1. August 9, 2012
Dear Fellow Shareholders:
Today, we are pleased to report another solid quarter. We met our expectations
for both revenue and operating income for the second quarter, driven by growth in
our existing games, as we prepare to launch new games in the upcoming quarters.
Q2 was also a very active quarter on the strategic front, with several announced
acquisitions, partnerships and investments that will further strengthen our slate of
robust franchises and help them to continue to grow year after year. Most recently,
we announced our acquisition of Japanese mobile game developer inBlue Inc
(“inBlue”), and our investment to become the largest shareholder of NCsoft
Corporation (“NCsoft”). After the close of Q2, we also announced our partnership
with Electronic Arts Inc. (“EA”) to publish FIFA Online 3 in Korea.
Each quarter, we post a shareholder letter like this one, along with our financial
statements, on our website at http://ir.nexon.co.jp/en/. We host a question-and-
answer conference call the same day with our management team, during which we
answer as many questions as we have time for. We ask that interested analysts
and investors please submit questions for management prior to the earnings
conference call via the following email address: nexon-ir@nexon.co.jp.
Second Quarter Fiscal 2012 Results
The table below summarizes our Q2 results, along with the previous four quarters
for comparison.
Selected Consolidated Operations Data1
(Millions of yen, except per share data)
FY Ending Percent
FY Ended December 31, 2011 December 31, 2012 Change
Q2 Q3 Q4 Q1 Q2 YoY
Revenues ¥20,456 ¥24,156 ¥22,190 ¥30,377 ¥22,876 12%
Operating income 8,605 10,948 9,354 17,384 10,678 24%
Net income 5,120 7,232 5,815 12,377 6,768 32%
Adjusted net income 2 5,507 7,582 6,153 12,738 7,148 30%
3
Earnings per share :
Basic EPS 14.51 20.39 15.59 28.82 15.63
Adjusted EPS 15.61 21.37 16.49 29.66 16.51
Cash and deposits 44,291 44,278 132,479 146,977 129,089
Footnotes:
1
Prepared in accordance with Japanese GAAP, which is rounded down to the nearest million yen.
2
Adjusted net income is a non-GAAP measure that excludes non-cash amortization of goodwill (and negative
goodwill in the case of acquisitions occurring before April 1, 2010) related to our acquisitions, which is
required under Japanese GAAP. We provide this information to investors for the purpose of comparing our
net income with that of companies that do not amortize goodwill or negative goodwill associated with
acquisitions in their financial results, including those reporting in accordance with U.S. GAAP.
3
Adjusted to reflect the 1:100 stock split that occurred on July 21, 2011.
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2. August 9, 2012
The following table is a summary of our key metrics for the quarter.
Selected Customer Metrics
2011 Q2 2012 Q2
MAU 83.1 million 77.4 million
Pay Rate 7.8% 10.3%
1, 2
ARPPU ¥1,538 ¥1,521
Footnotes:
1
ARPPU (Average Revenue per Paying User) is the average of monthly ARPPUs for the quarter.
2
ARPPUs are in current currency. On a constant currency basis (using 2011 currency exchange rates),
ARPPU for Q2 2012 would have been ¥1,524.
MAUs for the quarter were down modestly from 83.1 million to 77.4 million, which
was expected since we introduced no new major games in any of the last three
quarters.
In Korea, we think competition may have impacted usage – and therefore MAUs –
of our games at some point during the quarter. This effect is difficult to gauge, but
in looking at PC Café data, it appears that Nexon’s market share of gameplay time
for some of our products was temporarily impacted by the introduction of
competitive products. Nevertheless, total hours of gameplay were up in both
Nexon’s games and the industry overall. That is, the launch of new games into the
marketplace drove up aggregate usage of games overall, which also benefited
Nexon’s games in the quarter. This is a pattern that we have seen in the past.
In the meantime, our products continue to set records. In June, Dungeon&Fighter
set a new record for MCCUs, a measurement of both number of active users and
engagement. Our Pay Rate was 10.3%, up from 7.8% a year ago. ARPPUs were
in line with levels from a year ago, and up slightly on a constant-currency basis.
The following table presents our revenue results on a constant currency basis (i.e.,
applying the average exchange rate from Q2 2011) in order to show the growth
rates without the effect of fluctuating exchange rates compared to last year.
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3. August 9, 2012
Revenue by Region
(Millions of yen)
As- Constant
Reported Currency
Revenue for the Quarter Percent Percent
Ended June 30 1 2011 Q2 2012 Q2 Change Change 3
Korea ¥ 6,237 ¥ 6,251 0% 9%
China 7,805 10,737 38% 49%
Japan 3,214 2,826 -12% -12%
North America 1,511 1,515 0% 4%
Europe and Others 2 1,688 1,545 -8% 1%
Nexon Total 20,456 22,876 12% 20%
Footnotes:
1
The above table represents a breakdown of our revenue based on the region in which revenues originate. It
is not a presentation of our revenues according to NEXON Co., Ltd. (“Nexon”) entities.
2
Others: United Kingdom, other Asian countries, and South American countries.
3
Constant currency percent change is the growth rate had the currency rate not changed from Q2 2011. Rates
used: 1,340 Korean won/100 Japanese yen, 12.53 Japanese yen/Chinese yuan and 82.04 Japanese yen/U.S.
dollar.
As you can see, the strong Japanese yen compared to a year ago reduced our as-
reported results. Had the yen not grown stronger, our revenues would have shown
20% growth over Q2 of last year. We generated approximately 88% of our
revenue in Q2 from non-yen currencies, of which the Chinese yuan and Korean
won make up the large majority.
In Q2, total revenues were ¥22.87 billion, an increase of 12% over Q2 2011, or
20% on a constant currency basis. In addition to continued growth from our major
existing titles, our newer free-to-play titles such as Mabinogi Heroes and Cyphers
are demonstrating the kind of growth we hope to see from recently launched
games, and have the potential to join the ranks of our largest game franchises.
Worldwide, Mabinogi Heroes’ revenue increased 60% year-over-year. Although it
is still very early days for Cyphers, which launched in June 2011 in Korea,
monetization appears to be taking hold, and paying users increased 36% over Q1
2012.
Consolidated operating income was ¥10.67 billion in Q2, an increase of 24% year-
over-year. Our operating income margin was 47% in Q2 of this year, up from 42%
last year. Operating income margin was again above our long-term target range of
40-45%, but we expect it to come down over time as we continue to invest in new
development capacity.
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4. August 9, 2012
We manage our global business and present our results by major geographies,
each of which has different user and growth characteristics. Below, we discuss
each territory’s performance for Q2 2012 and the driving factors behind the results.
Korea
Revenues for the Korea region in Q2 2012 were ¥6.25 billion, flat versus a year
ago. On a constant currency basis revenues were up 9%.
As we have mentioned in the past, Q2 is typically a seasonally softer quarter for
Nexon, so our live game activity was focused on releasing small updates in most of
our games, supported by marketing programs to promote engagement.
MapleStory released two mini-games timed to coincide with its ninth anniversary
event. In April, Sudden Attack released the Ace Mode update, which sets up a
game of survival between teams of five players. The following month’s Shoot Out
Mode update for Sudden Attack enables the team with the last player standing to
win. Dungeon&Fighter launched the Pincer Operation update in May, which gives
players the ability to summon mercenaries in dungeons to battle by their
sides. Mabinogi’s Maestro of the Battlefield: Bard update in April included a new
future job wish called Bard; several new events such as the Dynamic Battle
System, which delivers instant spell casting; and other new in-game content. For
Counter-Strike Online we released new massive weapons and special mode maps.
Additional updates were also launched for Vindictus and Dragon Nest. Cyphers,
our newest online game, released two new characters with supernatural powers,
resulting in our second-highest MCCUs for the game, a major accomplishment in a
seasonally slower quarter. As mentioned above, early results for Cyphers indicate
to us that the game is on a solid growth track.
As we enter the summer season, we have been releasing larger updates for all of
our major games, supported by aggressive marketing plans to take advantage of
what is traditionally an active quarter for gamers.
Our newly reorganized team in Korea is hard at
work on the mobile games front. We launched six
new smartphone games during the quarter.
Dungeon&Fighter Female Gunner was released for
the Android Market and MapleStory Live’s free
version was released for the iOS and Android
Market. We also launched Shadow Move, a 3D
puzzle game, on iOS. Additionally, we published
KartRider Rush Plus
the Korean version of the MMORPG Empire Online,
developed by Lakoo, on iOS. KartRider Rush Plus, for the Android Market, based
on the original KartRider game, was downloaded 2 million times within a month
after its release. Lastly, Space Tanks, a tank battle game, launched on iOS.
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5. August 9, 2012
China
Our China business again delivered strong results. In Q2, revenues reached
¥10.73 billion in the region, an increase of 38% year-over-year, or 49% on a
constant currency basis. China was our largest region for the quarter at 47% of
total revenues.
During the quarter we released updates for most of our games. In KartRider, we
had several releases that contributed to year-over-year revenue growth of the
game, including a Labor Day update that revealed a new Ghost Mode and the
Shaeffer Z7 update that introduced a new kart body. We released several patches
for Counter-Strike Online in preparation for a major summer update. These
patches were designed to enhance gameplay and in-game communication
between players. Smaller updates in the game delivered a new “Shooting Star”
weapon, new mode maps and new quests. Dungeon&Fighter celebrated its fourth
anniversary by offering players multiple tools and awards such as game coins and
jewelry. We also released a large update called Revolution, which included a new
Male Mage (Magician) character along with specialized classes known as
Elemental Master and Glacial Master. For MapleStory players, we renewed certain
popular character classes including Adventurer, Cygnus Knights and Extreme
Adventurer. Our newer title, Mabinogi Heroes, released a new character, Kay,
which drove a 200% increase in weekly registrations from the previous week.
Japan
For Q2, revenues in Japan were ¥2.82 billion, a decrease of 12% year-over-year.
We launched updates for MapleStory, Dungeon&Fighter, Mabinogi and Mabinogi
Heroes during the quarter. For MapleStory, we released the Justice update which
introduced Phantom, a new character class with unique skills and a weapon called
the Cane used to attack in-game monsters. In April, we released Innovation, one
of our larger updates for Dungeon&Fighter. As part of the update, a new Male
Mage character class provided an incentive for players that had previously played
the game to log back in. To promote the update we partnered with Fate/Zero, a
popular anime television show. On May 24 we launched the Genesis update for
Mabinogi, adding Minstrel, a new job. Mabinogi Heroes kicked off the release of a
three-part update that included new episodes (dungeons) and maps.
In addition to our existing games, on April 26 we started service for KartRider, our
popular online multiplayer racing franchise. To promote the launch, we partnered
with Toyota and several Japanese celebrities. We also started a closed beta of
NAVYFIELD2 on June 27.
In Japan, the large majority of gamers have traditionally been either on console or
mobile. Thus, the focus of our new game development in Japan is on mobile
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6. August 9, 2012
platforms, with an emphasis on experimenting with new genres and new types of
gameplay. During the quarter, we launched MapleStory Brave Monsters, a social
card battle game on the GREE platform. The game accumulated 100,000
registered users within two weeks. On June 19, we published Ukishima Fuwarin, a
localized version of Rule the Sky, the top-grossing iOS game in Korea, which was
developed by JC Entertainment.
North America
Revenues in North America were ¥1.51 billion, flat versus the second quarter of
2011. On a constant currency basis, revenues increased 4%.
This quarter we delivered greater stability in our games, and thanks to the ongoing
hard work of our live operations and security teams, we are starting to see an
increase in our user base.
As we achieved greater stability and consistent uptime in our games, we were able
to release updates for all of our titles in North America. We supported these
updates with strong marketing campaigns to promote the new content. We
released two updates for MapleStory and celebrated its seventh anniversary with
in-game events. The third phase of the Alliance update introduced new quests and
allowed players to create a popular Legends character for a limited period of time.
At the end of May, we released the Renegades update, offering an exclusive
character to North America named Jett, a gun-wielding space bounty hunter.
Mabinogi had a strong quarter supported by the release of the Fighter’s Way
update in May. The update added a fighter storyline with a new fighter class, as
well as Macbeth, the final character in the game’s Shakespearean content. In
addition, we opened the Beauty Shop, another cash shop system. Earlier in the
quarter, we released the Merchant class update which included a new class and
commerce system, as well as new weapons. At the end of June, we released the
Genesis update, renewing the combat system in the game. For Dungeon Fighter
Online, we released the Omen of the Apocalypse update and introduced three new
dungeons. Later in the quarter, we released a larger update called Revolution in
which we introduced a new Male Mage, four new dungeons, a new quest system
and improved the graphics resolution of the game. We had three updates for
Combat Arms, which introduced new maps and an MVP leader board. The largest
of the three updates was Spiders vs. Scorpions, which added two maps in
Quarantine mode and kicked off the month-long Spiders vs. Scorpions event. We
also introduced updates to Dragon Nest, Atlantica Online, Vindictus and Sudden
Attack.
At the end of the quarter, we launched Vindictus, Dungeon Fighter Online and
Atlantica Online on the STEAM platform, making our games available to a broader
audience.
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7. August 9, 2012
We continue to manage the security and stability situation in North America, and
while we feel we have made significant progress, that progress will ultimately be
measured in our financial results for the region.
Europe, Southeast Asia and Other Regions
Our revenues in Europe, Southeast Asia and our other regions were ¥1.54 billion,
a decrease of 8% year-over-year. On a constant currency basis, revenues
increased 1%.
We had several updates in Europe during the quarter. We launched the first part
of the Legends update in MapleStory, which included a new Cannoneer character,
a Pirate that wields a hand cannon, and a new map called Coco Island. We had
several small updates for Combat Arms that provided a new map, a new MVP
system and multiple weapons. We also released a number of new maps and skills
to Atlantica Online, and Vindictus also received smaller updates throughout the
quarter.
On April 25 we completed our data center migration from Germany to Luxembourg.
With this migration, Nexon Europe now has the capacity to maintain and support
more publishing services and expand our servers for existing games at a lower
cost.
In Southeast Asia, where we currently operate in seven countries, we launched
several updates during the quarter to MapleStory and Counter-Strike Online in
Taiwan, and Atlantica Online in Indonesia.
Upcoming Games
Our new game development teams have been hard at work finalizing games for
our upcoming launches slated for Q3 and Q4 of 2012. These games include:
• Epic of the Three Kingdoms, a 3D MMORPG based
on the novel The Three Kingdoms, will launch in
Korea later this year. The game is built on the Unity
3D engine and is therefore playable across multiple
platforms, including PC and mobile devices.
Epic of the Three Kingdoms
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8. August 9, 2012
• Counter-Strike Online 2, a sequel to our
hit FPS Counter-Strike Online that we
co-developed with Valve Corporation, is
expected to launch in closed beta in
Korea in Q3 2012.
• Mabinogi 2 (final title TBA), based on
the Mabinogi back-story, is an entirely
new game with a completely different
Counter-Strike Online 2
game world and game-play
characteristics than the original. We believe it will unlock a new audience
for our games.
We are very excited about all three of these free-to-play games. They are
designed to break new creative ground through significant gameplay innovations.
As with all of our newly launched games, we will carefully monitor how these
games are resonating with their audiences, and continue to invest in them through
live game development should they prove successful.
In addition to the games from internally developed studios, we are very excited
about our upcoming games through our publishing relationships. These include
FIFA Online 3, discussed in more detail below, Warface and Pro Baseball 2K. We
feel the combination of our strong existing games business, plus our new games
under development, forms a strong foundation for lasting growth.
As we discussed above, we remain focused on building our position on mobile
platforms. During the quarter we launched a total of 13 games on mobile platforms
(iOS, Android, GREE and Mobage), and plan to introduce 11 more before year’s
end.
We see mobile as a logical extension of our strong and growing free-to-play
business. As more mobile devices have the graphics and connectivity necessary
for immersive, synchronous gameplay, we want to be positioned to deliver
outstanding free-to-play games for those platforms. Our approach continues to be
one of rigorous experimentation. We find that our best results happen when we
push the creative boundaries of a genre and try new approaches. As a result,
many of our games look and play differently than the current leading titles on a
platform.
Acquisitions and Partnerships
In early June, we became the largest shareholder in NCsoft through the acquisition
of 14.7% of the outstanding shares. This strategic relationship brings together
NCsoft’s strong pipeline of IP and our leading international publishing platform and
free-to-play expertise. By becoming NCsoft’s biggest shareholder, we believe the
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9. August 9, 2012
agreement opens the door to future commercial relationships, such as co-
development of games and leveraging NCsoft’s IP in international territories. We
are currently in active dialogue with NCsoft’s team regarding a variety of mutually
beneficial opportunities.
After the close of the quarter, we announced our
partnership with EA to publish FIFA Online 3 in
Korea, which will launch next fiscal year. FIFA is
the world’s premier sports franchise, as well as
one of the biggest online franchises in Korea,
and we believe we can further build on its
success by leveraging our operational games
expertise.
FIFA Online 3
In June, we acquired inBlue, a developer of mobile social games primarily for the
GREE platform in Japan, to further accelerate our efforts in mobile games
development. inBlue has grown rapidly since its establishment in 2010 to become
an award-winning developer and their game Chouhakai! Barbarossa (Barbarossa
Destruction) is currently ranked as one of the top games on the GREE platform.
The company recently launched Zero Senki byDimension-Zero (Chronicles of the
Zero War), based on a highly popular Japanese collectible card game. We expect
to continue the successful momentum of these titles by launching several new
games over the coming months.
We also increased our investment in JC Entertainment to
29.5%. JC Entertainment’s mobile title, Rule the Sky, has
consistently held the number one spot in Korea’s Top
Grossing chart in both the iOS App Store and Android’s
Google Play. It also reached the number one spot among all
free iOS games in Japan approximately 10 days after its
release.
Lastly, we recently announced that we have raised ¥50 billion
in debt financing. This capital enables us to leverage the very
favorable borrowing rates currently available to us in the
market and provides us with additional strategic flexibility, including potentially for
M&A, should we decide to use it. Our approach to M&A, however, remains
unchanged: we want to be prepared to move quickly and aggressively when
opportunities arise, but we will do so only when we see ways to prudently build the
business for the long-term.
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10. August 9, 2012
Business Outlook
We are reducing our business outlook slightly for the full fiscal year 2012 to
revenue of ¥104.3 billion and operating income of ¥47 billion. This equates to an
increase in revenue of 19% year-over-year, or approximately 22% on a constant
currency basis. In the third quarter of 2012, we expect revenues of ¥24.9 billion,
an increase of 3% versus the third quarter of 2011 (5% on a constant currency
basis).
Our outlook reflects our internal plan, which is based on a rigorous bottoms-up
review of our titles by region, and multiple planning scenarios for MAUs, pay rates,
and ARPPU. As we write this letter we are currently in the very dynamic summer
months, in which we are introducing content updates to several of our games
around the world. While our titles are delivering solid results in revenue and
operating metrics, based on very early indications we believe that a small
downward revision in our full-year outlook is prudent.
Business Outlook
(Millions of yen, except per share data)
FY Ended
December 31, 2012 Q3 (E) Full-Year (E)
Revenues ¥ 24,943 ¥ 104,334
Operating income 9,249 47,082
Net income 6,598 32,737
Adjusted net income 1 7,007 34,294
Basic EPS 15.30 75.88
Adjusted EPS 16.24 79.49
Footnote:
1
Adjusted net income is a non-GAAP measure that excludes the non-cash amortization of goodwill (and
negative goodwill in the case of acquisitions occurring before April 1, 2010) related to our acquisitions, which
is required under Japanese GAAP. We provide this information to investors for the purpose of comparing our
net income with that of companies that do not amortize goodwill or negative goodwill associated with
acquisitions in their financial results, including those reporting in accordance with U.S. GAAP.
The exchange rate assumptions we have used in our business outlook are
presented below.
Exchange Rate Assumptions
Exchange Rate 1
100 yen / Korean won 1,429.3
U.S. dollar (USD) 79.7
Chinese yuan (RMB) 12.6
Footnote:
1
The exchange rates we used in our business outlook are based on the average rates from January 2012 to
the end of June 2012.
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11. August 9, 2012
The impact of these rates varies by region given the composition of our revenue
and cost bases in those regions. Given the assumptions in the table above, every
¥100 of change against KRW100 would have a corresponding ¥2.2 billion revenue
impact and a negative ¥0.7 billion operating income impact in the fiscal year. For
example, a ¥100 weakening against KRW100 would add about ¥2.2 billion of
additional revenue but subtract about ¥0.7 billion of operating income.
A change of one Japanese yen in the Chinese yuan (RMB) exchange rate would
have a significant impact on both revenue and operating income. For example, a
¥100 weakening against RMB100 would add about ¥3.7 billion in additional
revenue and about ¥3.6 billion in additional operating income in the fiscal year.
Changes in the exchange rate of the Japanese yen against the U.S. dollar do not
have material impacts on our yen-denominated results compared to Korean won or
Chinese yuan since our U.S. dollar-denominated revenue and cost constitutes a
small proportion of our total revenue and cost.
Our Opportunity
Nexon continues to deliver industry-leading growth at high scale and profitability.
Nexon’s goal is simple: to be the world leader in online games. To reach that goal,
we have a straightforward strategy comprised of four major elements:
- Enhance and extend our existing game franchises;
- Broaden our portfolio through new game introductions;
- Expand geographically; and
- Bring our games to new platforms and devices
We have focused on these four initiatives continuously and aggressively since our
inception, and that focus has resulted in very consistent results: high growth and
high profitability year after year. We think this clarity of vision and consistency of
results makes us unique in the games business.
Sincerely,
Seungwoo Choi, CEO Owen Mahoney, CFO
Tokyo, Japan
August 9, 2012
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12. August 9, 2012
Glossary of Terms
Term / Abbreviation Meaning
AOS AOS is a sub-genre of the real-time strategy
genre, in which two teams of players compete
with each other in discrete games, with each
player controlling a single character through an
RTS-style interface.
FPS A game in which the player plays from the point
(first person shooter) of view of the game character in three-
dimensional graphics.
RTS A game that is usually played from a third-person
(real-time strategy) perspective, in which the player controls vast
numbers of in-game characters in a tactical
scenario.
MMORPG An online role-playing game that has a “massive”
(massively multiplayer online number (usually several hundred or more) of
role playing game) players who play concurrently.
MAU The total number of accounts of users who log in
(monthly active user) and play a particular game in a given month.
ARPPU Online game net revenues for any given period
(average revenue per paying divided by the average number of paying players
user) of such games during the period.
Pay Rate The number of paying users divided by monthly
active users for any given period of time.
MCCU The maximum number of users concurrently
(maximum concurrent users) accessing a game at a particular moment.
MCCU is generally used to measure the
popularity of a game.
Closed Beta A trial period during which a trial model (beta
version) of a game is tested by a limited number
of users or groups.
Open Beta A trial period during which a trial model (beta
version) of a game is tested without restrictions
on participation.
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13. August 9, 2012
Cautionary Statement regarding Forecast of Business Results
The forecast of business results is based on information available as of the date
these data were released and, due to various risks, uncertainties and other factors
arising in the future, actual results in the future may differ largely from the
estimates set out in this document.
These risks, uncertainties and other factors include, without limitation: the
continued growth and popularity of our key titles; our ability to maintain favorable
relationships with key licensing partners; our continued ability to offer games in
China, through local partners or otherwise; our ability to compete effectively in the
online games industry; our ability to address hacking, viruses, security breaches
and other technical challenges; fluctuations in currency exchange rates; our ability
to maintain and further develop our brand name; our effective acquisition of new
companies, businesses, technologies and games from third parties and the
possibility of recognizing impairment losses; continued growth of the online games
market, including the underlying infrastructure, and free-to-play/item-based
revenue generation model; our ability to adapt to new technologies; our ability to
enter into licensing arrangements for third-party titles on terms favorable to us;
effective defense of our intellectual property; legislative, regulatory, accounting and
taxation changes in the countries in which we operate; and any risk or uncertainty
as listed from time to time in our press releases, earnings reports or annual reports.
Cautionary statement regarding unaudited consolidated financial information
With the exception of the first quarter ended March 31, 2012, all of our three month
financial results, beginning with the fourth quarter ended December 31, 2011, are
unaudited. We prepare the unaudited consolidated financial information on the
same basis as our audited consolidated financial statements.
13