NEXON Co., Ltd.

Maiko Ara - Head of Global Investor Relations Owen Mahoney - President and Chief Executive Officer Shiro Uemura - Chief Financial Officer

Eiji Maeda - SMBC Nikko Securities Inc. Junko Yamamura - Nomura Securities Co., Ltd Han Joon Kim - Deutsche Bank Haruka Mori - JPMorgan Securities Japan Co., Ltd.

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 condition, such as revenues attributable to our key titles, growth prospects, including with respect to the online games industry, our 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 securities of NEXON.

We would also like to remind you that we are taking a new approach to our earnings conference calls. We will not be hosting separate conference calls in Japanese and English, but we'll be combining the two conference calls together with simultaneous translations in Japanese and English.

Our IR team will be available after the conference call to answer questions from those people who don’t have a chance to participate in the Q&A session. This recording will be available on our investor relations website, www.ir.nexon.co.jp/en/ following this call.

Unauthorized recording of this call is not permitted. I'd now like to turn the call over to Owen.

Thank you, Ara-san, and thank you all very much for joining us today. On today's call I'm going to outline the strong results NEXON delivered in the first quarter as well as our outlook in the second quarter and the full year.

Overall, we're very pleased with how we have started the year and particularly how the deep investments we've made in new games is aligning with our broader strategy of sustaining consumer engagements with strong live operations. Now I'd like to share a few highlights of the first quarter and provide you with some updates on our business worldwide.

We delivered another great quarter with revenues ahead of our expectations. The first quarter represented record high quarterly revenues, operating income and net income since the IPO.

This was primarily driven by exceptionally strong performance in China around the important January in the Lunar New Year season which continued into March. Last quarter we saw China Dungeon&Fighter Lunar New Year update which started in mid January got off to a great start.

The momentum of this update continued through the rest of the first quarter. Item sales in March were also stronger than we had expected.

Together, these factors combined to drive significant out performance for us in China. MapleStory also delivered solid results with continued year-over-year revenue growth in Korea and globally.

In last quarter's earnings briefing I talked about the longevity of our flagship games which are showing themselves to be incredibly robust over a period of many years and the first quarter continued that trend again underscoring this core strength of NEXON. This ability to grow a live online game over many years is NEXON's core strength.

Behind the scenes we've been working to extend the strength by developing tools and management approaches that enable us to apply our best live game operations and developing capability to more games and around the world. I'm pleased with the progress of our Japan business showed in the quarter with revenues up both sequentially and year-over-year, thanks to the solid performance of mobile games including HIT and HIDE AND FIRE.

This is our highest reported revenue in Japan in seen quarters. As most of you know, we have been generating more mobile revenues from browser games than from native games.

In the first quarter this trend reversed and revenues from native games accounted for more than half of the mobile revenues in Japan. A few weeks ago we launched a new mobile native game, Disney TOUCH TOUCH in Japan our first Disney game.

This is the first of many really exciting games we're going to be bringing to Japan during this year. While our Japan business is starting to perform better we also made the decision recently to terminate the development of [indiscernible] after it failed to meet our quality and KPI standards during the open beta.

Nonetheless, we continue to see a significant opportunity to grow our Japan business. Our perspective is that Japan is one of the great untapped markets for online games especially in mobile.

But the offering and games on console and mobile have been largely single player focused games. Japan has not yet become a major market for multiplayer online games, the kind that NEXON specializes in.

This is changing rapidly as mobile devices with outstanding network technology and advanced graphics processing units enable highly immersive online games. We believe we can lead in this rapidly developing market opportunity as we have an outstanding live operations team in Japan that we built over the last 10 years, the PC market and we can leverage that team for the much bigger mobile market.

This team knows how to make a live game last and grow for a very long time. We intend to combine that capability with great game development that is close to Japanese taste.

We've already seen some early successes of this combination with games developed outside Japan, namely HIT and HIDE AND FIRE and we want to lean into this opportunity with games developed inside Japan. So we've been beefing up the leadership team in the region.

During the quarter we transferred one of our most senior development leaders to oversee new game developments in mobile in Japan including gloops. Along with the support of the rest of our global organizations you’ll see us develop more games in Japan making Japan a second major internal development hub for us in addition to Korea.

Turning to the West I want to highlight an important milestone we reached in the United States, one with strategic importance for the initiative of expanding NEXON’s reach with western consumers. In April we announced better mobile titles, Dominations, surpassed lifetime revenues of more than a US$100 million.

We launched Dominations in the U.S. roughly two years ago and it has been growing, showing the kind of consistency and longevity in performance that has marked some of our biggest franchises.

Now I want to shift gears a little and talk about new games. In NEXON, we’re in the enviable position of having multiple blockbuster titles that generate solid recurring revenue.

This allows us to take creative risks on new games without endangering our core business. At the end of March we launched Dynasty Warriors Unleashed worldwide excluding Japan and China.

This is a mobile action RPG based on the popular Dynasty Warriors7 IP. The game is off to a good start especially in Asia and we expect the title to contribute to earnings starting in the second quarter.

Next, LawBreakers will be launching in western markets this year. LawBreakers has a highly unique take on the classic arena first person shooter and we think its intense action and unique approach is a great offering for the hardcore FPS audience.

The game completed its first closed beta test as well as had a great packed East presence in March. NEXON is launching many more titles around the world and our operations teams are extremely busy preparing for these launches which we hope will sustain player engagement for months, even years, longer than expected under current industry trends.

I look forward to telling you more about the development and the performance of some of these titles as we get further into the year. Lastly, I would like to talk about the recent changes we made to our dividend policy.

As you know, NEXON is highly profitable on a worldwide basis and has a significant cash position. From 2013 year-end until mid 2016 we have been paying a shareholder dividend of ¥5 per share semi-annually.

Our dividend to shareholders gets paid out of NEXON Company Limited, the listed Japanese corporation which is the parent company of NEON Group. While this entity comprises less than 10% of our global sales its costs include not only our local game operations and development functions in Japan, but also a variety of costs for the global organization including growth, investments in several global entities and related impairments or losses as well as stock options.

As a result, the amount of retained earnings in this entity at this point in time constrains our ability to support an ongoing dividend. We've therefore decided to suspend the dividend and retain the flexibility to continue our growth investments in our global operations.

As the Japanese entity rebuilds its reserves we will continue to re-evaluate reinitiating the dividends. Our previously announced buyback plan of 10 billion JPY over a one year period from February 13, 2017 remains intact.

With that, I'll turn the call over to our CFO, Uemura-san.

Thank you, Owen. Now let’s move on to Q1 results.

For additional details, please see the Q1 2017 investor presentation available on our IR website. We were pleased our revenues exceeded our outlook during the quarter.

Our Q1 revenues were ¥74.8 billion up 30% year-over-year on an as reported basis and up 33% year-over year on a constant currency basis. Operating income was ¥39.8 billion and net income was ¥19.9 billion.

The first quarter revenue, our performance was primarily due to the exception of the strong performance of Dungeon&Fighter in China. Operating income also exceeded our outlook.

This was primarily due to the revenue our performance in China which is higher margin revenue partially offset by ¥2.7 billion impairment loss on items including subsidiaries’ goodwill and game IPs. While operating income expense exceeded our outlook, net income was below our outlook due to the FX loss of ¥15.9 billion on our U.S.

dollar-denominated cash deposits and accounts receivable related to the appreciation of the Korean won and Japanese yen against the U.S. dollar during the first quarter.

As Owen mentioned, revenues for Dungeon&Fighter in China for the first quarter significantly exceeded our outlook. This was driven by the strong performance of the Lunar New Year update introduced on January 17th and continue until March 28th, which had a strong start and remained robust throughout the quarter in addition to very good item sales in March.

Also the Level Cap update introduced on January 17th was well received by core-users. Each of the key performance indicators for Dungeon&Fighter in China including MAUs, paying users, and ARPPU increased both quarter-over-quarter and year-over-year.

Revenues from the Korean business in the first quarter exceeded our outlook primarily due to the strong performances of our key titles including Dungeon&Fighter, FIFA Online 3 and FIFA Online 3M. As per Dungeon&Fighter the new character “Female Priest” that we added in January was well received in addition to the strong package sales in time for the Lunar New Year.

FIFA Online 3 and FIFA Online 3M exceeded our outlook primarily due to the strong sales of the Lunar New Year package. In addition, successful promotions had a positive impact on the revenues.

Revenue from our Korean business exceeded our outlook, but it decreased year-on-year. This was mainly due to the significant year-on-year decreases in revenues on Sudden Attack and Ship [ph].

Now, let me turn to Q2 outlook. For the second quarter, we expect revenues in the range of ¥41.3 billion to ¥44.8 billion, 8% to 18% increase year-on-year on an as-reported basis.

On a constant currency basis, we expect revenues in the range of ¥39.7 billion to ¥43.1 billion, 4% to 13% increase year-on-year. We expect operating income to be in the range of ¥11.2 billion to ¥14 billion.

Net income to be in the range of ¥10.4 billion to ¥12.8 billion. We expect revenue to increase year-on-year primarily in Europe and other regions in China.

In Europe and other regions we expect the mobile games Dynasty Warriors Unleashed launched at the end of March to contribute significantly to our Q2 revenues. This game is performing well particularly in Taiwan and Southeast Asia.

In China we introduced a Tier 1 content update to our key PC online game Dungeon&Fighter on April 27 in time for Labor Day and it took off, it is off to a good start. We are also scheduled to introduce the ninth anniversary update during Q2.

The number of active users and paying users from April have remained high compared to the same period last year. Therefore, we expect revenues to grow year-on-year.

In the second quarter we expect operating income to be in the range of ¥11.2 billion to ¥14 billion, decrease of 17% to increase of 5% year-on-year. Positive driver for operating income is on increased revenue driven by our high margin China business and the contribution from new mobile games in Europe and other regions.

As for negative drivers, first, greater marketing costs related mainly to the launch of new titles. Second, increased variable costs including PG fees related to the year-on-year increase in mobile revenue and loyalty costs due to the solid performance of publishing titles including Dynasty Warriors Unleashed.

Third, higher HR costs due to headcount increase primarily in Korea. And we see upper range of the operating income outlook we expect the impact from the positive driver to be larger than the negative drivers without any operating income growth year-on-year.

Now, we will be happy to take your questions. This is all from our side, we will like to open the floor for Q&A.

I have three questions altogether, so I will ask you one question at a time, is that okay?

Yes, please do that.

Firstly, I have a question about your dividend policy. You mentioned that you will forego dividend for some time, and I want to know what kind of conditions are necessary for you to reinitiate your dividend?

You need to get cash from your overseas subsidiaries, I believe? And you said that you are going to invest in acquiring new IPs and on PL will there be any impact, meaning that are you going to have upfront investment on PL as well?

Please.

Thank you very much for your question. Regarding our dividend policy, we have been investing for growth and we have been trying to balance this with shareholders return and that is what we have been mentioning so far.

Our management reviewed the positioning of NEXON and we decided to forego dividend and there are several reasons. We are not matured company but rather we have much lee way for further growth.

And we have divested company in Japan i.e. NEXON Company Limited and we do not have sufficient profit in order to provide dividend.

So, I believe that we might not be able to invest for growth if we continue paying the dividend. Therefore, we would like to focus on the growth initially and we need to have much investment for future growth.

Therefore, initially we will try to focus on spending our cash for our future growth. And once we are on the right path, of course there will be reserves accumulated in NEXON Company Limited and we believe that when time comes it will be possible for us to provide different means for our shareholders return.

Now, about PL, if we conduct investment and if we have to incur impairment loss we will have to book that as impairment loss on our PL. We believe that we have to be aggressive in making investments but needless to say not all investments will be a success.

And in those instances we need to recognize them as losses.

Thank you very much. Second question, it is about Korea, you mentioned that there has been a decrease of HIT in Korea, and looking at the titles, such as FIFA mobile I believe that title other than FIFA mobile is not on the top ranking list and in truth a smartphone/a mobile games what kind of competitive edge do you have?

Yes, you are right. There has been a decrease in HIT.

But considering what they booked last year HIT was a major popular title in Korea last year and a year has passed since then and therefore we cannot help deceleration of the game. Talking about mobile, when you compare it with PC longevity mobile game is shorter.

Having said that and we need to continue to launch titles such as HIT in the mobile domain. Currently we do not have any large title launch planned so, FIFA Online mobile is the only title on the top 10 list, but we will try to enrich our pipeline and so there we will be able to launch titles that can be in the top ranking list.

Thank you very much. Third question.

It is about China Dungeon&Fighter. I want to compare in different points, in Q1 in terms of ARPPU and our paid users and MAU these KPIs went up.

And year-on-year on a constant basis it grew by 78%. And out of all these KPIs which was the major contributing factor in Q1?

Talking about Q2 if the environment stays the same, I believe that you can expect a lot in Q1, but I believe that the sale will decrease in Q2 as compared to Q1 and I guess, you believe that the number wise Q2 will be lower than Q1 but still It’s the still promising. A long stable operation is important and I understand the Q1 was very good in terms of performance and do you think that this can continue but in Q1 of next fiscal year, do you think we will have a negative rebound as compared to Q1 and that has ended can you tell me the details?

About China Dungeon&Fighter about Q1 we were able to track very good performance and what is the backdrop at the lunar New Year package was very good we had Dragon Land as a new team and it was a limited offer content. And at the same time, level cap was updated and so far the maximum level was set and once we reached that point you cannot through the elevate your level, but it has been updated, so you can further go up the ladder.

And so the gain was further reinvigorated and so I believe that Dragon Land trigger the popularity, doing the quarter it outperforms our plan, so all the KPIs and MAU, ARPPU and paying user number all these KPIs went up. So it's not that any one of the KPIs was good, but rather it is across the board improvement of all the KPIs and that is the result of our analysis.

Talking about Q2 of course as mentioned before Q1 was a great success and because of their content update and level cap updates have contributed positively to our performance results so in a way it was a very special situation. So in Q2 we can increase while you are worrying about that we should say thank that Q1 was a special case.

Talking about the upside looking at the recent numbers we have the planned up until the Labor Day and KPI is very robust and there is nothing to worry about. In May and June if this momentum continues in Q2, it may be the result might be better than our forecast, but having said, that Q1 was a superb quarter, so as mentioned before, and stable operation is the key that we focus on.

As we want the uses to enjoy the in game play and that will be the measures that we will be taking in Q2. So in Q1 there was in yo1 dramatic improvement but in Q2 we will not see that level of improvement.

Thank you very much.

Thank you very much for the presentation, I’m Yamamura. I hope you can hear me yes?

Great results, congratulations, I have few questions as well. First is about the Chinese government regulation on the Korean games.

About the Dungeon&Fighter it is an existing game, so it not going to be affected. But in the future content and event when you consider those for example you might need approval from the government and so you might not be able to do the event in a timely manner.

Are you seeing some of the impact like that or in the similar way the PCs in China may post 3D2, CB2 – CBT was not started and MapleStory I believe is one of the new titles and CBT was conducted for the stuff means that this title did not have any problems about the launch? So in relation to the China Government regulation could you answer my questions?

Yes thank you for your questions. About the regulation in China, about existing live games and events and content there will be no impact from the regulations, so no regulations.

And for the MapleStory 2 it is a new title, but already it’s been approved. So concerning that, it’s not going to be regulated.

I see, thank you very much. Okay then recently you haven’t really seen any impact is that right?

Well, basically I want to clarify first, the regulation in China it’s been reported by the Press, but whether there will be actually the regulations or not, we have not yet heard precisely in government, Chinese government has not made any announcement. So that is what the future impact.

We’re not in a position to make that comment, so right now we don’t know, but there is no, there are effects that to shareholder they are impact from the regulations. Second question Sangokushi is also there online and also the Dynasty Warriors Unleashed, it was released in Korea and Asia and probably we will continue to launch in Japan, so console IP is the base and when you operate the mobile games like that, how to monetize, is it difficult or IP is so well known is it used easier to attract users, players, so Japanese console players IP was used in the action titles.

So based on that experience, KPI or user preference, have you seen any changes? So if you have to launch this in Japan maybe that would be related to your strategy, so any comment on that?

Yes we do use this IP of the Dynasty Warrior and Korea and also in Southeast Asia we started very well, but we just started the distribution, so we need to do the detailed analysis from now on. But the Japanese IP is very structured especially in Asia, so we would continue to acquire those IPs so that we can analyze this experience and utilize it.

Thank you. My final question is about the Lineage 2 and your title was a slight impact on your title, especially HIT and core RPG mobile titles, there might be some cannibalization.

I see some designs of that. So buy Lineage 2 the users, their attitude, do you think that will be positive for you or core RPG title do you think that there could be some cannibalization?

So is that going to be a negative? So Dark Avenger is in the pipeline, so is it positive or negative based on your feeding right now, any comments on that?

Yes Lineage 2 impact, so it’s not blockbusters, it’s a big hit, so in the zone title there we expect some impact. But in Korea the current status is that simple titles or actually the Lineage 2 is the only winner, so in the same zone more interesting higher quality games, we can go into them, so that we can have a ranking number one just as HIT did in the past.

So we would like to win that way.

I see, thank you very much.

Great, thank you very much for the opportunity to ask questions. I have three as well, the first one is kind of quick.

I think in one of the prior questions you mentioned that the KPIs for Dungeon&Fighter China were being sustained in April and May, so can you just help confirm that that was what the trend is currently?

Thank you very much for your question. Regarding KPI, I would like to repeat what I said.

We have the update for Lunar New Year and we updated the Level Cap and it actually stimulated the users and yoy KPI all went up and that was a situation of Q1 and so from January to March that was the situation and in April the momentum is there and there is no change. But come May and June, we are enjoying very good situation for four months, so it might slowdown in May and June, but at least up until April we are seeing a very good momentum.

Understood, thank you very much. The second question is about the idea that I think the current shift in places like Korea and China is moving towards MMORPG what obviously the Lineage 2 Revolution having done is kind of setting the stage there.

But if I look at the pipeline that you have on Page 18 of the presentation, I mean I would classify most of them as being sort of MMORPG or more of a shorter experience, so how do we reconcile the fact that I think the industry trend has moved to much more multiplier experience versus the fact that I think our pipelines are little bit more less multiplied on that?

Hi Han Joon, two thought for you and number one is as an overall comment I think it’s important to, when you have what you think is an industry trend, the industry trend has a tendency sometimes to turn on a dime with the launch of a new product. We could, you and I both know lots of examples of a situation where we thought the industry trend was going in one direction and then a new game came out and then suddenly the industry trend appears to be very different and that is the reality when you’re doing new game development.

It’s hard to predict, it’s easy to observe an industry trend in hindsight, it’s very hard to predict where it goes in the future. Second of all, we have a lot of games in the pipeline.

So I feel personally that we're very, I guess I would say covered although we don't proactively plan it this way. We plan it based Apo boy I think are interesting game ideas but we have a lot of games especially in Mobile in the pipeline.

And one of those games is Durango and this is a deep rich multiplayer experience that's coming up this year. So, that's one example of were really pushing the boundaries on full multiplayer experiences and I think you've heard us talk about it before and you'll hear us talk about it more as we get closer to the launch date.

Understood, i appreciate that comment. Lastly, you mentioned that you aim to get more made in Japan games out in Japan.

I don't think we see them on the list of the pipeline that you have on the presentation. So should I assume that we're just not getting a station now and some of them maybe at best maybe end of this year or more likely 2018?

And yes, I just kind of want to confirm how to think about the progress of the self developed Japanese titles and how they should wrap up over the next 18 months or so?

The answer to your question is we haven't made any announcements and we certainly will when they're ready to be made, but that'll be based off of game marketing. But we, as I said in the prepared remarks we have made really a second, smaller much more obviously, but definitely a development hub around a couple of our best developers.

So, we plan to be investing in that and we'll be making announcements about that it in due course.

Thank you. That’s all my questions.

Hi guys. Just one more question if I may.

I have notice in the pipeline chart as well, games like Need for Speed Edge and Durango have actually been moved a little bit to the right. So, can we just maybe talk about why we may be facing some delays if any and just kind of the progression of pipeline and where we think we're going to see a lot of our good stuff come through?

Thank you.

Sure, let me talk broadly about that. Need for Speed Edge and Durango 2 are very different situations.

Number one our Need for Speed Edge we're not the developer EA is. So we're the publisher.

I can't really comment in detail on that one. On a game like Durango I can talk in a little bit more detail.

The thing to remember about massively multiplayer online game is that you have to do a lot of iterative testing, that we're not making a movie here where you have a script and then you do principal filming and then you do post-production. There has to be a lot of iteration in the game and that happens in MMORPG around a progressively larger group of people in the same game all at the same time and then you find out what doesn't work and what you can optimize and then you because those players out of you know thousands and thousands of collective hours of testing it will give you a lot of great feedback.

Now it's important to remember that any and that if you have you know some delays in the front end. If you make if the game does what you wanted to do you're going to have many, many years of live game operations.

So, if you go back in our history some of our best and biggest games had some very similar sorts of delays. So it's all and they were cavalier about it, but the nature of the game development process is about iteration and checking.

And sometimes those delays come up because things that you didn't realize would happen in this live world environment with its own economy and sociology and the interactions between thousands of players they're hard to anticipate and you want to plan it for them so you make sure that you have a great game experience once you open it up to the full group of people.

Okay, great. Thank you very much.

Thank you.

Thank you very much for your question. Regarding Dungeon&Fighter in China I would like to explain it to you again.

Several years ago MAU went down because we had abort function. So the situation is quite different from now, but after abort sanction we had been emphasising the steady operations and that has been the main focus that we had.

And of course the content is of high quality and so that and we will be able to have a firm grasp of the users and have them enjoy our game. And I think that was one of our key success factors.

I repeat myself. About Q1 wise we had content update which was such a great success.

At the same time, we updated the Level Cap so, the core users who reached the maximum level since the level cap has been updated and they can elevate their level and so people were more active playing our games. And also we had a Dragon land content upgrade and we had a package sale that was in line with the concept of Dragon land, so content upgrade was a big success and it was assisted by the level cap update.

And so I believe that this game is very healthy so in Q2 I believe that we will be able to continue enjoying that momentum. Talking about Chinese market, PC online game wise it is hitting the threshold sort to speak.

So the market there is not changing dramatically, but rather the operation and content of China Dungeon&Fighter was a success. That is our analysis of the situation.

So let me ask you again, you said that MAU went up, so in terms of other KPIs, MAU as you can continue that in Q2 as well I believe. On a constant currency basis, I guess it grew by about 80% and what is the driver do you think MAU is the best driver?

In terms of the individual KPI, we do not disclose the details, but in Q1 the main contributor are of course MAU and also user PU increased as well and also ARPPU went up as well. And so if you put all those factors together you understand why we were able to reach such a great performance of Dungeon & Fighter, thank you.

Going to the second question which is paying user and I understand that the momentum is still there up until April and you have factored that in coming out with the guidance for Q2, I joined the colleagues maybe you said this late before work can you repeat that in terms of April during the Labor Day vacation we had covered the situation, so that has been factored in our Q2 as well and April returned favourably. But as mentioned before, the key success factor of Q1 is that we succeeded in the update of Lunar New Year and also the level cap update.

So these are very unique situations. So we do not say that this situation will continue forever more, but rather the situation of Q1 and Q2 are different.

And we have enjoyed the continuation of Q1 in April, but in May and June usually we see some steadiness and I believe that that will be the situation of this Q2 as well. Thank you.

Thank you very much. As there are no more questions, I would like to take this opportunity to thank you for your participation in this call.

Please feel free to contact NEXON team at [email protected] should you have any further questions and if you’re going to contact us by email please email to [email protected].