NEXON Co., Ltd.

Maiko Ara - Head of Global Investor Relations Owen Mahoney - President and CEO Shiro Uemura - CFO

Han Joon Kim - Deutsche Bank

Hello, everyone, and welcome. 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 conditions such as revenues attributable to our key titles', growth prospects including with respect to the online games industry, ability to compete effectively, adapt to new technologies, and address new technical challenges, our use of intellectual property, and other statements that are not historical facts.

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 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.

Please note, we may be using Japanese-English interpretation during the Q&A session. A recording of this conference call will be available on our Investor Relations website [worldwideweb.ir.net.nexon.co.jp/en/ 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 all for joining us today, Uemura-san will review our first quarter results and second quarter outlook shortly, before that I'd like to share a few highlights of the first quarter and our recent progress on some of our longer term objective -- initiatives. In Q1 we delivered another great quarter with revenues coming in ahead of our expectations.

This is primarily driven by strong execution especially in China around the important February Lunar New Year season which continued into March. Last quarter we mentioned Dungeon & Fighter in China was performing well after the strong start of Lunar New Year update introduced in late January.

Throughout the quarter again continued to perform well and ended up exceeding our revenue expectations. Korea also outperformed our expectations driven by better than expected results by key titles in both PC and mobile.

On the other hand while we delivered solid performance in most of the regions, our Japan business continued to face difficulties. As you're all aware gloops has been focused on preparing for the April launch of its highly anticipated mobile title LAPLACE LINK.

The focus has been on improving user experience based on feedback from the open beta test last December, however in the process of doing this work became clear that we need to spend more time to get a game to the quality standards we set for ourselves. So rather than launching the game before we think it’s as good as it needs to be we made the decision to postpone the launch by a few months.

We're focusing on game quality because that is the best determinant of long term success for our games and our company. As a result of this delay in addition the absence of new growth driver for gloops we recorded a ¥22.6 billion impairment loss in gloops' goodwill in the first quarter.

While we take these charges for accounting reasons it's important to know that gloops will continue to focus on the development of high quality mobile games. Now I want to shift gears a little and touch on two partner announcements we made recently and what they say about our long term opportunities.

First let me talk a bit about the acquisition of Big Huge Games which we announced in March. Big Huge Games is a US based games studio co-founded by industry veteran Brian Reynolds and Tim Train who are now developers behind Civilization II and Rise of Nations.

We entered into a strategic partnership with them on July 2013 and included the minority investment and began working with them on the new title DomiNations. The game has achieved international success with over 20 million downloads worldwide since its launch in April 2015.

Several months ago we determined that we could build on the success to date by deepening our relationship with the team and by adding additional expertise in live game development, operations, user support and marketing. The acquisition also establishes each head of in house game development in the west.

As a result of this transaction Big Huge Games became consolidated subsidiary of Nexon Group in the first quarter of 2016. Another announcement was the strategic partnership with Nat-Games the developer of the mobile title and the mobile blockbuster RPG HIT through a 22.4% equity investment.

This makes us the second largest shareholder of Nat-Games. Nat-Games is a Korean mobile studio led by a lead producer Yong-Hyun Park who developed the popular PC online MMRPG's Linage II and TERA.

We were the regional publisher for their debut title HIT which became the top selling game on both Korean Google Play and iOS Store following a launch in November 2015 and it has already surpassed 5 million downloads to date within Korea. Through the equity investment, we aim to strengthen our relationship with NAT Games, and we’re expecting a successful launch of HIT in the global market.

In conjunction with the strategic partnership with NAT Games, we also made a convertible bond investment in Barunson E&A; NAT Games has made their shareholder as a way to reinforce the relationship with NAT Games. These are great examples of our partnership model, with which I know you’re all familiar.

And we continue to see more opportunities to work with leading game developers and IP holders around the world. I’ll now turn it over to Uemura-san to run through the first quarter results and second quarter outlook.

Thanks, Owen. Now, let me move to the few items.

Revenues were ¥57.5 billion, up 11% on an as-reported basis, and up 23% on a constant currency basis. Operating income was ¥3.7 billion and net loss was ¥6.3 billion.

First quarter revenues exceeded the high end of our outlook. Our revenues grew double-digits on an as reported basis, despite the strong foreign exchange rate headwind; with the Japanese yen appreciating year-over-year against major currencies in our business, including the Korean won, Chinese yen and the U.S.

dollar. PC online game revenues exceeded the high end of our outlook, mainly driven by Dungeon&Fighter in China as Owen mentioned.

Mobile game revenues also exceeded the high end of our outlook. This was driven by the solid performance of the key titles especially in Korea.

The primary reason for the operating income underperformance was the impairment loss on gloops’ goodwill. Since before International Financial Reporting Standards, impairment losses is recorded as other expenses in the calculation of consolidated income statement and just has an impact on operating income.

We recognized ¥22.6 billion of impairment loss on gloops’ goodwill. And as of the end of the first quarter, we are at no remaining bonds in gloops’ goodwill.

Excluding the impact of impairment loss on gloops’ goodwill, which is a one-time factor, operating income has been ¥26.3 billion, exceeding our outlook. Net loss was ¥6.3 billion below our outlook.

This was mainly due to foreign exchange losses from foreign currency denominated cash deposits and further accounts receivables in addition to the impairment loss. Turning to our performance platforms.

First quarter PC online game revenues were ¥45.1 billion, up 3% year-over-year. Please refer to the reference materials investor presentation for our selected performance metrics for PC online games.

First quarter mobile revenues were ¥12.4 billion, up 49% year-over-year. Within mobile HIT the game revenue was ¥9.5 billion, up over 2-times year-over-year.

Revenues from NAT Games accounted for about 80% of the first quarter mobile revenues. By region, revenues from the China business were ¥25.8 billion, up 14% year-over-year on as reported basis and up 28% year-over-year on a constant currency basis.

We contracted a large scale update, the Lunar New Year Update, for Dungeon&Fighter on January 26th, which was well received by users. Revenue performance was especially strong for mid-February, too much, driven by extremely favorable item sales for the Lunar New Year Update.

First quarter MAUs for Dungeon&Fighter increased quarter-over-quarter. Revenues have slightly decreased quarter-over-quarter, simply due to the difficult comparison with the fourth quarter of 2015 with the number of paying users was exceptionally high.

As for Dungeon&Fighter, we continue to prioritize and forecast on the game stability and the longevity. Revenues from the Korean business were ¥22.6 billion, up 10% year-over-year on as reported basis and up 25% year-over-year on a constant currency basis.

Mobile game revenues in Korea were up 96% year-over-year. Key titles such as HIT, DomiNations and Legion of Heroes contributed to the [indiscernible] year-over-year growth.

During the first quarter, we conducted the growth [indiscernible] of our in-house titles MapleStoryM. As for PC online games, we’ve started servicing popular MMORPG tier.

Revenues from our Japan business were ¥4.6 billion, a 22% decrease versus a year ago. Mobile revenues were ¥3.6 billion a 21% decrease year over year and a 1% decrease quarter over quarter.

PC online revenues were ¥1.0 billion down 27% year over year and down 14% sequentially. Revenues in North America were ¥2.2 billion a 28% increase versus a year ago on a as reported basis and 33% increase from a constant currency basis.

Our revenues in Europe and other regions were ¥2.4 billion a 90% increase versus a year ago on a as reported basis and a increase of over two times on a constant currency basis. Now turning to our Q2 2016 outlook.

For the second quarter of 2016 we expect revenue in range of ¥37.5 billion to ¥40.3 billion representing a 12 to 6% decrease year over year on a as reported basis. On a constant basis we expect revenue in the range of ¥42.7 billion to ¥45.9 billion representing a 5 to 8% increase year over year.

We expect operating income to be in the range of ¥11.5 billion to ¥13.5 billion and net income to be in the range of ¥10.3 billion to ¥12.3 billion. We expect the foreign exchange rate over the major currencies in our business including the Korean won and Chinese Yuan against Japanese yen to depreciate by 14% effectively year over year.

As you are all aware depreciation of these currencies against Japanese yen will have a negative impact on our revenues, operating income and net income. As for foreign exchange sensitivity we expect every one Japanese yen move against the US dollar would have an impact of ¥0.3 billion on our revenue and ¥0.1 billion on our operating income.

For simplicity forex sensitivity is calculated based on assumption that Korean won and Chinese Yuan move similarly against Japanese yen. When there is a exchange rate movement in the US dollar and Japanese yen.

In China for second quarter revenue we expect a high single digits to low single digits percent decrease year over year on a as reported basis and a high single digit to high teens percent increase year over year on a constant currency basis. Our major PC online game Dungeon&Fighter received a tier 1 content update on April 24th in time for the Labor Day holiday.

Another tier 1 content update in time for the [indiscernible] and importantly from its launch in China is also scheduled in June. As for our new titles we conducted a Closed Beta Test for PC online game MapleStory 2 in April.

In Korea for the second quarter revenues we expect a low single digit percent decrease to low single digit percent increase year over year on a as reported basis and a low teens to high teens percent increase year over year on a constant currency basis. On the PC online side we conducted a Closed Beta Test for a new in house title Sudden Attack II in April.

We are currently preparing for its launch in the summer of 2016. We do not have any major new mobile title launches scheduled in Korea during second quarter.

In Japan we expect second quarter revenue to decrease 30+% with 20+% year over year. In North America for second quarter revenue we expect 30+% to 20+% decrease year over year on a as reported basis and 20+% decrease year over year on a constant currency basis.

In Europe and other regions for the second quarter revenue we expect a high teens to low teens percent decrease year over year on a as reported basis and a high single digit percent decrease to flat on a constant currency basis. In April we conducted the second Closed Beta Test for new PC online game Riders of Icarus in North America, Europe and other regions.

In the second quarter we expect operating margin in the range of 31 to 34% showing the year over year increase from 22% last year. While we expect revenues to be reduced by depreciation of major functional currencies including the Korean won and Chinese Yuan against Japanese yen.

We expect this decline to be more than offset by the significant decrease in amortization year over year due to the completion of amortization associated with Dungeon&Fighter IP as a decrease in marketing cost and the decrease in marketing cost year-over-year, as we do not have any major new titles scheduled for launch during the second quarter. We also expect a year-over-year decrease for other operating expenses, primarily in Korea, due to depreciation of the Korean won against Japanese yen.

As for interest cost, we expect a year-over-year increase due to an increase in headcount of approximately 400 mainly in Korea. However, Japanese yen appreciation positively impact foreign currency denominated cost items, partially offsetting the increase in HR cost.

Having shared that context on our performance and our outlook, we’ll be happy to take your questions.

Thank you, Uemura. Next we would like to open up the line to live Q&A.

I just wanted to get an update on your game pipeline. I get the impression that we might have had some production delays.

So, if you could just help us walk-through some of your key titles for 2Q? And I think last quarter you guys mentioned that you guys wouldn’t have any titles, so I think we’re pretty clear on that.

This quarter, just wanted to get a little bit more clarifications on what we do have.

Thank you very much for your question Han Kim. Please give us some moment while we translate.

Thank you very much for your question. I explained, you’re asking about some delay or time schedule of pipeline that we have.

It is in Q2 that it so happens that we do not have any major title in Q2, and some titles have been delayed. But basically we’re the company that persist quality and we do not want to launch any titles if the quality is still there.

Therefore, we will put our effort to come up with a very robust quality. So we can sure that it is indeed in the right situation to release into the market.

And so, we do have right titles in our pipeline and our pipeline is quite rich. And as a matter of fact starting in the second half of this year, we will be steadily launching new titles.

And since we are talking about the games, some games development that might be delayed in some instances at the given.

Maybe I might have missed your commentary at the beginning. So, we probably will not have any major mobile games margins in 2Q, is that just to confirm?

Yes you're right in Q2 we do not have any schedule a major mobile title.

Got it, got it, just wanted to get -- my follow on question just wanted to get your impressions and thoughts about Overwatch it's obviously getting a lot of global traction and the reason why I ask is obviously you guys operate Sudden Attack the leading first person shooter in Korea, how you guys are approaching it and how do you think about Sudden Attack II that's supposed to come out I think around June-ish. So just you know just your perspective and thoughts today would be appreciated.

Hi Han Joon this is Owen, there does not appear to be any impact that we can discern on Sudden Attack or our first person shooter titles in Korea at the time. You know they're very-very different titles and they're for different type of a customer base.

On that we don't really have a comment about how the game itself is expected doesn't appear to be having any impact on our game.

Okay, understood, that's it from me, thank you.

Thank you.

Thank you, if there are no further questions I would like this opportunity to thank you for your participation in this call. Please feel free to contact the Nexon IR team at [email protected] should you have any further question.

We appreciate your interest in Nexon and look forward to meeting you whether it is here in Tokyo or in your corner of the world.