarding your first question of whether the company is considering any M&As as part of its strategy to focus on the game business, we are actually using a strategy of hiring either small studios or talented people, and internalizing that game talent into the company rather than targeting the acquisition of a major game company. Actually, it's this strategy of absorbing outside talent or small studios that we're using to develop blockchain games and new games. You've asked about whether it is still meaningful to launch blockchain P2E games, even though the blockchain market is currently going through a very difficult time. Actually, regarding that question, I think our answer is that, in the case of web-board games, which is a category that NHN has as a particular strength, management of in-game goods is quite important. And we think that the management of in-game goods using blockchain is a natural fit to web-board games, unlike other blockchain-based P&E games that have been released. And so actually, the company was interested in blockchain game projects starting from back in 2018, and we have been preparing projects. And so throughout this year and continuing on to next year, we will be launching blockchain-based web-board games globally, regardless of the activity or the condition of the blockchain game market. So we are going to roll out strategically web-board games that are based on blockchain technology throughout the first half and next -- and second half of next year, which is, we think, a way of us servicing our web board games effectively to the global audience.

[Interpreted] Your third question was about any plans of divestment. First of all, the company has a long-term program of reducing the number of companies that are consolidated onto NHN's mother company. At of third quarter, we had around 90 subsidiaries that were included in our consolidation. We have a program to bring that down to around the 60s figure by 2024. Also, we are looking into ways of further enhancing the efficiency of each of our 5 key business areas, and that will be [ funded ] into our business plan.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions] The following question will be presented by Jong Hwa Sung from eBest.

[Interpreted] I have some follow-up questions regarding your marketing spend. First of all, I think previously, you've answered that you expect your marketing spend to decrease significantly next year. Can you clarify whether you meant a decrease in absolute amount of marketing as well as a decrease in share to revenue? Also, when I look your marketing spend. Second quarter, we all know there was the Hangame rebranding, which increased your marketing spend significantly quarter on quarter. That said, I had expected your marketing spend to come down to your usual levels of at least below KRW 30 billion per quarter in third quarter, given that Hangame remarketing would have been finished. But this quarter, it is above KRW 33 billion, which is higher than what I expected. My question is, was there any Hangame rebranding-related marketing spend that actually extended over, crossed over to third quarter? And if so, would it be then safe for us to assume that your marketing spend would definitely come down below KRW 30 billion in fourth quarter and reach levels similar to your marketing spend that we saw in the first quarter of this year?

[Interpreted] To answer your first question about next year's marketing guidance, yes, to just clarify, we are expecting our marketing spend to decrease, both in absolute amount and share to revenue next year. Regarding your question about our third quarter, fourth quarter marketing, you're also correct, some of our rebranding related marketing spend is lagging into the third and fourth quarter. The amount is decreasing, but gradually, and that is why our marketing spend overall is also expected to decrease quarter-on-quarter, but at a gradual pace. Regarding our fourth quarter marketing, what we can say is we are expecting a quarter-on-quarter decrease.

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

[Interpreted] Since there is no further questions, we will end the conference call here. Thank you very much. And if you have any further questions, please forward them to our IR team.