NEXON Co., Ltd.

Owen Mahoney - President & CEO Shiro Uemura - CFO

Junko Yamamura - Nomura Securities Co., Ltd Han Joon Kim - Deutsche Bank Jay Han - BNP Paribas

Good afternoon everyone, and welcome. And thank you for taking time right before the long weekend.

Partly talking about our financial results, we wanted to start today's meeting with footage that we give you a feel for our unique approached game development as well as our strategy for sustaining player engagement after the game is launched. This focus on game quality and sustained engagement is what delivers the kind of results we'll be sharing with you this quarter.

The game you just saw is LawBreakers, a title we release on August 8 and one that has heavily anticipated by hardcore first-person shooter fans in western markets. LawBreakers represents a new face for Nexon in two ways, first the game was developed in partnership with a proven western developer Boss Key Productions founded by Cliff Bleszinski.

And second the game is available on both the PC and Sony PlayStation4 Console, our first title for this important platform. Lawbreakers matches world class development talent in the west with Nexon's live game operations and development expertise.

We think this unique combination has the potential to make this franchise grow and last for a long time as we've done in Asia with so many other franchises. It's still early to talk about the numbers in this game but I hope you're as excited as we are about what it means for a growing Nexon's business.

This is one of several big initiatives we have underway to grow our global business. Okay.

To set the agenda for today's presentations. I'm first going to give an outline of the strong results Nexon delivered in the second quarter.

Then I will provide some color on our unique capabilities driving these results, which simply put is to create a sustained relationship with our customers that keeps players engaged for years. And is this extended relationship with our players that in turn drives our consistency and our growth.

And after that, I'll talk about our pipeline of upcoming games before turning it over to Uemura, our CFO to talk to you about the Q2 more specifically and Q3 outlook. Turning to the highlights of the second quarter.

Nexon had a great quarter, no question about it. This was our biggest Q2 ever.

Revenues were ¥47.1 billion up 23% year-over-year. Operating income was ¥16.3 billion up 22% year-over-year and net income was ¥19.4 billion up 157% year-over-year.

These strong results beat the high end of our guidance. Longevity in games across our regions particularly the strong performance of Dungeon & Fighter in China was a key driver of our Q2 performance.

Dungeon & Fighter in China just had its 9-year anniversary in June. Q2's excellent performance continued the momentum following Q1's record breaking results.

But more important than the revenue in Q2 or the games strengthening KPIs. Across the board, our player engagement within the games we saw that are player engagement within the game is getting stronger, which we think bodes well for the future.

Okay, with that as a backdrop I'd like to pause and explain an important differentiator in Nexon's development strategy. That is defying the boom and bust life cycle that marks most games and offering live operations and extended content plans that sustain player engagement.

Strategy is good for the consumer and great for our business. And Nexon, we believe multiplayer games or an entry point for sustained relationship with our customers.

A relationship that can and should extend in two years for each of our titles. As a result, we do game development and game publishing very differently than most of the rest of our industry.

While many focus on near term such as what happens to a game at launch or what the app store and Google Play rankings are, our primary concern is about making games that grow over time. In our world, a game is a hit only if it grows for many years.

So, when we make a new game, in addition to common game development issues, we bring deep experience to bear on the areas that make a game grow. One example of this is whether the technology base at the game server level is capable of handling the demands of the game.

As obvious as that sounds, some of the most expensive launches you've seen in the last 5 years in our industry failed as a result of a back-end technology that was under powered. Another is ensuring the quality of the content is sufficient to sustain the game over time and that we develop updated content rapidly.

And yet another is in depth testing of the many interactions of characters as thousands fill the games virtual world. Will the economy and sociology work when there are 10,000, 100,000 or a million players in the same game world at the same time.

The launch of an online game is not the end of our work, it's the beginning. Once again launch is our deeply experienced operations teams go to work on a myriad of different areas to ensure the game sustains.

These include creating an event, creating event driven life services. Another is managing the currency supply in the game world to ensure that the virtual inflation or deflation does not ruin the game experience.

Another is updating the game in a way that ensures the game maintains the balance between player classes. In practice, these are immensely difficult complex and difficult challenges for development and operations teams.

Doing at a scale requires deep knowledge that is distributed throughout an organization. And this step has enabled us to grow our business across many games not just one or two.

As a result, Exon's financial results have shown the kind of consistent growth and stability over two decades that is very different from the traditional games business. One that more resembles the software as a service module model.

Software as a service is appealing because it implies predictable annuity. Online games when developed and sustained properly, as we have shown for two decades have the power to achieve the same results.

We think this is the most powerful idea in video games and as more companies in the industry wake up to the power of longevity, we believe you'll be hearing a lot more about this in the future. And that leads to my last topic, which is our pipeline for the second half of 2017.

I have 3 new titles to show you today. Even though they are new early metrics are showing positive retention characteristics, which in turn will fuel further growth for Nexon.

First of all, I'd like to introduce as the newly launched mobile game Titanfall: Assault it actually launched just a few hours ago. This was launched by our Mobile arm in the United States Nixon M.

Titanfall: Assault is a player versus player real-time strategy game in which players collect upgrade and assemble a deck of pilots' titans in tactical burn cards which provide powerful battlefield support. In pre-launch play testing, the game has shown robust player retention engagement KPIs.

So excited to see how this does when it reaches a broader audience to launch. Next is Battlejack, a new mobile game which Nexon M will be launching in Q3.

Battlejack was developed by our partner Grand Cru a game developer in Helsinki. Battlejack is a colorful fast-paced mobile game with an innovative Blackjack inspired core mechanic and a deep fantasy backstory.

But what has us really excited is that the testing phase of the game users have been returning at very high raise. As I mentioned before, we only consider a game a hit if it continues to grow a year or more after launch.

So, the early metrics have us optimistic that we can hit this high bar. And finally, Dark Avenger 3, a new mobile game we just launched in Korea.

Show the video. Our Koreans -- Boolean Games developed Dark Avenger and Dark Avenger 2 which to-date have achieved more than 35 million in the global market.

For dark Avenger 3, the development team filled the game with high quality characters and backgrounds and a wide variety of gorgeous effects that provide an unprecedented and most of experience. The game launched two weeks ago and has quickly taken the number two and the number three spots on the app store top gross rankings on apple and Google respectively.

Having said that, as I mentioned before what we really care about his long-term retention and the early KPIs on that front appear to be robust. So, there's much to be excited about this quarter and for the future.

Looking ahead, we have two major initiatives that I encourage investors to watch and measure. First is our unique approach to long-term player engagement which clearly resonates with gamers around the world and translates into strong financial performance.

We will continue to develop and launch new titles with this long-term view. Second, we will continue to leverage partnerships with world class developers as an opportunity to learn more about capitalize on global game trends.

With that, I'd now like to turn it over to Uemura to run through the second quarter results in third quarter outlook. Thank you.

Thank you very much. Let's move on to Mr.

Uemura our CFO.

Thank you, Owen. Now let's move on to Q2 results.

As Owen noted, we were pleased that our revenues, operating income and net income all exceeded our outlook for the second quarter. Q7 a window that we've it please that are better than yours operate income and net income all exceeded our outlook for the second quarter.

Q2 revenues were ¥47.1 billion up 23% year-over-year on an as reported basis and up 21% year-over-year on a constant currency basis. The high end of our outlook was ¥44.8 billion.

Operating income was ¥16.3 billion which exceeded ¥14 billion the high end of our outlook. Net income was ¥19.4 billion well above the high end of our outlook which was ¥12.8 billion.

Second quarter revenue and operating income performance was primarily due to the strong performance of Dungeon & Fighter in China which is a higher margin business. This was driven by our outstanding life ops as Owen described.

Net income also exceeded our outlook due to additional ¥6.3 billion generated primarily from the Fx game as dollar denominated cash deposits and accounts receivable as a result of the depreciation out the Korean won against the US dollar during the second quarter. Revenues from the China business and the second quarter exceeded the high end of our outlook.

Again, this was mainly driven by Dungeon fighter. The ninth anniversary update we introduced on June 22 was well received along with the new character female priest sales of items such as avatars was strong.

In the wake of a seasonally strong first quarter due to the impact of the lunar new year second quarter revenues usually decrease sequentially consistent with that pattern born dungeon and fighter in China for the second quarter ARPP use decrease significantly quarter-over-quarter and then simply use this decrease Quarter-Over-Quarter. However, the RPP paying users I wish your positive growth year-over-year.

In particular the number of pain uses grew significantly. Venting use found the Korean business and the second quarter where near the high end of our outlook.

While we so a slowdown off some more pi game titles and the PC online game sudden attack we had strong performances and key PC online and mobile games. As a result, that the news on a constant currency basis were flattish year over year.

As for maple story which is a flagship example of our strength game operations a conducted a fourteenth anniversary update in the second quarter and it just receiving very good feedback from users. Now turning to our Q3, 2017 outlook.

For the third quarter and 2017, we expect revenues in the range of ¥51.62- ¥55.6 billion representing a 17% to 26% increase year-over-year on an as reported basis. On a constant currency basis, we expect revenues in the range of ¥470.8 billion to ¥51.4yen representing 8 to 16% increase year-over-year.

We expect continued strong performance in China to be our primary driver for revenue growth. We expect operating income to be in the range at ¥17.8 billion to ¥20.5 billion.

We expect an income to be in the range of ¥15.9 billion to ¥18 billion. In China for the third quarter revenues, weexpect20% plus to 30% plus increase year-on-year on a reported basis and high-teens to 20% plus increase year-on-year on a constant currency basis.

We introduced some of it updates to Dungeon & Fighter in July and related items sales are often extremely strong start. The number of our active users and paying users in July have both remained high compared to the same period last year.

Strong user indexes are also drive year-on-year growth in revenue. We also scheduled to introduce a large-scale content update, national day update in late September.

In Korea for the third quarter revenues we expect high single digit to high teens percentage increase year-on-year on as reported basis. We expect revenues to be flat to high single-digit percentage increase year-on-year on a constant currency basis.

We expect year-on-year revenue increase from TPC and mobile game titles as well as contributions to revenue from the mobile games such as Dark Avenger 3 which was launched in July. In Japan for the third quarter revenues we expect high single-digit too high low teens, to high low teens 8% increase year-on-year as reported basis.

We expect revenues overall to increase year-on-year because of continued contributions from mobile native app such as Hit and HIDE AND FIRE more than offsetting a decrease in revenues from mobile browser games. In North America for the third quarter revenues we expect high single digit to 20% plus increase year-on-year on as reported basis and flat too low teens percentage increase here when you're on a constant currency basis.

We expect revenues to increase year-on-year due to the contributions from Lawbreakers which was launched on 8 August 8. For Europe and other regions, we expect a high single digit to high-teens percentage of revenue increase year on year on earth reported basis.

And a flat to high single digit percentage increase your own you're on a constant currency basis. We expect a mobile game Dynasty Warriors Unleashed which launched at the end of March to contribute to a year on increasing awareness.

In the third quarter may expect operating income to be in the range of ¥17.8 billion to ¥20.5 billion which is an increase of 9% to 26%year-on-year. A positive driver is the increased revenues year-on-year primarily driven by our high margin China business and contributions from new titles.

As for the negative drivers, first increased variable cost including royalty cost and fees due to the year-on-year increase in revenues from PC publishing titles and mobile games. Second grader marketing costs related to the launch of new titles.

Third, increase in HR cost to our headcount increase primary in Korea. The high end of the range reflects the fact that we expect the impact of the positive drivers to be larger found the negative drivers resulting in operating income growth year-on-year.

Now, we'll be happy to take your questions.

Thank you very much for your presentation. I am Yamamura Nomura Securities Co., I had three questions.

The first question is on Dungeon & Fighter of China. At the outset, Mr.

Owen you mentioned about the fundamental strength of Dungeon & Fighter in China. If you look at Q1 and Q2 and try to conduct the analysis can you tell me the details you had the level cap.

And. I understand that there were other factors that provided that good tramp for Dungeon & Fighter.

But in Q2 there might be some factors and that that you were not able to continue from Q1 and also there might be some factors that I knew in Q2. Please tell me the factors that led to the growth in both Q1 and Q2.

One at a time please.

Thank you very much for your question. In terms of China Dungeon & Fighter, we are seeing a very favorable momentum and in Q1 it did very well and we are seeing the same trend and also in Q3 as well me believe that the client will continue.

In Q1 we have level - those will be corporate forecast endosymbiont content update. And those over a very well received.

And if I explained to you furthermore regarding Dungeon & Fighter, we position it as a very important game for us. So, we are very cautious.

So, we do not want to have any dramatic increase or no dramatic monetization. And we have been following this rule and that is the fundamental that we bore in mine in conducting the operation at this IP.

We take different parameters from this game and conduct dialogue with the users so that we and can ducked very granular analysis to understand what we should do. We do a plea is the experience we are trying to cater to the needs of the users.

So high quality update and also granular life operation are the two major factors and we are conducting very granular analysis of what is evolving and because of that stance/approach that we are taking we are seeing a very trend and MAUI. So, we see an increase in Y-o-Y and paying user wise we're seeing an increase as well.

Regarding air IPP you it is this study. So simply put these actually represent the profile/characteristics of growing game.

So, we did very well in Q1 and the momentum continued in Q2 as well and we believe that the moment will be maintained in Q3 as well. Every day we conduct granular operation of the game and conduct analysis so that we will be able to maintain our satisfactory level of growth.

Thank you.

Second question, this is a very nit-picky question. In Q2 about the royalty fee, maybe it's my misunderstanding but please bear with me it seems that the fee includes one-time payment or just shows the fact that IP content increase thus leading to the increased royalty fee and looking at royalty fee, it seems that there has been an increase when you compare Q2 to Q1.

In terms of royalty fee, needless to say, it all depends on the titles that are popular at that point in time. So, royalty fee ratio is not always constant.

In Q2, it looks relatively high but interests of some local - it was very favorable therefore royalty fee went up.

Thank you very much. My last question about the new titles.

I have several questions you have Darker Avenger 3 as well as LawBreakers. My question is on Dark Avenger 3.

In Korea Lineage RPG big title is positioned as number one. And the other RPG games they cannot have a very good track record or I should say might be difficult for other RPG games to be ranked high, but I know that you have just launched Dark Avenger 3 and the recent figures are very good.

So, do you think Dark Avenger 3 is quite different from other IPs. And even though this is RPG, if the quality is very high you will be able to win in this area.

So, can you tell me what is your analysis to date regarding Dark Avenger 3?

In Korea, I know that competition is getting very tough and that is the reality that we have to face and I know that top ranking games are very popular. But as you have mentioned right now Dark Avenger 3, John or allies is quite different from other Ips.

We focus on high quality and fun to play game. And once we can attain those two points as mentioned by Owen Dark Avenger 3 is positioned at number two and we will be able to be ranked as a high game.

In terms of Dark Avenger 3 we do not place importance in the initial ranking but rather we emphasize the longevity and serve. Retention rate is very important and Dark Avenger 3 was so we are seeing very good retention rate.

As I believe that we can expect much from this title and I believe in the high quality of Dark Avenger 3.

Thank you very much.

You might have some questions on the floor. But we would like to now take questions from the phone.

Great. Thanks for the opportunity to ask questions.

I have a few and maybe we just went through them a bit. But I recall as to follow-up to Dark Avengers 3, I know you can't disclose the KPIs, but can we say relative to one and two that three has better broad-based KPIs and thereby it may have better longevity than 1 and 2?

Hi, Han Joon. I think it's too early to tell.

As I said before, we're very happy with how early retention is looking so that we definitely can say it's going to be. We're going to have to watch it from here.

But we're feeling pretty good early on.

Okay. The second question has to elaborate because I can't point here.

I realized it's gotten good reviews, but it's also come from a lot of FPS fans, so I am wondering if this is going to be sort of a more niche audience again that hard core FPS audience wants because it's so hard core or if we're going to have a mass market appeal. So maybe is it more symbolically significant that we've made -- of the console market or is this something that we might actually see some significant financial contribution throughout the course of the next few years?

Well, I think you've got it right. LawBreakers was not designed to be a mass market first person shooter.

It's -- you can see the reviews on Steam of you can watch it being played on Twitch and everybody will tell you a pretty similar thing, which is it's a hard game to play. It's designed to be an arena first person shooter.

But our thinking on that is that's a very underserved market and if you give them a game that they want to play, they will continue to be very loyal with that and then once they're loyal then they can gradually expand out to a broader market. That's our thinking with it.

We think that the developer executed on a great game they put out a great game and it appears to be resonating with the audience early on. And then from here, we think that it serves very directly a very underserved market.

This is the group of players if you've ever heard of Unreal Tournament or the Old Quake Arena people this is an arena first person shooter. So, it's an underserved market.

It's also an incredibly fun game to watch and games that are fun to watch and that are hard to play can make for a very good spectator sport. And so, we think that it will have potential to both have great viewership on the types of channels where people like to watch games such as Twitch and other channels YouTube and so on and then has potential for eSports.

But the thing about eSports is we the publisher or the game developer don't decide whether game is going to be an eSport game. The users tell us whether it's going to be an eSport game.

People seem to be enjoying it, certainly there was a lot of that interaction that we saw at theE3 event. And we think it has real potential for now.

Understood. So, I guess as an extension of that I mean, I know it's hard but are there any kind of threshold where we start to think, okay well it seems like there's good demand here so we kind of push the eSports angle on this somehow?

I wouldn't say that there is a numerical example. I think that what will happen is the way that these things work is they come organically from the community.

The community says it, it says that they want it and then we support it. As you know, we are a pioneer in eSports.

We may be the ones who are in the seriously in eSports longer than just about anybody else I know in the video games industry. Based on our experience in Korea, our long experience in Korea so that experience tells us that on the market will inform us when it's ready for eSportsman.

We know how to support and when that day happens, if that day happens.

Got it. Thanks.

Well, one quick last question. Are you guys feeling any sort of competitive pressures from Battleground, I don't sit and talk with a bit soft into campaign to feel like that's the from people going over the battleground or is it more seasonal?

No, I think. Regarding.

Sorry I should make sure that everybody is caught up on translation here Han Joon, my take on that is that is two things. First of all, sudden attack, is sudden attack battle grounds as battlegrounds.

You and I have talked about this before, people like to talk about market share but I am of the belief that that's not really how our game industry works. How our game industry really works is like other sectors of entertainment.

The better that the games are the more it drives more people into games. I've seen this happen in television in the United States recently, it happened in animation in the west before that and it's happening again.

So, we applaud what happen in Battlegrounds. And our experience has been that when more good games happen in the games industry, more gamers play more games more often.

And we've seen this over and over again, even in a hyper competitive environment like Korea as you well know. So they sometimes have near term impacts but they're very hard to discern and isolate from other noise in the system and long term we think this is a very good thing when there's better games out there.

Alright. Thank you very much.

Thank you very much. We have a few more minutes to go so we will like to come back to the floor if there is any question.

Do you have any question in this room? And then person sitting in the very front.

I am Sakurai of Nikkei I have two questions. In terms of your game breakdown, PC is about 76% and mobile is 24%.

And does it mean that overseas wise you have more on PC than on mobile in the future, what will be the trend do you plan to increase the ratio of mobile? That's question number one.

Going to the second question in America you have eSports contest or match and in Japan do you have any plan sponsor eSports contest using your title or do you have any plan to ask a third party to sponsor eSports contest using your game? So please tell me your plan.

Great question. Regarding your first question.

As you mentioned we're about 75%, little over 75% in PC and it's over the last few quarters it's been at about that ratio. But we are not targeting a ratio per se.

We are, we have a legacy of a lot of PC games because that's where we got our start. And as you know markets like Korea and China are very PC heavy markets and because our games tend to last and grow for a very long time and they tend to keep getting bigger that has meant that whatever we do in mobile has a lot of competition from PC.

But as you can also tell, we're also developing heavily for mobile Dark Avengers 3 is an example that we have many others that we've been launching and that are in the pipeline. But I don't spend a lot of time thinking about what our ratio is going to be.

Because when I look out over two to five years, I see that the industry is really converging with PC and with mobile devices. I see several devices here that are sort of hybrids that are iPads or tablets some that are very light PC's and tablets are essentially just large mobile devices.

So over time, I don't think that -- I think that these things converge and we're not spending too much time as a practical matter on a daily basis we have to spend a lot of time thinking about it but strategically over time we're not targeting a number. What we're doing is believing that the industry will ultimately converge and managing our business or planning our business that way.

And then as far as eSports goes, your eSports question. It feels a little early in Japan right now.

It actually feels very early in North America as well, that's my personal experience of my personal opinion. A lot of people in the industry disagree with me on that.

There's certainly a ton of investment going on in the west in eSports and eSports teams and other areas. But when you compare it to the level of infrastructure and sort of maturity for example Korea, Korea is quite a bit farther along.

If you ever have a chance to visit Seoul, I would encourage you to visit the Nexon Arena, it seats about 550 people, it has about 300 events per year. So that's many nights out of the week or month and it's usually full with people.

And it's also usually populated by about 60% women, the ratio is 60:40 female to male. But going to see an eSports game live is something that's part of the night life in Gangnam and Seoul and that's very different than my experience going to see games in North America today.

I've gone to see different, even what are supposed to be built as very large games and most of the people who are live working for the event or worked for when the companies that was there or with family members they are players even though they were broadcasting to a lot of Twitch streamers around the world. Several thousand Twitch streamers.

So, my feeling is that there's a lot of talk about eSports, but in several countries, it's still early. Even though there's a lot of talk about it.

And as I said before, one of the things that's misunderstood is gamers tell you when they want to play something competitively. And then they sort of come back to the game, developer of the game publisher and say we want more eSports things.

They form their own teams and then they come back to us and they say we'd like more support. Hopefully that answers your question.

Thank you very much. Thank you very much next.

Additional questions through phones please.

Thanks for taking my questions. I have two questions, one on - the first question is on the Dark Avengers 3.

Compared to HIT what's the initial KPI of Dark Avenger like? I know Nexon doesn't disclose single game KPI but I hope to get some sense and compare with HIT to measure the potential of this game.

And I would like to understand Dark Avengers 3 is global edition plan. I am curious where would be the next country, Japan or Southeast Asia that's my first question.

Thank you very much for your questions. Dark Avenger 3.

We talked about the retention rate which is a very satisfactory. In comparison to HIT, how is it is your question.

As you said correctly, we do not disclose the KPI for each title, we rarely do that. But in comparison to HIT it is equivalent, it is not inferior to HIT KPIs.

And the environment Korea is changing very quickly, so in that sense HIT was a big hit and the environment now is quite different from that for Dark Avenger 3. But we are not looking at the temporary ranking, but rather we would like to have longevity long term titles.

So, the phenomena which is closer to HIT is being observed at this moment. As for the globalization plan, this is the in house developed title.

So strong IP especially Asia is something that we have, so we want to apply this to other countries. But as of now, we do not have a specific plan for the next countries.

So, whenever it is available we would make announcement.

Okay, great. My second question is on tax rate.

Could you elaborate the background of low tax rate in 2Q? And I'm curious what's your tax rate outlook in second half?

Yes, about the tax rate. Quarterly factors exist and because of that it changes.

But in general, 20% or so is the tax rate for a year unless there is something special. 2014 we expected about 20% tax rate that is our calculation.

Thank you very much.

Thank you very much. We have a few more minutes.

So once again, is there any question from the floor. If you have any question please raise your hand.

Thank you very much. It seems that there is no further question.

We would like to end the Q&A session. With this we would like to end FY17 Q2 earnings report.

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Once again, thank you very much for gathering despite your very busy schedule.