First Quarter Fiscal 2012 Results
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May 10, 2012 Dear Fellow Shareholders: Today, we are very happy to share with you our strong first quarter results. NEXON Co., Ltd. (“Nexon”) delivered record revenue, operating income and net income, and these results come on the back of a very strong 2011. Nexon’s solid performance in Q1 underscores yet again that our unique free-to-play business model and focus on immersive online games together are a robust engine for growth and profitability at scale. We experienced growth across all of our key financial metrics, which we will discuss in more detail below. Our performance in China was particularly robust during the quarter, and Korea delivered very strong growth as well. Performance in North America suffered as a result of certain operational challenges from Q4 that continued in Q1. Overall, our performance exceeded our revised guidance for the first quarter. As we mentioned in our previous shareholder letter, our approach to financial reporting is different from many public companies. 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, on 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: [email protected]. We believe this approach ensures that we are providing the information shareholders want in order to gain a deeper understanding of our business. First Quarter Fiscal 2012 Results Our Q1 results were better than the upwardly revision in guidance we provided in March. The table below summarizes these results, along with the previous four quarters for comparison: Selected Consolidated Operations Data (Millions of yen, except per share data) FY Ended December Percent FY Ended December 31, 2011 31, 2012 Change Q1 Q2 Q3 Q4 Q1 YoY Revenues ¥20,809 ¥20,456 ¥24,156 ¥22,190 ¥30,377 46% Operating income 9,340 8,605 10,948 9,354 17,384 86% Net income 7,586 5,120 7,232 5,815 12,377 63% Adjusted net income¹ 7,968 5,507 7,582 6,153 12,738 60% Earnings per share2: Basic EPS 21.50 14.51 20.39 15.59 28.82 Adjusted EPS 22.58 15.61 21.37 16.49 29.66 Cash and deposits 33,341 44,291 44,278 132,479 146,977 1 May 10, 2012 Footnote: * Amount is prepared in accordance with Japanese GAAP, which is rounded down to the nearest million yen, and therefore might slightly differ from what we disclosed in the Offering Circular, which was prepared in accordance with Western rounding conventions. 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. 2 Adjusted to reflect the 1:100 stock split that occurred on July 21, 2011. The following table presents our revenue results on a constant currency basis (i.e., applying the average exchange rate from Q1 2011) in order to show the growth rates without the effect of fluctuating exchange rates during the quarter. We generated approximately 90% of our revenue in Q1 from non-yen currencies, of which the U.S. dollar and Korean won make up the vast majority. Constant As Reported Currency Revenue for the Quarter Percent Percent Ended March 31 2011 Q1 2012 Q1 Change Change 3 Major Territories 1 Korea 6,631 8,856 34% 40% China 8,014 15,175 89% 98% Japan 2,654 3,096 17% 17% North America 1,718 1,397 -19% -15% Europe and Others 2 1,790 1,850 3% 9% Nexon Total ¥ 20,809 ¥ 30,377 46% 52% Footnote: 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 entities. 2 Others: United Kingdom, other Asia countries, and South American countries. 3 Constant currency percent change is the growth rate had the currency rate not changed from Q1 2011: 13.57 Korean Won/ Yen, and 82.34 Yen / US Dollar. In Q1, total revenues were ¥30.37 billion, an increase of 46% over Q1 2011, or 52% on a constant currency basis. This was driven by the continued strong performance of our existing titles – particularly in China – and the introduction of several new titles. Consolidated operating income was ¥17.38 billion in Q1, an increase of 86% year-over- year. Our operating income margin was 57% in Q1 of this year, up from 45% last year. 2 May 10, 2012 As previously reported, in 2011 we launched several new titles. In Korea, we launched Cyphers and SD Three Kingdoms. We also launched Mabinogi Heroes in Japan, Europe and China. Lastly, we launched Kartrider Rush on iOS and Android in Korea and North America, which has been downloaded more than 8.2 million times to date. As we went through Q1, these 2011-vintage games have maintained a trajectory of growth in line with our expectations. As with all newly- launched games experiencing such growth, we plan to Cyphers invest in development and marketing to drive them going forward. We also saw growth in several of our key monetization metrics in Q1. Average Monthly Active User count (“MAUs”) for Q1 2012 declined slightly to 82.8 million from 86.2 million in Q1 2011 (and was up from Q4 2011 MAU count of 80 million.) Our paying user rate was up year-over-year, with 10.9% of our users paying (“pay rate”) in Q1 2012, up from 8.3% in Q1 2011. As a result, our total number of paying users increased from 7.1 million to 9.1 million. Our Average Revenue Per Paying User (“ARPPU”) worldwide, calculated using month-end exchange rates, was ¥1,761 for Q1 2012, up from ¥1,427 in Q1 2011. Worldwide, eight of our titles have delivered more than $100 million in lifetime revenue. We have listed them here for your reference as you read about their contributions by region. 2 Service 2003 2003 2004 2004 2005 2006 2008 2008 Since 2D Action 2D Action 3D Action Arcade-style Action Turn-based Genre FPS FPS MMORPG MMORPG MMORPG racing game MMORPG MMORPG Lifetime Gross Sales 1 >$1,500 >$100 >$300 >$500 >$2,000 >$300 >$400 >$100 ($millions) Footnote: 1 Estimated lifetime gross sales collected from end-users, inclusive of revenue share retained by publishing partners in geographic markets where Nexon does not self-publish (e.g., China) and revenue prior to acquisitions by Nexon (MapleStory in 2004, Dungeon&Fighter in 2008, Sudden Attack in 2010 and Atlantica in 2010). 2 Co-developed by Nexon and Valve; Nexon and Valve co-own the franchise. 3 May 10, 2012 We manage our global business and present our results by major geographic regions, each of which has different user and growth characteristics. Below, we discuss each territory’s performance for Q1 2012 and the driving factors that support the results. Korea During Q1 2012, Korea continued to deliver consistent growth: ¥8.85 billion in revenue, growing 34% versus Q1 2011. On a constant currency basis, revenue increased 40% over Q1 2011. Korea represented approximately 29% of our total revenue for the quarter. Our growth came from strong performance in our live titles, accelerated by content updates timed for the Lunar New Year season. Sudden Attack, a leading first-person- shooter game (“FPS”), and Mabinogi Heroes, an action role-playing game (“RPG”) developed by our internal studio, DevCat, were both standout titles in the quarter. Our newer titles (those launched in the last one to three years) such as Cyphers and Dragon Nest also made meaningful contributions. We launched multiple content updates and various in-game promotions for most of our major games in Korea, several of which were timed to leverage the aforementioned Lunar New Year season. For Dungeon&Fighter, growth was driven by the continued success of last quarter’s “New Male Mage” update, which carried into Q1. For Sudden Attack, our teams launched new maps, weapons and characters along with special in- game events. The game subsequently achieved the top spot in Korea’s PC Café rankings in late January, and has continued to rank among the top three games since 2011. Mabinogi Heroes (also known as Vindictus in Western markets) introduced a new character called “Kay,” a male archer. MapleStory’s performance was mainly driven by the Lunar New Year holiday and the addition of a character class called “Mysterious Phantom.” MCCUs for the game reached 404,981 during the quarter. In addition, we ran several other in-game promotions in KartRider. On February 23, we also began servicing Heroes Generation 30, a massively multiplayer online role-playing game (MMORPG) developed by Chinese Gamer International Corp. Additionally, we signed several agreements for mobile and social games that we will discuss in more detail below. BattleStar: Reload, a casual side- scrolling shooter game, entered its first closed beta on March 23, and is currently slated for launch in the second half of 2012. China Our China business again delivered very impressive results: in Q1, revenue reached ¥15.17 billion in the region, an increase of 89% year-over-year, or 98% on a constant currency basis.