NHN Corporation (A181710) Earnings Call Transcript & Summary

Good morning. This is Ji Hye Kim, Head of IR team at NHN. Thank you very much for attending our 2024 third quarter earnings conference call. NHN's CEO, Woojin Jeong; CFO, Hyun Shik Ahn; and CEO of NHN Cloud, Dong-Wook Kim, are also present. CEO Woojin Jeong will start with a business update, followed by CFO Hyun Shik Ahn's presentation on financial results before taking your questions. 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. Also, I'll remind you that the conference call contains forward-looking statements and that the company's actual business results may differ materially. Now CEO Woojin Jeong will address some key business topics.

Good morning. This is Woojin Jeong, CEO of NHN. I will share some key updates for each line of business. During Q3, webboard games recorded stable traffic and Hangame Poker Classic carried out its fifth anniversary event in September, resulting in more than twice the inflow of new users per month than the previous year. Thanks to the fifth anniversary event, the Chuseok holidays and also a string of public holidays in early October, Hangame Poker Classic ranked #7 in [ AOS ] highest grossing chart in October 8, setting a new record, and is expected to continue this positive momentum in Q4 using competitive content, Guild Wars, to attract even more users. In Japan mobile games, COMPASS and Yo-Kai Watch Puni Puni carried out collaborations with popular IPs during Q3 and recorded meaningful Q-o-Q revenue growth. In order to extend NHN's webboard game capabilities globally, the social casino game Pebble City was soft-launched on September 25. Currently, it is undergoing tech review in each country. We plan to add well-polished and trendy new slot and community games unique to Pebble City for an official launch aimed for February 2025, including key markets of North America and Western Europe. Meanwhile, Darkest Days is preparing for simultaneous mobile and PC launch and will be conducting its final test during [ the next fest ] in February 2025. The subcultural genre game, Stella Fantasy, has been renamed ABYSSDIA, which better captures the game's new universe. ABYSSDIA will be launched during Q2 next year. Including Darkest Days and ABYSSDIA, a total of 8 new games are preparing for launch in 2025, and we will concentrate on delivering top-grade, well-made games to ensure successful launch and market take-up of all the games in the pipeline. NHN PAYCO has wrote off its outstanding receivables in connection with TMON and WeMakePrice issue as operating expense. The bad debt write-off is related with TMON and Happy Money INC, which are companies undergoing corporate rehabilitation procedures. We will continue to actively cooperate with the court's request and pursue various methods of collecting our receivables. Currently, NHN PAYCO is in emergency business management mode and is working on closing down some marginal businesses and maximizing cost efficiency. In order to generate greater synergies with subsidiary, NHN KCP, NHN PAYCO is planning to move its head office to NHN KCP's building in Guro during Q1 of next year. The stop of PAYCO online payments for TMON and WeMakePrice will impact PAYCO's transaction volume for some time, but NHN PAYCO will focus even more on growing its key businesses to quickly improve its losses. PAYCO's main service, the B2B corporate welfare solution, saw its transaction volume increase 31% Y-o-Y in Q3, continuing an upward trend, and PAYCO mobile meal coupon is already accepted in about 70,000 locations, which is the highest level of convenience in the industry, and continues to expand its service coverage, including the addition of Starbucks last October. NHN Commerce continues to focus on reorganizing the Chinese business of its subsidiary, IBT, as well as uncovering new growth engines. IBT continues to fold unprofitable businesses, including some operation agencies, and such restructuring has resulted in improved cost structure. Even though market recovery is still slow, IBT plans to improve its business competitiveness by continuously identifying brands that appeal to Chinese consumers. This year, it signed a Chinese distribution contract with BBIA, which is a popular Korean makeup brand, which has shown healthy growth. And W.Lab, which is our own brand, is planning to launch new products during the year. In our tech business, we continue to strengthen our AI capabilities and win meaningful projects in public sector and finance. NHN Dooray launched the Dooray AI in October. Dooray AI is capable of flexibly using various LLMs, including global LLMs, as well as the customers' own internal language models and offers heightened security with data leakage prevention and internal audit monitoring. NHN Dooray recently won meaningful public sector projects, including the Korea AeroSpace Administration and Ministry of National Defense, and is actively seeking out financial sector projects as the first company in the Korean SaaS industry to receive CSP Stability Assessment. In response to recent announcement by the Financial Services Commission to ease network separation regulations for financial institutions in Korea, 4 major financial institutions, including Woori Financial Group and Shinhan Investment Securities have applied to have Dooray recognized as an innovative financial service and is preparing to adopt Dooray collaboration tools in their internal administrative networks. NHN Cloud won the Pan-Government Service Integration Counter Cloud Lease Project in September and, including this project, won more than 60% of the entire project budget related with the National Information Resource Service Daegu Center this year. Furthermore, in connection with the cloud-native initiatives, NHN Cloud successfully carried out cloud designs for several public institutions, thereby positioning itself favorably in future private/public cooperation projects led by the government, including the Daegu Center. In my letter to shareholders dated September 27, I addressed the possible impact of the TMON and WeMakePrice issue on PAYCO and also explained our shareholder return policy for 2025. Despite the one-off bad debt write-off, NHN remains committed to support its share price and plans to pay out dividends next year at levels similar to previous years and to buy back additional shares corresponding to 3% of current number of outstanding shares and to cancel the entire buyback shares within 2025. Already, approximately KRW 31.1 billion of buyback has been carried out. And from today, an additional KRW 10 billion of buyback will start. We will focus on creating a profit model based on selection and concentration in order to become able to announce additional mid- to long-term shareholder return policies that are predictable and sustainable in the future. That completes my business update. And now CFO Hyun Shik Ahn will take you through our Q3 financial results.

Good morning. This is CFO Hyun Shik Ahn. I would like to share our 2024 Q3 results. 2024 Q3 consolidated revenue was KRW 608.4 billion, which is a 6.4% Y-o-Y increase and 1.5% Q-o-Q increase. Q3 operating loss was approximately KRW 113.4 billion as we wrote off the entire amount of overdue receivables arising from TMON and WeMakePrice issue. When this one-off write-off is excluded, Q3 operating profit would be KRW 27.3 billion, which is a 16.8% Y-o-Y increase and 4.2% Q-o-Q decrease. I will go through the revenue by business line before explaining the one-off expense in detail. Q3 game revenue was KRW 112.5 billion, which is a 2.1% Y-o-Y and 5.7% Q-o-Q increase. Total webboard games revenue increased 8.1% Y-o-Y and remained flat Q-o-Q. PC games revenue was KRW 44 billion, which is a 10.4% Y-o-Y and 2.4% Q-o-Q growth, thanks to the Hangame Poker Classic fifth anniversary event and the Chuseok holiday event. Meanwhile, mobile games revenue was KRW 68.6 billion, which is a 2.6% Y-o-Y decrease but an 8% increase Q-o-Q. During Q3, COMPASS delivered strong performance, thanks to the rerun collaboration with Fate/Stay Night, the popular Japanese anime. Yo-Kai Watch Puni Puni also showed strong performance with its collaboration with Hololive but, on a Y-o-Y basis, still recorded a revenue decrease against Q3 of last year when it recorded the highest quarterly revenue with the Yo-Kai Watch 10th anniversary event. Payment and advertisement revenue was KRW 292.6 billion, which is a 10.3% Y-o-Y increase and 1.1% Q-o-Q decrease. For NHN PAYCO, despite top line growth in key businesses, the discontinuation of online merchant transactions related with TMON and WeMakePrice had an impact. NHN KCP revenue decreased 1.5% Q-o-Q due to some impact of the TMON/WeMakePrice issue and decrease in vehicle deliveries by the imported automobile merchant but, on a Y-o-Y basis, increased 12% with growth of overall transaction volume, leading the growth of the payment business. Commerce revenue was KRW 61 billion. IBT, the subsidiary covering China, saw a rebound in revenue, both Y-o-Y and Q-o-Q as it strengthened business with new brands. The Chinese business may undergo further volatility in volume given that restructuring of loss-making businesses are still underway, but it will focus on building profitable businesses by identifying new brands to collaborate with. NHN Global, which covers the U.S., continues to feel the weight of the weak U.S. economic sentiment but has succeeded in limiting the decline in revenue compared to the fall in order placements by redesigning its benefit structure. Tech revenue was KRW 102.7 billion, which is a 7.6% Y-o-Y and 4.7% Q-o-Q increase. When excluding the impact of Diquest and Cloudnexa, which were excluded from consolidation from Q4 of last year, Q3 tech revenue grew by 21.5% Y-o-Y. NHN Cloud's revenue included revenue from projects related with the cloud-native consulting for public sector institutions, and Q3 revenue increased 22.5% Y-o-Y and 0.9% Q-o-Q. NHN Dooray also grew by double digit, both Y-o-Y and Q-o-Q basis, reflecting revenue from public sector. Content revenue was KRW 50.5 billion, which is a 1% growth Y-o-Y but a 5.3% decrease Q-o-Q. NHN Link revenue increased 33% Y-o-Y, thanks to ticket sales driven by large concerts and festivals. But NHN Comico and NHN BUGS revenue somewhat decreased due to intensive competition. Other business recorded revenue of around KRW 10 billion, which is a 10.7% Q-o-Q growth, reflecting the peak summer travel season. Next, about our operating expenses. Total operating expense was KRW 721.8 billion, which increased by 31.7% Y-o-Y and 26.4% Q-o-Q. Commission expense was KRW 409 billion, which is a 2.1% Q-o-Q increase, reflecting increase of mobile games revenue-linked commission expense. Labor cost was KRW 107.3 billion, a 3.6% Q-o-Q decrease. Despite the effect of NHN KCP's regular bonuses, enterprise-wide efficiency initiatives continued and consolidated head count decreased by 122% versus the end of Q2. Advertisement and marketing was KRW 17.7 billion, which is a 21% increase Q-o-Q. Webboard game-related marketing expense increased due to the Hangame Poker Classic fifth anniversary event, but marketing expense to revenue ratio in Q3 was 2.9%, still within stable range. Depreciation was KRW 27.2 billion, a 7% increase Q-o-Q, reflecting depreciation of NHN Cloud's right-of-use assets. Other operating expenses was KRW 156.8 billion, including the KRW 140.7 billion of one-off bad debt expenses related with TMON and WeMakePrice. The one-off bad debt expense reflects 100% of all receivables of our affiliates related with TMON and WeMakePrice that have come due. Among the amount, NHN PAYCO's bad debt expense is KRW 123.7 billion. And according to the decision to reflect the expense as operating expense, the KRW 10.2 billion bad debt expense, which had been accounted for as nonoperating expense in Q2, was additionally adjusted for in Q3. The amount reflected by NHN KCP is KRW 1.3 billion, which accounts for uncollected receivables arising from advertisement and travel businesses. Other operating expenses, excluding the one-off bad debt expense was KRW 16.1 billion, which is a 4.1% increase Q-o-Q. After the one-off expense, Q3 recorded an operating loss of KRW 113.4 billion. Without the one-off bad debt expense, Q3 operating profit would be KRW 27.3 billion, a 16.8% Y-o-Y increase and a 4.2% Q-o-Q decrease. On a Y-o-Y basis, despite the fall in Japan mobile game revenue versus Q3 of last year, profitability improved evenly across businesses, including payment, tech and content. On a Q-o-Q basis, even though profitability improved in Game and Commerce, the decrease of NHN PAYCO's volume and NHN Cloud's depreciation had an impact. Q3 net loss was KRW 110.3 billion. In terms of nonoperating expense, NHN PAYCO's bad debt of around KRW 10.2 billion, which had been reflected in Q2, was deducted. That completes the presentation on 2024 Q3 financial results, and now we will take your questions.

[Operator Instructions] The first question will be provided by Dong Woo Kim from Kyobo Securities.

I have two questions. The first question is about the TMON and WeMakePrice bad debt write-off. Would it be correct for us to understand that, with the write-off that you took this quarter, most of the risks that are related with that issue have been resolved that, that is in the past. Is that correct? And also going forward, what kind of vision do you have for the NHN payment-related services going forward? Second question is about your games. You said that there are 8 games that are preparing for launch next year in 2025. Among the 8, is there a title that you are particularly excited about? And how much growth are you expecting from your game business next year internally?

To answer your first question, yes, you are correct to understand that most of the risk related with the TMON and WeMakePrice have been resolved. There is a possibility of additional receivables. But even if that does arise, the size relative to what we have recognized as write-offs would be minimal. Now regarding what we have in plan for our payment business going forward, there are two focuses. One is to focus on efficiency. As we mentioned during the presentation, PAYCO is planning to move to the Guro office of KCP. By relocating together with KCP, the focus would be on efficiency by removing some redundancies that overlap between PAYCO and KCP and also continuing to focus on efficiency and streamlining its cost structure and the human resource structure. While focusing on efficiency, it will also focus on areas where it has competitive edge over other payment services such as CLO and B2B. To answer your second question about our game business next year, looking at our strategy in the game business next year, I think there's two key directions, one is globalizing our webboard game capabilities. As you know, we have a very distinctive overwhelming advantage in webboard games in the Korean market. We have continued to increase our market share. That said, the Korean webboard market in terms of the size is limited, and that is why we're focusing on Pebble City to expand our webboard game capabilities to the global market, and this will give us access to very stable revenue flow, as you know, which is one of the key features of webboard game. Once we have the market share, it is a source of stable income. And that is why one key focus of our game business next year strategically is to globalize our webboard game through Pebble City. The second focus is to continue to diversify our user base and genre. So this will go for the mid-core genre games such as Darkest Days and [ Ghost ], which is what we're working in Japan. So we want to further diversify our genre beyond using, leveraging our mid-core games that we're preparing next year. And with both of these strategies successfully implemented, we're looking forward to 20% to 30% top line growth in our game business next year.

The following question will be presented by Jae-min Ahn from NH Investment Securities.

I have two questions about next year's outlook. First question is your outlook for the payment and advertisement business. First of all, can you just briefly recap what kind of impact are you expecting overall from the TMON/WeMakePrice issue for not only PAYCO but including KCP. Do you think that it is possible to expect increase of volume next year in your payment and advertisement business, for example? Second question is your next year guidance outlook for your overall tech business. It's great to see your cloud and also tech growth in Japan continuing to grow. What kind of outlook do you have for your tech business next year?

Regarding your first question, I think in terms of payments that were used, that payments that use the prepayment means, for example, gift certificates being used to charge PAYCO, those transactions would inevitably feel a negative impact because of an overall insecurity that users feel about the credit structure. So in that aspect, in terms of PAYCO transaction volumes tied to prepaid means, a decrease in volume at this point appears to be inevitable. However, we are going to focus on making up for that decrease by increasing our other businesses where PAYCO has an advantage, such as the CLO business, by increasing the transaction volume there and also designing new and different benefit structures and leveraging the alliances that we have with the large number of PAYCO merchants. So for next year, our goal will be to maintain or even increase the overall volume.

This is Dong-Wook Kim of NHN Cloud. First of all, to give you a bit of outlook on market, the public sector market next year, even though the public sector cloud-related budget size is similar this year and next year, a large part of this year's budget is still left unexecuted. So assuming that, that will be carried forward to next year, actually, next year's public sector cloud budget market size may be close to double to what we had this year. So overall, market outlook next year on a year-on-year basis is very positive. Also, if you look into the details, the public sector projects are largely CSAP or MLS projects. MLS is a relatively new project, and that is why many of these projects that were scheduled to come to market in Q2 and Q3 are finally coming to market in Q4. Now NHN Cloud has the capabilities and technology to take on the MLS projects. And also, we're preparing for the relevant certifications. So compared to other players targeting the public sector market, NHN Cloud has the technology advantage. Also, the other change that we're seeing in the market has been triggered by the change in VMware's pricing policy, which has triggered not only private companies but also the public sector to try to search for alternatives to replace VMware. NHN Cloud offers as an AWS outpost services that can do that and also offers the MPD, which can serve as an alternative to VMware. And we're also looking forward to, therefore, more demand for these services from not only private sector but also public sector next year. In terms of the AI service, previously, AI service was mainly sold to customers and clients that already had the resources, but now AI service is becoming more of a service that can sell only when there is a price competitiveness. We have the advantage in AI service in the fact that we have a dedicated AI center. Also from next year, we'll be able to resell the Gwangju capability, the Gwangju data center capability. So we have the capabilities to sell and also the technical support capabilities as well as the price competitiveness.

To give you a bit more information on the Japan MSP business, the MSP business in Japan has recorded positive growth on a year-on-year basis this year. We're also expecting there to be healthy top line growth next year. That said, on the bottom line basis, we are expecting, for example, impact of foreign exchange rates and also impact due to changes in Amazon's policy. So the growth at the bottom line level in MSP in Japan may be limited relative to the top line growth. Since there is no further questions, we will end the conference call here. Thank you very much for joining our 2024 Q3 earnings conference call. Please forward any remaining questions to the IR team. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]