NEXON Co., Ltd.

Owen Mahoney – President and Chief Executive Officer Shiro Uemura – Chief Financial Officer

Keiichi Yoneshima – Credit Suisse Securities Junko Yamamuram – Nomura Securities

Thank you, everyone, for your time today. I thought I'd start today's presentation with some context.

One of the most misunderstood aspects of online games is that they can grow and generate revenues and profitabilities for years, even decades. Many industry analysts are stuck in a model that overvalues brand-new games, even though most new games have a short life cycle.

While short life cycles may be true for most of the industry, it is important for investors to understand how well-managed online games can be sustained for years, generating predictable revenue and profitability. This requires investors to recognize a different model, one that does not rely primarily on hype and high cost associated with developing and marketing new games.

Instead, the truly valuable model is one of sustained revenue, profitability and player base, thanks to skillfully managed life services. Games that continue to last and grow are the most valuable assets in the games business by far.

Since the industry often doesn't recognize this truth, the focus of the most of the games industry is about new games, and little a value is put on long-lasting annuity like cash flows of well-managed live games. At NEXON, we think about our biggest online games, operating on a model that is much like a theme park, like Disneyland.

The rides, the restaurants and other amusements are periodically updated, but the overall experience, known as Disneyland, continues to last for decades. Disneyland doesn't invest in a completely new year, built right next to the existing park.

And yet, it seems that many game analysts and observers believe that this type of strategy would be a good place, a good one for online games. Back in 2011, during NEXON's IPO, the number one question received during the roadshow was, when do MapleStory and Dungeon&Fighter start declining.

That literally was the number one question, every meeting has that question. Certainly, nobody thought at that time that these two games would continue to grow seven years later in 2018, but that's exactly what they've done.

And they've been getting stronger over the years, not weaker. So with that as context, I'd like to start today by talking about some of our key existing games.

Q2 was a truly outstanding quarter for one of our most enduring franchises, MapleStory. Following the successful 15th anniversary events in summer content update, this 15-year franchise grew an incredible 61% year-over-year in Korea.

Let me repeat that, our 15-year-old game franchise grew revenue by 61%. Another of NEXON's franchises, Dungeon&Fighter is showing consistent growth in China with year-over-year growth rate in the second quarter – growth in the second quarter, despite a very high bar set in the same quarter 2017.

Dungeon&Fighter strengthening position was certainly visible in the anniversary celebrations we saw in China. I'll talk a little bit more about that shortly.

The consistent growth of these titles over many years represents a larger story. The growth of NEXON's owned intellectual property into the ranks of the most valuable IP in the world.

The financial metrics tell a very good story about massive life-to-date revenue, growth in CCUs and the massive yearly cash flow. But observers often miss the influence of NEXON's IP because it not tangible to them.

Our customers live in different countries than our biggest investors and analysts, and therefore it's difficult to grasp how truly important our IP is to those customers. So we thought we'd take a minute to give you a sense of what these IP’s mean to the people who play them every day.

Let's go back to MapleStory as I said a 15 year old franchise which to repeat in the most recent quarter grew 61% year-over-year. Growing MapleStory starts with holding our base Korean players who have been playing for many years and cascading their love of the game to a new generations, to-date over one-third of the entire Korean population have played MapleStory, millions grew up with MapleStory and millions more play MapleStory for the first time every year.

In addition to frequent content updates to refresh the game for existing players we have skillfully localized MapleStory for large audiences in new markets like Japan and China. So, on the top row of this slide are a couple of pictures from our 15 anniversary art balloon event in April.

The iconic MapleStory characters are fan favorites whenever we do live fan and events. In the bottom row you can see an offline event we held in Taipei last year, over 1,500 users gathered wearing red hoodies and formed a giant human maple leaf which is part of the game's logo.

Their efforts got them in the Guinness Book of World Record for the largest human maple leaf beating the previous record held by Canada. As you can imagine our friends in Canada did not take this too kindly since after all the maple leaf is part of their national flag, so they managed to recapture the record for now.

Fortunately I'm not Canadian. And of course everyone in this room knows Dungeon&Fighter is a monster IP that keeps growing especially in China.

Today Dungeon&Fighter has generated well over $10 billion in life-to-date gross revenues worldwide. To put that number in some context Dungeon&Fighter is a couple of billion dollars bigger than life-to-date Star Wars box office worldwide.

By the way Star Wars is the largest movie franchise of all time and it started in 1977, about 40 years ago, so those are the numbers. In that context you can see why our 10th anniversary events in China helped grow awareness in player engagement, here's some pictures.

We had a variety of outdoor location based marketing events, and on the upper right you can see the hundreds of fans that were enjoying the light show in the side of the buildings in that area. On the lower right is a picture from the 10th anniversary celebration event held in June when thousands of fans gathered to celebrate the anniversary.

Also around this time CCTV, which is China's predominant state TV broadcaster ran a special on Dungeon&Fighter as part of –as one of the most successful intellectual properties in China, supporting the development of the nation's IP’s in cultural programs and the games industry. It's exceptionally rare for IP’s to be covered by the state broadcaster which underscores how massive Dungeon&Fighter is in the country.

Supporting our fans is an enormously dedicated and talented a live game development an operations team around the world, who lead the industry in growing our biggest franchises over time. And as you can see in the pictures and in the numbers their talent and their work really pays off.

This is not easy work. Another of our blockbuster live games is FIFA Online 3 which is currently transitioning its audience to FIFA Online 4.

Transitions in online games are always tricky but the stakes were especially high on this one, since it's our largest transition to-date. I'm very glad to report the live game teams did a great job working closely with our partners at Electronic Arts.

The new PC service launched in May and the mobile game just launched at the end of July. Our initial focus has been on core users and the next step is to transition casual users.

We think it's proceeding very well. And we've got a trailer here for you so you can get a sense for what the game is all about.

[Video Presentation] So our teams have been working really hard to enable these huge franchises to grow consistently over the long-term. Thanks to their talent and efforts we have an enormously stable base of revenues from which to invest in new projects and expand our franchises geographically.

So I hope the biggest take away from this presentation is to understand the core idea of games that last for decades. This longevity is both possible in exceedingly valuable.

We think it is the most important idea in the video games industry, it is widely misunderstood. Longevity measured in decades is also highly unique in the games industry, only a few companies have done it for any length of time.

So with that as a backdrop, now let's talk about new titles. The stable annuity-like revenues from our massive existing franchises give NEXON a stream of capital that enables us to invest in creative risks without compromising the financial stability of our company.

So let's look at a few of these. The first of these is the Japan launch of OVERHIT, we launched the game in late May and within a month and a half it has exceeded 1.5 million downloads.

The development team spent a lot of time localizing and culturalizing the game specifically for the Japanese market, so it ended up quite different from the Korean version. It appears to be off to a great start, so we'll be watching it closely in the coming months.

Let's have a look at the trailer so you can see what it looks like. [Video Presentation] Since I know each of you will be downloading this game right after this presentation, I want to look forward to your feedback.

Next is starting us Darkness Rises, in June we really started Darkness Rises in 140 countries around the world and has been off to a fantastic start, especially in Asia as well as in the West. Like OVERHIT in Japan, and we worked very hard to localize and culturalize the art and the gameplay from the original Korean version and that seems to have paid–off really well so far.

The game has been downloaded over 10 million times worldwide in six weeks. So let's play the trailer.

[Video Presentation] Right and finally is MapleStory M which is the mobile version of our hit franchise MapleStory, originally a PC game. The game first launched in Korea in 2016 and has been showing steady growth and strong retention over the last several quarters, two weeks ago we launched the game in over 140 countries outside Korea and exceeded 3 million downloads in just one week.

Given the retention numbers we're seeing in Korea and a very successful launch in other countries two weeks ago we think this has great potential over the long-term. Let's play the trailer.

[Video Presentation] As you've heard us say over and over what we really target as longevity, long term engagement by our customers which results in long-term value for our shareholders. So we've been experimenting with new titles, new styles of gameplay, new ways of launching and new regions, and when we see retention numbers, we want it double down our efforts.

Our massive cash flows from our existing business and enables us to invest in building tomorrow's business. We have many more games slated for launch around the world including the Western service of MapleStory 2, the OVERHIT global launch service, and Dynasty Warriors Unleashed for the Japan service for which we opened the pre-registration today.

To summarize NEXON is in a uniquely – is a uniquely stable company in a somewhat chaotic and hit driven games industry. We've learned to build and sustain global blockbuster games for years and even decades.

We avoid the boom-and-bust model that cripples many other publishers, and instead use the margins from our perennial blockbusters to invest in new titles that could break through to become hits. With that I'll turn it over to Shiro Uemura to discuss the second quarter results and the third quarter outlook.

Thank you

Now let's move on to the Q2 results. Revenues were JPY478.8 billion up 2% year-over-year on as reported basis and down 2% year-over-year on a constant currency basis, in the range of our outlook.

The operating income was JPY16 billion and the net income was JPY32.2 billion both of which exceeded our expectations. Revenues from Korea in the second quarter were down slightly year-over-year this was primarily due to the service transition FIFA Online 3 to FIFA Online 4 which had a negative impact in both PC and mobile business.

Revenues from Japan and other regions included in Europe and others decreased while revenues from China and North America increased year-over-year, as a result our group revenues were roughly flat year-over-year as expected. In comparison with our outlook, revenues from PC online games exceeded our expectations driven by the strong performance of MapleStory in Korea, thanks to the successful 15 anniversary promotions and Summer update.

Meanwhile revenues from mobile games were below our expectations due to lower than expected contributions from KAISER which launched in Korea during the second quarter, and the OVERHIT service in Korea. Net while our PC revenues exceeded our outlook and this was offset by lower than expected mobile revenues.

As a result total revenues were within the range of our outlook. Operating Income exceeded our outlook, while we recorded JPY0.8 billion impairment loss primarily on prepaid royalties, we recorded other income as well as incurred lower than planned costs.

We acquired an additional 30% of equities of NAT Games and consolidated then beginning at the end of Q2. In reference to this we evaluated the equities we held before the additional acquisition against the market price, as a result we recorded a JPY2.7 billion gain on the step acquisition under other income.

I will explain the details of the expected impact on our financials related to the NAT Games consolidation later. Costs were lower than planned, mainly due to lower variable costs including platform fees and royalties due to lower than expected revenues from mobile business and KAISER, a published title as well as lower-than-planned marketing costs.

The net income exceeded our outlook, due to a JPY15.5 billion FX gain on our U.S dollar denominated cash deposits, and account receivables related to the depreciation of the Korean won against the U.S. dollar during the second quarter.

Revenues from our China business in the second quarter were at the high-end of outlook. For Dungeon&Fighter we introduced the Labor Day update in April and the 10th anniversary update in June both of which were well received by users.

This year's Labor Day update went very well similar to that of last year's, which gave us a strong result. Moreover the user community showed excitement toward the large scale promotions and off-line events for the 10th anniversary.

We conducted many M game events and introduced the largest content update in time for anniversary, all of which were well received. In the second quarter, we focused on providing our players with enjoyable content to enhance their engagement and achieve good results as we had hoped.

Revenues, ARPU and MAU’s decreased quarter-over-quarter due to typical seasonality. On the other hand paying users increase quarter-over-quarter this was driven by small item sales in time for seasonal events including April Fool’s day which were very popular.

ARPU and MAU’s decreased while our paying users increased year-over-year. Revenues increased year-over-year driven by increased paying users.

Revenues from Korea in the second quarter were within the range of our outlook. PC revenues were down slightly year-over-year.

We launched FIFA Online 4 in late May, and since the beginning of May, we have stopped introducing content updates, and in-game sales for FIFA Online 3. In Q2 revenues decreased year-over-year, since we focused on supporting users’ smooth transition from FIFA Online 3 to FIFA Online 4.

Meanwhile, MapleStory grew significantly year-over-year driven by the successful 15th anniversary events and Summer update. The strong year-over-year growth of MapleStory was offset by a decline in FIFA Online 3, as a result PC revenues in Korea were down slightly year-over-year.

Mobile game revenues were roughly flat year-over-year, similar to the PC online service FIFA Online 3 M decreased year-over-year, however we benefited from games launched in the second half of 2017 including OVERHIT the AxE as well as KAISER which launched in June. As a result mobile revenues were roughly flat year-over-year.

Overall revenues from our Korea business decreased slightly year-over-year. Revenues from Japan in the second quarter decreased year-over-year while we benefited from the OVERHIT launched in late May, this was more than offset by the decrease from HIT and mobile browser games.

As a result revenues from the Japan business decreased year-over-year. Revenues from North America business increased significantly year-on-year mainly driven by contributions from Pixelberry Studios which was consolidated in Q4 2017.

Revenues from Europe and others in Q2 decreased year-on-year. Revenues from Europe increased year-on-year driven by contributions from Pixelberry Studios similar to North America, however revenues from other regions decreased due to the deceleration of Dynasty Warriors on the East.

As a result revenues from Europe and others decreased year-on-year. As mentioned earlier we started to consolidate NAT Games beginning at the end of Q2, NAT Games is the developer of HIT and OVERHIT and has excellent development capabilities.

We entered into a strategic partnership with them and made them an equity method at affiliate in April 2016. To strengthen, collaboration and the relationship as well as reinforce NEXON Group's development capabilities we additionally acquired about 30% of the outstanding shares and made them a consolidated subsidiary in late June.

In relation to the consolidation we booked JPY10.6 billion goodwill and JPY21.2 billion in intangible assets at the end of Q2. NAT Games generates most of its revenues from royalty income paid by NEXON.

The expected impact on quarterly consolidated results through the acquisition is around JPY0.7 billion in amortization cost on the intangible assets beginning in Q3. Now turning to our Q3 2018 outlook, for Q3 we expect revenues in the range of JPY60.9 billion to JPY65.9 billion representing a 1% to 9% increase year-on-year on as report basis and a flat to 8% increase year-on-year on a constant currency basis.

We expect NEXON Group revenues to be up 1% to 9% year-on-year, while we expect revenues to increase year-on-year in North America, Europe and others, and roughly flat in China. We expect these to be partially offset by revenue decreases in Korea and Japan.

We expect our operating income to be in the range of JPY21 to JPY25.2 billion. We expect a net income to be in the range of JPY20.5 billion to JPY24 billion.

In China we conducted Summer update of our key PC online game Dungeon&Fighter on July 5. We are also scheduled to introduce a National Day update in September.

MAUs in July increased and paying users were roughly year-on-year, while ARPU decreased year-on-year. Reflecting factors including the most recent situation we expect Dungeon&Fighter revenues for Q3 to be roughly flat year-on-year.

We expect MapleStory 2 to decrease year-on-year. Over all we expect revenues from our China business to be roughly year-on-year.

For the PC online business in Korea we expect FIFA revenues to decrease year-on-year as we launched FIFA Online 4 in May and the game is still at the beginning of the service. We don't launched its mobile version FIFA Online 4 M on July 26 and closed the services for FIFA Online 3 and FIFA Online 3 M.

on August 2. On the other hand, given the strength of MapleStory driven by some update continuing from the Q2, as well as Dungeon&Fighter which is expected to perform well driven by the Level Cap update released on August 9, we expect revenues of these titles to increase year-on-year.

We expect increase in revenues from MapleStory and Dungeon&Fighter to exceed, the decline in FIFA revenues resulting in the PC, online revenues in Korea increasing year-over-year. Looking at the mobile business in Korea, we expect OVERHIT launched in Q4 last year and KAISER launched in this year's Q2 to contribute to revenues.

However similar to PC we expect revenues from FIFA mobile to decrease year-on-year, as well as those from Dark Avenger 3, and AxE both launched in Q3 last year resulting in mobile revenues in Korea decreasing year-over-year. Over all we expect a decrease in mobile revenues to be bigger than the increase in PC revenues resulting in the revenue of Korea business decreasing year-on-year.

In Japan we expect revenues to decrease year-on-year primarily due to the deceleration of the mobile browser games HIT and HIDE AND FIRE, while we expect contributions from OVERHIT launched in the Q2 and Gigant Shock launched in late July. In North America we expect revenues to increase year-on-year driven by contributions from Pixelberry Studios, Choices as well as from Darkness Rises launched in late June, and MapleStory M launched in late July.

In Europe and other regions we expect revenues to increase year-on-year driven by contributions from Choices, Darkness Rises and MapleStory M similar to North America. In the Q3 of 2018, we expect operating income to be in the range of JPY21 billion to JPY25.2 billion representing a year-on-year decrease of 8% to increase of 11%.

Favorable factors compared to 2017 Q3 on operating income are first, an increase in revenues primarily driven by North America, Europe and others business. Second, in Q3 in 2017 we recorded impairment loss of JPY3.6 billion, which will not be repeated in 2018.

Negative factors compared with 2017 Q3 on operating income, first, an increase of HR cost mainly due to the higher stock option expenses, and a higher headcount. Second, an increase in marketing costs associated with promotions for new titles including Darkness Rises, the OVERHIT Japan service, and the MapleStory M global service as well as promotions for Choices and Korea MapleStory.

The high-end of the range reflects the fact that we expect the impact of the positive drivers to be larger than that of negative drivers resulting in YOY operating income increase. Now we are happy to take your questions.

Thank you, I am Yoneshima of Credit Suisse Securities, I have two questions. Firstly about the guidance in marketing cost, on the Page 20 you are assuming JPY1.80 billion and I guess the last Q3 was by JPY5 billion, so looking at the quarterly basis you have the marketing costs of about JPY7 billion, and it seems that the figure is very large and is it to do understand that you have so many titles, that's why you have a marketing cost to be high?

Or are there any other factors? It seems that the marketing cost is very high, so can you explain about that.

Second question you mentioned about the transition from FIFA 3 to FIFA 4 and you mentioned that it is progressing very smoothly, and I understand that this is a major transition. And I want to know what were the positive points and what were the negative points, if there were any and when do you plan to end your transition?

And I believe that you can recover in Q4 year-on-year, or do you think we need more time in order to recover the performance of this title. These two questions, please answer.

Thank you very much for your question. Firstly about Q3 marketing cost guidance.

Regarding our cost, there are some factors that will contribute to the fluctuation and one of the major fluctuating item marketing, because depending on the title and the pipeline quarter-over-quarter, there are some changes and so it does not make much sense to compare year-over-year figures. So in Q3 what kind of marketing endeavors that we plan?

As mentioned before we have Darkness Rises and we have our OVERHIT Japan service, and we have MapleStory in global, and Choices and Korea MapleStory and these are the titles that we will focus our marketing effort in. I repeat myself, the marketing cost is not stable, it goes up and goes down depending on the environment.

Now moving on to the second question on FIFA transition, I repeat myself we are trending very smoothly and everything is going as expected. Heading from Q2 to Q3 we are still in the transition phase so there will be some deceleration.

I repeat myself again, we are trending very smoothly so – and turns out the National Day update, we will conduct the content update as we make sure that we have a stable daily operation of the game.

When can we be on par with Q3 level?

It's very difficult to read the crystal ball. In the end of July we launched our FIFA Mobile 4, and we are preparing, and so that we will be able to be in the right position during the high season.

We cannot tell you definitively when we will be able to recover. So I'm talking about the high-season in China because we talk about National Day not Korea.

Now, what are the lessons learned. This is our first time to go through a major transition and we needed to learn how we can continue retaining the core players, so that they can translate to the new version and there were many lessons learned and I believe that this was a good experience for us to accumulate our knowledge about the players.

And FIFA is trending well, and we would like to go back to Q3 level and not the rest be assured at that time, but rather put more effort in growing the for the moment.

Thank you.

Thank you. Yamamuram from Nomura Securities I have three questions.

First is about Dungeon&Fighter status. In the presentation materials, the less expensive items were offered and by doing, so paying users number increased.

So Dungeon&Fighter when you consider the continuity, in the past you offered lower price items and you increased the paying user and you established the users and the event was successful and that pushes up the revenues that happened in the past. So what is the current status right now?

Also some new paying users, do you see gradually increase, if that is the case in a year or two years that would push up the overall revenue. So that's the first point.

Second point is similar about the transition of the FIFA more specifically so for example, items, and points, transition I think that you took measures, so when the users transit from one to another how do they move do they gradually increase the payment and since the World Cup happened, is it go up and down and then it stabilizes during the transition process, how do the users behave, if you can talk about that. The third point about the cost, the second quarter you had lot of marketing cost and it was lower than your plan as a result, so I’d like to know the reason, you wanted to spend more, but you couldn't, what happened or did you think that the marketing budget was too high, so that's the third point that I’d ask you about cost?

Yes first point about the Dungeon&Fighter current status. In Q2 of last year I think we had a similar situation, MAUs is stable, it's a little down but stable, and paying users are slightly increasing, their ARPU is relatively stable.

So about Q2 as we explained in Q1, user engagement is what we have been focused upon, so it is a lower season, so we want to make sure that the users can enjoy. But of course that we had events and offered less expensive items, so we continued to offer cheap items and there are many users who buy cheap items.

Now, Dungeon&Fighter growth last year if I may talk about that, last year paying users increased significantly, that was last year and in Q1 this year package sales were strong and ARPU increased, and revenue grew in Q2, and the status is same as last year it's almost flat. Now as for Q3, similar if you compare that to last year MAU is slightly up.

ARPU is down, paying user is stable. So, I think this is very similar to Q3 of last year.

So high bar set in Q3, we – probably we will be able to achieve that and we are likely to achieve that. So quarterly, that measures are changing and so it is not always the case that we take the same measure, but if you look at the KPIs in Q3 it seems that it will be very similar to the Q3 of last year.

So in any case, Dungeon&Fighter for us is a very important title, 2017 there was a major growth. And maintaining that level we want to make sure that we can realize the reasonable level of up.

Now about FIFA, FIFA 3 users, we want to make sure that they transit from FIFA 3 to FIFA 4 we're going to make sure that we give points, so the points to be transitive, of course can be utilized so they can use this point to play, but at the end of July mobile was launched and that points are being consumed, so in the near future, as FIFA Online 4 we would like to make sure that the user would pay. About the cost question the third point, could you ask me that question once again?

About cost in the presentation material, the marketing cost, the actual was lower than what you expect it. So is this in comparison to your expectations, so why was it lower.

Is it strategic decision, or you could not spend over the budget that you allocated.

We surveyed our guidance, our expected marketing costs and actual the gap is not so big a slightly lower. So it's basically what we expected So KAISER was probably a little bit weaker and because of that marketing was lower, marketing cost was lower, but it's not a big difference.

Think about marketing I think we may have talked about this before, but the key thing in marketing especially in mobile games, but it's true in online games is we're in the free to play business. So we do launch marketing of course to generate interest around a game, but we also look very, very closely at the expected lifetime value of a customer.

And we watch that very closely, we have quite detailed models about that. And then we look at a number that we call effective cost per install, and if the lifetime value expected is higher than the effective cost per install, then we'll be buying advertising, and if it's lower then we won't buy advertising, because by definition that would mean we'd have a negative ROI, if they amount a money that we expect over the life of the user is lower than the cost to acquire that user.

So that's our general approach, and that colors everything that we do. So it's not a topic about any specific game, it's just a general approach to how we think about marketing and it may seem obvious to everybody in this room because everybody in this room is a professional investor, but I’d point it out because it's sadly somewhat on comment to take this approach in a video game – in the online games business, you find a lot of game companies who want to drive their games up to the top of the app charts, by buying revenue, by spending money in ROI negative way and it's very destructive.

One of things it does is it drives up marketing costs, customer acquisition costs for everybody when they do it, but eventually they run out of money, and then they go out of business and that's happened several times in the last year for exactly that reason, so we're very careful about this topic, because we're always thinking about the long term. So I – provide that color so you understand how we think about this problem.

Thank you.