NEXON Co., Ltd. (3659) Earnings Call Transcript

And welcome to NEXON's Second Quarter 2026 Online Earnings Presentation. Today's presentation is being recorded. [Operator Instructions] We will now hand over to Maiko Ana, Head of Investor Relations and Corporate Communications. Please go ahead.

Hello, everyone, and welcome to NEXON's online earnings presentation. Thank you for joining us today. With me are Patrick Soderlund, Executive Chairman of NEXON, Junghun Lee, President and CEO; Prisma and Shiro Uemura, CFO. Today's presentation will contain forward-looking statements, including statements about our results of operations and financial condition such as revenue attributable to our key titles, growth prospects, including with respect to online games industry our ability to compete effectively, adapt to new technologies and address new technological challenges, our use of intellectual property and other scheme in that are not historical facts. These statements represent our 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 are 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 presentation is intended to provide investors and analysts with financial and operational information about NEXON not to solicit or recommend any sale or purchase of stock or other securities of NEXON. A recording of this presentation will be available on our Investor Relations website following this presentation. An authorized recording of this presentation is not permitted. With that, now pass to Junghun.

Good afternoon, everyone, and thank you for joining our call. Earlier today, NEXON letter slide deck and press release detailing our second quarter 2026 performance and our outlook for the third quarter. Today's call, we will update listeners on our second quarter performance, third quarter outlook and the longer-term perspective from Maxim's Executive Chairman, Patrick Soderlund. Well, I will begin with some context on the special dividend announced earlier today. We believe NEXON's uniquely advantaged by the enduring strength of our established franchises deeply engaged player committees and the blueprint for delivering both portal growth from existing IP and the horizontal growth from all new games that can compete and win in global markets. Our balance sheet provides abundant resources for investing in new opportunities and for attracting world-class creative talent at a time when merchant of the industry is plank. Recently, the divestiture of our investments returned JPY 106 billion in principal and generated JPY 142 billion in gains. Bringing our total cash reserve at the end of the Q2 to JPY 842 billion, given the size of our reserves and the stability of our business. NEXON's board has concluded the most direct and equitable way to return that cash to all shareholders. Special dividend of JPY 415 per share totaling approximately JPY 324 billion or USD 2 billion to our shareholders registered as of the end of this September. The special dividend is expected to be approved by our Board in September and is supplementary to our established policy or returning more than 33% of the prior year's operating income to shareholders through buybacks and semiannual dividends. With that, I will now review our second quarter our Q2 results were better than expected, with revenue and operating income was above outlook. Revenue was JPY 121.1 billion, growing 2% year-over-year. Operating income was JPY 31.3 billion, down 17% year-over-year. The clear highlights of the core came from our MapleStory franchise and the ongoing contributions from operators. The MapleStory franchise delivered another record-setting quarter, growing 63% year-over-year. Automate driven by a good showing from the core [indiscernible] alongside the 2 expansion offerings. MapleStory words and VapestiPG. Our ability to extend the MapleStory franchise with new experiences is our playbook, we are developing for other NEXON franchises, including Anandia. And we are particularly pleased to reach the enjoying strength of operators, which recognized more than JPY 18.3 billion of revenue in the quarter. Recently, surpassing more than 16.3 million units. So operators has generated revenue of more than JPY 88 billion since the launch in October last year. Later this year in October, mark will release Frozen Trade, the largest content update since the launch and 1 that players are excited about. Packed with a larger manto pre content, including on your map, new weapons Animas and gaze, a new output alongside our paid premium reword past. Frozen trades designed to reenergize the core, bring back dormant users and optic new players. Additionally, in July, our partners at Tencent conducted or closed by Alta test of operators in China, which exceeded our targets for registrations and all the feedback from mobilization quality was very encouraging. Beyond the ongoing commercial success. Operators stands as proof that NEXON's and back Studios team has developed a load metaphor creating and publishing games, the can break through in highly erective west markets dominated by legacy franchises. It's a new and potent capability for NEXON and 1 we intend to replicate at scale. In short, NEXON's second quarter results came in better than expected. More broadly, our transformation initiative is delivering measurable progress, particularly in regards to cost management, we are managing our full year HR costs to remain flat year-over-year. And we are in the processes of assigning profit targets for all products and projects while eliminating low-margin projects and reallocating resource to program franchises together with improved productivity in our game studios relate to the integration of new technology. Over time, our cost management in societies is expected to improve both margins and operating income. Looking now to the second half of the year. We have a steady stream of new content which will bring additional revenue into our full year result. This includes operators, large frozen trail updates coming in October. Mabinogi Mobile, which launched in Taiwan, Hong Kong and Macau on July 22, and will debut in Japan in Q4. gas on all new games that launched in Korea on July 23, Overwatch on PC Korea in partnership with Lisa entertainment extent service began yesterday. Dave the Diver or mover version for our surprising hit, Dave is tracking for our global launch on September 17. Idle RPG is scheduled for our first quarter launch using our franchise expansion stress from MapleStory, Idle RPG is on the extension of [indiscernible] franchise. Other releases planned for this year included Azur Promilia world PC and mobile in Korea and Temppal:Overgeared our new full 3D MMORPG based on a popular web mobile and Repton IP, which will launch in Korea, Taiwan, Hong Kong and Macau. And our pipeline extends well into 2027 and beyond, including on the expansion of the tenting pipe universe with 3 new titles concerned [indiscernible] Project over care. Other promising times in development include our new expansion to the Mabinogi universe indices declined fate and 4 or new titles, Nakwon: Last Paradise, [indiscernible] Project Rx plus 2 games in the early stage of development at EmbaStudios. In summary, the success of our maker store expansion strategy and upgrades in the West serve as proof points in our dices that NEXON is advantaged with our growth strategy that can be applied across our larger IP portfolio backed by a strong balance sheet with abundant resources. Our transformation initiative focused on improving efficiency and profitability and world-class creative teams, we are positioning NEXON for long-term growth and profitability. With that, I will turn the call over to Remo who will provide more detail on our second quarter results as well as our third quarter outlook.

Revenue was JPY 121.1 billion and operating income was JPY 31.3 billion. Both metrics exceeded our outlook led by strong performance of the MapleStory franchise. Year-over-year revenue grew 2%, while operating income declined 17%, this reflects a shift in our product mix with higher revenue-linked costs, which include creator fees tied to MapleStory World strong results and user acquisition costs related to MapleStory Idle RPG as well as cloud service fees from growing global life services and data usage along with increased software service fees. Turning into expenses related to our outlook, total cost came in lower than planned. Higher creator fees within the other line of cokes driven by outperformance of MapleStory worlds were more than offset by lower-than-planned HR costs on a nonrecurring reversal of share-based compensation as well as lower royalties on the than expected performance of the FC franchise, along with lower marketing costs. In this a recent increase in expenses is variable cost that tie to revenue from new products. In essence, expenses like ARC Raiders, PGP, performance-based user acquisition costs increased with the success of these new products. In Q2, net income was JPY 29.6 billion, which also exceeded our outlook driven by the operating income outperformance and the JPY 5.5 billion valuation gain on funds. Year-over-year, it was up 77%, primarily to JPY 1.7 billion FX loss recognized in Q2 compared to JPY 17.5 billion FX loss recognized in the year ago quarter. Shifting to franchise performance in Q2, the collective revenue of our 3 major franchises was JPY 81.2 billion down 5% year-over-year. Horizontal revenue, including new titles, was up 20% year-over-year due JPY 39.9 billion, driven by a continued contribution from arcades, which contributed about 15% of our revenue for the quarter. The MapleStory franchise delivered another exceptional performance in Q2 significantly outperforming our outlook with 62% year-over-year revenue growth, a record quarterly high. This was led by MapleStory world and MapleStory IPG. In Korea, MapleStory delivered a Q2 record revenue exceeded our outlook, growing 7% year-over-year on top of last year's 91% growth, driven by strong sales tied to the June summer update. Revenue from MapleStory growth outperformed our expectations, growing 123% year-over-year. This was driven by 2 new user-generated worlds launched in late April, Maple Planet in Korea and Maple Star in Taiwan. MapleStory Idle RPG also exceeded our outlook driven by the April half anniversary update. Another strong contributor to our quarter was operators, which recorded JPY 18.3 billion in revenue. By the end of the second quarter, the gain had sold in excess of 16.3 million units since launching late last year and continues to generate strong interest with a vibrant player committee in Western markets. Next, our Dungeon & Fighter franchise performed as expected, with revenue declining 44% year-over-year as the mobile game outperformed and the PC service tracked our outlook. Revenue from PC Dungeon & Fighter China was within our guidance range, but declined year-over-year, reflecting a soft start to the April new season update. The June anniversary update delivered solid retention among the core. In Korea, PC Dungeon & Fighter's revenue declined year-over-year, reflecting a tough comparison with the prior year and a soft reception to the new season update in March. Dungeon & Fighter mobile entered by the mobile revenue in China, which was down year-over-year, exceeded our Q2 outlook driven by the main anniversary update and monetization from a new feature. Moving on to the FC franchise. Revenue came in below our outlook and declined versus the year ago quarter owing to softness in both PC online and FC mobile. And for FC Online, the World Cup did not translate into the traffic lift we had anticipated, and our user acquisition efforts also fell short of plan. As for FC Mobile, on April active overhauling UR/UX and graphics led to some technical quality issues, which affected traffic and monetization service quality has since stabilized with traffic recovering since June, alongside ongoing UX improvements. Mabinogi Mobile revenue declined year-over-year against the strong launch quarter based on Q2 2025 and also moderated sequentially. Now moving on to the Q3 outlook. In Q3, we expect revenue to be in the range of JPY 120.7 billion to JPY 133.4 billion, representing a 2% to 12% increase on an as-reported basis or a 3% decrease to 7% increase on a constant currency basis year-over-year. Our Q3 revenue outlook reflects ongoing growth in the MapleStory franchise as well as contributions from craters and Mabinogi Mobile launched in Taiwan, Hong Kong and Macau on July 22. Turning to the franchise outlook. We expect the MapleStory franchise to sustain its momentum with revenue growth of approximately 40% year-on-year led by MapleStory wars and MapleStory idle. For PC MapleStory in Korea, we expect revenue to close to Q3 '25, which grew about 3x year-on-year as the summer update continues with additional content. For global MapleStory, we expect double-digit year-on-year growth supported by the hyper localized summer update in Western Maplestory. MapleStory rewards revenue is expected to approximately double year-on-year, driven by continued strength in labor, Maple Planet and Maple Star. For MapleStory Idle IPG, we expect an ongoing contribution to franchise year-on-year while moderating sequentially. Next, on Dungeon & Fighter franchise. Overall, we expect Q3 franchise revenue to decline year-on-year. In China, sales tied to the July summer update for Dungeon & Fighter PC started strong, but have since slowed. However, combined with the September National Day update and new rate content, we expect revenue performance to improve. Year-on-year, revenue is expected to rise, though this is primarily driven by favorable FX translation with underlying local currency performance expected to remain roughly flat. In Korea, we expect year-on-year decline. We will focus on the retention and we engage with test players with August anniversary update and new rate content. For Dungeon & Fighter Mobile, we are planning to release a series of content updates, including new form Dungeon multi characterism content as well as a new read time for National Day holiday, while expecting revenue to decline year-on-year. Next, turning to the FC franchise. In Q3, we expect franchise revenue to slightly decline year-on-year. Following the June team of the season update, we expect PC Online's revenue to recover sequentially and returned close to prior year levels. Also following the July launch of FC mobile team of the season class content, we expect both traffic and revenue to improve sequentially in Q3, while declining year-on-year. For Mabinogi Mobile, we expect Q3 revenue to decline year-on-year against a difficult comparison with a strong launch quarter performance in Korea but to grow at a strong double-digit rate quarter-on-quarter supported by a solid start to our Taiwan, Hong Kong and Macau service, which launched on July 22. Japan launch will follow in Q4. Turning to operators, sales are expected to further normalize more than 9 months after launch with the revenue contribution expected to decline sequentially from Q2. The frozen trial, the largest update since launch is on track for October release. Moving to the operating income outlook. We expect Q3 operating income to be in the range of 22.6% to JPY 32.3 billion, 40% to 14% decrease on a reported basis or 48% to 24% decrease year-on-year on a constant currency basis. Other in line for Q3, 2025 included JPY 3.9 billion and gain from the liquidation of trust, which will not repeat in Q3 '26 affecting the year-on-year comparison. And similar to Q2, Q3 expenses reflect higher revenue-linked costs including PG fields, royalties along with the cloud and software service fees as well as marketing costs for user acquisition and new title promotions. These are primarily the cost of product diversification, both for Q3 releases and launches ahead in Q4. Our Q3 outlook also includes a onetime cost of JPY 1.5 billion for the adjustment of outstanding stock options in connection with the special dividend subject to Board approval. Net income is expected to be in the range of JPY 18.2 billion to JPY 25.6 billion, 52% to 33% decrease on as-reported basis or 60% to 43% decrease on a constant currency basis year-on-year compared with Q3 '25, in which we recorded FX gain of JPY 9.2 billion. And finally, an update on our capital allocation and shareholder returns. The renewed forecast outlined in our transformation initiatives extends to how we manage our balance sheet. Steady cash flow from established franchises fresh cash flow streams from new games and experiences and our recent influx of cash from divesture of the investments have generated excess liquidity that led to our announcement of special dividend. Our plan to pay special dividend of JPY 415 per share totaling about JPY 324 billion or USD 2 billion is subject to Board approval, expected in September and marks a significant step forward in improving our capital efficiency. This is aligned with target of minimum ROE of 10% with an aim to grow this to 15% over the mid- to long term and with a policy of returning more than 33% of the prior year's operating income to shareholders. Alongside our regular dividends and the buyback since our IPO in December 2011. This special dividend will bring our total capital return to the shareholders to more than JPY 900 billion by the end 2026. Looking ahead, we will continue to return capital through dividends and buybacks while managing our balance sheet effectively and efficiently and preserving being the flexibility to fund strategic investment. Whenever a compelling path opportunity comes along. Now I hand over to Patrick to talk about the perspective on our industry and our positioning.

Thank you, Uemura. Before we go to Q&A, I'd like to take a step back and share some thoughts on where I see NEXON and the game industry moving in the next 3 years. I stepped into the Chairman's role in late February, with recognition of a growing realization, we need to fundamentally change our processes to capture the advantages of new technology and avoid the challenges forcing a contraction in our sector. At our capital markets briefing in late March, I presented investors with a series of commitments. We promised a review of our product portfolio and pipeline with the intention of creating fewer but bigger, better games each of which is responsible for a minimum contribution margin. We committed to a better process for faster decision-making and for the adoption of new technology in every element of our business. Importantly, we committed ourselves to renew discipline with top to bottom cost management. Our transformation initiative was met with skepticism by investors and rightly so. NEXON has not yet earned the benefit of the doubt. We need to build trust. Today, we are in the early stages of a multiyear transition, still building trust, but the early evidence is on the table, and it looks promising. Q2 revenue and operating income both ahead of our outlook. Fixed cost, particularly HR costs are tracking to be flat with the prior year. MapleStory is setting revenue records 23 years after launch and continues to grow with diverse new experiences like the UGC hit MapleStory worlds. And ARC Raiders has sold more than 16 million units, primarily in Western markets dominated by legacy franchises and established a vibrant player community. Now 1 quarter doesn't make a fiscal year, but by many measures, the plan is working. By no means is everything working the way we want. Dungeon & Fighter is in a rebuilding year with a plan that prioritizes getting it right over getting fast. And it remains one of the biggest and most resilient franchises the game industry has ever produced. While the current challenges are not easily overcome, nothing has changed our view that we can and will return this franchise to dynamic growth. And rest assured, we plan to intensify our focus on cost management in the months ahead. On a much larger scale, the game industry is witnessing its most challenging period in close to 30 years. The Western market is contracting. The console market is in decline and the $60 to $100 price point is collapsing under the weight of rapidly escalating production costs. The result has been canceled games on projects, multiple closures of credential studios and tens of thousands of talented developers laid off. This is painful, and we take no satisfaction in the misery of others, but we should be clear about what this means for our own company. NEXON as a company, many others in our industry are trying to become a business model that is heavily indexed towards recurring revenue rather than onetime sales. Owned IP build a massive loyal communities that grow generation after generation over decades. Efficient development with each product assigned a targeted contribution margin as opposed to bedding a 5-year development cycle chewing up $0.5 billion budget. And finally, a balance sheet that doesn't need venture, PE or a big hit to make payroll. Today, many companies are desperately transitioning to a model that NEXON has operated for decades. And at a time when investments in the game sector has slowed, our business in Asia funds our growth initiative in the West without the need for outside capital. We don't make games that get bought, played and replaced. We build worlds that people want to live in for a long time. MapleStory players who joined at 15 are still in the game at 40. NEXON's player communities and the revenue they contribute are sustained by updates of fresh content that keep the experience fresh and fun year after year after year. More recently, our ARC Raiders have shown how the fewer, bigger thesis can work, offering a new model for development. a small team working with new technology, a fresh idea over 16 million units in 9 months. The next 3 years are simple to visualize. The downturn separates companies that need time and money to radically change their model to survive from companies like NEXON with a model and strategy that is perfectly attenuated to what the players, the talent and the investors want. Now in our fourth decade, NEXON's best most exciting and successful years are in front of us. I've been in this role for 6 months and recognize the amount of work in front of us is enormous. I'm not asking you to trust us. Trust is earned but I'm saying we are in the early chapters of a story that begins in 2026. And chapter after chapter quarter after quarter, will report progress on the transformation and results that we expect will show growth, revenue, operating profit and more return to our investors.

Thank you for your insights and vision, Patrick. Operator, we are ready to take questions.

[Operator Instructions] The first question is [indiscernible] from Goldman Sachs.

[Foreign Language] So I have 3 questions altogether. And first question is related to guidance. I understand that in Q3 forecast, you have incorporated the investment that you plan to make, so is it correct to understand that the cost increase is one-off aspect? In March CMB, you mentioned the importance of cost management. And I want to know how you plan to balance out the cost control as well as the growth investment?

[Foreign Language] Thank you very much for your question. Regarding your question about the cost aspect that I have delineated in the guidance of Q3. Instead of looking it as a one-off element or not, please do understand it as the impact of the change in revenue mix. As already explained, MapleStory Idl RPG or MapleStory World, these titles are trending very well. And as the revenue from those titles increase because of the nature of these titles, variable costs tend to increase as well. And so because of that, we had factored in some cost in our guidance. And as you have mentioned, Munakatasa, it is true that we have incorporated the upfront investment, such as marketing that is being required but then that cost is not only for Q3, but it also covers Q4 as well. In Q4, we already have 4 titles in the pipeline. So we have factored in element of marketing costs in the guidance that I have given to you. So once again, please to understand that, that does not only cover Q3, but Q4 as well and by developing new titles, we would like to provide returns in the future to the investors and also provide fun element to the players at large. And so we will be very stringent in monitoring the cost structure and we will be allocating more resources to, for example, all new titles as well. So please do understand that because of the change in revenue mix, there will be some changes in the variable costs. But in the end of the day, because of the change in the revenue mix, we believe that we will be able to contribute in the improvement of operating income margin going forward.

[Foreign Language] Thank you very much. So does it mean that as compared to before, it is true that your portfolio has been diversified. And so we have to factor in cost in different way. So are you suggesting that on our end, we should be trying to read what will be the performance going forward from a different angle as compared to years ago?

[Foreign Language] It is indeed true that we are seeing some moderation of Dungeon & Fighter title in that context, what you have mentioned is true, but we are diversifying our source of revenue mix and in the long run, we plan to stabilize our business as a whole. So we will try to manage the cost so that we will be able to enjoy the increase in profit in the future.

[Foreign Language] My second question is related to FC. I understand that doing World Cup you plan to increase the user engagement and that was your focus, but unfortunately, you were not able to capture the increase of users as you have expected. So I want to know what is your take of the analysis of what had happened? And regarding FC franchise, what will be the time line? And what will be the initiatives you will be undertaking to bring back FC on track?

[Foreign Language] This is Junghun Lee. I'll be able to answer this question. First off, in Korea, the World Cup lift that we initially anticipated did not fully materialize at this time and the enthusiasm around the tournament itself in South Korea was lower than we have expected. And as a result, the return of last players, new user acquisition as well as traffic growth we had expected from our in-game World Cup events fell short of plan. That said, traffic and revenue trends have improved since the team of the season update that was released in late and taking this into account, we do expect our Q3 revenue to be roughly in line with prior year level. [Foreign Language] So for the remainder of this year of 2026, our top priority is not short-term revenue growth but continuing to strengthen traffic and engagement and rebuild quite a solid foundation for the franchise. So basically, our goal is to ensure that the FC franchise exits this year on a more solid and stable footing. [Foreign Language]. Lastly, at our previous earnings call, if you remember, we announced a long-term agreement EA regarding the FC franchise. Now we believe this stands as a proof point both companies share confidence in the long-term growth potential of the franchise and NEXON and EA are actively discussing concrete action plans with which we will be able to see the FC franchise maintaining its category-leading position in Korea and to expand its scale even further going forward.

[Foreign Language] I understood it very well. And let's move on to the third question, which is on contextual capital, which you have pointed out to be a very important element in your CMB as well. And the DNA of generative AI understand that contextual capital will be the element that will provide you with a competitive edge. I know that Dungeon & Fighter is weakening right now. And I was wondering how you can leverage on context your capital to revive this title. I'm sure that you have some learnings as well as insight from contextual capital. And I want to know how you plan to leverage on that know-how/insight in order to bring Dungeon & Fighter on track.

[Foreign Language] This is Junghun again to answer your question. Let me first put this concept of contextual capital in a simple word. So basically, contractual capital is the capital of time that our development teams and player communities have filled together by sharing moments over many decades. [Foreign Language] So we may have entered an era where AI help humans write code and generate artwork. However, the context that NEXON's multiple long-running live surface titles have accumulated so far over decades is not something our competitors can quickly replicate and follow. [Foreign Language] Yes. Basically, this is -- the same is true for Dungeon & Fighter, MapleStory or of other NEXON's long-term live service titles. Building on this kind of 1 capital, we are working to produce a wider range of content to closely matches and reads, players taste and delivering it at a greater speed. So we do expect the results to come through steadily as a sustained long-term upward trajectory going forward.

[Foreign Language]Next is Mr. Seyon Park of Morgan Stanley.

Can you hear me?

Yes.

I have 2 questions. The first is on the ARC Raiders upcoming update. The second will be on the capital return. The first question, as we look forward to the frozen trail update, what kind of expectations as the company have in terms of monetizing this to me, expect additional units sold, I guess, from those players who have not played the game so far? Or would it be more monetization of your existing gamer base, would it be a combination of the 2? Maybe if you can kind of give us a little bit more color on how -- or what kind of impact you're expecting from this is my first question. .