NHN Corporation (A181710) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. Welcome to the conference call for the Fiscal Year 2023 First Quarter Earnings Results by NHN. Now we shall commence the presentation by NHN.

[Interpreted] Good morning. This is Ji Hye Kim, Head of IR team at NHN. Thank you very much for attending our 2023 first 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-Shik 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 that's 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 and investors for joining this call. I would like to start the call with key business updates for each of our business areas. First, in the case of our game business, thanks to the strong performance during the Lunar New Year holidays, web-board game continued to solid growth and in Q1, web-board game revenue increased by 27% Y-o-Y and 11% Q-o-Q. Also the regional competition content launched on mobile [ quota ] in late March, has been delivering meaningful results, helping to offset the weak seasonality of web-board games which in April saw only a 2% drop in revenue versus March and report an encouraging 27% increase Y-o-Y. The sports regional competition and cafe system, which has become unique content that differentiates time gain from others, increases interaction among players and creates another dimension of fund. It is also driving improvements in key game metrics and performance. This year, NHN will continue to unveil in-game content to refresh user interest and lead the growth of the web-board market. Meanwhile, Line Disney Tsum Tsum had its ninth anniversary event in January, driving up value by 65% Q-o-Q, COMPASS also unveiled a teaser video for an animation still in development at the Niconico super conference, which is a major Japanese game event on April 30, driving up expectations. The new game, Darkest Days is planning to start preregistration during third quarter and meet global users within the year. A detailed time line will be shared with the market once details are decided. Our next payment business. Q1 transaction volume was KRW 2.7 trillion, which is a 26% increase Y-o-Y. Off-line payment increased by 54% Y-o-Y and grew to account for 26% of all payments. The transaction volume of 10% and the Corporate Employee Benefit Solution, which is the B2B service increased by 113% and 108%, respectively, Y-o-Y in Q1 acting as the main driver behind offline payment growth. In particular, about 70% of Campus Zone payments are being made in PAYCO Points, and we expect Campus Zone to contribute to enlarging the overlap between off-line uses and PAYCO Point payments. Despite weakness in the overall advertising market, Q1 PAYCO coupon revenue increased by 38% Y-o-Y and the new business of providing PAYCO coupon service to major card companies is also gradually expanding its service scope. During the second half of last year, PAYCO changed its organization and service to focus on its core business. And this year, it has been focusing on driving up revenue of key PAYCO services while maintaining cost efficiency. This has [ noted ] in a very meaningful level of improvement in PAYCO's operating loss in Q1 and the target for this year is to reduce PAYCO's operating loss by more than 50% versus last year. PAYCO has managed to achieve visible bottom line improvement and continued volume growth at the same time which is very encouraging, and PAYCO will continue to focus on delivering both profitability and volume growth by pioneering new services unique to people. In the case of the Commerce business, even though China abolished its zero-COVID policy, recovery of consumer sentiment remained slow in Q1 and even in the U.S., retailer demand remains subdued. As a result, the GMV of commerce business continued to decline by double digits Y-o-Y and also contracted Q-o-Q. However, NHN Accommate has been focusing on expanding its global distribution channel to break through the current situation. For example, late March, it was the only global commerce company to be selected as an important product supplier for [ TikTok ] is doing and recently signed MOUs with JamboLive, which is Taiwan's largest live commerce platform as well as TikTok, which is a major commerce platform in China. Even though uncertainties cannot be ruled out yet, we will actively respond to changes in the external environment and tap the recovery of consumer sentiment in China step by step. For the technology business in NHN Cloud, which was established April 1 last year, marked its first anniversary and became a unicorn with over KRW 1 trillion in enterprise value. This year, NHN Cloud is planning to continue its drive for volume growth, especially from the public sector clients and further solidify its position in the Korean market. While continuing to focus on cloud migration projects, it is preparing to open the Gwangju National AI Data Center in the second half, which will provide additional revenue growth. Furthermore, using the infrastructure secured from the national AI data center, NHN Cloud has been developing a customizable enterprise generative AI platform, targeting the public and financial sectors. It has also plans to take on an active role in the Korean AI semiconductor project led by the Korean government. Meanwhile, NHN Cloud is preparing to deliver meaningful performance from the financial sector on top of the public sector. Last year, NHN Cloud signed an MOU with Shinhan Investment Securities and has also signed up around 60 financial institutions, including Shinhan EZ Insurance, the Korea Inclusive Finance Agency, Korea Investment Capital and [indiscernible] Savings Bank. Japan's [ Tegris ] MSP business also continued smooth sailing and contracts signed with major customers. Tegris plans to secure around 200 agencies around Japan within the year, and we'll be focusing on acquiring new accounts. On March of last year, NHN established the ESG Committee under its Board of Directors and also created a dedicated organization for ESG to place greater emphasis on ESG management. Thanks to such efforts, NHN received an overall A rating from the Korea Institute of Corporate Governance and Sustainability last year and was the only Korean company in the sector to have its ESG rating upgraded. In particular, last year, NHN focused on environmental management is carried out a voluntary study of its greenhouse gas emissions and in August, the NHN Seongnam main office and data center obtained the environmental management system, ISO 14001 and energy management system ISO 50001 certification. This year, NHN will continue to strengthen its ESG management across environment, social and governance aspects. And as part of such efforts, recently established an enterprise risk management system and officially appointed the company's CRO. During the first half, NHN plans to publish its first sustainability report to share more details with the investor community. I hope you will continue to support NHN's ESG management efforts. That completes my business update. And now CFO, Hyun Shik Ahn will take you through the business results of each business line.

[Interpreted] Good morning, this is CFO, Hyun Shik Ahn. I would like to share our 2023 first quarter results. 2023 first quarter consolidated revenue was KRW 548.3 billion, which is a 5.4% Y-o-Y growth and 2.2% Q-o-Q decrease. Operating profit was KRW 19.1 billion, which is a 23.1% increase Y-o-Y and a 90.5% increase Q-o-Q. Q1 game revenue was KRW 117.0 billion, which is a 7.6% Y-o-Y increase and 7.5% Q-o-Q increase. Total web-board game revenue increased by 26.6% Y-o-Y continuing solid growth. PC online game revenue was KRW 43.2 billion, similar to last year, but went up by 8.8% Q-o-Q, thanks to the Lunar New Year holiday effect. Mobile game revenue was KRW 73.8 billion, which is an increase by 12% Y-o-Y and 6.7% Q-o-Q. Mobile web-board game revenue, which has been setting new quarterly revenue records, increased by 46.6% Y-o-Y and 14.1% Q-o-Q in Q1 despite more efficient marketing spend. Hangame poker rose to #7 in the AOS daily grossing chart once [indiscernible] in a new grossing ranking record. For overseas mobile games, including Japan, revenue slightly increased due thanks to Line Disney, Tsum Tsum ninth anniversary event in January despite the reverse effect against Q4, which included COMPASS collaboration in December. For the payment and advertising business revenue was KRW 249.4 billion, a 19.2% increase Y-o-Y and 5.2% increase Q-o-Q. NHN PAYCO reduced its marketing expense, which reduced deductions from the top line, resulting in a revenue increasing effect. And NHN KCP also recorded revenue growth Q-o-Q, even against Q4 peak seasonality as large domestic merchants saw an increase in transaction volume. Commerce revenue recorded KRW 50.6 billion, which is a 51.7% Y-o-Y decrease and a 31.6% Q-o-Q decrease, while the global economic weakness continues, the commerce business in China faced weak consumer sentiment in Q1. And in the U.S., the Silicon Valley Bank crisis had a negative impact on the overall economy resulting in a Q-o-Q revenue drop. Business revenue was KRW 100.1 billion, which is a Y-o-Y 57.3% increase but a 4.6% Q-o-Q decrease. NHN Cloud revenue decreased Q-o-Q against Q4 when there was a concentration of public sector revenue. However, on a Y-o-Y basis, NHN Cloud continued to report strong growth with some public sector cloud migration contracts signed during 2022, generating revenue in Q1. Meanwhile, Japan's NHN Techorus reported revenue growth of 31% Y-o-Y and 10.7% Q-o-Q, driven by acquisition of new large customers. Content revenue was KRW 41.8 billion, a drop by 10.9% Y-o-Y and 15.5% Q-o-Q. NHN Comico maintained stable traffic while keeping marketing efficiency and NHN Link, so its revenue decreased Q-o-Q against Q4, which is the peak season for concerts and exhibits. In others, the NHN Doctor Tour saw its revenue increase by more than 3x Q-o-Q thanks to the steep recovery in travel demand. Next, about our operating expenses and profits. Total operating expense was KRW 529.2 billion, which increased by 4.8% Y-o-Y decrease by 3.9% Q-o-Q. Our commission expense was KRW 352.4 billion, a 3.2% Q-o-Q decrease. Despite increase in revenue-linked commissions of the payment business, the COGS decrease of the Chinese commerce business drove the decrease in commission expense. Labor cost was KRW 114.5 billion, which is a 0.4% Q-o-Q increase. Despite the wage increase reflected in Q1, the Q2 increase in labor cost was limited due to the reverse base effect against Q4 included the year-end bonuses. Advertisement and Marketing was KRW 20.1 billion, which is a 28.4% decrease Q-o-Q. [indiscernible] continue to maintain efficient marketing spend from last quarter and on top of it, Hangame brand advertising [indiscernible] and PAYCO has been executing its marketing more efficiently. This has decrease in marketing expense to revenue ratio to 3.7%, which is a decrease by 1.3 percentage points Q-o-Q. Depreciation was KRW 21 billion, a 2.8% Q-o-Q decrease, and other operating expense was KRW 14.7 billion, which is an 8.5% Q-o-Q decrease. Operating profit was KRW 19.1 billion, which is a 23.1% Y-o-Y increase and a 90.5% Q-o-Q increase. Net profit was KRW 25.6 billion, returning to a positive net profit as the year-end goodwill impairment loss and valuation loss on certain financial assets decreased versus Q4. That completes our presentation on the first quarter results, and we will now start the Q&A session.

[Operator Instructions] [Interpreted] The first question will be provided by Jae-min Ahn from NH Investment & Securities.

[Interpreted] It's good to see that the web-board game and the company's overall performance is doing very well. You mentioned that the web-board game performance in first quarter was good. This comes at the end of a strong 2022 throughout last year game performance was strong. I'm asking about how sustainable do you think the web-board game performance would be this year? Can you provide on a full year basis of guidance or the company's goals regarding web-board games for the full year? Also, in terms of marketing expenses, how low are you planning to decrease your marketing spend? Can you share with us, for example, the company's target in terms of marketing expense to revenue ratio for the year?

[Interpreted] Last year, one of the goals of our very aggressive brand advertising campaign was to widen demographic of our web-board game users, especially towards the younger age group. And I think that the increased marketing spend last year, which did cause some concern in the market is returning the effect of this, and we're seeing that benefit starting to kick in from fourth quarter last year and weeks to enjoy that benefit of the lowered age group of the web-board games demographics throughout this year. So in terms of the sustainability of the web-board game performance, we expect that to be sustained as long as we're able to retain the younger audience that have been newly attracted into our web-board game service. Regarding marketing expense, we have been maintaining that on a running basis around a 10% ratio, and it leads back to sustain it around that level.

[Interpreted] To add a bit more information about the marketing spend. That 10% ratio that our CEO just shared is for the web-board games level. And regarding the web-board game last year, we did spend as marketing to a level that comes from outside considered to be excessive. But we think that, that is returning in terms of benefits such as better retention and also better loyalty from our user base. Because of the marketing spend that we executed last year we expect to ride on that benefit this year and able to sustain the business with less marketing spend. So for the entire year, we're targeting at the entire company level around low 4% marketing spend to revenue ratio.