Nexon Co Ltd

TSE:3659

Earnings Call Transcript 2021-Q1

[Operator]

Good day, everyone, and welcome to Nexon's 2021 First Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Maiko Ara, Head of Investor Relations and Corporate PR. Please go ahead, ma'am.

[Maiko Ara, executive]

Hello, everyone, and welcome. Thank you for joining us today. With me are Owen Mahoney, President and CEO of Nexon; and Shiro Uemura, CFO.

Today's call will contain forward-looking statements, including statements about our results of operation and financial conditions, such as revenues attributable to our key titles; growth prospects, including with respect to online game 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 owner 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.

[Owen Mahoney, executive]

Thank you, Ara-san, and welcome, everyone, to Nexon's First Quarter 2021 Conference Call. Today, I will provide an update on Nexon's first quarter performance, followed by some perspective on trends shaping our business. After that, our CFO, Uemura-san, will provide a detailed financial review of our quarter and our guidance for Q2.

Nexon has delivered another strong quarter. All but one of our regions contributed a first quarter performance that was close to or above the high end of our guidance. The exception was the Korea region. Although revenue from Korea increased by 26% year-over-year, it was below our outlook due to softer-than-expected results from MapleStory and KartRider Rush+. On the strength of our existing portfolio of virtual worlds, we again saw revenue growth, up 7% year-over-year on an as reported basis and up 3% on a constant currency basis.

Separate from our core business, in March, Nexon disclosed investments that we made in the last year in 4 entertainment companies. These companies, which like Nexon, are defined by disciplined and dedicated management of global IP are, Hasbro, Bandai Namco, Konami, and Sega Sammy. Others received investment, but did not meet the threshold for disclosure. As of March 31, our investments in this collection of companies generated an unrealized gain of JPY 29.6 billion or 26%.

Next, I'd like to offer some context on our long-term strategy and some specific near-term trends. The past 18 months offer a clear affirmation of the focused strategy Nexon adopted in 2019. At that time, we resolved to reduce the number of projects we pursue, saying no to many good development projects, live games and investments, so that we could say yes to a much smaller number of truly great ideas. The projects we chose to focus on include more resources for our best online virtual worlds, expansion onto new platforms, including mobile and consoles, investing in a much more advanced technology base for operating massive virtual worlds and building new ones and building a select number of highly original game IP for global markets. We know from experience that focusing attention on the development and live operations of virtual worlds like MapleStory and Dungeon&Fighter offers years and even decades of revenue growth.

We also know that long-running virtual worlds like MapleStory is not a linear progression, and that periods of rapid growth, like MapleStory's 98% year-over-year growth in Korea last year can be followed by transitional periods of flat performance or even decline. Our long-term investors understand the dynamics of virtual world's business and recognize the long-term growth characteristics of these franchises as they have seen the pattern play out repeatedly across our portfolio. They understand that our existing portfolio as well as our new -- as well as new and unreleased titles like Mobile Dungeon&Fighter, KartRider: Drift and the new games from our Embark Studios will operate on the same model, a core set of titles that together provide a stable base, augmented by step function growth as we launch and grow new titles. Experience tells us to anticipate some quarters with soft year-over-year performance in the near term, so that we can design our business to be robust over the long term.

Several factors inform our outlook for Q2 and trends we expect in 2021. First, our focused strategy generated an extraordinary success in 2020, exemplified by MapleStory delivering 98% annual growth, an all-time high, 17 years after it launched in Korea. This was coupled with strong performances by other Nexon flagships, like Kingdom of the Winds: Yeon and KartRider Rush+. Lapping that success on games with such a large base will not be easy, and focusing on doing a few things extraordinarily well can make our results more uneven in the short term. But in the longer term, we make better products and therefore, get better results for our shareholders.

Second, as we've said in the past, while the COVID pandemic seems to have benefited games in virtual worlds in the short term, the larger force, by far, is the fundamental secular shift in global entertainment from off-line to online and from lean-back passive linear media to lean-forward interactivity. Nonetheless, depending on the region and the game, we anticipate short-term declines in player engagement as the world exits the pandemic. We don't, however, expect this to persist. We think the experience of virtual worlds is as compelling as anything in entertainment. The global audience will continue to grow dramatically, and the secular trend will get even stronger. The forces at work existed well before the pandemic and will continue afterwards.

A third factor is about commitment to providing our players with greater transparency on rules, particularly on disclosing the probability values assigned to items purchased in our games. We've recognized that the standards, which players hold Nexon and games too have changed. This has become an industry-wide theme in Korea. And while Nexon and MapleStory are not the sole focus, we take this feedback very seriously. Our game teams move rapidly with policies designed to clarify misunderstandings and maintain the trust of our players.

In March, we began the process of making our probability tables public and opened a suggestion board for vetting questions and suggestions from our players. We have more work to do. Nexon has received accolades for our efforts to listen to players and incorporate their feedback. As one example, one of Korea's top gaming outlets games outlets, [indiscernible] lauded Nexon for meeting with players and actively accepting user input to improve the game.

In summary, Nexon had a strong first quarter. Focusing on a core set of priorities has served us extremely well, and we are getting ready to launch major new games, including Mobile Dungeon&Fighter, KartRider: Drift and the first game from Embark Studios. The world will hopefully emerge from the pandemic soon. The entertainment industry's already clearly altered from even 1 year ago, and there is growing recognition that the virtual and the interactive are at the core of the entertainment experience in the new world. Building and running deeply immersive interactive experiences on a mass scale is not a widely held skill set. It is one of the most scarce resources in the world today. And this is the exact capability Nexon has built, and we are working so hard to augment, so that we are at the core of the global entertainment industry of the 21st century.

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

[Shiro Uemura, executive]

[Interpreted] Thank you, Owen. Now I will review our Q1 2021 results. For additional details, please see the Q1 2021 investor presentation available on our IR website.

In Q1, we delivered year-over-year growth in all regions, excluding China, driven by strong performances of multiple major franchises. Group revenues were JPY 88.3 billion, up 7% year-over-year on an as reported basis and up 3% year-over-year on a constant currency basis, which was within the range of our outlook.

By region, revenues from China, North America and Europe and rest of world each exceeded our expectations. Revenues from Japan were in the range of our outlook, and Korea was below our expectations.

Looking at the total company performance on a platform basis. PC revenues exceeded our outlook, while mobile revenues were in the range of our outlook.

Operating income was JPY 43.3 billion, which exceeded our outlook. This was primarily due to lower-than-planned costs, including payment gateway fees and marketing costs, while revenues were within the range of our outlook.

Net income was JPY 46.0 billion, which exceeded our outlook, primarily driven by an JPY 18.1 billion FX gain related to the depreciation of the Korean won and Japanese yen against the U.S. dollar during the quarter and its corresponding impact on U.S. dollar-denominated cash deposits.

Let's move on to results by region. Revenues from our Korea business were below our outlook, primarily due to lower-than-expected performances of MapleStory and KartRider Rush+. On a year-over-year basis, revenues increased by 26% on an as reported basis and by 21% on a constant currency basis.

PC revenues grew by 21% year-over-year, driven by the growth in our 4 major titles. MapleStory's revenue grew year-over-year, driven by the well-received winter update, while its revenue was below our outlook. In late February, MapleStory players pointed out that the information available on our game, including probabilities associated with unlocking valuable items was not clear enough and that there was a lack of communication. Related to this, the number of active users, which have stayed high since the beginning of the quarter, declined beginning in late February. We have addressed this issue and announced the policy to improve communication, transparency and to maintain the trust of our players.

First, we provided compensation to our users in March to April. Second, we publicly announced our plan to disclose probabilities for all of our paid probability based items in our major games in Korea. This is the industry's first initiative in Korea. We have disclosed probabilities of some items, and we'll continue to disclose more going forward. Lastly, we arranged the meeting to receive feedback from key player influencers and open a suggestion board where the development team can respond to questions and suggestions from players. We are committed to ongoing improvements in transparency and communication to provide further assurance of fairness to players. FIFA ONLINE 4's PC and mobile revenues combined grew year-over-year, driven by the well-received Lunar New Year package offerings and promotions. Revenues from Dungeon&Fighter and Sudden Attack also grew by 13% and 56% year-over-year, respectively.

Mobile revenues increased by 42% year-over-year, driven by contributions from the Kingdom of the Winds: Yeon, KartRider Rush+ and FIFA MOBILE as well as MapleStory M, which grew 69%, partially offset by a year-over-year decrease in V4.

Revenues from our China business exceeded our outlook due to Dungeon&Fighter, which was slightly above our expectations. On a year-over-year basis, revenues decreased by 23% on an as reported basis and by 26% on a constant currency basis. As for Dungeon&Fighter active users, which had remained stable since the previous quarter, decreased in February. This was primarily due to lower engagement by light users waning off following the Lunar New Year update, which was introduced on January 21. In contrast, paying users remained flat sequentially, which was above our expectation. As a result, revenue slightly exceeded our outlook. Quarter-over-quarter ARPPU and revenues increased due to the typical seasonality.

On a year-over-year basis, active users and paying users both decreased due to reduced user engagement and strengthened bot sanctions. ARPPU remained roughly flat. As a result, revenue decreased year-over-year as expected. Revenues from Japan more than doubled year-over-year, driven by contributions from FIFA MOBILE, V4, TRAHA as well as Blue Archive, which launched on February 4. Revenues from North America and Europe increased by 16%, primarily driven by MapleStory and MapleStory M, which grew by 136% and 78% year-over-year respectively. Revenues from rest of world increased by 10%, primarily driven by MapleStory, which grew 90% year-over-year.

Now I will move on to our FY 2021 second quarter outlook. Q2 2021 will be a challenging comparison given the strong performance we achieved in the year ago quarter. As a reminder, on a constant currency basis, in the year ago quarter, our top line grew 27% year-over-year. Our performance last year was driven by the growth of our major PC titles, including MapleStory as well as rapid growth from our mobile business following the launches of V4 in Q4 2019 and KartRider Rush+ in Q2 2020.

Given this tough comparison, we expect our overall group revenues to decrease year-over-year in Q2 2021. We expect our Q2 group revenues to be in the range of JPY 54.5 billion to JPY 59.6 billion, representing a 16% to 8% decrease year-over-year on an as reported basis and a 23% to 16% decrease year-over-year on a constant currency basis. We expect our Q2 operating income to be in the range of JPY 12.0 billion to JPY 16.4 billion, representing a 55% to 39% decrease year-over-year on an as reported basis and a 60% to 46% decrease year-over-year on a constant currency basis. I'll discuss the details of this shortly.

We expect net income to be in the range of JPY 9.0 billion to JPY 12.3 billion, representing a 55% to 38% decrease year-over-year on an as reported basis and a 61% to 45% decrease year-over-year on a constant currency basis. In Korea, during the year ago quarter, on a constant currency basis, we achieved 81% year-over-year growth. Given the challenging comparison, along with the probability issue in MapleStory, we expect revenues from our Korea business to be in the range of JPY 31.6 billion to JPY 33.8 billion, representing a 4% decrease to 3% increase year-over-year on an as reported basis and a 13% to 7% decrease year-over-year on a constant currency basis.

As for the PC business, we expect FIFA ONLINE 4 to sustain its recent strength and grow year-over-year. We also expect Sudden Attack to grow triple digits year-over-year. As I explained earlier, MapleStory's active users have decreased since late February, and the current number of active users is lower compared to last year's elevated level. Given the enormous performance from the game in Q2 2020, when it grew 151%, we expect, on a constant currency basis, began to decrease compared to last year.

We also expect Dungeon&Fighter's revenue to decrease compared to Q2 2020 when its revenue grew by 49% year-over-year on a constant currency basis. While we anticipate growth from FIFA ONLINE 4 and Sudden Attack, we expect this to be more than offset by the declines in MapleStory and Dungeon&Fighter. As a result, we expect PC revenues in Korea to decrease year-over-year. We expect mobile revenues in Korea to be roughly flat year-over-year on a constant currency basis. Contributions from the Kingdom of the Winds: Yeon and growth in FIFA ONLINE 4M and MapleStory M are expected to be offset by decreases in V4 and KartRider Rush+, both of which had strong performances in the prior year ago quarter following their recent launches.

Turning to China. We anticipate Dungeon&Fighter's revenue to decrease year-over-year. Accordingly, we expect revenues from our China business to be in the range of JPY 13.5 billion to JPY 15.6 billion, representing a 30% to 19% decrease year-over-year on an as reported basis and a 37% to 27% decrease year-over-year on a constant currency basis. Excluding the impact of a JPY 2.3 billion one-off royalty revenue adjustment recognized in Q2 2020, we expect a decrease of 20% to 8% year-over-year on an as reported basis or a decrease of 28% to 17% year-over-year on a constant currency basis.

As for Dungeon&Fighter, we recently introduced the Labor Day update on April 22, which included avatar packages and related new dungeons. In addition, in June, we will release the 13th anniversary update. Current MAUs and paying users in April have further decreased since Q1 2021 and remain lower compared to last year. Therefore, we expect this revenue to decline year-over-year. As for Mobile Dungeon&Fighter, our partners at Tencent are working to resolve some remaining factors needed to launch the game. We're working closely with them while also creating more content for the game.

In Japan, we expect revenues to be in the range of JPY 2.4 billion to JPY 2.7 billion, representing a 15% to 4% decrease year-over-year on an as reported basis and a 20% to 9% decrease year-over-year on a constant currency basis. We anticipate contributions from FIFA MOBILE, Blue Archive and V4 will be more than offset by a decrease from TRAHA due to a tough comparison following its Q2 2020 launch.

In North America and Europe, we expect revenues to be in the range of JPY 4 billion to JPY 4.4 billion, representing a 21% to 13% decrease year-over-year on an as reported basis and a 23% to 15% decrease year-over-year on a constant currency basis, primarily due to a decrease in revenues from revenue from Choices. We expect revenues in the rest of the world to be in the range of JPY 3.0 billion to JPY 3.1 billion, representing a 36% to 32% decrease year-over-year on an as reported basis and a 41% to 38% decrease year-over-year on a constant currency basis, primarily due to tough comparisons for KartRider Rush+, which launched in Q2 2020 as well as V4, which launched in Taiwan, Hong Kong and Macau in Q1 2020.

In Q2 2021, we expect operating income to be in the range of JPY 12 billion to JPY 16.4 billion, representing a year-over-year decrease of 55% to 39%. Unfavorable factors compared to Q2 2020 regarding the operating income include: first, revenue decrease; second, increased stock options costs and HR costs associated with the introduction of a new compensation policy in Korea; third, increased outsourcing costs. Favorable factor compared to Q2 2020 includes decreased marketing costs. The high end of the range reflects the fact that we expect the impact of negative drivers to be larger than that of positive drivers resulting in a year-over-year operating income decrease.

We expect revenues to decrease in Q2 2021 due to the tough comparison in Q2 2020. However, our virtual world business is designed to last for years based on our long-term operation plan. Experience clearly tells us that growth is nonlinear and accrues over an extended period. While we have seen periods of consecutive decreases in Dungeon&Fighter and MapleStory in the past, they continue to grow over the long term. We are executing on our focused strategy and steadily carrying out our daily operations to grow our existing virtual worlds over the long term.

Accordingly, we expect our revenue foundation to stably grow over the long term. In addition to our existing business, we also have a number of upcoming virtual worlds under development. We will aim for further long-term growth by launching these titles going forward.

Lastly, I'd like to provide an update on the shareholder return and capital allocation strategy. Regarding our 3-year JPY 100 billion share repurchase policy that we announced on November 10, 2020, we haven't yet executed any specific buyback. Over the next 30 months until November 2023, the end of the planned period, we will consider several factors, including investment opportunities, financial condition as well as the share price as we buy back our shares.

As to our investments in global entertainment companies, we've invested JPY 115.8 billion, which accounted for 71% of the $1.5 billion that the Board of Directors authorized and recorded an unrealized gain of JPY 29.6 billion under other comprehensive income as of Q1.

With that, I'll turn it back to Owen.

[Owen Mahoney, executive]

Thank you, Uemura-san. To summarize, Nexon's incredible performance in 2020 was followed by a strong first quarter in 2021. We are tracking closely to the focused strategy we established 18 months ago, using live game operations to support virtual worlds over the long term. Experience tells us that periods of robust growth can create tough comps in the quarters that follow, but the long-term trend has been up and to the right. And we are extremely excited to be talking more about new product launches later in the year.

With that, we are ready to take your questions.

[Maiko Ara, executive]

Thank you, Owen. Next, we would like to open up the lines to live Q&A. Q&A session will be conducted with Japanese-English or English-Japanese consecutive interpretation. Please be noted that interpretation will come between your questions and our answers. Please hold for interpretation before you hear our answers. Our answers will also be followed by interpretation. So please hold until the interpretation finishes before moving on to the next question. [Operator Instructions]

Now we'd be happy to take your questions.

[Operator]

[Operator Instructions] The first question comes from Ms. Junko Yamamura from Nomura Securities Company Limited.

[Junko Yamamura, analyst]

[Interpreted] Again, this is Yamamura from Nomura Securities. I have 2 questions, and I'd like to start with the first question. I'd like to know what's going on with MapleStory. Now you've been operating this title for almost 20 years. And why are we seeing this problem now? And I recall, for example, in the case of Dungeon&Fighter, before the performance started to fall, we were seeing immense growth in its revenue. Does that mean that perhaps when your franchise performances are going well, you sort of overdo the operation, and that is why you sort of lose your step. Is that it?

And I do understand how franchise is like what you have don't always go through a linear growth. And I do understand that. But do you think that you do need to come up with measures where if things are getting too hot, too heated, you need to come up with measures for cooling down the operation or do you think when things get too heated, you need to revisit how you've been operating the title? Do you think you need to do that, so that you'd be able to find a way to decrease, lessen this volatility that we are seeing? That is my first question.

[Shiro Uemura, executive]

[Interpreted] Thank you very much for your question. And now, first of all, one thing that I would like to say upfront for your better understanding is the reason why we were seeing a decline in the performance in Dungeon&Fighter versus the issue that we are facing at this moment with the MapleStory comes from a very different reason. And at the moment, of course, we do operate various virtual world titles, and we have been doing this for a very long period of time. And so over the years, we have already experienced that each of the titles, each of our games would face different issues at some certain point of time. We've already experienced that. And we also do have track record in seeking a way to fix those problems. So it's really about trying to make sure we handle each of the specific unique issues whenever it happens.

Now your question was, why is MapleStory experiencing this after around 20 years of operation, and it does go back to what Owen was referring to earlier. So whenever the game grows, the game history or legacy grows, that also would mean that, that is a very long time, and it is very possible that the attitude, the way of thinking and the behavior of user would also change accordingly to the time. So we do believe it is very natural that today there will be users, who would be seeking for a clear, more clearer, better to understand probability table. That is very understandable. And we do feel that it is important that we revisit seriously to what -- how we have been operating, which seems to have created misunderstanding amongst the users.

Now I did also mention that we at the moment are planning to make sure that with our major titles, we will be disclosing the probability table for all the paid probability items. And this is going to be important because it is necessary for us to make sure that we'd be able to keep on growing this world of our online games together with the users. And it is very important to make sure that our users trust us and have fun while they play the games. And so even with this MapleStory, it is -- for us, it is important that we sincerely listen to our users' request, so that this title, once again, would be trusted enough for the players who want to play the game for another 10, 20 years.

[Junko Yamamura, analyst]

[Interpreted] And so my second question, this is something that I'm asking because I just want to confirm about your mobile game titles. Now I do feel that compared to your Q4, your Q1 result dropped dramatically. And even for Q2, you are forecasting a performance -- sales performance that seems to be declining more than the usual seasonality. Now when I look around your mobile titles, I don't really find many titles that's in its first year, where there could be a lot of momentum pickups. You don't really have that. So that's -- why do you think you're seeing this? So I understand you've already explained about the year-over-year trend, but can you share with us your Q-on-Q analysis? That's my second question.

[Shiro Uemura, executive]

[Interpreted] Thank you. So looking at our mobile business, just like you mentioned, there are some specific times when if you just cut out a certain period of time, there will be a decline, be it year-over-year or quarter-on-quarter. The reason is because it could be, for example, in the timing of the title launch. But then at the same time, we do have to admit that if you look at Q1 and Q2 of 2021, we're not really expecting any new major title launch. But then even if you look at our existing title, when it comes to mobile titles, it's always the case when right after the launch, we have this immense pickup.

But then as time goes by, there is this waning condition with the users. And it's sort of started to stabilize. And this is something that we've always been observing. So again, Q1 and Q2 for 2021, timing-wise, you can say that our mobile business is suffering a decline. But then I am very sure that once we have a new title, that is -- it is really going to change this trend. Now when it comes to like seasonality, usually, we don't really see such apparent seasonality with our mobile games. But then with said, it is true that there is some seasonality factors when it comes to like FIFA ONLINE M or MapleStory M. So perhaps seasonality is also another factor behind this.

[Owen Mahoney, executive]

Can you hear me? Okay. Sorry, I'd like to just add 1 or 2 items on top of what Uemura-san was saying to both of your questions. Regarding, first of all, MapleStory, I just want to remind you that we have this huge comp on MapleStory in -- over 2020. Remember, MapleStory doubled its revenue last year, nearly doubled its revenue year-over-year from 2019. And let's also remember that 2019 was its biggest year ever to date then. So it went from its biggest year in 2019 ever to doubling its biggest year ever. So this is quite a substantial comp in over -- that we're dealing with here.

And as we said before, both in our prepared remarks and in previous quarters, in a 20-year -- in a nearly 20-year game, we are going to have ups and downs. That will happen. And you can see it on our graphic on the deck on Page 33 in the case of MapleStory, but the same pattern has appeared in all of our major products. And we recognize this creates an analytical challenge for the analyst. We see these patterns in years, and we manage them over a period of years and decades. But for those who follow us and have to think in shorter-term time frames, it's going to look -- the picture is going to look very differently. But what happened -- the analytical challenges when we do well, what tends to happen is people draw a continuous line up into the right, and when it doesn't increase year-over-year, that line looks like it's going to -- it looks very dire. And that's the challenge of analyzing and understanding a virtual worlds company that measures its success over a period of years and decades. And -- but I would say, overall, the content, we're very focused on creating content for long-term growth.

Now there was a second question you had about MapleStory and again -- excuse me, about mobile games in general. And again, one of the things I'd like to do is just draw your attention to the MapleStory Mobile example. Remember, 2020 was MapleStory Mobile's best year so far, even after its launch here. So it launched, it sort of settled in, as Uemura-san described, and then it really accelerated in 2020. And we expect that, as we've said before, the mobile business and the PC business are starting to look more and more similar because we're delivering virtual worlds on mobile devices as well. So we think we're going to have ups and downs in the mobile business as well. But the overall trend will be up into the right as it has been for PC. But the difference between the 2 is that we're addressing a much larger total addressable market on mobile. So we hope for that to expand to a much bigger market over time.

[Operator]

[Interpreted] The next question is from Han Joon Kim from Macquarie Capital Limited.

[Han Joon Kim, analyst]

I do have a few questions, but I'll do them one by one. In terms of the first question, it's tied to the MapleStory topic that's come up. Now we respect the fact that the modern-day media in YouTube and stuff tends to over sensationalize things and could get a little bit extreme about talking negatively about the situation at MapleStory today. But unfortunately, that's kind of what we're forced to kind of look at and review. Now I think you guys have basically come out and said, you guys think this is kind of the course of the natural kind of life of the game. But it would be great if you could just kind of give us what KPIs, what are you guys looking at to give you that sense that this is part of the similar pattern that you've seen before in past parts of the years. And with that, it will be great if you can just kind of give us and share with us some of those KPIs as to what's the MAU? Is it the paying ratio? Is it the spending ratio -- the time spending of the average gamer and so forth. So if you could just kind of dissect that a little bit for us, that would be great.

[Shiro Uemura, executive]

[Interpreted] Well, regarding KPIs of MapleStory, we analyze various types of KPIs on our side and some representative are MAU paid users as well as are ARPPU. However, in our daily operations, we need to also have a graph on the game in a timely manner. So we will look at DAU as well as some other indicators. It's not only KPIs that we look at, though. We put importance on getting direct feedback from our users to understand the status of the game. And as you know, we've been seeing the decline since late February, and this was regarding the average active users as well as paid users. And because of this analysis, we have led to the guidance that we have gave out for Q2. However, we believe the most important factor is to engage in dialogue with our users, so that we could realize relationship of trust once again, so that we could reactivate the game. And I think this is the area, the very area that we need to focus on for the time being, so that we could grow the game again over the medium to long term.

And your question was about which parts of the current trend is similar to past trends. But I think that really depends on the issue at hand. The issue at hand not necessarily is the same issues that we faced in the past. Therefore, we believe that what's most important is to engage in dialogue on a daily basis with our user base. Thank you.

[Han Joon Kim, analyst]

So would it be fair to say that -- I think in the past, when we've talked about, let's say, Dungeon&Fighter in China situation, you've given some commentary in the past that you think that the core cohort stabilizing or MAU kind of stabilized and so forth. And we've really haven't given that kind of indication at the current juncture. So are we supposed to read this correctly, in that we're still seeing continued decline trends today and we're still not sure where the declines will end? So for the foreseeable future, we're just going to have to manage this process for the time being, but the decline process is continuing. Is that fair?

[Shiro Uemura, executive]

[Interpreted] Yes, to answer your question around MapleStory, although active users and paying users were declining from February, currently, on a relative basis, these KPIs have started to stabilize. However, we believe our utmost focus currently should be to deepen our dialogue with our user base, so that we can make the game even more exciting going forward. So the KPIs are relatively steady compared to before. However, we don't want to be too optimistic about the situation, and we'll continue to ensure that we handle this situation correctly.

[Han Joon Kim, analyst]

Got it. And then the last question is on Dungeon&Fighter in China, the PC portion of it. And again, I respectfully respect the hard task that you have at hand. But I kind of previously thought we might have about 1.5 years of decline and starts to maybe stabilize a bit. Where -- we had 2 years of decline, this year, the current first half was still declining, and so at this pace, it looks like our numbers for the full year looks like it's on a trajectory that looks very similar to 2016. So I guess just putting things into perspective, should we consider that '17, '18, '19 were kind of a really good cycle, in that if we kind of hedge back to 2016 period, perhaps, we've kind of gone back to a stabilized core cohort base. Is that a fair way of thinking? I know there's so many variabilities in there, but I just kind of wanted to get a sense of how we gauge where things stabilize and how long these kind of [ curves head the way ] before we can start to stabilize and go back and grow.

[Shiro Uemura, executive]

[Interpreted] Well, just to reflect back on how Dungeon&Fighter were doing -- was doing in China. First of all, from the second half of 2019, its performance started to deteriorate, and the downtrend continued on during the course of 2020. And then at the end of the year, at the previous results briefing, I personally said that we have started to see some stabilization in the KPIs. And under -- with that as the backdrop, we reached the Lunar New Year in 2021.

And we did all that we could and then our performance resulted in one that exceeded our expectations by a bit. However, after the lunar New Year, our KPIs started to deteriorate again, namely for paying users, we've been seeing a decline. And so it's a matter of where the stabilization is going to happen going forward, but we would like to ensure that we monitor the situation closely and engage in countermeasures accordingly. We are not thinking at this moment that we're going to get back to 2019 when it was a great year for D&S in China. But we would like to first ensure that we see good stabilization, so that we could promote growth for the game over the medium- to long-term again.

[Owen Mahoney, executive]

Han Joon, this is Owen. Han Joon, can you hear me? So just to add a couple of other things on to what Uemura-san said, we've obviously been looking at this really closely. And as we've discussed it internally, there's a couple of factors that we've considered and -- that may be in there. One is, to what extent is the closure of PC cafés during the period of COVID affected the Dungeon&Fighter performance in China. Another is we had expected, as you know, to launch Mobile Dungeon&Fighter now and the sort of impact or a positive impact to the marketing around that we sort of expected and [indiscernible] to what extent those are factors or not factors is really hard for us to tell.

But I think at the end of the day, we don't feel we've quite found the right formula for our live operations or live development for what the product -- new content to go in the product exactly needs to look like. We're working with our partners at Tencent very closely on this. And over time, we've been -- it's gotten a lot of -- it's -- we put a lot of management attention to it. And we've been beefing up our development team, and we've got some of our very best developers on the issue. So I think it would be a mistake to draw a line and then make a prediction based off of pattern recognition. We really think it's -- or patterns that may or may not be applicable from other games at other times. But I'd reiterate that we've seen this happen so many times. We go through this process. We do some updates, they don't resonate. Sometimes the game will decline for several quarters in a row or a couple of years, and then it will come back. It will come roaring back. We don't know quite what that looks like yet, but we've certainly got some of our very best people on it. We're working very closely with Tencent on it.

[Operator]

[Interpreted] The next question comes from Minami Munakata from Goldman Sachs, Japan.

[Minami Munakata, analyst]

[Interpreted] This is Munakata from Goldman Sachs. I have 2 questions, but I'd like to start with the first one. It goes back to what the CEO, Owen, was saying at the very outset. And you mentioned that perhaps depending on some regions or some game titles, after the pandemic, there might be some decrease in the player engagement. And so -- but then when I look back, my memory, I don't really believe that the titles that you offer really enjoy -- is a title that is supposed to enjoy a positive impact simply because of stay-home situation around the world. So your comment, does that mean that you are expecting specific region or specific game title, where you expect a decline in the performance from here of? So I just wanted to confirm that. And if the answer seems to be yes, I also want to ask have you already seen the signs of that? That's my first question.

[Shiro Uemura, executive]

[Interpreted] Thank you for your question. Now back when COVID really started to spread around the world, I think this is the way we were describing about the trend that we were receiving at the moment. In other words, we don't expect that, overall, we'd be getting such a large impact from the COVID on a net basis. And there are, of course, reasons because there are some tailwinds as well as headwinds when we look at some of the changes, the impact coming from the pandemic. For example, users having to stay home, schools being closed. This means we can enjoy a bit of a tailwind because people have more time to access online games -- access to games. But then there's also some -- on the other hand, there is the negative trend, for example, if you wanted to play a specific game title with many people and have fun, that means you need to have PC cafés open.

But then when there are some regions where PC cafés are closed, that would be rather a headwind for us. So again, the situation can differ depending on which region we're talking about, which title we're talking about. But what we were saying back then was, overall, on a net basis, the COVID probably would not have a positive or a negative impact. It's not only going to have a major impact in that sense. And as a matter of fact, that is the same view as of today. Now we know that PC cafés, some areas have started to reopen them, that is good news for us. And perhaps there might be some titles, where in the future where people start to go back to everyday lives when the pandemic starts to get resolved, there might be some titles where the trend sort of starts on a declining trend. But again, it's not like we're expecting like a major positive or negative impact to be that apparent. Of course, it's something that we yet have to see, but that's how we think at the moment.

[Minami Munakata, analyst]

[Interpreted] I'd like to move on to my second question. This is about China's Dungeon&Fighter PC version, PC Dungeon&Fighter in China. Now I know you've been trying to work for several quarters, like 3 quarters to improve the situation. But then I'm sure the cause of this decline, be it some of the issues that you identify, some challenges or perhaps some feedback from the users, for example, dissatisfaction. Those trends, I'm sure, must have been changing over time as you look into the game performance. But at this moment, what is your analysis? What is the issue that you need to resolve? And when -- you've been saying that you're working on to stabilize the performance. And so in that case, how are you trying to do that? Because I know in the past, you were -- you'd be looking at some of the user feedbacks. And if you find some very prevalent or apparent feedbacks coming in, then you'd make sure you'd be able to launch some updates to respond to those feedbacks. I know you've been trying to do something like that. But what would be your measures as you look down the road? That's my second question.

[Shiro Uemura, executive]

[Interpreted] Your question was on our China Dungeon&Fighter game. And this is something that we probably have been saying from before. But when we look at the issue, our analysis at the moment is the game balance has become too -- into too much the core, the hardcore players. And we have lost some of the light or middle users. We've been seeing this waning off of these players. And so that is why the game balance has sort of changed. And that means the nonpaying users or light or mid-users -- middle users are no longer able to enjoy playing the game because there's many core players. That is our current analysis.

Now if we want to go back to the growth trajectory, that means we need to make sure we'd be able to reinvite those lapsed users. But this is something that we would not be able to do just in a leap. It needs some step-by-step approach. So first of all, we have to make sure that we'd be able to maintain our current users, who's enjoying playing the game. We have to make sure we'd be able to seek some stability with our existing users, and then work so that we'd be able to bring back those lapsed middle or light users by bit by bit changing the balance of the user base. And again, this type of strategy or this measures is not something that we'd be able to accomplish in a short period of time. It is going to be a step-by-step approach as we try to seek stability. That's my response.

[Operator]

[Interpreted] The next question is from Seyon Park of Morgan Stanley, South Korea.

[Seyon Park, analyst]

Can you hear me?

[Owen Mahoney, executive]

Yes, we can.

[Seyon Park, analyst]

I have 2 questions. I guess I'll ask the first one in order. Owen, you mentioned that there's going to be peaks and valleys in terms of revenues and the grossing of games, which I fully understand. But I guess in terms of just the visibility as to when management believes that we can kind of emerge from the current valley. I do recall that at the beginning of the year, there were a number of titles that were kind of lined up for 2021, KartRider: Drift was one, Mobile D&F is the other, Mabinogi, I believe, is the other one. We've not had any big flagship titles for the first 5 months right now. And just was wondering when you feel we can have either a big kind of content update for either the existing games or new title launches to kind of drive a big kind of boost in revenues?

[Owen Mahoney, executive]

Thanks. So a couple of things. Number one is, the way to think about our business, again, and I think you know this, is existing titles and the new titles. So on our existing title base, look, again, we're coming off on some of them from an absolutely spectacular year in 2020 or very, very solid performance. Again, just to repeat on MapleStory, we don't -- it's kind of hard to call MapleStory a valley when we're coming off of doubling the revenue year-over-year in 2020 and the year prior to that was -- in 2019 was its biggest year of all time. But recognizing the framing of your question, I think what we're -- we believe is that over time, in our existing games, the general trend is up. We're going to have peaks and valleys over time, but the general trend is up.

Then second, you layer on top of that, new game launches. And what we've said before for several quarters and what we are saying now is that we've got really within the line of the games that we have announced, we've got 3 big beats coming up. First is Mobile Dungeon&Fighter, second is KartRider: Drift, and third is the first game from Embark Studios. We don't have anything to report on Mobile Dungeon&Fighter. KartRider: Drift, as I've said before, we're very excited about, we're going to be talking about later this year. And Embark's first game, we don't -- we will be talking about that a lot more later in this year. So it's chugging along on the new game development front in very much the way that we've been planning it now for some time. And those new games based off of the focus that we're putting on and we're extraordinarily excited about each of those 3 for very different reasons, and we think they represent a step function growth for our company off of this very solid base.

[Seyon Park, analyst]

I guess I think you kind of answered my second question, but I guess, just a lot of investors, I think, are still kind of curious as to the situation with mobile D&F. I think it's not -- it doesn't seem to be reflected in the second quarter guidance. And hence, I guess, can we -- is it realistic that we can expect this to come out this year? Or is that also kind of TBD, meaning that there is a risk that this could be pushed back even to 2022?

[Owen Mahoney, executive]

I'm sorry, I don't have anything to really provide an update for you on that topic. We remain extremely excited about launching MD&F. And we're working with our partners at Tencent -- or our partners at Tencent are working to resolve the remaining factors needed to launch the game. But in the meantime, as a developer and the IP owner, we're using the extra time to create a lot of additional content to enhance the longevity and give the very best player experience that we can. So we don't really have anything further to report at this time, but we hope to have more information soon.

[Operator]

This concludes the question-and-answer session. Ms. Ara, at this time, I'd like to turn the conference back over to you for any additional or closing remarks.

[Maiko Ara, executive]

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 IR team at [e-mail] should you have any further questions. We appreciate your interest in Nexon and look forward to meeting you, whether it is here in Tokyo or in your corner of the world.

[Operator]

Thank you. That concludes today's conference. Thank you for your participation. You may now disconnect.

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