NHN Corp

KRX:181710

Earnings Call Transcript 2023-Q3

[Ji Hye Kim, executive]

[Interpreted] Good morning. This is Ji Hye Kim, the IR team leader at NHN. Thank you very much for attending our 2023 third quarter earnings conference call. NHN CEO, U-Jin Chung; CFO, Hyun Shik Ahn; CEO of NHN PAYCO, Yeon-Hun Jeong;, CEO of NHN Commerce, Yoon-Shik Lee; and CEO of NHN Cloud, Dong-Wook Kim are also present.

CFO, Hyun Shik Ahn, will start off with a presentation on our third quarter financial results, followed by CEO, U-Jin Chung, business update before we take your questions. The earnings announced today have been prepared based on IFRS consolidated financial statements and are subject to change depending on the results of the external auditor's review, which is currently underway.

Also, I remind you that the conference call contains forward-looking statements and that the company's actual business results may differ materially. Now CFO, Hyun Shik Ahn, will start off today's conference call with a look at third quarter financials and business results.

[Hyun Shik Ahn, executive]

[Interpreted] Good morning, this is CFO, Hyun Shik Ahn. I would like to share with you the third quarter results. 2023 third quarter consolidated revenue was KRW 571.5 billion, which is a 9.4% Y-o-Y growth and a 3.6% Q-o-Q increase. Operating profit was KRW 23.4 billion, which is 181.5% increase Y-o-Y and an 11.8% increase Q-o-Q. Q3 operating profit margin was 4.1%, which is a 0.3 percentage point improvement Q-o-Q and a 2.5 percentage point improvement Y-o-Y.

Third quarter game revenue was KRW 110.2 billion, which is 4.9% Y-o-Y decrease, but a 2.8% increase Q-o-Q. PC online game revenue was KRW 39.8 billion, which is a 10.8% decrease Y-o-Y and a 2.1% decrease Q-o-Q. Mobile game revenue was KRW 70.4 billion, which is a decrease by 1.2% Y-o-Y, but a 5.8% increase Q-o-Q. Web-board games maintained solid traffic even against last year's elevated levels driven by the deregulation introduced as of July 1 last year.

Q3 web-board game revenue decreased by 2% on a Y-o-Y basis. In Q3, Yo-Kai Watch Puni Puni event celebrating 10 years of the Yo-Kai Watch IP was a huge success among users and its revenue more than doubled on a Q-o-Q basis, setting a new quarterly revenue high.

For the payment and advertising business, revenue was KRW 265.1 billion, which is a 16.8% increase Y-o-Y and a 2.8% increase Q-o-Q. NHN PAYCO continues to successfully improve its top and bottom lines, including a Y-o-Y 65% improvement in its operating loss YTD as of third quarter. NHN KCP also continued volume growth, thanks to increased transaction volume of large Korean merchants and major global merchants, including global OTT and Tesla. NHN KCP has been meaningfully gaining market share in the payment gateway market.

Commerce business revenue was KRW 60.7 billion, despite the full quarter effect of the Ikonic acquisition in July. NHN Commerce China also went business streamlining for the sake of better long-term profitability, including the discontinuation of [indiscernible], which is a platform specializing in Chinese consumers purchasing fashion goods from Korea.

Overall, Commerce business revenue decreased by 8.4% Y-o-Y and increased by 17% Q-o-Q. Even though the China commerce business environment is yet to see clear signs of improvement, both domestically and externally, we are working with major players in China to widen our coverage and increase our business capabilities.

Tech business revenue was KRW 95.4 billion, which is a Y-o-Y 33.8% increase and a 1.9% Q-o-Q increase. Revenue of the CSP, including NHN Cloud, increased by 13.3% Y-o-Y and 6.0% Q-o-Q, thanks to the recognition of some new revenue from public sector clients. The MSP business led by Japan's NHN Techorus saw a revenue growth of 28.1% Y-o-Y and 0.2% Q-o-Q with the continued acquisition of new customers.

Sales of Cloudnexa of the U.S., which was classified as our MSP business, was completed as of end of September. And therefore, Cloudnexa is no longer a consolidated subsidiary. The focus of our MSP business development going forward will, therefore, be Japan.

Content revenue was KRW 50 billion, which is a Y-o-Y 1.9% decrease and a 0.9% Q-o-Q decrease. This is in part due to some revenue decline at NHN BUGS and NHN Edu.

However, NHN Comico maintained stable traffic with efficient marketing, and NHN Link set another quarterly revenue record, driven by growth in both sports tickets and concert ticket sales. NHN Link's third quarter revenue grew by 74.7% Y-o-Y and 14.4% Q-o-Q. In other businesses, NHN Doctor Tour increased by more than 5x Y-o-Y and 3% on a Q-o-Q basis as it focuses on adding greater diversity to its product portfolio and on attracting new travelers.

Next, about our operating expenses and profits. Total operating expense was KRW 548.2 billion, which is an increase by 6.6% Y-o-Y and an increase by 3.3% Q-o-Q. Commission expense was KRW 367.9 billion, which is a 3.4% Q-o-Q increase. Even though NHN KCP's revenue-linked commissions increased and the Commerce sector COGS increase following the acquisition -- consolidation of Ikonic, this was accompanied by revenue growth and therefore, commission to revenue ratio in Q3 was 64.4%, which is a 0.1 percentage point drop Q-o-Q.

Labor cost was KRW 115.7 billion, which is a 0.1% Q-o-Q decrease. Even though consolidated headcount increased by 39% Q-o-Q and NHN KCP's fixed amount bonuses were reflected besides of the increase was limited to -- reflecting the reverse base effect from the bonus payments made by certain subsidiaries during the prior quarter.

Advertisement and marketing was KRW 19.8 billion, which is 1.9% increase Q-o-Q. During Q3, we practiced efficient marketing across all lines of business, and the marketing-to-revenue ratio in Q3 remains at 3.5%, similar to Q2. Depreciation was KRW 21.1 billion, which is a 5.3% Q-o-Q increase, reflecting NHN Cloud's additional investments in cloud computing infrastructure.

Other operating expense was KRW 17.8 billion, which is a 37.2% Q-o-Q increase. Our office management costs have increased as we reduced working from home, and there was some one-off bad debt expenses related with the tech business.

Total operating profit was KRW 23.4 billion, which is a 181.5% Y-o-Y increase and an 11.8% Q-o-Q increase. Net profit was KRW 8 billion, which is a 62.7% decrease Y-o-Y and a 48.2% decrease Q-o-Q. Our subsidiary, Cloudnexa, sale was completed during Q3, resulting in an investment disposal loss of roughly KRW 4.7 billion. Also our corporate income tax expense increased KRW 7.8 billion Q-o-Q against second quarter when there was recognition of deferred corporate tax on some investment securities.

That completes my presentation on third quarter financials. And now our CEO, U-Jin Chung, will talk about major business topics.

[Chung U-Jin, executive]

[Interpreted] Good morning, this is U-Jin Chung, CEO of NHN. Let me start off with an update of our game business and the new game lineup. Wooparoo Odyssey service by NHN developed by Highbrow was successfully launched in the Korean mobile market on October 5. Wooparoo Odyssey gained positive responses by successfully attracting the strong fan base of Wooparoo Mountain and also the new audiences who love great casual games. It's off to a great start, ranking #1 in the Apple App Store popularity chart and also #5 on Daily [ Growth ] Chart.

NHN currently has 11 new games in its pipeline, 6 of which are scheduled for launch next year in 2024, including the global launch of Wooparoo Odyssey and the Zombie Apocalypse game, Darkest Days. Marvel Slot blockchain social casino game will be launched under the official name of Pebble City, starting with the onboarding of Pebble City on our own blockchain game platform, Pebble, based on the Mainnet Sui during the first half of next year. We will follow with development and launch of new social casino games.

Our goal is to create a full blockchain social casino game lineup to appeal to global users, leveraging NHN's unique game item management know-how. There's also the Project G, which is a mega IP-based mobile game being developed by Japan's NHN PlayArt, targeting release for next year. For Darkest Days, given its launch somewhat being postponed, we will use the time to add even greater variety of fun and perfection to the game.

Our Project RE and Project BA, both based on different high-profile Japanese IP, have gone into the polishing stage, targeting release in 2025. As you can see from our pipeline, we plan to continuously strengthen the engine driving our game business by launching new games across casual games, mid-core and social casino.

Next about our Payment business. This year, PAYCO has proved its monetization potential by focusing its capabilities around its core services. It maintains an emphasis on operational efficiency. The internal goal was a 50% improvement of operating loss each quarter, which PAYCO has been overachieving throughout this year. As of YTD third quarter, its operating loss has improved by 65% compared to the same period last year.

The competitive landscape of Korean easy payment market has become better defined. And PAYCO will continue to focus on increasing revenue and improving its loss rather than pursuing transaction volume expansion. Standing by this approach, PAYCO will remain focused on what it does best through continuous improvement of its fundamental capabilities.

PAYCO's third quarter transaction volume was KRW 2.6 trillion. And among this KRW 2.6 trillion, KRW 1.4 trillion or 54% was RTPV or volume that is actually -- that actually contributes to revenue, such as Corporate Employee Benefit Solutions, PAYCO Point payments and coupons.

In third quarter, such revenue contributing transaction volume, or our RTPV, increased by 29% Y-o-Y, outpacing the growth of the overall transaction volume and steadily gaining its share within the revenue. In order to focus PAYCO's capabilities on transactions that contribute to revenue, PAYCO support of Samsung Pay will end as of end of this year. However, we will continue to deliver greater user convenience by promoting the use of PAYCO point cards that is accepted anywhere and also offers great user rewards.

NHN Cloud started the official operation of a National AI Data Center last October. The operation of this AI specialized data center is very meaningful, not only for the cloud business operated by NHN Cloud, but also at the heart of developing Korea's national competitiveness in AI. The AI Data Center is based on NVIDIA H100, the highest spec GPU to date and will help boost the cloud business as the platform for bringing Korea's AI technology to life.

Cloud migration of Korean public sector institutions has slowed down versus expectations we had at the start of this year as the current government newly announced a cloud-native migration program and allocated budget for this as part of its Digital Platform Government Committee implementation Plan. However, NHN Cloud has maintained its high market share in the public sector cloud migration projects this year and remains the market leader.

Next year, public sector budget is expected to increase 3x and this year as a result of this cloud native migration project. And we expect to see friendly market environment, given that this is the start of an initiative driven by the current government. Meanwhile, even in the private sector, we will add further know-how by carrying out Shinhan Investment Securities Meta project, which is the largest cloud migration project in the financial sector.

That completes my update on our key business topics, and I will be happy to take your questions.

[Operator]

[Interpreted] [Operator Instructions] The first question will be provided by Ha Jeong Kim from DAOL Investment & Securities.

[Ha Jeong Kim, analyst]

[Interpreted] I have two questions. The first question is about the cloud business and how there are 2 different approaches? When we look at the global cloud service providers, they're actually very active in aligning with the major software, the AI software provider, whether it's OpenAI or Anthropic and somehow trying to connect their cloud services with these AI-related software. But I think NHN's focus is more on the hardware side. As you mentioned during the presentation, I think your focus is, for example, getting enough H100 GPUs to get the hardware ready.

Now many people are saying that this boom in generative AI will also drive up demand for cloud. When there is that AI-related cloud demand, where do you think will be the key differentiating competitive edge among Korean cloud service providers using the cloud service provider with the upper hand in software would be better in terms of competition or hardware? Or do you think that the competitive factor is somewhere else, not even hardware or software?

Second question is about PAYCO. What do you think will be the impact of your discontinuation of support for Samsung Pay? Also, you've mentioned that actually, your losses are improving faster than originally planned. So given that, when do you think you'll be able to turn around?

[Unknown Executive]

[Interpreted] To answer your first question, it is correct that whereas the global companies are, for example, working with OpenAI, that's launching various services. NHN Cloud has been focusing more on providing the capable infrastructure to support the LLM services rather than going about developing our own LLM-based service. That said, while we prepare the infrastructure, we're also actively reaching out and talking with various Korean start-ups as well as, Korean large corporations to build alliances that are related with OpenAI.

To answer your question regarding PAYCO, first about the implications of discontinuing our support for Samsung Pay. It is true that Samsung Pay initially did help us increase the overall gross volume of the PAYCO service. However, in hindsight, looking back at the past 5 years, we've realized that even though Samsung Pay had benefit of driving up absolute volume, it wasn't helping us either on top line or bottom line. It was a service that was actually making us incur expenses without any benefit or contribution to our top or bottom line.

Also, when you look into the users, our user base, actually, there was a very limited number of our users who only use Samsung Pay. Most of our users who do use Samsung Pay also use our other services. And based on all of that, we've decided to not extend the agreement that is in place and to end the Samsung Pay service as the current agreement comes to the end of its term. And we will be actually using our resources to focus more on the revenue contributing or revenue-based TPV or other transactions volume that directly has an impact on our revenue.

About when we expect turnaround of our PAYCO service? I am still very cautious. But I think during this year, we've been able to very strongly confirm the possibility of our performance throughout the year. And so based on our experience this year, I cautiously would say that we're expecting turnaround possibilities within the next 2-year time frame, and we will be executing our strategies based on that expectation.

[Operator]

[Interpreted] The following question will be presented by Seoko Kang from Shinhan Investment.

[SeokO Kang, analyst]

[Interpreted] I have two questions related with your cloud business. First question is, you've also recently opened the Gwangju Data Center, and you have other data centers in the pipeline. What kind of financial contributions can we expect from that? I think that point is a bit unclear from where I stand. What kind of implication or contribution do these data centers have on the financials of the company as a whole? Can you give us some rough guidance on that?

The second question is more of a mid- to long-term question regarding the cloud business. We expect the government to continue its cloud migration. Private sector cloud demand is also expected to continue to grow, given that what kind of CAGR growth rate do you expect or target for your cloud business on a year-over-year basis until, for example, 2025 or '28 or '29?

[Unknown Executive]

[Interpreted] To answer your question, the Gwangju Data Center, we actually think that the revenue growth will start visibly from mid-2025 once HVAC actually starts to be supplied. Right now, the Gwangju Data Center has been fully leased out by the government, and the government is providing that resource to, for example, start-ups. And so we expect there to be around 2x growth in revenue once it comes around mid-2025.

Regarding our long-term growth rate targets, we think that our cloud business on a mid- to long-term basis will be able to grow at average 15% on a year.

[Operator]

[Interpreted] [Operator Instructions]

[Hyun Shik Ahn, executive]

[Interpreted] Since there is no further questions, we will end the conference call here. Thank you very much for joining us this morning. And if you have any further questions, please forward them to our IR team. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]