NHN Corporation (A181710) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. Welcome to the conference call for the fiscal year 2022 fourth 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 2022 full year and fourth quarter earnings conference call. NHN CEO, U-Jin Chung; CFO, Hyun Shik Ahn; CEO of NHN PAYCO; Yeon-Hun Jeong; 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 results of the external auditor's review currently underway. Also, I remind you that the conference call contains forward-looking statements and that the company's actual business results may differ materially. 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, investors for joining our conference call. Even though year-end is traditionally peak season for our payment and commerce businesses, during fourth quarter last year, the increasing concerns about a global recession resulted in a noticeable slowdown in overall demand. During fourth quarter, even though NHN continued various efforts to improve its business fundamentals, including reexamining its overall business model and revamping its services, the company's profitability in 2022 has somewhat weakened due to the volatile macroeconomic environment. During such a challenging period, the company passed a meaningful milestone of KRW 2 trillion in full year revenue. And this year, we will concentrate on profitability with an aim of delivering gradual improvements in our bottom line. On January 26, NHN Cloud, our subsidiary, successfully attracted investment of KRW 150 billion at a valuation of around KRW 1 trillion from IMM Investment, which is a leading Korean private equity firm. The investment by IMM and NHN Cloud is particularly meaningful because the deal is an official recognition of NHN Cloud's performance and growth potential as a Korean top-tier cloud service provider, and also because NHN Cloud has now joined the ranks of a unicorn company. With the NHN Cloud deal, the value of our unlisted subsidiaries that is NHN PAYCO, Commerce, Dooray, Edu and NHN Cloud officially recognized through investment deals amounts to a total of KRW 2.4 trillion. When NHN's ownership ratio is applied, the value owned by NHN is over KRW 1.8 trillion. With the subsidiaries delivering tangible business results throughout the year, we expect the equity value of these major subsidiaries will be fairly reflected onto NHN's own enterprise value. I ask for your continued support for NHN in 2023. And now I will go over the key achievements and updates for each businesses. First, the game business. Fourth quarter web-board games revenue increased by 30% year-over-year and also managed to defend the revenue decline versus the previous quarter at 5%. Even though during the last quarter, web-board games that -- even though during the third quarter, the web-board games had enjoyed the positive effects of regulatory easing and Chuseok holidays. This year, web-board game is expected to continue a positive trend. Monthly revenue in January was 12%, up than the previous month and 30% up than January last year, which is a strong start for the year. On January 26, the new Texas Hold'em [ Down ] mobile game Double A Poker was launched, attracting young users at enjoying mind sports. For Japan mobile games, in December, COMPASS had a collaboration with a famous Japanese manga, a certain scientific rail gun, and also in early January, Disney Tsum Tsum had its 9th anniversary event. Both delivered strong performance, reaching #2 on the iOS grossing chart. Japan NHN player has been working on developing new events and collaborations and is currently developing 3 new titles with a target of launch in 2024. Next is an update on PAYCO. PAYCO Point payments have been steadily increasing around offline channels, and this has helped PAYCO record a transaction volume of KRW 2.7 trillion in fourth quarter, which is a 33% Y-o-Y growth. Volume of Campus Zone and the B2B service company welfare solution, respectively, increased by 233% and 131% Y-o-Y, driving the growth of offline payments. The share of offline payment in fourth quarter was 24%. In terms of profitability, with more PAYCO Point cards issued, PAYCO Point payment volume increased by 81% Y-o-Y, and PAYCO coupons fourth quarter revenue is also increased by 76% Y-o-Y. The new business of providing PAYCO coupon service to Korean major credit card companies is also gradually increasing in contribution to revenue. Last December, PAYCO completely overhauled its reward policy with a focus on efficient cost spending. The reward program was redesigned to encourage activities around brand of a month and PAYCO Point cards. While the size of benefit sales by users would remain the same, we plan to meaningfully cut down our marketing expense. Performance during fourth quarter negative conditions continue, given that in China, the Zero COVID policy was tightened with the spread of COVID-19 in China, and major Chinese cities underwent a long-term lockdown. As a result, the Singles' Day performance was disappointing and total GMV of commerce for fourth quarter continued to shrink by double digits year-over-year. Global consumer sentiment continues to deteriorate and uncertainty remains high. However, the business environment for commerce may improve gradually, depending on the effects of China's reopening. In the tech business, NHN Cloud once again recorded a best win rate in the cloud migration projects of public sector institutions in 2022. In recognition of its stable cloud service provision in December, NHN Cloud received commendation from the Ministry of SME and Startups as well as the Ministry of Education. The annual revenue of the cloud service providers, including NHN Cloud, grew by 65% year-over-year, thanks to the wins in the public sector projects. This year, in terms of public sector projects, the Gwang-ju National AI Data Center is scheduled to open in the second half, opening a way for collaboration with AI companies, and we will lead the key cloud market, including AI processors. As part of this last October, we participated in the Korean AI Processor Test Bed Project organized by the National IT Industry Promotion Agency and built an AI processor cloud infrastructure consisting of [Indiscernible] processors at the Pangyo Data Center NCC and was able to verify the possibility of AI service in a cloud environment for the first time in Korea. Techorus continued solid growth by attracting large customers in fourth quarter and the full year revenue of the MSP business increased 25% year-over-year. On the content side, NHN Links, Doctor Tour, which were negatively affected by COVID, have been showing a noticeable improvement in business fundamentals for NHN Link, even after the end of the professional baseball season concert, and show ticket revenue roughly doubled year-over-year in Q4, driving solid results. Even on a full year basis, 2022 revenue grew by more than double versus 2021, and this comeback was possible because NHN Link had focused on expanding its coverage of concerts and shows during the past 2 years. In Korea, indoor face mask requirements were lifted as of January 30, and so we hope to see 2023 become the first year of full normal growth free from the influence of COVID-19. NHN Doctor Tour has started to see travel revenue come back, including travel to Japan and Southeast Asia, even though some time may be needed for the travel market to recover pre-COVID demand levels. Doctor Tour will focus on offering unique and differentiated products in line with the stable recovery of the travel market. That was my update on key business topics and our CFO, Hyun Shik Ahn, will take you through the business results.

[Interpreted] Well, good morning. This is CFO, Hyun Shik Ahn. I would like to share the 2022 fourth quarter and full year results. Our 2022 fourth quarter consolidated revenue was KRW 561.4 billion, a 2.8% Y-o-Y growth and 7.5% Q-o-Q growth. Operating profit was KRW 11.7 billion, which is a 53.1% decrease Y-o-Y, but a 41.3% increase Q-o-Q. Net loss was KRW 16.2 billion. 2022 full year revenue was KRW 2,115.6 billion, which is a 10% Y-o-Y growth. Full year operating profit was KRW 40.7 billion and net loss was KRW 4.6 billion. Fourth quarter game revenue was KRW 108.5 billion, which is a 5.3% Y-o-Y increase and a 6.4% Q-o-Q decrease. Total web-board game revenue increased by 30.3% Y-o-Y, continuing solid growth. PC online game revenue was KRW 39.7 billion, similar to last year, but an 11.1% decrease Q-o-Q, showing a reverse base effect against the third quarter, which included the Chuseok holidays. Mobile game revenue was KRW 68.8 billion, which is an increase by 8.5% Y-o-Y and decreased by 3.5% Q-o-Q. Mobile web-board game revenue increased by 64% Y-o-Y, reviewing quarterly revenue high record and Hangame Poker rose to #8 in the AOS daily grossing chart in early December, which is the highest ranking ever for the game. For Japan mobile games, despite the effect of a collaboration between COMPASS and the famous Japanese animation, revenue continued to show some natural attrition due to the reverse base effect against third quarter. When you guys watch Puni Puni has the collaboration with Hololive and also the lack of events for Disney Tsum Tsum during the fourth quarter. For payment and advertising, business revenue was KRW 238.2 billion, which is a 5.8% increase Y-o-Y and a 5.0% increase Q-o-Q. During the year-end peak season, NHN PAYCO, NHN KCP enjoyed increase in transaction volume and PAYCO's coupon business revenue increased by 76% Y-o-Y. Commerce revenue recorded KRW 73.6 billion, which is a 34.2% Y-o-Y decrease, but an 11% Q-o-Q increase. For China commerce business, Singles' Day effect was very limited due to weak consumer sentiment and NHN Global in the U.S. also was affected by the economic slowdown. However, NHN Global saw an increase in commission income based on solid user metrics and fourth quarter revenue increased both Y-o-Y and Q-o-Q, even though fourth quarter is a slow season. Tech business revenue was KRW 104.7 billion, which is Y-o-Y 58.3% and Q-o-Q 46.9% increase. NHN Cloud revenue increased by 60% Y-o-Y and 71% Q-o-Q, reflecting the new public sector project win. And NHN Techorus in Japan also grew by 24% Y-o-Y and 18% Q-o-Q, thanks to the successful acquisition of new large customers. Content revenue was KRW 49.5 billion, which is a 5.3% Y-o-Y and a 2.9% Q-o-Q decline. NHN Comico focused on production of original content and used its marketing budget more efficiently and NHN Link recovered pre-COVID strength with its concert and show ticket revenue doubling from last year. Next is about the operating expenses and profit. Total operating expense was KRW 549.6 billion, which increased by 5.5% Y-o-Y and 6.9% Q-o-Q. Commission expense was KRW 363.9 billion, which is 8.5% Q-o-Q increase due to increase in revenue tied commissions for NHN, and some inventory valuation models for the Chinese commerce business. Commission expense to revenue was 64.8%, which is a drop by 1 percentage points Y-o-Y due to the limited Singles' Day revenue of Accommate. Labor cost was KRW 114.1 billion, which is 11% Q-o-Q increase due to year-end bonuses paid by some of our entities. Advertisement and marketing expense was KRW 29.3 billion, which is a 13.7% decrease from third quarter with web-board game and webtoon-related marketing expenses stabilizing. Other operating expenses was KRW 14.3 billion, which is a 8.4% Q-o-Q decrease. Operating profit was KRW 11.7 billion, which is a 53.1% Y-o-Y decrease, but a 41.3% Q-o-Q increase. On a net basis, the company recorded a net loss of KRW 16.2 billion due to year-end goodwill impairment loss and decrease in some FX translation gain caused by the fall in the Korean yuan to the U.S. dollar exchange rate during the fourth quarter. That completes our presentation on 2022 full year and fourth quarter results, and now we will start the Q&A session.

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