NEXON Co., Ltd. (OTCPK:NEXOF) Q3 2023 Earnings Conference Call November 9, 2023 3:00 AM ET
Takanori Kawai – Team Leader of Investor Relations
Owen Mahoney – President & Chief Executive Officer
Shiro Uemura – Chief Financial Officer
Conference Call Participants
Seyon Park – Morgan Stanley
Haruka Mori – JPMorgan Securities
Yijia Zhai – Macquarie Capital Limited
David Gibson – MST Financial Services
Hello, everyone and welcome to Nexon’s earnings conference call. Thank you for joining us today. With me are Owen Mahoney, President and CEO of Nexon; and Shiro Uemura, CFO.
Today’s call will contain forward-looking statements, including statements about our results of operations and financial condition such as revenues attributable to our key titles, growth prospects, including with respect to the online games industry, our ability to compete effectively, adapting new technologies and address new technical challenges, our use of intellectual property and other statements that are not historical pack. These statements represent our predictions, projections and expectations about future events which we believe are reasonable or based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information on some of these risks and uncertainties can be found in our earnings-related IR documents. We assume no obligation to update or alter any forward-looking statements. Please note, net income refers to net income attributable to owners of the parent as stated in NEXON’s consolidated financial results. Furthermore, this conference call is intended to provide investors analysts with financial and operational information about Nexon, not to solicit or recommend any sale or purchase of staff or other securities of Nexon. A recording of this conference call will be available on our Investor Relations website, firstname.lastname@example.org following this call. Unauthorized recording of this conference call is not permitted.
I’d now like to turn the call over to Owen.
Thank you, Kawai and good afternoon, everyone. Shiro Uemura and I are very excited to tell you about our Q3 results. It was another great quarter for Nexon, our sixth consecutive quarter of double-digit year-over-year revenue growth. In our Q4 guidance calls for a seventh such quarter of double-digit year-over-year growth. Shiro Uemura will provide you the details. We’ll also provide you an update on our pipeline which is proving to be not just the most exciting in our company’s history but also one of the most exciting in the entire global games industry. Our other major announcement today is that after an enormously fulfilling decade leading Nexon, I will be stepping down as CEO after the Annual General Shareholders Meeting this coming March.
While this move may come as a surprise, it has been in the works for some time. It all starts with assembling a deep bench of highly capable executives who can lead the next generation of the company. Nexon has one of the best collections of proven and effective leaders in the global games industry, exemplified by Junghun Lee, who in March, will take my position as Global CEO. Over the years, Junghun and I have worked extremely closely together and he was the key leader of so many of Nexon’s successes in recent years.
His operational capabilities are unparalleled in the games industry and he also has deep experience in game development on both PC and on mobile. Under Junghun’s leadership, Nexon Korea has experienced a string of successes in an unprecedented renaissance of growth that is the envy of the industry. And he’s built a highly capable team of the industry’s best virtual world’s creators and operators. As you’ve heard us say many times in the past, we are highly dedicated to consistent and robust growth over the long term into strong corporate governance.
Succession planning is a core part of that commitment and doesn’t happen without proactively ensuring strong generational change. After 10 amazing years leading Nexon and with the company having the strongest tailwinds in its history, it’s the perfect time to pass the torch to that next generation of leadership. Junghun and I, along with others on the executive team are already hard at work to ensure a smooth transition to his role of CEO in March. After the shareholders meeting, I expect to remain as a Board member and as an adviser to the company. With that, I’ll now move on to our third quarter results.
Nexon enjoyed yet another outstanding quarter with a 23% increase in revenue and a 47% increase in operating profit year-over-year. We had strong year-over-year revenue growth from MapleStory, FC Mobile and Blue Archive as well as contributions from several new games. As we’ve said many times in the past, Nexon’s growth strategy is uniquely effective in the games industry. The first pillar of that 2-part growth formula is about sustained and stable growth of our existing massive virtual world franchises.
We call these forever franchises and for good reason. They grow for years or decades. MapleStory demonstrated once again Nexon’s unprecedented ability to deliver consistent and robust growth from its massive virtual world. Now in its 20th year, MapleStory grew an incredible 46% year-over-year in Q3. With our Q4 guidance, MapleStory’s annual revenue is now 3x bigger than it was only 5 years ago. And we think the future of MapleStory Mobile is also bright.
During the quarter, we launched MapleStory Mobile in China and it has been performing better than our internal expectations. Also in China, Dungeon&Fighter performed within our expected range with solid year-over-year increase in MAUs and paying users. In Q4, we are prioritizing player engagement over monetization and plan to introduce additional updates and events ahead of the Lunar New Year update in Q1 of 2024. EA Sports FC Online continued its strong momentum with little to no negative impact from a rebranding from FIFA to FC that concluded in September.
Both MAUs and paying users were up year-over-year. And despite the extremely high hurdle set in the 2022 World Cup year, we expect the game to complete FY ’23 with double-digit year-over-year revenue growth. You’ve heard us say this many times in the past, Nexon’s world-class live operations and careful management of our massive live virtual world franchises creates a highly robust and consistent base of stable growth for our shareholders.
This is the first pillar of our 2-part approach to growth. The second pillar of our 2-part growth strategy is to develop a way to bring highly differentiated new franchises to the market that will stack on top of our massive live virtual worlds. Developing highly valuable new content is traditionally a major challenge for the games industry but we are demonstrating an approach that works. And we are currently readying the most robust and exciting pipeline of new titles in our 3-decade history. And that pipeline is getting accolades from customers.
I’ll start with an update of our beta of the first attendant, a new title from our Korea studios which is getting a lot of buzz with players globally. The game is a third-person, 4-player cooperative RPG shooter for PC, PlayStation and Xbox. We just completed our first open beta and player feedback was very positive. The game climbed to the top 8 on the most played games on the steam charts and retention rates solidly exceeded our targets. An interest level was high around the world. Interestingly, more than 60% was from the Western regions like U.S. and Europe. Most of the rest was from various regions around Asia. Anticipating the potential for a large global user base, our development team is focused on creating a large volume of additional content that will follow the games release in 2024.
Next, we are just weeks away from the commercial launch of the finals. This is the first title from our Embark Studios in Stockholm, Sweden and the first in a series of games aimed directly at expanding NEXON’s global footprint in Europe and North America. The final aims to redefine the category of online first-person shooters by innovating on several interlocking vectors, gameplay innovation, enabled by proprietary technology innovation wrapped in a whole new setting and gameplay modes the industry has not seen before.
As gamers ourselves, we believe that the industry as a whole and the FPS genre, in particular, has been starved of innovation over the last several years and gamers around the world would welcome a well-crafted AAA experience with a fresh approach. The open beta test which concluded this week ramped simultaneously on 3 platforms: PlayStation, Xbox and PC.
In addition to adding console, the beta featured in new map and mode plus a lot of new content. Our primary objective for the beta objectives for the beta were to get gameplay feedback and stress test the server performance at scale, frame rates and movement with large groups given the advanced destruction physics and our team’s ability to provide rapid updates across all platforms and the feedback from users has been extraordinary.
Despite doing almost no marketing for the playtest, over 7.5 million people downloaded the game worldwide widely distributed across North America, Europe and Asia. On PC alone, we were ranked in the top 4 to 5 in usage on steam for most of the tests. Retention rates exceeded our goals by a wide margin. And perhaps most gratifying, players told us that the game is highly unique, highly polished and stands way out above a field of other AAA games. This was exactly our goal.
More than just testing the game, we are testing a whole new way of making games, leveraging targeted technology investments in proprietary game development tools such as advanced server side destruction, the objective has been to deliver a blockbuster game with a much smaller, much more nimble development team. The finals team was less than 100 people at peak. This approach represents a revolution in our industry in which game development teams for a AAA game routinely run over 500 and sometimes well over 1,000 people. While we haven’t announced yet a commercial launch date, we plan to launch the game before the end of the year.
And there is a great deal more in the pipeline. While much investor attention has understandably been on the finals, the team from Embark is making rapid progress on the next game called Arc Readers, a PVPBE extraction shooter set in a beautiful but extremely hostile world. Like the Finals, Arc Readers is designed to redefine a genre in both highly original gameplay and an original technology that enables that gameplay. Again, our objective is to have a much smaller and more creative team delivering a much bigger and more innovative game. We plan to share a lot more about our creators in the next few months as we ready the first external beta test in preparation for a commercial launch in 2024. Based on our internal play tests and the alpha test in June, we are every bit as excited about our creators as we are about the Finals.
And finally, I’d like to talk about our third product for Embark what they are currently calling internally their creative platform. We have not spoken much about this in the past but are now ready to share more about the significant progress the team has been making. For background, we have long felt that game development is entirely too difficult, relegated to a small class of highly trained craftspeople who spend years learning complex tools and esoteric coding techniques. Part of the complexity is that unlike in linear media, video games are at their core a set of if-then rules that must be hand-coded into thousands of lines of precise instructions to make even the simplest games. The inherent complexity of the process leaves little room for creative experimentation and filters out all but the most determined creators.
Embark’s created playground turns us on its head completely by enabling players to create their own experiences together in real-time. One simple example of the toolset in the Creative playground is to use AI to power behaviors of creatures what the industry calls MPCs. Simulated physics and AI can enable an in-game creature to walk in physically realistic ways without ever using the costly industry-standard pre-rendering or motion capture technology. Our vision is for any user to develop any sort of creature they can imagine, a dog and Alien eyeball with 1 leg, a 3-headed setup and learn to walk by itself using machine learning. And then the creatures can be given personality traits. A user can make a world populated by angry crocodiles who are always hungry for the next meal. And then they can add AI-powered hamburger creatures who don’t want to get eaten. Each AI-powered creature can observe and comment on their environment, talk to the user and act according their assigned personalities. By playing with these accessible tools in a fun and social sandbox, anyone can create experiences and show them directly with their friends.
What I’ve just described is a small sliver of what the team has been developing. Our early community has made some incredible new worlds and they told us that the creative playground is not just powerful, it is a fun, creative space to hang out with friends and together to play, create an experiment. And what is fun to use is what tends to get adopted by a mass audience, like social media focused around making entertaining linear videos, game making, can and should be a form of self-expression for a mass audience and that makes it a great business opportunity.
After a long gestation period to develop the core concepts and technologies, the development team plans to open the platform to external audience for testing in the first half of 2024. For some early peak videos of both Arc readers and Embark’s creative playground, please go to our Investor Relations website and click on the media page. We will be talking a lot more about these products in 2024. So as we prepare to bring the finals to commercial launch, we are demonstrating not just a new game but a radical new approach to bringing highly differentiated AAA games to market for a fraction of the time and the cost of traditional development. This isn’t just a story of 1 or 2 titles. This is a foundational change in the management and economics of game development. And to reiterate, these new titles layer on top of a layer of existing franchises that have year after year, shown robust and consistent growth. We are not replacing old revenue from declining titles. We are adding new revenue on top of already growing existing revenue. This business model is a revolution in the games industry.
So to summarize, there are 4 key themes for Nexon this quarter. First, we had an outstanding Q3 and once again showed the anti-fragile nature of our business model and capability of our operations teams and our guidance calls for a seventh consecutive quarter of double-digit year-over-year growth. The consistent growth of our massive virtual world franchises is nearly unheard of in the global video games industry. Second, we had an outstanding open beta for the finals with much higher-than-anticipated demand and very strong retention, placing the game among the ranks of top blockbusters in the global games industry. We plan to start commercial launch by end of the year.
Third, we are making rapid progress on several other major new products that are at least as exciting creatively and commercially as the finals. And fourth, we think our approach to gain development and operations, that is technology empowering smaller but more effective game teams to bring unique AAA experiences to market is proving to be a highly powerful investment strategy that separates Nexon from the rest of the games industry. For investors, our approach translates to asymmetric upside opportunity. That is minimal downside, thanks to the consistency of our existing virtual worlds and the potential for step function growth upside in both revenue and earnings.
With that, I’ll turn the call over to Uemura-san.
Thank you, Owen. Next, I review our Q3 results. For additional details, please see the Q3 2023 investor presentation available on our IR website. In Q3, we achieved record-breaking third quarter revenues. Group revenues were JPY120.3 billion, up 23% year-over-year on an as-reported basis and up 17% year-over-year on a constant currency basis. Our performance was driven by the growth of MapleStory and FC Mobile in Korea and Blue Archive as well as good contributions from new sites such as Wars of Prasia, Dave the Diver and MapleStory M in China. Overall, our top-line performance exceeded our outlook. MapleStory M in Korea FC Online and MapleStory M in China exceeded our expectations.
By region, revenues from China were within the range of our outlook, while revenues from Korea, Japan, North America and Europe exceeded our expectations. Revenues from the rest of world came in lower than expected. Looking at the total company performance by platform, PC revenues were within the range of our outlook, while mobile revenues exceeded our outlook. Operating income was up 47% year-over-year and exceeded our outlook at JPY46.3 billion driven by a revenue outperformance. This marked record-breaking third quarter operating income.
Net income was JPY35.2 billion, exceeding our outlook primarily driven by an operating income outperformance and FX gain of JPY6 billion. Year-over-year, it was down 15% due to a JPY26.4 billion FX gain that was recorded a year ago. Let’s move on to results by region. Revenues from our Korea business were JPY75.9 billion, representing backbreaking quarterly revenues in Korea. This performance exceeded our outlook, primarily driven by the better-than-expected performances of MapleStory M and FC Online.
On a year-over-year basis, revenues increased by 21% on an as-reported basis and by 13% on a constant currency basis. For MapleStory M MAUs paying users and ARPU all increased year-over-year driven by the successful major update in July. With the strong momentum the event held in September was well received by users as a result, it’s paving exceeded our expectations and achieved record-breaking quarterly revenue. The PCM mobile compile revenues of FC Online newly rebranded in September exceeded our outlook as it maintained its strength from last year. MAUs and paying users both increased year-over-year.
All in all, PC revenues in Korea increased by 40% year-over-year, driven by the growth of MapleStory M and contribution from Wars of Prasia. As for the mobile business, FC Mobile also maintained its strong momentum following the workout period. Its revenue grew year-over-year and marked record-breaking quarterly revenue. Blue Archive and MapleStory M also grew year-over-year. On a year-over-year basis, mobile revenues in Korea decreased by 13% as growth of these titles and the contribution from Wars of Prasia were more than offset by revenue decreases in Dungeon&Fighter Mobile and HIT2. On a quarter-over-quarter basis, mobile revenue slightly decreased due to a decrease in Wars of Prasia revenue.
Revenues from our China business were within the range of our outlook at JPY24 billion. MapleStory M exceeded our expectations while Blue Archive was below our expectations. On a year-over-year basis, revenues increased by 22% on an as-reported basis and by 20% on a constant currency basis, primarily driven by contributions by new titles, including MapleStory M and Blue Archive. For Dungeon&Fighter revenue was within the range of our outlook and slightly decreased year-over-year. Both the summer update in July and the National Day update in September were well received by players while package pipe and sales increased year-over-year individual item sales decrease as we distributed many attractive rewards at an event helped to maintain a high level of users.
As a result of this event, MAUs and paying users increased while ARPU decreased year-over-year. On a quarter-over-quarter basis, ARPU was flat despite the seasonality because of the event. MAUs and paying users decreased due to a tough comparison with the previous quarter which was boosted by the adversity update. MapleStory M which launch on August 17, exceeded our expectations as it successfully acquired a large band base driven by the strength of the MapleStory M IP. For Blue Archive which launched on August 3, revenue was below our outlook. One of the number of players was in line with our expectations, item sales were lower than expected.
Revenues from Japan increased by 12% year-over-year, driven by the significant growth of Blue Archive. Revenues from North America and Europe increased by 78% year-over-year, driven by growth of MapleStory M and multiple mobile games as well as a contribution from Dave the Diver. Revenues from the rest of world increased by 17% year-over-year, driven by the significant growth of Blue Archive and contributions from Dave the Diver. This was partially offset by revenue decreases in MapleStory M and older mobile titles.
Moving on to our FY 2023 fourth quarter outlook. In Q4, we expect growth on MapleStory M as well as contributions from Wars of Prasia, MapleStory M in China and The Finals which is scheduled to launch in the fourth quarter. As a result, we expect Q4 revenues in the range of JPY87.9 billion to JPY96.2 billion, representing an 8% to 19% increase year-over-year on an as-reported basis and a 2% to 12% increase year-over-year on a constant currency basis.
The high end of revenues represents our seventh consecutive quarter of double-digit year-over-year revenue growth. We expect our Q4 operating income to be in the range of JPY11.4 billion to JPY17.8 billion, representing a 4% to 62% increase year-over-year on an as-reported basis and a 2% decrease to 53% increase year-over-year on a carton currency basis. I’ll discuss the details on this shortly. We expect net income to be in the range of JPY8.9 billion to JPY13.9 billion. In Korea, we expect growth from MapleStory M as well as contribution from Wars of Prasia while expecting year-over-year decreases from HIT2 and Dungeon&Fighter Mobile, both of which launched in 2022.
As a result, we expect revenues in Korea to be in the range of JPY55.1 billion to JPY58.9 billion, representing an 8% to 16% increase year-over-year on an as-reported basis and a 2% to 9% increase year-over-year on a constant currency basis. We expect MapleStory M to grow significantly year-over-year as it maintains its strong momentum from this Q3 when it achieved record-breaking quarterly revenue. We anticipate a decrease in combined PC and mobile revenues from FC Online and due to the tough comparison with an exceptionally strong performance in Q4 2022 driven by the workup.
We expect the year-over-year increase in Korea PC revenue as we anticipate growth from MapleStory M and the contribution from Wars of Prasia, partially offset by an increase from FC Online. Regarding the mobile business, we expect Q4 revenue to decrease year-over-year. We expect year-over-year growth in FC Mobile and contribution from Wars of Prasia. We expect these to be more than offset by year-over-year rather decreases in HIT2 and Dungeon&Fighter Mobile which launched in 2022.
Turning to China, while we expect a contribution from MapleStory M, we anticipate a year-over-year revenue decrease from Dungeon&Fighter which delivered a strong performance in Q4 2022. Accordingly, we expect revenues from our China business to be in the range of JPY16.4 billion to JPY18.6 billion, representing a 7% decrease to 5% increase year-over-year on an as-reported basis and an 11% decrease to a year-over-year on a constant currency basis.
For Dungeon&Fighter, we are introducing various updates and events designed to enhance user engagement ahead of the Lunar New Year update set for Q1 2024. In October, paying users increased while active users decreased slightly and ARPU decreased year-over-year. Given it is a challenging comparison with Q4 2022, when revenue significantly grew year-over-year and given we will focus on enhancing user engagement over monetization, we expect this revenue to decrease year-over-year. MapleStory M which launched in Q3, is expected to maintain its strong momentum and contribute to Q4.
In Japan, we expect revenues in the range of JPY2.5 billion to JPY3 billion representing a 9% decrease to 6% increase year-over-year on an as-reported basis and a 12% decrease to 2% increase year-over-year on a constant currency basis. We anticipate growth in MapleStory as well as contributions from Dave the Diver which was launched on Switch on October 26 and Dynasty Warriors M which is scheduled to launch in Q4 to be offset by decreases from terminated mobile titles.
In North America and Europe, we expect revenues to be in the range of JPY8.3 billion to JPY9.4 billion, representing an 81% to 106% increase year-over-year on an as-reported basis and a 72% to 95% increase year-over-year on a constant currency basis, driven by the growth in MapleStory M and other mobile titles as well as contribution from The Finals which is scheduled to launch in Q4. We expect revenues in the rest of the world in the range of JPY5.5 billion to JPY6.2 billion, representing an 8% to 22% increase year-over-year on an as-reported basis and a 2% to 15% increase year-over-year on a constant currency basis.
While we anticipate contribution from HIT2 which launched in Q2 as well as The Finals and Dynasty OEM, both of which are scheduled to launch in Q4, we expect these to be partially offset by revenue decreases in MapleStory and older mobile titles. In Q4 2023, we expect operating income to be in the range of JPY11.4 billion to JPY17.8 billion, representing a 4% to 62% increase year-over-year on an as-reported basis and a 2% decrease to 53% increase year-over-year on a constant currency basis. An increase in Q4 revenue is expected which will contribute to an improvement in year-over-year operating income.
Some of this is expected to be offset by increased costs related to business growth. First, we expect increased HR costs related to additional headcount for the development and operation of our major virtual worlds. Second, we expect higher marketing expenses for new titles, such as The Finals and for MapleStory as it sustains its positive momentum. While we expect increases in costs, operating income is expected to grow year-over-year as we anticipate our growth business to grow in good shape and our group revenues to increase. Also, we expect our operating income margin to increase year-over-year. By adding our Q4 outlook on to Q3 accumulated results, our operating income margin in FY 2023 is expected to improve by 5 percentage points from 29% last year to 34% this year.
Overall, Nexon has been building a business model in which we can grow steeply by launching new fracture worlds on to a solid foundation of the existing franchises. In Q3, we focused on stable operation and grew revenues from the portfolio of our 3 major franchises. Especially MapleStory M maintained its strong momentum following a large update in July and achieved record-breaking quarterly revenue.
Driven by the stable growth of our existing portfolio and contributions from new games such as Wars of Prasia, Dave the Diver and MapleStory M in China, group revenues and operating income grew double-digit year-over-year. In Q4, we expect continued growth of our existing portfolio through stable operations. In addition, we expect high end of our revenues and operating income to continue to grow double-digit year-over-year, driven by contributions from new games such as The Finals of the first game from Embark Studios.
Last, I would like to provide an update on the shareholder return. Given our strong financial condition and business performance as well as the current market environment, we have been aggressively purchasing our shares. To date, we have completed JPY70 billion of our JPY100 billion share repurchase policy that we announced on August 9, 2022. As for the remaining JPY30 billion worth of shares, today, our Board of Directors has authorized to purchase the purchase of these shares in the market during the period from tomorrow, November 10 to February 16, 2024. When this final tranche is done, we will have completed the JPY100 billion share repurchase policy in 1.5 years faster than the updated plan of 2 years in which we authorized a 1-year acceleration in the last quarter.
We will continue to be committed to considering shareholders’ return proactively. This concludes my comments. Back to you, Owen.
Thanks Uemura-san. Before we go to your questions, I’d like to reiterate a key point about Nexon’s place in the global games industry. We often talk to investors, customers and employees and we commonly hear the same themes from all quarters. Very few major new game franchises are being introduced by the industry. With the rise of development costs, it is too risky to innovate, when something innovative does come out from the industry, it usually fails.
There are too many sequels, too little innovation and too few creative surprises. In the response of many companies has been to do massive acquisitions and massive layoffs. We believe there is a better way and have spent the last several years rewriting the industry template. First, game customers don’t want to be fed the same old thing. They have many good sources of entertainment competing for their time. They became gamers because they love the art form. Second, game developers don’t want to manage thousands of people or make the same game every year. They chose to work in the games industry because they want to make great game arts for a mass audience.
And three, investors who fund the games industry don’t want a hits-driven business with highly risky $100 million to $200 million bets. They want to minimize risk while having a chance for maximum upside. They’re not unreasonable. They are putting their capital and their careers on the line and they want that money to be used wisely. Typically, these 3 constituent goals are treated as a zero-sum game as a toggle war. Our approach is to solve each constituent problems at the same time and is based on 2 innovations.
Innovation number 1 is our business model of launching highly unique AAA games that stack on top of a base of massive and consistently growing live virtual worlds. The games industry is largely built on a legacy of replacing old lost revenue with new revenue. Nexon has the unusual luxury of stacking new revenue on top of existing revenue. That approach leads to consistent growth over time and significant asymmetric upside opportunity for investors. Innovation number 2 is our technology stack to build and operate more innovative games at much lower cost. The traditional industry approach has evolved a little in the last 20 years, namely to hire hundreds or thousands of people to build or operate an online game.
Nexon’s approach is to build software tools that accelerate and scale every developer and operator by a factor of 10 or more. That means our teams can spend more time building interesting new games and less time managing massive teams. Both of these pillars represent a revolution for the games industry. Together, they enable us to get out of the cycle of endlessly increasing development budgets and minimal innovation. It means developers can be creative again, iterating on fresh game ideas rather than on being HR specialists managing thousands of people. In short, our approach allows us to step out of the red ocean of the legacy industry and into large new blue oceans.
The entire Nexon management team have spent years architecting the strategy. Our results this quarter indicate more than ever it’s working. And as we transition over the coming 5 months to Junghun’s leadership, we’re focused on not just continuity but on accelerating our strategy. All of this adds up to significant investment tailwinds for the company.
We’d now be happy to take your questions.
Thank you, Owen. Next, we would like to open up the lines to live Q&A. Q&A session will be conducted with Japanese English or English-Japanese consecutive interpretation. Please be noted that interpretation will come between your questions and our answers. Please hold for interpretation before you hear our answers. Our answers will also be followed by interpretation. So please hold until the interpretation finishes before moving on to the next question. For those of you who have more than one question, we will take your questions one by one.
Now, we’d be happy to take your questions.
The first question is from Seyon Park from Morgan Stanley.
Thank you for the opportunity. I think, news of the session comes as a surprise. And I just do want to say that at least since I started covering the company in which I think it’s been 6, 7 years or so, it’s been an incredible journey seeing the company grow its IP, grow profit, get rerated and then I do hope that the new management continued the dedication to shareholders that Owen has shown over the years. With that, I actually have only one question which is related to the final, maybe you can just share the monetization scheme for this game? And how much of that revenue contribution is currently baked into the fourth quarter outlook?
Thank you very much for your question. So firstly, I will respond to your question of how much we have factored in in the number of new gain into the guidance for Q4. Actually, we usually do not provide you with the breakdown of how each title contribute to our revenues. But just to give you some flavor to what we have disclosed today as our Q4 forecast, please understand that we believe that the year-on-year growth in the Western region and this is a contribution from the finals of Embark, half rather not 50% but half of Y-o-Y growth.
Okay. So half of the Y-o-Y growth that is baked into the fourth quarter guidance reflects contribution to the final. In which case, it does kind of seem to be not as significant. And then maybe can you explain a little bit on the ramp-up of the monetization is that imply that in the initial stages, the game will have relatively lower monetization and that can potentially ramp, I guess, going into next year.
Seyon, this is Owen. I want to come back to a couple of your other comments questions but just to answer this directly, remember that we have announced that we’re going to launch it before the end of the year but we have not announced when before the end of the year, we’re going to launch it. And as you know, we’re now on November 9. So it’s a little hard to talk to you in great detail about Q4. That’s point number 1. But second, I’d say, as we mentioned in our prepared remarks, the data from the most recent beta has been pretty outstanding across the board. And as we said, we will be launching before end of the year. But I’d reiterate what I said about other titles which is we are playing for the long term and that’s the smart way to launch a virtual world in the market. And our confidence after the beta for the long term in this franchise has gone way up as a result of what we saw in the beta. So I’d say our thesis of step function growth that we’ve talked about numerous times, we think is firmly in place.
Your other question is about monetization strategy, we have not released great details about that yet but you can imagine that we’re probably not going to strike too far away from games of similar genres that have launched from Western Studios.
And then third, thanks for your comments upfront. And just kind of back at you, you’ve been with us for a long time and we’re way ahead of a lot of folks and identifying the trends in the industry that we were focused on. So I really want to compliment you and thank you for your interest in Nexon and I would also say, reiterate something that I sort of touched on in the prepared remarks. The strategy that you are seeing us put in play and have been putting in play is something that was architected not just by me but by the entire executive team and a great deal of discussion and thought and debate and so on. And of course, we work in a very dynamic industry. So our strategy could and should evolve over time. But we are very much dedicated as an executive team and seeing that through for sure.
Our next question is Ms. Haruka Mori from JPMorgan Securities Japan. Ms. Mori, please go ahead.
This is Mori speaking. Thank you for the opportunity. I have 3 questions. First of all, I’m extremely surprised to hear the news that the CEO will step down and hand it over to the new CEO. I have been seeing Owen for the past 10 years. And I was reflecting on various memories that I have on — Owens on when I heard the news. And I would like to hear more about this handover of the CEO. Firstly, regarding the timing. I thought that since your company is planning to launch various new titles through Embark going forward. Why didn’t you stay longer to see that happen? Why now is the first question. And secondly, I believe you have been preparing for the successor for a long time. I think it’s quite natural to appoint Mr. Lee as the successor as he has been taking the lead of Nexon Korea for a long time. But I would like to ask you what was the background in choosing Mr. Junghun Lee as your successor? And what is your expectation towards Mr. Junghun Lee when he becomes the CEO?
Well, thanks for your comments, Mori and I also have really enjoyed working with you since before the IPO has been quite a long time. And thanks for all your deep study and interest in Nexon for all those years. We’ve been great to work with. In terms of succession planning, this is really a topic about corporate governance. And one of the most important things that you do as an executive team as a CEO and as a Board member is to ensure long-term health of the company. And you’ve heard us talk about this probably about long-term health of Nexon, probably more than you want to remember. And Lee, we are really serious about it. A lot of people talk about corporate governance but we’ve seen the results of a lot of challenges in a lot of other companies who haven’t gotten their act together with succession planning. And we think this is an incredibly important topic for a team to address head-on and proactively.
And I’ll tell you, it doesn’t just start one day where you decide you want to make — you want to have a new executive in a position of CEO. You have to plan way ahead. And that’s what we must do for the long-term health of the company. And that starts with a great bench of executives around the company and I am very, very blessed by the privilege of working with an executive team that I consider to be the best in the industry and around the world. I’ve met a lot of game company executives, a lot of game companies, management teams in many different countries around the world and I would stack our team against any other team out there. I truly believe that. And you don’t have to believe me, you have to look at our results and I think our results speak for themselves. So this has been in the works for some time. And you probably noticed that Lee Junghun joined our Board of Directors last March and that was proper and all part of the same piece.
Sorry, I’m not sure if I’m answering your question directly but let me just add just one data point to remind you of. A lot of the eyes are on the new products that launch. Our industry is often has a deep focus on catalysts as we’ve talked about in the past. But I think for a minute about the management team that made MapleStory, a virtual world that’s existed for 20 years, it just grew in this quarter by 59% year-over-year in Korea. That is the work of Junghun Lee and management team below him. That’s an astounding number. That’s like the — I don’t know if it’s the right analogy is that winning the Triple Crown 5 times in a row. It’s just unheard of in the video games business globally.
When I tell my friends around the world who work in video games and have done life, have made online games, they can’t believe it. And I can tell you going back to before the IPO, when you and I first met, you and I both know that nobody saw that coming or even one fraction of that. So that’s the management team that I’ve been privileged to work with. Together, we’ve made a strategy that has worked really well and I’m very excited about the future of Nexon as excited, if not more so, for the next generation of Nexon.
So, I hope that answers your question.
And taking a rather long time but I would like to also ask about the expectation that as The Final. I understand that the contribution from The Finals are factored into the fourth quarter assumptions. But if the assumptions in the fourth quarter is a slow ramp-up the amount that I can calculate from your numbers is rather large. Can we interpret this as being the initial stage of the ramp-up being this large? In other words, in the following quarters or towards next fiscal year, this amount will be growing quite rapidly. Do I have the correct expectation?
My another question is with regards to the marketing. I do understand that in the fourth quarter, the advertising and promotion expenses will be raised and that is in line — that is for the preparation of the launch. And I believe for the time being, you are going to be in the phase of user acquisition. Am I correct to understand that, that phase will continue into the next fiscal year?
Let me reconfirm the numbers that I mentioned for the fourth quarter related to the finals, I said that roughly half of the year-on-year growth in North America and Europe in the fourth quarter is expected to come from the finals. As Mori-san mentioned, it’s possible to do the math. And we do believe that this is a reasonable assumption. We have not disclosed the launch timing. We are simply saying it’s going to be within the year. So once again, it’s going to be half of the year-on-year growth of North America and Europe. With regards to the positioning of the finals, we are expecting the finals to become the fourth pillar on top of the MapleStory and Dungeon&Fighter and FC Online as we are prepared to spend a long — a rather long time to grow this title to ensure that the title will have sufficient longevity. As everybody commented, we — our stance is not to expect a huge sales in the first phase but we will be implementing various measures by monitoring the situation so that this title will be enjoyed by a lot of players and will become the fourth pillar of our titles.
And your question related to the marketing investment, it’s quite natural for us to make upfront investment for marketing for major launches and we do factor them in the fourth quarter. But as I have said before, it will depend on the timing and the situation. So if you look at the quarterly marketing investments, there are volatilities, ups and downs but let me explain how we think about marketing the investment on a full-year basis. If we look at the past record, usually, as a result, we have spent roughly 7% to 10% of the sales on marketing. So for this title as well, including the fourth quarter, the range of marketing spend will be along those lines, like 8% to 9%. And in the future as well, we will monitor the situation. Once we see the solid revenue potential, we will look at ROI to determine the level of marketing investment. So on a full year basis, roughly speaking, the marketing spend will be around 7%, 8%, 9%, 10% range of the sales.
The next question is Yijia Zhai from Macquarie Capital Limited.
Thank you very much for giving me that opportunity to ask a question. I have 2 questions in total. The first question is about the succession plan of the CEO. And while Owen was taking in the leadership, I understand that Nexon tried new waters. For example, we have acquired Embark Studios as well as AGBO and you have tried other new endeavors as well. And I see that Mr. Lee is super in recording greater performance and earnings. But what kind of expectation should I have towards Mr. Lee regarding this challenging spirit? And what kind of new world-class strategy he might be pursuing?
Well, thanks for your question. I’m — I have one more quarter as CFO. So we’ll be also seeing you next quarter, excuse me, as CEO, not CFO. Sorry about that. I have one more quarter as CEO and so I’ll be talking more about this exact topic next quarter and you’ll be hear– hearing both of us talk more about this in the lead up to March. So that’s the first point. But what I’d say in the meantime is as you’ve heard us say before, Junghun and I have worked extremely closely together. We both work closely together. We’re also, I would consider as very close personal friends. And with deal with the rest of the executive team, we spent a great deal of time architecting a strategy that we’ve articulated to all of you as well as to our employees and to our customers. And that is — we’re very much aligned on those topics.
But the last thing I’d say is that any leader of a large creative organization faces a challenge which is to how to continue to make sure your current business is going well, while also building for a longer-term future. And we have taken very much of a barbell approach to that strategy. That is we have really focused on executing on our — on building our live virtual world franchises on the one side that generate a great deal of stable growth for us. And at the same time, we’ve also made some targeted, very targeted, very thought-out calculated bets in the future.
And a CEO that’s serious about innovation, we think, a leader and an executive team that’s curious about innovation has to keep those 2 things, taking care of today’s business and taking care of tomorrow’s business or innovation, deeper innovation. You have to keep that in dynamic balance. That’s a very tricky thing to do. But any major innovation company, whether they’re in technology or media or what have you, the ones we’ve always admired have handled that very well. And Junghun and I have had long conversations about this over the years. And where — we and the rest of the executive team are very dedicated to both taking care of today’s business and then also taking targeted prudent bets on the future. We really think that this quarter proves out the wisdom of that strategy and also the execution that the teams have been able to pull off on that strategy, that approach.
Thank you. I would like to move on to the second question which is on MapleStory in China. And I know that begin with expectations toward this title was not that high, given my understanding that the awareness level of this title in China is not set high. I see that you did not spend much on promoting MapleStory in China. But then you were able to get some results, as we have mentioned. So I want to know the overall landscape of the mobile-type environment in China and the background of how you were able to get the results that you have mentioned.
Regarding MapleStory Mobile in China, we were able to significantly outperform our expectations. It is not as well-known as in Korea but the MapleStory IP itself has a certain level of awareness in China. And especially, we provided MapleStory PC in China, so we have a fan base already. So people who have played MapleStory PC in the past, when they saw the mobile version, they thought, “Oh, wow, I used the play this before” and maybe that was one of the enticing factors to draw them to try a claim in a MapleStory on mobile. And so I guess that is one of the reasons why they started playing in MapleStory Mobile. I think that it is quite similar to the situation of Kingdom of the Winds in Korea. We had a PC version and then we launched the mobile version and people were used to play a Kingdom of Winds on PC. They felt at home playing the mobile again and that led to the popularity of the mobile version. And once you can repeat but MapleStory IP itself is known in China through its active itself PC.
Thank you very much. And I would like you to comment on the overall market landscape in China.
Regarding mobile games in China, of course, we know much about how we — our cycles are doing in China but we don’t have much information regarding other mobile titles in China. And of course, China is a very large market. So if there is any business opportunity, we would like to prepare the titles that will resonate with Chinese users. But I would like to refrain from making any comment on the general China mobile market.
We would next like to take questions from Mr. David Gibson of MST Financial Services. Mr. Gibson, please go ahead.
Just as per earlier discussion about the operating margin for the year, for next year, do you think it’s possible that it might improve a further 5 percentage points as it did in 2023, what you’re expected to do in 2023?
With regards to OP margin, actually, our target KPIs are sales — top line revenue and the amount of operating profit. With regards to the margin ratio it fluctuates depending on the business situation. The reasons can be, for example, due to the competitive environment, we, in some cases, need to make investment into our human resources. Another example can be the difference between in-house title development and outside title development which for a direction we choose and that will impact our margin ratio. So our focus is not open margin but rather the absolute amount of the revenue and operating profit.
In the FY 2023, we did say that the — it is at 34% and 5 percentage point improvement. But we would like to refrain from making any comment on the margin ratio for FY ’24.
I guess I missed a quick one then on the final. Can you give us an image on — this is unusual because it’s multi-platform. Can you give a sense for the players? Is it equal across PC, Xbox PlayStation? Or is it mainly PC and then PlayStation? Just wanting kind of relative size.
So far, we have not disclosed the information.
Okay. I got to the final one. Owen, all the best you’ve done a great job. I think everyone here reflects that in respect to evenly. You’ve given a great explanation today of why Nexon will be in great hands with Mr. Lee, no doubt about it. I haven’t quite worked out why you are stepping aside to 6 years old. It’s not that old. Is this personal? Do you want a new challenge? Did the Board come to you? Or did you suggest that I’m just kind of to understand why you want to make this happen, whereas clearly that you think you’ve got a fantastic team behind you?
Thanks for your question. So honestly, it’s no more complex than what we said in our prepared remarks and what I’ve been saying during the Q&A. Look, I’ve been in the box for 10 years now. That’s way beyond what I understand the average to be for a public company and CEO. And it is right and proper for a company that is serious about long-term growth to be very serious about succession planning. We’ve observed companies that we really admire really struggle with this topic. And we — I think everybody on this call has watched some great companies really have a challenge with this topic of succession planning, where the CEO doesn’t have — you can’t draw on a great bench of great people. And therefore, the company and the shareholders and the employees, the customers, they all suffer. We don’t want that to happen to us. So we’re dead serious about this topic of long-term growth. So we want to be way ahead of this and we think that, that’s what good corporate governance is in mature thoughtful management is all about. So it’s really nothing more complex than that.
So the last thing I would say, just very briefly is that if you do have that framework in mind, when is the right time to execute on a succession plan. The right time to do it is when the company is in great shape. And is set up for even more success in the future. And then to draw on it. You don’t want to do it when the company is in trouble. You don’t want to hand over problems to the next generation of leadership. It’s hard enough to be a leader. What we’ve done is execute a thoughtful planned out pre-edited approach to succession planning when the company is firing on all cylinders and we very much believe that. So we think now is a great time to execute on the succession plan.
So you won’t be taking up the role at PlayStation there?
I am very happy to be serving — continuing to serve on the Board of Nexon and support Junghun and certainly as an adviser for the company. So I’m very happy with my situation but thanks for the nice joke.
This concludes the question and answer session. Mr. Takanori Kawai, I’d want to turn the conference back over to you for any additional or closing remarks.
Thank you. There is no further questions and the time is up. So I would like to take this to thank you for your participation in this call. Please feel free to contact an exit Investor Relations at email@example.com should you have any further questions.
Thank you. That concludes today’s conference. Thank you for your participation. You may now disconnect.