NHN Corporation (A181710) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. Thank you all for joining the conference call for the NHN Earnings Results. This conference will start with a presentation followed by a Q&A session.[Operator Instructions] Now we will begin the presentation on NHN's Fourth Quarter of Fiscal Year 2024 Earnings Results.

[Interpreted] Good morning. This is Ji Hye Kim, Head of IR team at NHN. Thank you very much for attending our 2024 Full Year and Q4 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 audit 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. Now CEO, Woojin Jeong, will address some key business topics.

[Interpreted] Good morning. This is Woojin Jeong, CEO of NHN. I will share some key updates for each of the business lines. Webboard games continued solid traffic in Q4 once again. ‘Hangame Poker Classic enjoyed the user draw-in effect from the fifth anniversary event, which was augmented by guild war, the new competition content launched in Q4, driving Q4 revenue up by 45% Y-o-Y and setting a new quarterly revenue record. Hangame Double A Poker successfully held a 2024 Bithumb Double A Poker Championship in November together with the crypto asset platform Bithumb, doubling its Q4 revenue by more than twice Y-o-Y. It will continue on promoting a healthy Hold'em tournament game culture this year. In 2024, webboard game was able to successfully attract new users using its differentiated content. In particular, Hangame Poker Classic monthly paying users increased by 28% Y-o-Y in 2024, which is -- which in turn made the competition content more attractive, triggering the synergistic effect leading to maximized revenue. This year marks the 25th anniversary of PC Poker, and we are preparing various events to celebrate this anniversary and to keep the stable growth momentum going. For Japan mobile games, Compass enjoyed the effects of its collaboration with ‘HUNTERxHUNTER, a famous Japanese Manga in December, climbing to #4 in the iOS grossing chart and also used the eighth anniversary offline event to increase users and set a new revenue record yet again. NHN is planning to launch a total of 6 new games this year, Darkest Days is planning to launch globally quickly after its final test on Steam Next Fest starting from February 25. We will simultaneously launch both the mobile version, which features ease of control as well as the PC version, which features impressive impact feedback and look forward to a successful uptake in Korea and other key target countries. ABYSSDIA opened its official community in January and is currently focusing on upgrading its content ahead of the official Japan launch in Q2. Also during next week, we are planning to launch the social casino game platform, Pebble, and we will be gradually rolling out content such as Pebble City that takes full advantage of NHN's game item management capabilities to attract global users and take on the global market, especially the North American market, which is the very heartland of social casino games. Project STAR, which is the central piece of our game pipeline for the second half is expected to deliver strong performance using a popular major IP. The name of this IP will be announced around late March, in line with the schedule of launching the game within this year. Japan NHN Playart is also working on several new titles targeting launch this year and next year. Token Puzzle, which is an action puzzle genre game targeting next year launch, will combine Token Rambo, the Japanese game IP with NHN's unique puzzle game know-how. Also, Project G also based on a popular IP is under development under collaboration with the IP holder. Since the TMON and Wemakeprice issue last year, NHN PAYCO has doubled down on selection and concentration, revising the strategy of each of its business lines. It is concentrating on coupon, PAYCO Points and B2B business, but phasing out some low-profit businesses. During February, it will be relocating to NHN KCP's office in Guro and focus on creating synergies for the payment business. At this point, with major online merchants, including TMON, no longer on the payment platform, PAYCO's volume will inevitably decrease for some time. However, the B2B corporate welfare solution, which is PAYCO's main business, continued to deliver strong growth, increasing volume by 44% Y-o-Y in Q4. Also, KCP continues to deliver above-market growth despite modest contraction in the e-commerce market overall. For the e-commerce business, NHN Commerce continues to work on revamping the Chinese business of its subsidiary, IBT. It has closed down some of its operation agent services or B2B distribution businesses and is searching for new business models and brands to turn around its profitability. The cosmetic brands, ‘BBIA’ and our own brand W. Lab are continuing a healthy growth trend. And in March, we are planning to launch a fashion license business using the popular design brand Wiggle Wiggle. NHN Cloud demonstrated its technical capabilities through the National Information Resource Service Daegu Center opened last year. In 2024, among the 17 institutions that had cloud-native migration projects, 10 selected NHN Cloud as their CSP, which is an overwhelming win rate. In particular, NHN Cloud was selected for the two largest projects tendered by the Ministry of Interior and Safety, which were the pan-government Service Counter Cloud Lease project and the National Geographic Information Institute Migration Project, further strengthening its competitive lead as the #1 player in the public sector market. Based on this track record, we are confident that we will be able to deliver significant performance in the sector once again this year. NHN Dooray was designated as an innovative finance service by the FSC in December and became the first collaborative work tool in Korea to provide SaaS in the internal network of financial institutions. Four major financial institutions, that is Woori Financial Group, Woori Investment Securities, Shinhan Investment Securities and IBK Bank are preparing to deploy Dooray services, including AI, and NHN Dooray will actively pursue new businesses in the financial sector this year. NHN's tech companies are not resting on their world, but nimbly responding to the changing demands of the market. They are developing highly secure private cloud as well as products designed for AI demand such as cloud station and Dooray AI. They are also preparing the foundation for a GPU as a service business, leveraging their technical advantage. The recent emergence of low-cost, high-performance AI has triggered global interest in securing AI competitiveness. And the Korean Ministry of Science and ICT also decided to procure GPUs, which are essential for AI research and development faster than their original schedule. Accordingly, NHN Cloud as the CSP that owns and operates the AI infrastructure with the best specifications in Korea through the Pangyo National Data Center will actively pursue AI projects sponsored by the Korean government. That completes my business update. And now CFO, Hyun Shik Ahn, will take you through the Q4 and full year 2024 financial results.

[Interpreted] Good morning. This is CFO, Hyun Shik Ahn. I would like to share our 2024 full year and Q4 results. 2024 full year revenue was KRW 2,456.1 billion, which is an 8.2% Y-o-Y increase. Full year operating loss was about KRW 32.6 billion. When the one-off operating expense in Q3 tied to the TMON and WeMakePrice issue is excluded, the full year operating profit would be KRW 108.1 billion, which is a 94% Y-o-Y increase and the largest operating profit in company history. 2024 Q4 consolidated revenue was KRW 643.9 billion, which is a 7.6% Y-o-Y and 5.8% Q-o-Q increase. Q4 consolidated operating profit was approximately KRW 25 billion, returning to a profit-making quarter versus last year and last quarter. To look at the Q4 business results by each line of business, Q4 game revenue was KRW 119 billion, which is a 6.5% Y-o-Y and 5.7% Q-o-Q increase. Total webboard game revenue increased by 13% Y-o-Y and 4% Q-o-Q. PC game revenue was KRW 44.4 billion, which is a 13.2% Y-o-Y and 1.1% Q-o-Q growth. And mobile game revenue was KRW 74.6 billion, which is 2.8% Y-o-Y and 8.7% Q-o-Q increase. In particular, Japan Compass set a new quarterly revenue record, thanks to the collaboration and the eighth anniversary offline event. Payment and advertisement revenue was KRW 307 billion, which is a 4.8% Y-o-Y and 4.9% Q-o-Q increase. Despite the decrease of volume from online merchants such as TMON, NHN PAYCO continues to drive cost control and business efficiency efforts. And when excluding the one-off expenses related with the TMON WeMakePrice in Q3, NHN PAYCO's full year operating loss would be KRW 9.7 billion, which is a KRW 6 billion improvement on a Y-o-Y basis. NHN KCP continues to see increase in transaction volume from overseas merchants and reflected revenue of KRW 11 billion in Q4, including the consolidation of KOCES or the Korea credit card electronic settlement service as of November. Commerce revenue was KRW 61.2 billion, IBT, which is the subsidiary covering China, closed down some existing businesses, including the operation agent service during Q4, but its business with new brands performed well, driving 30% Q-o-Q revenue growth. The Chinese business underwent an active business efficiency transformation last year, moving away from its existing business model and is now creating a new business model with new brands. While its volume would contract in 2025, we expect to see a meaningful improvement in its bottom line this year. Tech revenue was KRW 118.5 billion, which is a 50.2% Y-o-Y and 15.4% Q-o-Q increase. NHN Cloud's revenue meaningfully reflected the revenue from public sector cloud migration projects in Q4, resulting in NHN Cloud's 2024 full year revenue increasing by 27% Y-o-Y. NHN Dooray also grew by double digits, both Y-o-Y and Q-o-Q, thanks to strong performance in public sector projects, including the opening of service for the Ministry of National Defense in November. Japan's NHN TECHORUS grew by 34% Y-o-Y and 16% Q-o-Q, thanks to a large number of new customers acquired related with the AWS resale. Content revenue was KRW 51.8 billion, a 4% Y-o-Y and 2.4% Q-o-Q growth. NHN Link revenue increased 35% Y-o-Y, thanks to year-end concert ticket sales, which offset the end of some sports season. NHN Comico saw some decrease in platform revenue as it changed its business strategy to focus more on outside distribution. Other businesses reported revenue of around KRW 6.9 billion, which is a 47.8% Y-o-Y and 30.9% Q-o-Q decrease, reflecting the exclusion of ‘Tournet Hawaii from consolidation as of September. Next about our operating expenses. Total operating expense was KRW 618.9 billion, which increased by 2.1% Y-o-Y, but decreased by 14.2% Q-o-Q. Commission expense was KRW 443.5 billion, 8.4% Q-o-Q increase reflecting increase of commissions related with NHN KCP and NHN Links revenue increase in Q4 and the inclusion of KOCES into consolidation. Iconic, which is under the Commerce business, recognized COGS related with inventory valuation as part of its business restructuring. Labor cost was KRW 106.6 billion, which is a 0.6% Q-o-Q decrease. Despite the increase of 55% due to the consolidation of KOCES, there was decrease of headcount tied to the business reform of e-commerce business. And there was also the base effect against Q3, which had included regular bonuses of NHN KCP. Advertisement and marketing was KRW 17.7 billion, a 0.5% decrease Q-o-Q, reflecting decrease in platform marketing expense due to the change in webtoon strategy to focus more on outside distribution. Depreciation was KRW 27.3 billion, a 0.3% increase Q-o-Q. Other operating expense was KRW 20.3 billion, an 87.1% decrease Q-o-Q, reflecting a base effect against Q3 when the TMON, WeMakePrice bad debt write-off expense was recognized. Q4 operating profit was KRW 25 billion, returning to a profitable quarter. 2024 full year operating loss was KRW 32.6 billion. But as explained before, when excluding the TMON, WeMakePrice one-off expense, 2024 full year operating profit would be KRW 108.1 billion, which is a 94% Y-o-Y increase. Q4 net loss was KRW 74.8 billion, and the size of loss increased on a Y-o-Y basis, but decreased on a Q-o-Q basis. During 2024, NHN eliminated about 14 subsidiaries through an active business efficiency initiative and revisited the business models of its remaining businesses. As of end of 2024, the Commerce business had 634 full-time employees, which is 161% less than the end of 2023 and a strong sign of our active business reform. On the Korean commerce business, the operation of NHN we choose online shopping mall 1,300K was discontinued and the Chinese commerce business also discontinued businesses such as its operation agent service in 2024 and established a new business strategy. NHN recognized KRW 62 billion of goodwill impairment loss on a consolidated basis, mainly coming from its commerce business. Also, Iconic, a subsidiary of NHN Commerce and NHN Global, the U.S. commerce entity, recognized additional nonoperating expenses related with intangible assets as part of its business restructuring. That completes the presentation on the 2024 full year and Q4 financial results. And now we will take your questions.

[Operator Instructions] The first question will be provided by Jin-Gu Kim from Kiwoom Securities.

[Interpreted] I have two questions. First of all, can you share the 2025 game revenue guideline, what you expect this year at a company-wide level? And can you get into a bit more detail for the Japanese legacy games? On that side, there will be two factors, I think. One would be the natural attrition, the other would be effects from collaboration. So on a full year basis, do you -- what kind of expectations do you have? Second question is more of a general question about AI. Is the company planning any solutions or services either B2B or B2C based on AI? If so, please share.

[Interpreted] Well, first to answer your question specific to the legacy games of Playart, many of the games of [ Tsum Tsum ], Compass, some of the games have been more than 10 years. But if you look at last year, they continue to set new records and continue to draw in new users. And so even though there is a concern about the volume decreasing over long term, I still believe that we can maintain the revenue size and the scale of the game users and traffic by attracting younger generations, new users into the game for some time in the future. Also, in terms of collaboration, we have seen repeatedly on several occasions that by collaborating with new IP that are in trend, these games can create quite a strong response. And that is why I believe that our legacy games will maintain this growth momentum in 2025. So based on the assumptions and we believe that our webboard game and the Playart legacy games will continue to deliver a strong performance, the company is setting the 2025 and 2026 game revenue target, assuming that our new games that we will be launching this year and next year will also be delivering strong performance. Our goal is that the new games that we will be launching will bring in a minimum 25% growth on our top line.

[Interpreted] So I think the second question about the AI services. For example, we have the NHN Easy Maker, which is a service that allows users to use the AI infrastructure with greater ease. Also, as we mentioned, Dooray has various AI-related services as part of its collaboration tool, and we plan to expand that market. Also, internally, for internal development use, we have image processing or music creation tools that are based on AI. These are being used on an internal basis now. But going forward, we have plans of making it more of a cloud-based service and provide that to outside users.

The following question will be presented by Kim Hyun Yong from Hyundai Motor Securities.

[Interpreted] I have two questions. First is on the cloud business side. I do notice that even though it is growing, the growth rate is decreasing. So in that context, can you share with us the cloud business growth target that you have for 2025 and compare that to the growth rate you saw in 2024? Also, can you divide that into Korea business versus Japan business so that you can sort of narrow the growth target guidance range for us? Second question is about your subsidiaries. During the presentation, you mentioned that last year, the company had eliminated 14 subsidiaries. Can you share which business lines those subsidiaries were in? For example, can you share, if possible, the number of subsidiaries that were eliminated from which business line? In addition, does the company plan to have additional subsidiary eliminations going on in 2025? And if so, how many?

[Interpreted] Well, to answer your question about the cloud, I don't exactly understand what you mean by the cloud growth rate decreasing in a trend because when we look at the growth rate, even though, yes, our cloud business growth rate has declined when you compare 2020 to 2023, actually between 2023 and 2024, our business reported quite a strong growth rate. So even though I'm not quite clear what you're referring to, when we look forward to growth of the cloud business in 2025, there are some variables that we need to watch out for. While there are some positive factors such as the DeepSeek and the expected increase in government budgets related with AI, which will be a positive for us in terms of our AI-related business or the Pangyo data center. In 2025 this year, some of our notification service may decrease. Notification service has a higher impact on top line versus operating profit bottom line. And by that service scale decreasing, there will be a larger decrease proportionately on the top line. However, even though that may potentially decrease the growth rate on a year-on-year basis, that would mean that the revenue that we do grow would have a higher profitability.

[Interpreted] Now for Techorus for Japan, when we look at our numbers, its top line revenue grew by 14% between 2023 versus 2024. This year, our revenue target for Techorus is to grow more than it has grown in 2024. To answer your second question about the subsidiaries that we had folded, most of them are under our commerce business, subsidiaries or portfolio companies that we had invested in related with commerce business accounts for the largest number. Other than that, there were some subsidiaries related with Doctor Tour or the cloud business.

[Interpreted] Also, you've asked about whether we plan to continue this year. This year, we are planning to hold about a dozen or more companies again. There is a bit of a variable there, too, regarding the government approvals in other countries. So this would be relevant to the subsidiaries that we have overseas. In some jurisdictions, we need government approval to actually hold the company. And depending on when that government approval comes through, some of that may be pushed back to 2026, even though we're preparing the holding of the companies currently. And once again, most of the companies that would go through that process this year would be related with our commerce business.

[Interpreted] Currently there are no participants with questions.

[Interpreted] If there's no further questions, we will end the earnings call here. If you have any further questions, please forward them to our IR team. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]