NEXON Co., Ltd.

Hello, everyone, and welcome to NEXON's earnings conference call. 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 other securities of NEXON.

A recording of this conference call will be available on our Investor Relations website, www.ir.nexon.co.jp/en/ following this call. Unauthorized recording of this conference call is not permitted.

I'd now like to turn the call over to Owen.

Thank you, Kawai-san, and welcome everyone to NEXON’s Fourth Quarter and year-end 2021 earnings call. On today’s call, I will report on our progress in 2021, and outline for 2022, in particular, our plans for growing our existing Virtual World franchises, launches of major new Virtual Worlds, and developing our global IP strategy to create new revenue streams.

I will also offer some insights on how NEXON's strong balance sheet, powered by stable revenue and margins, allows us to invest in technology and intellectual property for robust long-term growth. 2022 will see the biggest game launches in our company’s history.

The investments we made last year put NEXON on a trajectory to exit 2022 with step-function revenue growth from new Virtual World franchises layered onto the steady revenue and cash flows from our existing portfolio. 2021 was all about building: building our existing franchises, building new franchises, building technology and building our base of IP.

We carefully controlled monetization in our core Virtual Worlds in order to strengthen player relationships ahead of major content updates and promotions in 2022. We also faced a tough comp with record-breaking revenue and operating profit in 2020.

The resulting decrease in year-over-year revenue was in line with our expectations. The business of Virtual Worlds is a marathon, one that favors those who make patient tech investments laser focused on the user experience.

Our strategy for strengthening existing franchises improved engagement in the second half of 2021, ahead of an expectation of steadily improving revenue in 2022. On our highest grossing franchise, China Dungeon&Fighter, 2021 revenue was down year-over-year.

This was due in part to our strategy for controlling monetization to build momentum ahead of a level cap release planned for the first half of 2022. Also, during the year, we appointed new creative leadership to the D&F team, and they have delivered several updates, and communicated with the D&F community to share new content and events scheduled in 2022.

Dungeon&Fighter epitomizes NEXON’s approach to running Virtual Worlds for the long term. The game is in its second decade; it consistently generates revenue and margin and makes it one of the global entertainment industry’s largest and most successful franchises.

Our approach in 2021 was to stabilize, iterate, and invest for a renewed era of growth in 2022 and beyond. In Korea, year-over-year revenue from MapleStory was down, reflecting the massive comp from the prior year, and our careful management of player relations, following an industry-wide focus on probabilities in purchasing in-game items.

Our team has established a process for meeting with players, listening to their input and sharing their ideas with our live operations team for rapid incorporation in the game. We are encouraged by the ongoing improvements in MapleStory’s Net Promoter Score, a key measurement of player satisfaction.

As we mentioned on previous calls, positive user sentiment continues to grow. In the past ten months, NPS on MapleStory rose 50 points from the low point in March last year.

We expect MapleStory’s performance in 2022 will demonstrate once again how Virtual Worlds can and do grow for years and decades, when managed for the long term. In 2021 we listened closely to our players, and invested in the user experience based on that feedback.

We believe 2022 and beyond will show the wisdom of those investments. Titles that performed well in 2021 include FIFA, Korea Dungeon&Fighter, and Sudden Attack, all of which saw year-over-year revenue increases and are exceeding or close to exceeding individual records for annual sales.

Sudden Attack is a recent example of careful, long-term-oriented franchise management. After an earlier slump, the game grew 125% year-over-year in 2021 to nearly it’s all time high reached previously in 2015.

Sudden Attack was originally launched in 2005. Over the course of years, a well-run Virtual World will display ups and downs which create a challenge for investors in the short term.

Long-term, a good operations team innovates and experiments to extend the growth for many more years. Experienced operators of Virtual Worlds embrace this as a vital process for franchise growth.

Now I’d like to turn to our plan for 2022, which leverages the progress we made in 2021, to deliver step-function improvement in our revenue and growth trajectory. Much of our growth this year will be driven by the introduction of exciting new Virtual Worlds in multiple new markets.

I’ll start with the highly anticipated launch of Mobile Dungeon&Fighter in Korea on March 24. The game is packed with content, much of it specifically developed for Korean players.

Coming out of our successful Closed-Beta Test in December, it’s fair to say the anticipation for this launch is high. KartRider: Drift, a brand new, multi-platform Virtual World scheduled for release in 2022, conducted a Closed-Beta Test in December with positive feedback from players.

You’ll see more testing and polishing ahead of the launch this year. We’ve filled the 2022 calendar with other significant launches, including DNF Duel, Mabinogi Mobile and several more major titles.

That brings us to the launch of ARC Raiders, the first Virtual World from Embark Studios. Our first public trailer debuted at The Game Awards Show in December, and captured more than 80 million views.

Many thought that they were seeing pre-rendered CGI, when in fact they were seeing real gameplay, with cinematic graphics and sound, machine learning and AI, and procedural physics, rather than pre-rendered animations. Another theme on the player forums was their appreciation for the development team’s desire to bring out fresh ideas: actual innovation and differentiation that is missing from so many new games.

The development team is enormously talented, and sharply focused on making the game they want to play. It’s our experience that when great developers make the game they want to play, rather than what others are doing, the game will find a large and loyal audience.

We plan to share more about ARC Raiders and the other projects underway at Embark over the course of 2022. Next, I want to offer you some details on technology investments we have quietly but methodically made over the last couple years.

These technology investments are designed to save us time and money; to enable us to make and run much better Virtual Worlds for our players and to grow our company to a much bigger scale than we or anyone else is operating. NEXON’s enormous experience in creating and sustaining Virtual Worlds is often overlooked.

Virtual Worlds are highly specialized, difficult to operate and difficult to scale. Money and smart engineers are required for entry, but that’s just a start.

Building and operating Virtual Worlds is at its core, a creative endeavor. Once this user-oriented creativity is understood, then technology can help.

And this is how NEXON has been investing in technology, leveraging our knowledge and experience in Virtual Worlds to build a technology stack that accelerates and scales everything we do. In game development, the team at Embark has been leading the way.

AAA game development has traditionally relied on tools and methodologies first implemented over two decades ago, an eternity in the technology world. With AAA development blowing past $150 million in average new game cost, clearly the old approach of using ancient tools and throwing more bodies at the problem is not sustainable.

Modern tech can help. For example, traditional AAA development usually requires an army of highly skilled environment artists spending months to paint a large virtual landscape, which needs to look convincingly natural both up close and from far away.

ARC Raiders takes a much simpler approach. They directly import laserscanned data – satellite data from Tenerife Spain.

With proprietary tools they’re able to rapidly build landscapes for optimal gameplay, painting nature into the environment procedurally different elevations are populated with specific biomes contextual to their location, snow on mountains, trees on slopes, grass in valleys, a fully procedural and virtual landscape that is as convincing as the real world. This approach of course saves an enormous amount of money.

More importantly it gets our artists and developers closer to the actual process of making a game fun. Our desire to make a mind-blowing gameplay is what drives our development of new tech, since quality is the most reliable business model.

Live Operations of Virtual Worlds is the second major category of tech we have been developing. Live Operations is often overlooked but the key to success over the long-term.

Fortunately, we’ve found Live Operations lends itself well to Machine Learning and other technologies, and our Intelligence Labs unit in Seoul has created a large technology stack that has been having significant real-world impact on our Virtual Worlds. For example, our team has created a matching system that players – that pairs players and environments based on their skill level and in-game choices.

We’ve developed an Abuse Detection Bot, which protects players from hacks, trolls, and other problems. And our Store-Item Recommendation Feature offers tips on items for purchase based on a player’s skill level and play style.

AI is used at companies like Netflix and Spotify to enormous benefit as recommendation engines. But in Virtual Worlds the data set is naturally much bigger; literally every move your avatar makes in a virtual world can be used by the AI to better match your play style to others who are most compatible with you.

That means a better user experience. And a better user experience means better longevity.

This is not research for use in the future. These innovations are already built into our games, including soon-to-be released Virtual Worlds, KartRider: Drift and ARC Raiders.

The power of this tech stack to drive cost savings and revenue growth is enormous. It enables greater scale in individual franchises and for our company to operate at increased speed.

Next, I will offer some insights on NEXON’s IP strategy and the recent acquisitions and partnerships that reflect our commitment to developing properties that cross over cultures, genres, and platforms. In December, we announced an agreement with Games Workshop to develop a Virtual World based on the popular Warhammer franchise.

We structured a global relationship that enables us to both benefit significantly from the continuing growth of the Warhammer IP over the long-term. In January, we announced a strategic investment in AGBO, one of the few truly premier film and television production companies in the United States.

The agreement pairs us with two of the most bankable and creative forces in Hollywood, Joe and Anthony Russo. Our objective is to significantly enhance the value of NEXON’s existing franchises and together with AGBO, to increase our pipeline of global IP.

NEXON’s $400 million investment gives us two board seats and a 38% stake in AGBO. The partnership will be managed by NEXON Film and Television, a new division of our company based in Los Angeles.

Film, TV, and streaming platforms have a proven ability to drive awareness, engagement and revenue in game franchises. NEXON and AGBO share a common vision for building IP franchises over many years, and bringing them to a massive, global audience.

The AGBO agreement is just one piece of the larger mosaic NEXON is creating to capture the biggest opportunities unfolding in global entertainment. The global media industry is shifting rapidly.

A fast-growing number agree that Virtual Worlds are at the center of this shift. We think investments that may seem non-obvious and non-traditional in the short-term will, in time, seem highly far-sighted.

In closing, I’d like to make a couple of points about our plans for 2022. 2021 was a year of building and investment.

We focused on building new franchises while improving our existing Virtual Worlds. In China, we brought in new creative leadership on Dungeon&Fighter and scaled back our monetization strategy while we rebuild engagement with new content.

In Korea, we worked on solidifying relationships with players ahead of another period of dynamic growth. In both cases, the work we’ve done in 2021 and the first quarter of 2022, is expected to re-energize growth in the rest of the year.

2021 is behind us now and we are in a countdown to the biggest year of new releases in our company history, including three major new Virtual Worlds. What should not be overlooked is how NEXON is investing to scale our ability to support these new revenue streams.

In 2021, NEXON generated an additional $1 billion in operating cash flow, a powerful stream of cash that strengthens our balance sheet and allows us to invest in new games and revenue streams to be layered onto our current business. The launch of three new Virtual Worlds, layered onto the consistent revenue from our existing games, will position us to exit 2022 with a step-change improvement to our long-term growth trajectory.

With that, I’ll turn the call over to Uemura-san.

Thank you, Owen. Next, I’ll review our Q4 and FY2021 full-year results.

For additional details, please see the Q4 2021 Investor Presentation available on our IR website. We faced a challenging comparison this quarter following a record-breaking Q4 in 2020.

Group revenues were within our outlook at ¥54.3 billion, down 18% year-over-year on an as reported basis and down 22% year-over-year on a constant currency basis. Blue Archive, which launched in Korea and globally on November 9, significantly exceeded our expectations while the performances of Dungeon&Fighter in China and MapleStory in Korea were slightly lower than expected.

By region, revenues from North America and Europe exceeded our expectations, and Korea and rest of the world were in the range of our outlook. Revenues from China and Japan came in slightly lower than expected.

Looking at the total company performance by platforms, PC revenues were in the range of our expectations while mobile revenues exceeded our outlook. Operating income was within our outlook at ¥3 billion, down 81% year-over-year.

Marketing expenses were lower than our plan while recording a ¥2.8 billion impairment loss primarily on NAT Games’ IP as we expect a delay in one of the game launches. Net income was ¥22 billion, exceeding our outlook.

The outperformance was driven by ¥14.6 billion additional deferred tax assets primarily on overseas subsidiaries, as well as FX gain of ¥3.2 billion primarily on U.S. dollar denominated cash deposits and a revaluation gain of ¥1.2 billion yen due to movements in the market price of Bitcoin during the quarter.

Next is results by region. Revenues from our Korea business were in the range of our outlook.

Blue Archive, which launched on November 9th, and KartRider Rush+ significantly exceeded our expectations, helping to offset the lower-than-expected performances of MapleStory, MapleStory M and Sudden Attack. On a year-over-year basis, revenues decreased by 25% on an as-reported basis and by 27% on a constant currency basis as in Q4 2020 our Korea business grew by 70% year-over-year on a constant currency basis.

As we said last quarter, we are focusing on increasing user engagement in MapleStory rather than short-term monetization. As a result, while revenue was slightly below our expectations, Net Promoter Score improved in Q4 compared to Q3.

Moving to FIFA Online 4, PC and mobile combined revenues grew year-on-year as expected. While slightly below our expectations, Sudden Attack grew more than 2x year-over-year, achieving record-breaking Q4 revenue.

Meanwhile, Dungeon&Fighter revenue decreased year-over-year as expected. While Sudden Attack and FIFA Online 4 grew year-over-year, these were more than offset by MapleStory’s and Dungeon&Fighter’s revenue decreases consequently, PC revenues in Korea decreased by 16% year-on-year.

As for the mobile business, revenues exceeded our outlook. Blue Archive was off to a good start and significantly exceeded our expectations as it acquired many core users due to a successful marketing strategy that focused specifically on the target audience.

On a year-on-year basis, mobile revenues decreased by 37% as in Q4 2020 mobile revenues grew by 113% on a constant currency basis driven by contributions from The Kingdom of the Winds: Yeon and KartRider Rush+. On a quarter-on-quarter basis, mobile revenues were roughly flat as a revenue decrease in The Kingdom of the Winds: Yeon was offset by the launch of Blue Archive.

Revenues from our China business were slightly below our outlook and decreased 11% year-on-year on an as-reported basis and 19% year-on-year on a constant currency basis. For Dungeon&Fighter, we continued the National Day update from Q3 and primarily continued to conduct events to focus on improving user expectations.

Quarter-on-quarter, MAUs, paying users, ARPPU and revenue decreased due to seasonality. These metrics also decreased on a year-on-year basis.

While ARPPU was on an increasing trend for the past few quarters, it decreased as we strategically controlled monetization for the purpose of regaining users and increasing their engagement from 2022 onward. Revenues from Japan decreased by 29% year-over-year.

MapleStory had a good quarter driven by well received collaboration with other companies and contributions from Blue Archive and COUNTER: SIDE, launched on December 19th, however there were not being able to offset the decreases from V4 and TRAHA. Revenues from North America and Europe decreased by 5% year-on-year due to revenue decrease in Choices despite a contribution from Blue Archive.

Revenues from the Rest of World increased by 29% year-over-year with growth in MapleStory and MapleStory M as well as a contribution from Blue Archive, partially offset by a revenue decrease from KartRider Rush+. Next, I’ll review our FY2021 full-year results.

FY2021 was a transitional period for growth in FY2022 and beyond. We focused on improving our major franchises such as Dungeon&Fighter in China and MapleStory in Korea and games development.

As for the PC business, revenues from two of our largest franchises, Dungeon&Fighter in China, and MapleStory in Korea, decreased year-on-year as they are still on the way of recovery. However, overall PC revenues were roughly flat as a result of record-breaking full-year revenues from FIFA ONLINE 4 in Korea and Sudden Attack growing more than two times year-on-year.

As for the mobile business, revenues decreased as we achieved the record-breaking revenues in FY2020. Group revenues for the full year 2021 were ¥274.5 billion, down 6% year-on-year on an as-reported basis and down 12% year-over-year on a constant currency basis.

Operating income was ¥91.5 billion, down 18% year-on-year on an as-reported basis and down 24% year-on-year on a constant currency basis. Net income was ¥114.9 billion, up 104% year-over-year on an as-reported basis and up 94% year-over-year on a constant currency basis due to the ¥15.3 billion additional deferred tax assets primarily on overseas subsidiaries, as well as an FX gain of ¥36.4 billion on our cash deposits.

Next is our fiscal 2022 FY outlook. Q1 outlook.

In Q1 2022, we will continue to focus on building player engagement for our two major titles, Dungeon&Fighter in China and MapleStory in Korea. We expect Dungeon&Fighter in China to grow year-on-year driven by the well-received Lunar New Year update.

As for MapleStory in Korea, while we could see continued improvements in the Net Promoter Score, we expect a revenue decrease as we achieved a record quarterly revenue one year ago. Consequently, we expect our Q1 2022 group revenues to be in the range of ¥84.8 billion to ¥92.7 billion, representing a 4% decrease to 5% increase year-over-year on an as-reported basis, 8% decrease to 1% increase year-on-year on a constant currency basis.

We expect Q1 operating income to be in the range of JPY32.9 billion to JPY39.7 billion, representing 24% to 8% decrease year-on-year on an as-reported basis and 30% to 16% decrease year-on-year on a constant currency basis due to increases in HR costs, marketing costs primarily associated with new titles. I’ll discuss the details of this shortly.

We expect net income to be in the range of JPY32.7 billion to JPY38 billion, representing a 29% to 18% decrease year-on-year on an as-reported basis and a 34% to 23% decrease year-on-year on a constant currency basis. Net income outlook includes a gain on disposal of Six Waves equities.

Last year in Korea, we achieved 26% year-on-year growth driven by MapleStory’s record quarterly revenue and contributions from The Kingdom of the Winds: Yeon and KartRider Rush+. Given that challenging comparison, we expect revenues from our Korea business to be down in Q1.

We are looking for revenue to be in the range of JPY42.9 billion to JPY46.5 billion, representing a 14% to 7% decrease year-on-year on an as-reported basis, 15% to 8% decrease year-on-year on a constant currency basis. As for the PC business, we expect FIFA Online 4 to grow, Sudden Attack’s revenue to be roughly flat and Dungeon&Fighter’s revenue to slightly decrease year-over-year.

As for MapleStory, like we did last quarter, we will continue to focus on strengthening our mid-to-long-term relationship with our players rather than seeking short-term revenues. As a result of this strategy, we have continued to see further improvement in engagement and the Net Promoter Score thus far in Q1 2022.

However, we expect revenue to decrease this quarter compared to Q1 2021 when the game grew by 37% year-over-year driven by the success of the largest-ever Winter update. Consequently, we expect year-over-year PC revenues in Korea to decrease in Q1.

Regarding the mobile business in Korea, we expect first quarter revenues to be roughly flat year-over-year. We expect to benefit from Blue Archive, which launched in Q4 2021, and anticipate growth from FIFA ONLINE 4 M and FIFA MOBILE.

We also expect to benefit from several days of contribution from Mobile Dungeon&Fighter, which is scheduled to launch on March 24th. However, we expect these to be offset by year-over-year revenue decreases in V4, MapleStory M and KartRider Rush+.

On a quarter-over-quarter basis, we expect revenues to increase driven by seasonal revenue increases in FIFA ONLINE 4 M and MapleStory M as well as a contribution from Mobile Dungeon&Fighter. Turning to China, we expect revenues from our China business to be in the range of JPY30.9 billion to JPY34.2 billion, representing a 20% to 32% increase year-over-year on an as-reported basis and a 9% to 21% increase year-over-year on a constant currency basis.

Our performance in China will be driven by the anticipated increase in Dungeon&Fighter’s revenue. We introduced the Lunar New Year update for Dungeon&Fighter on January 20th, which includes avatar package offerings and a new job added for a popular character.

We expect this update and the package sales to drive the year-over-year growth of the franchise. While we expect growth in Q1, we will continue to strategically control monetization and operate the game for mid- to long-term growth.

This year, we hope to increase active users and paying users gradually through regular updates and the Level cap release scheduled for the first half. In Japan, we expect revenues in the range of ¥2.6 billion to ¥3.0 billion yen, representing a 23% to 12% decrease year-over-year both on an as-reported basis and on a constant currency basis.

We anticipate a contribution from COUNTER SIDE and to be more than offset by decreases from Blue Archive, V4, and TRAHA. In North America and Europe, we expect revenues to be in the range of ¥3.9 billion to ¥4.4 billion, representing a 19% to 8% decrease year-over-year on an as-reported basis and a 23% to 13% decrease year-over-year on a constant currency basis.

We anticipate a contribution from Blue Archive to be more than offset by a decrease from Choices. We expect revenues in the Rest of World in the range of ¥4.4 billion to ¥4.7 billion, representing a 7% to 13% increase year-over-year on an as-reported basis and a 4% to 10% increase year-over-year on a constant currency basis.

While we anticipate a contribution from Blue Archive and growth from MapleStory M and MapleStory, we expect these to be partially offset by a decrease from KartRider Rush+. In Q1 2022, we expect operating income to be in the range of ¥32.9 billion to ¥39.7 billion, representing a year-over-year decrease of 24% to 8%.

Unfavorable factors compared to Q1 2021 regarding the operating income include: First, increased HR costs due to headcount growth, annual salary hike, and an increase in stock option costs. Second, increased marketing costs associated with promotions for Mobile Dungeon&Fighter in Korea, which is scheduled to launch on March 24 and MapleStory.

Consequently, we expect operating income to decrease year-over-year. Overall, in Q4 2021, we focused on improving our major titles, Dungeon&Fighter in China and MapleStory in Korea, for growth in 2022 and beyond.

In Q1 2022, the enhancement of player engagement of our two major titles is progressing well and we are ready to get back on a long-term growth track. In addition, the development of new games is progressing well.

We will launch Mobile Dungeon&Fighter in Korea, on March 24, and KartRider: Drift, ARC Raiders, along with many other titles later this year. We are excited to achieve significant growth in 2022 and beyond by adding these titles on top of our stable revenue foundation.

Last, I would like to provide an update on the shareholder return and capital allocation strategy. As for dividends, the Board of Directors today decided to revise our dividend forecast, increasing the year-end dividend from ¥2.5 to ¥5 per share.

We also plan to pay a semi-annual dividend of ¥5 per share in 2022. Regarding our three-year ¥100 billion share repurchase policy that we announced on November 10, 2020, we announced that we would conduct ¥40 billion share repurchase by April 2022, which is currently ongoing.

As of the end of January, we have completed approximately ¥20 billion repurchase. As for the remaining ¥60 billion, we plan to conduct the share repurchase after April 2022 by November 2023 by considering several factors including investment opportunities, financial conditions, as well as the share price.

We make the most of our cash at hand to compose a balanced portfolio of investment for growth, shareholder return, and cash management. As of the end of December 2021, we put roughly ¥95 billion in growth opportunities and roughly ¥109 billion for share repurchases and dividends.

In addition, we put roughly ¥136 billion mainly into equities as active cash management, and we had an unrealized gain on those investments of approximately ¥48 billion. We also conservatively manage roughly ¥535 billion in cash deposits, of which ¥93 billion is allocated to dividend payments and share buybacks.

We will effectively utilize our cash by leveraging the strength of our solid financial base upon consideration of the balances between business investments and shareholder returns. This ends my comments.

Back to you Owen.

Thank you, Uemura-san. Before we move on to Q&A, I'd like to briefly leave you with some context on the future of the media industry.

As Uemura-san and I mentioned above, NEXON has been investing heavily in first, new games that provide step-function growth in operating income; second, technology to build new massive virtual worlds and operate them better; and third, intellectual property to expand the scope and scale of our audience. We expect each of these investments will pay out for us in 2022, and to compound each year after that.

Now, we are doing this in the context of great interest in the topic of the Metaverse. Nearly every analyst and press discussion I've had in the last six months has included some form of this topic, and the number one question I get is whether I or anyone else can define for them what the Metaverse is supposed to be.

Although we are in many ways thrilled that so many people are interested in this topic, we have mostly side-stepped participating in such a circular and vague discussion that seems to serve little purpose other than hype for the purveyors. As you try to parse what is important and what the future of the media industry holds in order to smartly allocate your capital, allow me to share two short thoughts that largely are missing from the discussion.

The first is the incredible economics that are generated by those entertainment companies that know how to operate and build massive virtual worlds. Virtual worlds generate enduring, long-term growth that might look bumpy in the short-term but produce very solid cash flows over time.

Those economics are not sci-fi and they do not require new consumer hardware, they are here today, and will continue to grow rapidly thanks to proliferation of high-powered mobile devices at consumer price points. Consumers who already spend a large portion of their day in virtual worlds know why their chosen entertainment form is so compelling.

For outsiders to those worlds, it's harder to grasp. This is not the traditional games business.

The second major point is that what is lacking from nearly every question, debate and presentation on the Metaverse is a serious description of the user experience. Most demos have struck us and others as cringe-worthy, mostly because they clearly were not made by someone who spends any time in actual Virtual Worlds.

What is the specific user experience? Why would a user want this?

Why would that user keep coming back for thousands of hours, spanning years or decades? Then how, specifically will we build it?

In NEXON’s experience – and we’ve been making online Virtual Worlds since we invented the category in Korea over 25 years ago – is that any project that forgets the user is going to die an expensive, humiliating death. In coming months and years, you’ll see us make more moves to build on the vision we have outlined above.

These moves won’t always seem obvious or mainstream. That’s because much of the mainstream discussion is ignoring the user experience.

We won’t always get it right, but the user experience is our north star, and we endeavor to get it right because we know when we do, the benefits to users are enormous. And pleasing customers is by far the most enduring way to please investors.

With that, Operator, we are ready to take questions.

Hi thank you for the opportunity. I have two questions.

The first question is related to your existing titles Dungeon&Fighter in China and MapleStory. If you look at the 1Q guidance and with the Lunar year already having passed you seem to be already kind of reflecting a meaningful recovery for Dungeon&Fighter in China.

Although it's, if you compare it with the peak years, a couple of years ago, it there's still some way to go and I guess taking you know, management commentary from last year should we be expecting this to be the beginning or the early innings of a gradual recovery over the longer term? That's the first question?

Same thing with MapleStory in Korea. And then the second question is regarding your recent investment in a AGBO and, the formation of a new film on TV division.

And I'm just kind of curious, what management is thinking over the, longer term about how you plan to leverage this opportunity, whether this means NEXON maybe gets access to some of DIP that you know, could come out from new productions or whether NEXON is actually thinking about entering the film and TV business as well and some, some thoughts on, what that would mean would be most appreciated. Thank you.

[Foreign Language]

[Foreign Language] Thank you for your questions. This is Uemura speaker, CFO.

Let me answer to your first question. You are right that as we mentioned in the previous quarters earning call, both China Dungeon&Fighter and Korea MapleStory, we are seeing the improvement of the user engagement.

This is as a result of a strategically controlling the monetization and offering the events so that the user can enjoy those games. And we did that very well, especially in Q4.

And in Q1 after the Lunar year update, we are seeing the good signs and we believe that we can expect the year-on-year growth for China Dungeon&Fighter. As for MapleStory we have a very high hurdle to clear because of the performance of last year, but if you look at the net promoter score and other metrics, we are seeing improvements.

So we believe both of those franchises are on the recovery track. We would like to make sure that we work on the daily operation and try to monitor the various KPIs, so that we can go back to the steady and solid recovery.

So we would do so by doing and operating those games steadily.

And this is Owen. Sam, I'll take your second question, which is about AGBO.

I think your question was really about sort of what we see there, what we're doing and what our future plans are. Look, the short answer is that the partnership recognizes the enormous untapped value of cross platform development of global entertainment.

Our view is that film and TV and streaming platforms have a proven ability to drive awareness and engagement in game franchises, so – and the opportunity is international. So this will help us not just in one region, but around the world.

The slightly longer background is that the history of making movies in TV from games has been spotty at best from a creative perspective. But from an economic perspective, it's been very, very successful.

Even if you look at that history of, for example, Metacritics, many, many of, if not the large majority, have Metacritic's sub 50% of movies or TV that was made out of games, but the impact on the game performance has been very, very positive. Our aspirations are actually to have both accretive success that results in a much better long-term economic success, so both short-term and long-term.

And, of course, when you're talking about AGBO, the Russo Brothers and the team they have built around them, they have been just extraordinarily successful. They're basically the most bankable team in Hollywood right now.

But as we got to know them better, as we talked about our plans for the future, what we see is that we see the world very similarly as they do. In other words, it's about world building.

And world building over a period of years. So that invests value in the IP rather than harvesting the value of the IP.

So, the value of those investments that we make in the IP and in the world’s compounds over time. And they see the world very similarly in their chosen field.

So, we've got a very similar view of the future. They're extraordinarily creatively focused, and as a result have been economically very successful.

So, we think that this helps our franchises a lot not just in one region, but around the world. So that's our thinking behind that now.

[Foreign Language]

Thank you very much.

[Foreign Language] Thank you.

[Foreign Language] Thank you very much. Thank you for allowing me to ask questions.

This is Yijia Zhai from Macquarie Capital Limited. I do have two questions.

My first is about China Dungeon&Fighter. I'd like to know a little more about this.

You mentioned about the year-over-year increase in January, but then are you talking about, for example, increase in ARPPUs through the package, or are you talking about MAU increase? And do you believe that this is going to be sustainable, this growth is going to be sustainable over the mid to long-term.

This is something I would like to hear a little more flavor about. And also in terms of the level cap increase, I do recall that in the past, it wasn't exactly successful, but what makes you confident that you would be able to find success this time is something that I would also like to hear.

And then also for on China Dungeon&Fighter, when I look at your roadmap from 2021 to 2023, I don't exactly find China Dungeon&Fighter, but is this because you're not exactly expecting contribution from this title on, in terms of revenue from here. So that is something that I want to – also wanted to hear.

And that's my first question, but then the second question has to do with what you have on presentation deck Page 3 and here you're talking about the step-function revenue growth, and so can you elaborate on this little more, for example, what kind of image do you have in terms of the future sales and op, operating profit?

[Foreign Language] Allow me limited to answer your first question in regards to China Dungeon&Fighter. So in Q4, we have been able to make sure we have a very good improved increase in terms of user engagement.

And I do believe like I – like we mentioned earlier that we currently are observing a very good trend. To be specific, we are finding a more activated existing users.

And so at the moment, I would think it’s not exactly about MAU, but more about how we’re doing better in terms of the revenue side from the package. And so again, we are finding a very good trend where we are finding a natural increase in terms of our performance as we find user engagement also on the rise.

Now, in terms of a label the Level Cap release. We do not recall that we had not been able to do well in the past, but then it is true there may have been some times where we were not exactly able to see the full extent of what we expected.

But then the first objective, the goal of doing any Level Cap release is to make sure that we be able to have more activities or activate the users in the game. In other words, Level Cap release enables users to do more inside the game.

So as we try to go into Level Cap release in this good circumstance, we do believe we should be able to have more user engagement or activation of the users. [Foreign Language] And I’d also like to answer your second question, in other words, what is our expectation in terms of sales and operating profit scale for 2022?

Now, of course, every time we make this guidance, we only tell our outlook to the upcoming quarter. So it’s not like I have the full number, specific numbers, I’d be able to share with you in terms of 2022.

But then as for our Q1 outlook for 2022, we know, we should be able to see a very good performance coming from our existing titles. But that also means, there will be some associated cost increase as well, which goes back to what we – what I did mention earlier.

In other words, it is the increase coming from HR, as well as the marketing cost. Both I would call them as advanced investment required for the new – the title launch, the new pipeline that will be coming up later on, especially towards the later half of 2022.

And to do that, we have to make sure that we’ll be able to have talented people, so that we’ll be able to keep on operating quality games. So again, that is why we are going to be making these advanced investments.

And the same could be said for any marketing expense we will be making, because it is – it will be all the titles that we do have high expectation. Now for the rest of 2022 as time goes on, we should be able to see the contribution from these new titles to not just the top line, but eventually to our operating profit.

So we are going to make sure, we’ll be able to steadily prepare for that. Once again, I am not going to be able to tell you like what specific numbers we’re expecting, but then this is really much what we have in mind in terms of our strategy.

And this is Owen. I just want to summarize sort of your question had to do with our phrasing of step function growth that we see as a result of our investments in 2021, 2020 and before.

I think what you’re hearing us say is we feel confident in our existing slate of games and the earnings power, those games and their growth over time in coming years. And on top of that, we’re entering a very busy period in 2022 and 2023 of new game launches.

And so when you layer the new game launches on top of the solid platform, the solid base of existing games. That’s why we characterize the potential as a step function growth in revenue and earnings power.

[Foreign Language]

Thank you very much.

Thank you.

Hi. Thanks very much for taking my question.

I was just wondering is it possible to explain within SG&A why the personnel cost was up sort of like 50% last year. It’s quite a lot higher than the last few years.

And similarly the platform fees were quite high, even though revenues were lower than last year. That’s my first question.

And my second question is just in this presentation there’s not been many mention of Mobile Dungeon&Fighter in China. Obviously there’s not necessarily a lot you can say, but I was wondering if there’s any update there or if you’ve abandoned it or if you’ve got any comment that would be helpful.

Thank you very much [Foreign Language]

[Foreign Language] Thank you. To the first question, let me answer about the HR cost or personnel cost.

It is true that in 2021, the personnel cost increased. It is a fact.

And as we explained last year, the market has been very competitive for the human resources, and for us the human resources are our asset. And especially in Korea the human resource, our market is very tight.

And so we have been increased as our salary of the employees to the very highest level of the gaming industry, as well as the average IT company. And that was one of the reasons behind the increase of last year.

As for this year’s increase this has to do with the regular salary increase or pay rise – pay raise, and also the stock option related additional costs, but mainly this is related to the new recruits. As you know, we have a very rich pipeline from 2022 and onwards, and therefore we need people for development as well as for the operation in order to have a very high quality operation.

And also the live development we need a new personnel. So this time, the increases mainly due to the new recruits.

As for the platform fee this is a business as usual, depending on which title does well, it changes. So in the case of internal IP if basically it’s a PC online games, the platform fee is a low, but in the case of other companies then the royalty will be higher.

So it fluctuates and mainly this is relation – related to the mobile games. So it is not just one reason, but different multiple reasons.

And this is Owen. I’ll take the second question you had.

The short – your question was what’s up with China mobile Dungeon&Fighter. And have we abandoned our plans?

The short answer to your question is no, we have not abandoned our plans for launching mobile Dungeon&Fighter in China in any way. We just had a lot to update you on for 2021 and our plans for 2022.

We don’t have any major updates for you today, but I’d say we remain very committed to getting the game into the hands of our fans as soon as the conditions permit. [Foreign Language]

Thank you for taking my question. This is Fukuyama from UBS Securities.

Now I do like to hear from Owen, what would be your mid-to-long term, especially for the Europe or Europe and U.S. market.

In other words what kind of proportion do you think this market would have to your total performance or sales? I asked this because I know that you are going to be – going into the more entertainment space through the investment in AGBO and from Embark studio.

We are expecting to hear more about the new titles coming. Now, when we look into the Western market, we know the total addressable market TAM is extremely high, especially for the PC game space, but then at the same time, I do believe that the outlook you currently would have is under JPY20 billion with, but then what I would like to know is what kind of upsides would you be expecting to that number?

Thanks for your question. We don't give specific guidance about going out beyond the current quarter.

I'd say overall though your assumption is spot-on, which is that we have big ambitions for the west, and that's really going to be led by our efforts in new game development. We're very excited about ARC Raiders, the first game from the Embark studios, and we're very excited about the other games or virtual worlds that they have in the pipeline.

But we're also very excited about certain other games that are coming out of our Korean studios, such as KartRider: Drift, which we think has real global opportunity. And then the investment in AGBO is about augmenting the IP that we have in our portfolio, and that we're creating and lend ourselves to other opportunities they originate.

So we see sort of a two way street there that, that we think is going to be very exciting. Net, our ambition is about global footprint and global opportunity.

And so we're very focused on that and the idea that we can make a virtual world last and grow for decades as we’ve done, for example, with MapleStory or Dungeon&Fighter, or our other franchises is a very exciting idea and we think it’s global. [Foreign Language]

If I may just ask a quick follow-up or additional question. At the moment, for example, we are seeing an accelerated M&As going on in this game space, especially in the U.S., it’s the non-game companies acquiring the game companies.

For example, we saw the example of Microsoft acquiring Activision. And so we’re also seeing these examples one by one.

So it seems like everyone is out for a fight of contents as well as good IP. And so I wanted to hear how you look at this, because we are seeing an increase in a number of players in the game industry and a change in the competition environment.

And so with that change, do you think, or does the management think that there needs to be a change in your own strategy? What are some of the expectations, or perhaps some issues that you feel amidst all these changes?

If you’d be able to comment on that? Thank you.

Sure. I can’t comment on decision making at other companies, of course.

But what I can comment on is what’s going on in the industry at large. And I think what you’re really seeing here is what we’ve been talking about for some time, which is a secular shift in the entertainment industry.

We've been talking about this for a couple years, and when we first said this a few years ago, it was considered heresy or a very non-traditional thinking a couple years ago. All the thinking, all the inks built in the media industry and the newspaper and coverage was about linear entertainment.

And clearly there's a significant shift merging and shift to interactive. And today every media and tech company is talking about interactive openly.

And that makes companies that have great ability to make virtual worlds in the interactive entertainment and companies that have great IP extraordinarily valuable. And I think that there's a growing recognition of this shift and that puts us, it certainly that that viewpoint has informed our every bit of our thinking and it puts us in a very strong position in the global entertainment industry.

[Foreign Language]

Thank you so much. Always looking forward to your big step up going forward.

[Foreign Language]

Thank you.

Thank you. If there are no further questions, I would like to take this opportunity to thank you for your participation in this call.

Please feel free to contact the NEXON Investor Relations at [email protected] should you have any further questions. We appreciate your interest in NEXON and look forward to meeting with you, whether it is here in Tokyo or in any corner of the world.