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Kessan 1708682945115077


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Kessan 1708682945115077

  1. 1. August 9, 2012Dear Fellow Shareholders:Today, we are pleased to report another solid quarter. We met our expectationsfor both revenue and operating income for the second quarter, driven by growth inour 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 announcedacquisitions, partnerships and investments that will further strengthen our slate ofrobust 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 NCsoftCorporation (“NCsoft”). After the close of Q2, we also announced our partnershipwith Electronic Arts Inc. (“EA”) to publish FIFA Online 3 in Korea.Each quarter, we post a shareholder letter like this one, along with our financialstatements, on our website at We host a question-and-answer conference call the same day with our management team, during which weanswer as many questions as we have time for. We ask that interested analystsand investors please submit questions for management prior to the earningsconference call via the following email address: Quarter Fiscal 2012 ResultsThe table below summarizes our Q2 results, along with the previous four quartersfor 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 44,278 132,479 146,977 129,089Footnotes: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. 1
  2. 2. August 9, 2012The 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 ¥1,521Footnotes: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, whichwas expected since we introduced no new major games in any of the last threequarters.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, butin looking at PC Café data, it appears that Nexon’s market share of gameplay timefor some of our products was temporarily impacted by the introduction ofcompetitive products. Nevertheless, total hours of gameplay were up in bothNexon’s games and the industry overall. That is, the launch of new games into themarketplace drove up aggregate usage of games overall, which also benefitedNexon’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&Fighterset a new record for MCCUs, a measurement of both number of active users andengagement. Our Pay Rate was 10.3%, up from 7.8% a year ago. ARPPUs werein 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 growthrates without the effect of fluctuating exchange rates compared to last year. 2
  3. 3. August 9, 2012 Revenue by Region (Millions of yen) As- Constant Reported CurrencyRevenue 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 shown20% growth over Q2 of last year. We generated approximately 88% of ourrevenue in Q2 from non-yen currencies, of which the Chinese yuan and Koreanwon make up the large majority.In Q2, total revenues were ¥22.87 billion, an increase of 12% over Q2 2011, or20% on a constant currency basis. In addition to continued growth from our majorexisting titles, our newer free-to-play titles such as Mabinogi Heroes and Cyphersare demonstrating the kind of growth we hope to see from recently launchedgames, and have the potential to join the ranks of our largest game franchises.Worldwide, Mabinogi Heroes’ revenue increased 60% year-over-year. Although itis 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 Q12012.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 of40-45%, but we expect it to come down over time as we continue to invest in newdevelopment capacity. 3
  4. 4. August 9, 2012We manage our global business and present our results by major geographies,each of which has different user and growth characteristics. Below, we discusseach territory’s performance for Q2 2012 and the driving factors behind the results.KoreaRevenues for the Korea region in Q2 2012 were ¥6.25 billion, flat versus a yearago. On a constant currency basis revenues were up 9%.As we have mentioned in the past, Q2 is typically a seasonally softer quarter forNexon, so our live game activity was focused on releasing small updates in most ofour games, supported by marketing programs to promote engagement.MapleStory released two mini-games timed to coincide with its ninth anniversaryevent. In April, Sudden Attack released the Ace Mode update, which sets up agame of survival between teams of five players. The following month’s Shoot OutMode update for Sudden Attack enables the team with the last player standing towin. Dungeon&Fighter launched the Pincer Operation update in May, which givesplayers the ability to summon mercenaries in dungeons to battle by theirsides. Mabinogi’s Maestro of the Battlefield: Bard update in April included a newfuture job wish called Bard; several new events such as the Dynamic BattleSystem, which delivers instant spell casting; and other new in-game content. ForCounter-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 aseasonally slower quarter. As mentioned above, early results for Cyphers indicateto us that the game is on a solid growth track.As we enter the summer season, we have been releasing larger updates for all ofour major games, supported by aggressive marketing plans to take advantage ofwhat is traditionally an active quarter for gamers.Our newly reorganized team in Korea is hard atwork on the mobile games front. We launched sixnew smartphone games during the quarter.Dungeon&Fighter Female Gunner was released forthe Android Market and MapleStory Live’s freeversion was released for the iOS and AndroidMarket. We also launched Shadow Move, a 3Dpuzzle game, on iOS. Additionally, we published KartRider Rush Plusthe Korean version of the MMORPG Empire Online,developed by Lakoo, on iOS. KartRider Rush Plus, for the Android Market, basedon the original KartRider game, was downloaded 2 million times within a monthafter its release. Lastly, Space Tanks, a tank battle game, launched on iOS. 4
  5. 5. August 9, 2012ChinaOur 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 aconstant currency basis. China was our largest region for the quarter at 47% oftotal revenues.During the quarter we released updates for most of our games. In KartRider, wehad several releases that contributed to year-over-year revenue growth of thegame, including a Labor Day update that revealed a new Ghost Mode and theShaeffer Z7 update that introduced a new kart body. We released several patchesfor Counter-Strike Online in preparation for a major summer update. Thesepatches were designed to enhance gameplay and in-game communicationbetween players. Smaller updates in the game delivered a new “Shooting Star”weapon, new mode maps and new quests. Dungeon&Fighter celebrated its fourthanniversary by offering players multiple tools and awards such as game coins andjewelry. We also released a large update called Revolution, which included a newMale Mage (Magician) character along with specialized classes known asElemental Master and Glacial Master. For MapleStory players, we renewed certainpopular character classes including Adventurer, Cygnus Knights and ExtremeAdventurer. Our newer title, Mabinogi Heroes, released a new character, Kay,which drove a 200% increase in weekly registrations from the previous week.JapanFor Q2, revenues in Japan were ¥2.82 billion, a decrease of 12% year-over-year.We launched updates for MapleStory, Dungeon&Fighter, Mabinogi and MabinogiHeroes during the quarter. For MapleStory, we released the Justice update whichintroduced Phantom, a new character class with unique skills and a weapon calledthe Cane used to attack in-game monsters. In April, we released Innovation, oneof our larger updates for Dungeon&Fighter. As part of the update, a new MaleMage character class provided an incentive for players that had previously playedthe game to log back in. To promote the update we partnered with Fate/Zero, apopular anime television show. On May 24 we launched the Genesis update forMabinogi, adding Minstrel, a new job. Mabinogi Heroes kicked off the release of athree-part update that included new episodes (dungeons) and maps.In addition to our existing games, on April 26 we started service for KartRider, ourpopular online multiplayer racing franchise. To promote the launch, we partneredwith Toyota and several Japanese celebrities. We also started a closed beta ofNAVYFIELD2 on June 27.In Japan, the large majority of gamers have traditionally been either on console ormobile. Thus, the focus of our new game development in Japan is on mobile 5
  6. 6. August 9, 2012platforms, with an emphasis on experimenting with new genres and new types ofgameplay. During the quarter, we launched MapleStory Brave Monsters, a socialcard battle game on the GREE platform. The game accumulated 100,000registered users within two weeks. On June 19, we published Ukishima Fuwarin, alocalized version of Rule the Sky, the top-grossing iOS game in Korea, which wasdeveloped by JC Entertainment.North AmericaRevenues in North America were ¥1.51 billion, flat versus the second quarter of2011. On a constant currency basis, revenues increased 4%.This quarter we delivered greater stability in our games, and thanks to the ongoinghard work of our live operations and security teams, we are starting to see anincrease in our user base.As we achieved greater stability and consistent uptime in our games, we were ableto release updates for all of our titles in North America. We supported theseupdates with strong marketing campaigns to promote the new content. Wereleased two updates for MapleStory and celebrated its seventh anniversary within-game events. The third phase of the Alliance update introduced new quests andallowed 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 exclusivecharacter to North America named Jett, a gun-wielding space bounty hunter.Mabinogi had a strong quarter supported by the release of the Fighter’s Wayupdate in May. The update added a fighter storyline with a new fighter class, aswell as Macbeth, the final character in the game’s Shakespearean content. Inaddition, we opened the Beauty Shop, another cash shop system. Earlier in thequarter, we released the Merchant class update which included a new class andcommerce system, as well as new weapons. At the end of June, we released theGenesis update, renewing the combat system in the game. For Dungeon FighterOnline, we released the Omen of the Apocalypse update and introduced three newdungeons. Later in the quarter, we released a larger update called Revolution inwhich we introduced a new Male Mage, four new dungeons, a new quest systemand improved the graphics resolution of the game. We had three updates forCombat Arms, which introduced new maps and an MVP leader board. The largestof the three updates was Spiders vs. Scorpions, which added two maps inQuarantine mode and kicked off the month-long Spiders vs. Scorpions event. Wealso introduced updates to Dragon Nest, Atlantica Online, Vindictus and SuddenAttack.At the end of the quarter, we launched Vindictus, Dungeon Fighter Online andAtlantica Online on the STEAM platform, making our games available to a broaderaudience. 6
  7. 7. August 9, 2012We continue to manage the security and stability situation in North America, andwhile we feel we have made significant progress, that progress will ultimately bemeasured in our financial results for the region.Europe, Southeast Asia and Other RegionsOur 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, revenuesincreased 1%.We had several updates in Europe during the quarter. We launched the first partof 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 hadseveral small updates for Combat Arms that provided a new map, a new MVPsystem and multiple weapons. We also released a number of new maps and skillsto Atlantica Online, and Vindictus also received smaller updates throughout thequarter.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 supportmore publishing services and expand our servers for existing games at a lowercost.In Southeast Asia, where we currently operate in seven countries, we launchedseveral updates during the quarter to MapleStory and Counter-Strike Online inTaiwan, and Atlantica Online in Indonesia.Upcoming GamesOur new game development teams have been hard at work finalizing games forour 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 7
  8. 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 aredesigned to break new creative ground through significant gameplay innovations.As with all of our newly launched games, we will carefully monitor how thesegames are resonating with their audiences, and continue to invest in them throughlive game development should they prove successful.In addition to the games from internally developed studios, we are very excitedabout our upcoming games through our publishing relationships. These includeFIFA Online 3, discussed in more detail below, Warface and Pro Baseball 2K. Wefeel the combination of our strong existing games business, plus our new gamesunder development, forms a strong foundation for lasting growth.As we discussed above, we remain focused on building our position on mobileplatforms. 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’send.We see mobile as a logical extension of our strong and growing free-to-playbusiness. As more mobile devices have the graphics and connectivity necessaryfor immersive, synchronous gameplay, we want to be positioned to deliveroutstanding free-to-play games for those platforms. Our approach continues to beone of rigorous experimentation. We find that our best results happen when wepush 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 aplatform.Acquisitions and PartnershipsIn early June, we became the largest shareholder in NCsoft through the acquisitionof 14.7% of the outstanding shares. This strategic relationship brings togetherNCsoft’s strong pipeline of IP and our leading international publishing platform andfree-to-play expertise. By becoming NCsoft’s biggest shareholder, we believe the 8
  9. 9. August 9, 2012agreement opens the door to future commercial relationships, such as co-development of games and leveraging NCsoft’s IP in international territories. Weare currently in active dialogue with NCsoft’s team regarding a variety of mutuallybeneficial 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 3In June, we acquired inBlue, a developer of mobile social games primarily for theGREE platform in Japan, to further accelerate our efforts in mobile gamesdevelopment. inBlue has grown rapidly since its establishment in 2010 to becomean award-winning developer and their game Chouhakai! Barbarossa (BarbarossaDestruction) is currently ranked as one of the top games on the GREE platform.The company recently launched Zero Senki byDimension-Zero (Chronicles of theZero War), based on a highly popular Japanese collectible card game. We expectto continue the successful momentum of these titles by launching several newgames over the coming months.We also increased our investment in JC Entertainment to29.5%. JC Entertainment’s mobile title, Rule the Sky, hasconsistently held the number one spot in Korea’s TopGrossing chart in both the iOS App Store and Android’sGoogle Play. It also reached the number one spot among allfree iOS games in Japan approximately 10 days after itsrelease.Lastly, we recently announced that we have raised ¥50 billionin debt financing. This capital enables us to leverage the veryfavorable borrowing rates currently available to us in themarket and provides us with additional strategic flexibility, including potentially forM&A, should we decide to use it. Our approach to M&A, however, remainsunchanged: we want to be prepared to move quickly and aggressively whenopportunities arise, but we will do so only when we see ways to prudently build thebusiness for the long-term. 9
  10. 10. August 9, 2012Business OutlookWe are reducing our business outlook slightly for the full fiscal year 2012 torevenue of ¥104.3 billion and operating income of ¥47 billion. This equates to anincrease in revenue of 19% year-over-year, or approximately 22% on a constantcurrency 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 currencybasis).Our outlook reflects our internal plan, which is based on a rigorous bottoms-upreview 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 summermonths, in which we are introducing content updates to several of our gamesaround the world. While our titles are delivering solid results in revenue andoperating metrics, based on very early indications we believe that a smalldownward 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 79.49Footnote: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 arepresented below. Exchange Rate Assumptions Exchange Rate 1 100 yen / Korean won 1,429.3 U.S. dollar (USD) 79.7 Chinese yuan (RMB) 12.6Footnote: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. 10
  11. 11. August 9, 2012The impact of these rates varies by region given the composition of our revenueand 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 revenueimpact and a negative ¥0.7 billion operating income impact in the fiscal year. Forexample, a ¥100 weakening against KRW100 would add about ¥2.2 billion ofadditional revenue but subtract about ¥0.7 billion of operating income.A change of one Japanese yen in the Chinese yuan (RMB) exchange rate wouldhave a significant impact on both revenue and operating income. For example, a¥100 weakening against RMB100 would add about ¥3.7 billion in additionalrevenue 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 nothave material impacts on our yen-denominated results compared to Korean won orChinese yuan since our U.S. dollar-denominated revenue and cost constitutes asmall proportion of our total revenue and cost.Our OpportunityNexon 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 devicesWe have focused on these four initiatives continuously and aggressively since ourinception, and that focus has resulted in very consistent results: high growth andhigh profitability year after year. We think this clarity of vision and consistency ofresults makes us unique in the games business.Sincerely, Seungwoo Choi, CEO Owen Mahoney, CFOTokyo, JapanAugust 9, 2012 11
  12. 12. August 9, 2012 Glossary of TermsTerm / Abbreviation MeaningAOS 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) ofrole 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 playersuser) 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. 12
  13. 13. August 9, 2012Cautionary Statement regarding Forecast of Business ResultsThe forecast of business results is based on information available as of the datethese data were released and, due to various risks, uncertainties and other factorsarising in the future, actual results in the future may differ largely from theestimates set out in this document.These risks, uncertainties and other factors include, without limitation: thecontinued growth and popularity of our key titles; our ability to maintain favorablerelationships with key licensing partners; our continued ability to offer games inChina, through local partners or otherwise; our ability to compete effectively in theonline games industry; our ability to address hacking, viruses, security breachesand other technical challenges; fluctuations in currency exchange rates; our abilityto maintain and further develop our brand name; our effective acquisition of newcompanies, businesses, technologies and games from third parties and thepossibility of recognizing impairment losses; continued growth of the online gamesmarket, including the underlying infrastructure, and free-to-play/item-basedrevenue generation model; our ability to adapt to new technologies; our ability toenter into licensing arrangements for third-party titles on terms favorable to us;effective defense of our intellectual property; legislative, regulatory, accounting andtaxation changes in the countries in which we operate; and any risk or uncertaintyas listed from time to time in our press releases, earnings reports or annual reports.Cautionary statement regarding unaudited consolidated financial informationWith the exception of the first quarter ended March 31, 2012, all of our three monthfinancial results, beginning with the fourth quarter ended December 31, 2011, areunaudited. We prepare the unaudited consolidated financial information on thesame basis as our audited consolidated financial statements. 13