NHN Corporation (A181710) Earnings Call Transcript & Summary

[Interpreted] Good morning. This is [indiscernible], Head of IR at NHN. Thank you very much for attending our 2025 Q1 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 off with a business update, followed by CFO, Hyun Shik Ahn's presentation on our financial results before we take 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 that is 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 NHN CEO, Woojin Jeong. Starting from Q1, NHN will apply a new classification of its lines of business to better align with its core businesses. Instead of the previous classification into 5 lines of business, that is Games, Payment and Advertisement, Commerce, Tech and Content, from now on, Commerce, Content and Advertisement will be combined into other businesses. Therefore, going forward, we will break down our performance into 4 businesses consisting of Games, Payment and Others. Under this structure, NHN's core line of business will be defined as Game, Payment and Tech. And within Commerce, Content and Advertisement businesses, the less important services will be further streamlined according to an approach of selection and concentration, and I ask for the continued support and interest from the investment community. Now I will go over the business highlights. First of all, the Games continued solid growth supported by positive seasonality. In particular, PC Poker's Hangame Poker Championship's Season 1 successfully attracted a large number of new and returned users, resulting in a Y-o-Y 21% increase in Poker Classic MAU. The Hangame Poker Championship Season 2 held on May 6 once again attracted core users looking for exciting competition, keeping the positive trend continuing on to Q2. Riding on this trend, we will focus on keeping the growth momentum going even in the seasonally slow Q2 using Hangame's differentiating content. For mobile games, LINE: Disney Tsum Tsum had its 11th anniversary event and rising to #2 in Japan's iOS grossing chart. Yo-kai Watch: Puni Puni had a collaboration with a popular IP Hololive, delivering double-digit growth both Y-o-Y and Q-o-Q. The new game, Darkest Days started global open beta service on April 24 for both mobile and PC. First day PCU was around 14,000 and users around the world came in through both stream and mobile channels. Since launch, average play time is steadily climbing, showing the strong user engagement for single and multi-content. Darkest Days is currently in open beta service, actively reflecting user feedback in additional improvement work with the official launch scheduled after the major update in June. ABYSSDIA, which is a subculture collection RPG game serviced by NHN and developed by Ring Games, pushed back its launch date by around 2 months in order to ensure better game quality and is now scheduled for launch first in Japan in Q3. Currently, preregistration is underway in Japan for ABYSSDIA, which features a particularly attractive story production based on an intriguing in-game universe. Project STAR is a new game under development targeting particularly the Japanese user audience, combining NHN's puzzle game development know-how and the fandom power of the popular IP Oshi no Ko, also known as My Star. We are planning to unveil it first in the Japan market, which has a strong fan base for the 3 match puzzle games and is expected to deliver successful results in the local Japanese market with game content that maximizes the strength of the IP through collaboration with Kadokawa. We will continue to drive growth of the game business by developing new games across multiple genres and featuring differentiated content. NHN PAYCO continued stable operation of its unique corporate welfare solutions, coupons and PAYCO Points businesses despite difficult external environment. In Q1, PAYCO focused on narrowing its losses by redesigning the point reward system and fully discontinued certain low-margin services. As a result, in Q1, PAYCO's loss decreased by 33% on a Q-o-Q basis. Also, PAYCO's corporate welfare solutions attracted new large corporate accounts, further adding to PAYCO's brand power. In Q1, the corporate welfare solution transaction volume increased 24% Y-o-Y, adding another quarter of solid growth. PAYCO will continue to place top priority on active improvement of its business fundamentals to further narrow down its losses while also driving revenue growth around its core services. In March, NHN Cloud launched the Cloud Station, which is a fully managed private cloud service. With Cloud Station, customers are able to use public cloud solutions in a private cloud environment, and NHN Cloud will actively target private multi-cloud demand, which is steadily growing in both public and private sector accounts. In Q2, the 2025 cloud-native design and migration project for public sector institutions is expected to come to market and NHN Cloud has secured additional floor space at the National Information Resource Services Daegu Center, which is a cloud data center exclusive for government use and is preparing to win a lion's share of the projects coming to market. Also, with more details about the government ministry-led AI project becoming available in the second half of this year, NHN Cloud will actively and also strategically capture this opportunity by leveraging the Gwangju National AI Data Center. NHN Dooray continues to add accounts from the public and financial sectors using its strength as a collaboration tool that combines Gen AI with collaboration, e-mail and payment functions. In March, the Korea Energy Agency became the first public sector agency to successfully deploy Dooray AI. Dooray, as the first collaboration service to be designated as an innovative financial service, has been successfully deployed in Woori Financial Group's 8 affiliates and is currently being rolled out to additional affiliates within the Woori Financial Group. This is just the beginning, and Dooray is ready to rapidly win market share in the financial market, which has been dominated by global companies thus far. The other businesses, which mainly consist of the commerce and content business focused on improving its business fundamentals and at the same time, proved the effectiveness of the new business models that had been developed over some time. The Chinese IBT, which recently shifted its focus to distribution of various brands into China is off to a good start with the successful opening in March of the online mall for the popular design brand, Wiggle Wiggle in China. It is currently working on introducing other Korean brands to the Chinese market and also strengthening its fashion and beauty license business. MHN Comico, the webtoon subsidiary, successfully released original Comico Works on various Webtoon platforms, demonstrating the strength of its original works and also generating increased distribution revenue. Comico will focus on strengthening its third-party platform distribution and also raising the efficiency of its global platform business. This year, the focus is on ensuring that the new business models of commerce and content businesses take firm root while also continuing further streamlining of their operation. Through such efforts, we hope to achieve meaningful reduction of their losses on a Y-o-Y basis and to make their business foundation more solid. That completes the business highlights. And now CFO, Hyun Shik Ahn, will go over the Q1 business results.

[Interpreted] Good morning. This is CFO, Hyun Shik Ahn. I would like to share our 2025 Q1 business results. Q1 consolidated revenue was KRW 600.1 billion, which is a 0.7% Y-o-Y and 6.8% Q-o-Q decrease. Q1 consolidated operating profit was approximately KRW 27.6 billion, which is a 1.3% Y-o-Y and 10.6% Q-o-Q increase. Q1 operating profit margin was 4.6%, which is a 0.1 percentage point improvement Y-o-Y and a 0.7 percentage point increase Q-o-Q. To look at Q1 business results by lines of business, Q1 Games revenue was KRW 119.6 billion, which is a 1.9% Y-o-Y decrease and a 0.5% Q-o-Q increase. Total web-board game revenue increased 7.2% Y-o-Y and was roughly flat on a Q-o-Q basis. PC game revenue was KRW 45.3 billion, which is an 8.8% Y-o-Y and 2% Q-o-Q growth as PC Poker's Hangame Poker Championship Season 1 and the Hangame Poker Classic's Guild War upgrade effects further augmented the lunar new year holiday effects. Mobile game revenue was KRW 74.3 billion, which is a 7.4% Y-o-Y decrease, but similar to Q4. Even though the LINE: Disney Tsum Tsum 11th anniversary event and the Yo-kai Watch: Puni Puni's Hololive collaboration were quite successful. The mobile game revenue decreased on a Y-o-Y basis against Q1 of last year when LINE: Disney Tsum Tsum had set a new quarterly revenue record with the 10th anniversary event. Payment business revenue was KRW 290.3 billion. NHN KCP revenue increased 4.2% Y-o-Y, thanks to growth of domestic and global merchant transaction volume and the inclusion of KOCES, the Korea Credit Card Electronic Settlement service into consolidation despite Q1 being a traditionally slow season. However, on a Q-o-Q basis, revenue declined by 2.4%. Tech revenue was KRW 105.6 billion, an 11% Y-o-Y increase, but 10.9% Q-o-Q decrease. NHN Cloud revenue dropped Q-o-Q against Q4, which had enjoyed large public sector revenue, but maintained a solid growth trend on a Y-o-Y basis. NHN Dooray revenue increased 36.6% Y-o-Y with increase of public sector and financial sector accounts. Other businesses recorded revenue of KRW 104.5 billion, which is a 19.8% Y-o-Y and 19.2% Q-o-Q decrease, mainly due to decrease in commerce business revenue. Commerce revenue decreased 32.3% Q-o-Q, mainly due to Chinese IBT's business streamlining and the contracting size of Ikonic, which is undergoing debt restructuring. Despite such structural changes, the size of loss is improving meaningfully. NHN Link's revenue slightly fell Q-o-Q against Q4, which is the peak concert and performance season, but increased 62.5% Y-o-Y with ticket revenue growing overall in sports shows and exhibitions. NHC Comico changed its business strategy to focus on distribution through third-party platforms, which resulted in increase of distribution revenue but some decline in platform revenue. Next about our operating expenses. Total operating expense was KRW 57.5 billion, which is a 0.8% decrease Y-o-Y and 7.5% decrease Q-o-Q. Commission expense was KRW 395.5 billion, a 10.8% Q-o-Q decrease and reflecting decrease of revenue-linked commissions for the Payment business and fall in commerce COGS. Labor cost was KRW 113.8 billion, which is a 6.8% Q-o-Q increase. Despite the decrease of consolidated headcount by 50% on a Q-o-Q basis, bonuses paid by subsidiaries that are included in consolidation, including NHN KCP and NHN PlayArt caused the labor cost increase. Advertisement and marketing was KRW 18.2 billion, a 3.2% increase Q-o-Q, reflecting the premarketing expense for the new games, including Darkest Days. Depreciation was KRW 26.4 billion, a 3.3% decrease Q-o-Q. Other operating expense was KRW 14.8 billion, which is a 27.1% decrease Q-o-Q, reflecting the base effect against Q4 when the bad debt from the commerce business had been written off. Q1 consolidated operating profit was KRW 27.6 billion, which is a 1.3% Y-o-Y and a 10.6% Q-o-Q increase. Increase in the operating profit was combined with significant improvement in the nonoperating performance, resulting in Q1 net loss of KRW 0.2 billion, which is a significant reduction of losses, both on Y-o-Y and Q-o-Q basis. In particular, the Q1 nonoperating performance improved KRW 93.2 billion versus Q4, which had included some goodwill impairment loss from the active restructuring of the commerce subsidiaries. Corporate tax expense increased by KRW 13.9 billion Q-o-Q due to a decrease in deferred tax assets resulting from the subsidiary put option exercise in Q1. This completes the presentation on our Q1 financial results, and now we will take your questions.

[Interpreted] [Operator Instructions] The first question will be provided by Hoyoon Jung from Korea Investment & Securities.

[Interpreted] I have 2 questions. The first question is regarding the cloud business. During the presentation, you mentioned that you expect the Korean government-led AI projects to increase this year. In that context, can you give us an amount or a size of the projects and contracts that you expect you'll be able to win? Second question is about the businesses, especially the loss-making businesses, including PAYCO. You said that making them more efficient is one of the key focuses this year. How much of a reduction in losses do you think you'll be able to achieve in these loss-making businesses this year?

[Interpreted] To answer your first question, one of the major projects, the high-performance computing projects that require GPU supply to the public sector had already been bid and won in the earlier part of this year. We participated as part of the KT consortium, and we started supply of GPUs starting from May. We won about 25% of that volume. We also have additional GPU-related, these high-performance computing-related projects coming online related with, for example, [indiscernible] Sciences also supplying GPU to NCSOFT and so forth. And so we have additional projects in the pipeline. Looking towards the second half of this year, the government is continuing to place projects that require high-performance computing. We are estimating that the size will be around KRW 23.4 billion. We are winning a large part of that using our Gwangju AI Data Center. About 40% of that is supported by our Gwangju AI Data Center, and we will continue to participate in bids for not only government-led AI-related projects, but also other overall high-performance computing projects. Regarding your second question, we are working very hard to improve the businesses, but the actual impact that we will see on our bottom line, this pace will depend on the pace and the steps that we need to go through to improve the businesses. And so there is some flexibility in the amount of bottom line effect we may see within this year, depending on how these business streamlining processes move forward in the future. That said, even though we are -- this is a conservative estimate, we think that there will be at least KRW 15 billion improvement effect on our bottom line and possibly upside of around up to KRW 20 billion.

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

[Interpreted] Since there's no further questions, we will end the earnings conference call here. Thank you very much for joining us for the 2025 Q1 Earnings Conference Call of NHN. If you have any further questions, please forward them to the IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]