Nexon Co Ltd

TSE:3659

Earnings Call Transcript 2020-Q3

[Operator]

Good day, everyone, and welcome to Nexon's 2020 Third 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 Third Quarter 2020 Conference Call. Q3 was another record-breaking quarter for Nexon with revenues up 52%. Our strategy of focusing resources on games with the biggest potential to grow on multiple platforms is paying strong dividends, particularly in Korea, where revenue and player engagement has again exceeded our expectations. Uemura-san will take you through the detailed review of Nexon's performance in the third quarter in a few minutes. My introductory remarks will be comparatively brief and focus on only a few points that are key to understanding our company and our industry.

To start, Nexon is the world leader in a segment of the entertainment business which is not yet well understood, virtual worlds. By that, I mean deeply immersive multiplayer online games played primarily on PCs and increasingly on smartphones. Many are aware that Nexon pioneered the genre in the 1990s. And that through our live operations expertise, we have a unique ability to grow blockbuster franchises over a span of decades.

What is less understood is how well Nexon is positioned to capture enormous opportunities from advancements in mobile technology as virtual worlds are now played on mobile phones. Just as the evolution of console technology took us from Pong and Pac-Man to Call of Duty and Grand Theft Auto, a steady pace of breakthroughs in mobile capabilities, both devices and networks is enabling billions of new players access to Nexon's sweet spot, virtual worlds.

Our performance this quarter highlights the robust strength of Nexon IP as we bring our games on to mobile platforms. Extending franchises like MapleStory, The Kingdom of the Winds, KartRider and Dungeon&Fighter to mobile represents a massive increase in our total addressable market from a couple of hundred million game playable PCs to several billion smartphones. As of Q3, mobile represents 42% of our revenue, up from 26% a year ago when we embarked on our focused strategy.

Next, I'd like to address the durability and diversity of Nexon's business, in particular, the core franchises that have life-to-date revenues exceeding $1 billion. Today, we announced record-breaking revenue and operating income for the third quarter. Of course, we're proud of this achievement. However, what makes our third quarter remarkable is that we achieved this performance even without the benefit of the launch of Mobile Dungeon&Fighter. We are very much looking forward to launching M D&F, but the point is, even though we did not launch it in Q3, our revenues still went up by over 50%, and it was our best Q3 ever.

Q3 highlights the power of our franchises and the strength and solid execution of our focused strategy. In other words, as massive as Dungeon&Fighter is, Nexon is more than Dungeon&Fighter. Nexon is an extraordinarily well-balanced company with fast-growing revenue streams from multiple franchises, markets and technology platforms.

Third, I'll highlight Nexon's IP, which includes some of the largest franchises in the global entertainment industry. You'll recall that last year, we sharply focused our strategy around fewer games with bigger potential as breakout hits, on leveraging our own IP and on bringing those virtual worlds to mobile. The early results of this initiative point to a breakthrough success. There's a common misunderstanding in the broader games industry that the success of the game is determined in the days that follow its launch. This dates back to the era of off-line packaged goods games when any title that wasn't a hit on day one was destined to fail. That's not true anymore, and it never really was true in the business of virtual worlds.

At Nexon, we don't measure success in days or weeks, we measure it in years and decades. Here are examples of some of our biggest virtual world franchises. Our MapleStory franchise launched in 2003. In Korea, it grew 132% year-over-year in the first quarter, 151% year-over-year in the second and 71% year-over-year in the third. Lifetime revenue is greater than $3 billion. Dungeon&Fighter, which originally launched in 2005, is having a particularly strong year in Korea where it grew 53% year-over-year in Q1, 49% year-over-year in Q2 and 56% year-over-year in the third quarter. Global lifetime revenue now exceeds USD 15 billion.

KartRider launched in 2004. It has been played by more than 50 people -- excuse me, 50% of the population of Korea and 45% of all Taiwanese. Today, lifetime revenue exceeds $800 million. And finally, The Kingdom of the Winds. The game was originally released by Nexon in 1996, making it the first and most enduring massively multiplayer online role-playing game. In Q3, we launched a mobile version, The Kingdom of the Winds: Yeon, which has performed far beyond our expectations. In fact, its performance on mobile this quarter was more than 20x the performance of the existing PC version.

Our focus on virtual worlds and our live game operations strengths have helped Nexon to engage existing players, bring back lapsed players and recruit new players as we provide a steady stream of new content and franchises that our players know and love.

That brings me to my final point, growth opportunities layered on to our highly stable and robust core of virtual world franchises. Revenue from these core franchises generates more than $1 billion in annual operating cash, which strengthens our balance sheet and gives us strategic flexibility to invest in new high-growth initiatives. As you know, our next new title is a highly promising Mobile Dungeon&Fighter, which we expect to launch in the near future. Following that will be new games on multiple platform platforms from our Embark Studios in Stockholm. We plan to provide more details on that in the next quarter, but we're extremely excited about the groundbreaking innovation and fun we're seeing in the game.

And we plan to launch the next-generation of KartRider in 2021. The first version of the franchise has been played by more than 380 million players on PC alone, and the next version will extend well beyond PC. Our objective is to bring it beyond its core markets of Korea and Taiwan to major new audiences in the U.S., Europe and around Asia.

Let me summarize with 3 key points about where Nexon is today. First, Nexon is the pioneer and leader in the business of virtual worlds, a segment of the entertainment industry that is in the early stages of massive growth, thanks to the explosion in mobile handset capabilities. Second, our business is durable and diversified across multiple franchises, multiple regions and multiple platforms, and it is getting more diversified all the time. Today, more than 40% of our revenue comes from mobile. We have not one, but several monster IP franchises that are as big as some of the biggest in the entire global entertainment business. And third, on top of the extremely stable existing business, our content strategy is to launch a focused number of global blockbusters on multiple platforms in multiple regions, which continue to grow for decades.

Our Q3 results highlight the strength and diversity of our portfolio. Our focused strategy is working, and I've never been more excited about Nexon's future. Finally, I would like to welcome a new member to Nexon's Board of Directors, Kevin Mayer. Many of you know Kevin for his role in reinvigorating Walt Disney as a global force in film, television and streaming. Kevin's experience, insights and counsel will be invaluable to helping chart Nexon's path to becoming a global entertainment powerhouse.

With that, I'll hand the call over to Uemura-san.

[Shiro Uemura, executive]

[Interpreted] I will review our Q3 results. For additional details, please see the Q3 2020 investor presentation available on our IR website. Nexon just completed another record-breaking Q3, proving once again the significance of our focused strategy and the strength and diversity of our portfolio, which includes MapleStory, The Kingdom of the Winds: Yeon, KartRider Rush+ and FIFA ONLINE 4.

While we did not benefit from Mobile Dungeon&Fighter, which was included in our outlook, an exceptionally strong performance in group revenues from other games exceeded our expectations and brought us within the range at JPY 79.4 billion, up 52% year-over-year on an as-reported basis or on a constant currency basis.

By region, revenues from Korea, North America and Europe and rest of world each exceeded our expectations. Revenues from Japan were in the range of our outlook, and China was below our outlook due to the postponement of the mobile Dungeon&Fighter launch.

Looking at the total company performance on a platform basis. PC revenues exceeded our outlook, driven by MapleStory's strong performance across geographies. Mobile revenues, of course, were negatively affected by the delay of Mobile Dungeon&Fighter and came in below our outlook. However, the rest of our mobile titles performed well during the quarter. The Kingdom of the Winds: Yeon significantly exceeded our expectations and KartRider Rush+ and FIFA also exceeded our expectations. Year-over-year, PC and mobile revenues grew by 20% and 140%, respectively. PC revenues accounted for 58% of the group revenues, while mobile revenues accounted for 42%.

Operating income was JPY 27.6 billion, which was below our outlook. This is due to the absence of Mobile Dungeon&Fighter, which is a high-margin royalty business, as well as a JPY 3 billion impairment loss primarily goodwill related to Big Huge Games. However, we recognize Q3 operating income which grew 13% year-over-year, driven by a strong performance in Korea.

Looking at the cost items. Our HR costs in Q3 were lower than our plan, while we recorded higher than plan payment gateway fees and royalties in relation to the strong performances of co-developed mobile game, The Kingdom of the Wind: Yeon as well as other mobile games, including KartRider Rush+ and V4, as a result, total cost exceeded our plan. Net income was JPY 10.3 billion, which was below our outlook, primarily due to the operating income under performance as well as a JPY 8.6 billion FX loss related to the appreciation of the Korean won against the U.S. dollar in 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 in Q3 exceeded our outlook, primarily driven by stronger-than-expected performances of the new mobile games, The Kingdom of the Winds: Yeon as well as MapleStory, KartRider Rush+ and V4. We saw strong results from all 4 of our major PC titles. MapleStory demonstrated strong momentum throughout the quarter. Its revenue exceeded our expectations and grew 71% on a constant currency basis. Dungeon&Fighter increased its revenue by 56% year-over-year. Both MapleStory and Dungeon&Fighter achieved record-high Q3 revenue.

Sudden Attack also grew by 35% year-over-year. FIFA ONLINE 4's PC and Mobile revenues combined slightly exceeded our outlook and were slightly up compared to Q3 2019 when its revenues grew significantly year-over-year.

Nexon's corporate strategy is making steady progress on platform expansion and bringing our flagship titles to mobile. We began with MapleStory and KartRider and FIFA in Q2. On July 15, we launched The Kingdom of the Winds: Yeon, which combines nostalgic aspects and pixelated art of the original PC game with contemporary mobile gameplay. The game was immediately popular with a broad demographic, including long-time fans as well as new younger players. This younger audience of players and their teens and 20s accounts for more than half of all the players of the game.

And both user engagement and revenue significantly exceeded our expectations in Q3. The breakout success of The Kingdom of the Winds: Yeon, a franchise originally launched in 1996, stands as a clear validation of Nexon's strategy to bring well-known brands to the mobile platform.

KartRider Rush+ and V4 also performed well in Q3. In addition to these titles as well as the contribution from FIFA Mobile, which launched in June, revenues from our Korea business grew 114% on as a reported basis or 115% on a constant currency basis year-over-year and achieved the highest Q3 revenues. The revenue from our Korea business in Q3 accounted for 64% of Nexon Group's revenues.

Revenues from our China business were below our outlook due to the postponement of Mobile Dungeon&Fighter, which was scheduled for release in August. Excluding the impact of Mobile Dungeon&Fighter revenues, we're within our expected range. On a year-over-year basis, revenues decreased 11% on as-reported basis or on a constant currency basis. During the year ago period, we launched a large-scale update for KartRider Rush+, which performed particularly well and created a difficult comparison this year. PC Dungeon&Fighter's Q3 revenue was in the range of our outlook, but slightly decreased year-over-year.

In Q3, in addition to the seasonal updates, including the summer update in July and the National Day update, which began in late September, we conducted events and other updates as an ongoing initiative to stabilize and improve the user metrics. However, the number of active and paying users decreased both year-over-year and sequentially. This was primarily due to lower usage engagement from the waning effect of the key update in March as well as continued strengthening of player identity verification and bot functions.

ARPPU increased sequentially due to the typical seasonality, while this more than offset by the decrease in paying users resulting in a quarter-over-quarter decrease in Dungeon&Fighter's revenue. As a reminder, in Q2, we recorded an adjustment of JPY 2.3 billion for onetime royalty income related to Dungeon&Fighter sales. Revenue decreased slightly year-over-year, while ARPPU increased compared to Q3 2019. As the portion of light users decreased compared to a year ago, this was more than offset by decreases in paying users as well as sales for the National Day package offerings.

Revenues from our Japan business were in the range of our outlook. On a year-over-year basis, we recorded a revenue decrease of 17% on an as-reported basis and 16% on a constant currency basis, primarily due to the disposition of groups. However, excluding the impact of groups, revenues increased year-over-year. We are currently in a transition period in Japan as we streamline our pipeline and operations based on our group-focused strategy. Next year, we expect to strengthen our capabilities as we begin to benefit from these efforts.

Revenues from North America and Europe in Q3 exceeded our outlook. On a year-over-year basis, revenues increased by 21% on an as-reported basis and 22% on a constant currency basis. MapleStory on a constant currency basis grew 178% versus the year ago period. Revenues from the rest of world exceeded our outlook. On a year-over-year basis, revenue grew 55% on an as-reported basis and 56% on a constant currency basis. MapleStory grew 165% year-over-year on a constant currency basis.

I will now discuss our Q4 2020 outlook. We expect the strength and diversity of our portfolio, including MapleStory, The Kingdom of the Winds: Yeon and KartRider Rush+ to drive our group performance in Q4. We anticipate year-over-year revenue and operating income growth at a group level, driven by strong growth in Korea as well as growth in all other territories, excluding China.

We expect our Q4 revenues in the range of JPY 60.7 to JPY 65.5 billion, representing a 23% to 33% increase year-over-year on an as-reported basis and a 24% to 33% increase year-over-year on a constant currency basis. We expect our Q4 operating income to be in the range of JPY 12.3 billion to JPY 16 billion, representing a 173% to 254% increase year-over-year on an as-reported basis and 171% to 252% increase year-over-year on a constant currency basis. I will discuss the details of this shortly.

We expect net income to be in the range of JPY 8.7 billion to JPY 11.6 billion, representing a 167% to 255% increase year-over-year on an as-reported basis and 162% to 250% increase year-over-year on a constant currency basis.

We expect another strong quarter in Korea. We anticipate MapleStory and Sudden Attack to grow double digit and Dungeon&Fighter to grow triple-digit year-over-year. In addition, we are looking for strong contributions from The Kingdom of the Winds: Yeon, KartRider Rush+ and FIFA MOBILE. As a result, we expect revenues from our Korea business to be in the range of JPY 38.2 billion to JPY 40.4 billion, representing a 57% to 66% increase year-over-year on an as-reported basis and 58% to 67% year-over-year on a constant currency basis.

In regards to The Kingdom of the Winds: Yeon, we are extremely pleased with the stronger-than-expected engagement from players. And along with our co-development partner, we have committed more development resources to accommodate the need for additional content. While the team works to refresh the content, we foresee a sequential decrease in Q4 revenue to be followed by a return to sustained success for the game.

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 11.8 billion to JPY 13.3 billion, representing a 24% to 15% decrease year-over-year on an as-reported basis and a 25% to 16% decrease year-over-year on a constant currency basis. As a reminder, our Q4 China outlook does not include any contribution from Mobile Dungeon&Fighter. In addition to making changes that assure the game complies with Tencent's player protection systems, our team at mobile has used this extra time to develop additional exciting content and adding polish for a great mobile experience. We are in close contact with Tencent and hopeful that the game will be available soon. We will keep you posted on our progress.

As for PC Dungeon&Fighter, the National Day update has continued since September. There has not been a notable change in the number of active users or paying users for Q3. We expect the user levels to remain at low levels throughout the quarter. We also expect that the sales from the National Day package offering, which has a major impact on Q4 revenue, to decline year-over-year due to users being lower than the year ago period. While we have other updates and events planned during Q4, we anticipate that these will not majorly affect its performance nor improve user metrics. In the near term, we will focus our efforts on sustaining its user metrics at the current level as to stably operate the game. As you know, we have a portfolio of franchises that drive the majority of our revenue. These are primarily franchises that have been around 15 years or more, during which their revenue has [ added to this load ]. Despite there being periods of time when revenues have declined for a given game, as we tune the game to our players, we have been able to get the title to stabilize before ultimately returning to growth.

We're continuing to iterate Dungeon&Fighter as we focus on appealing to existing [ last and newly ] players. Over time, we expect the game to follow the same trajectory that we have seen with other titles, we first stabilize the game and then ultimately return it to growth. In Japan, we expect revenues in the range of JPY 2.9 billion to JPY 3.3 billion, representing a 26% to 45% increase year-over-year on an as-reported basis and a 27% to 45% increase year-over-year on a constant currency basis. We anticipate contributions from V4, which launched in Q3 2020 as well as FIFA MOBILE, which launched on October 12, to more than offset the negative impact of group's disposition.

In North America and Europe, we expect revenues to be in the range of JPY 4.6 billion to JPY 5.1 billion, representing a 10% to 21% increase over year on an as-reported basis and a 13% to 24% increase year-over-year on a constant currency basis. We anticipate MapleStory's strong momentum to continue into Q4 and grow triple-digit year-over-year.

We expect revenues in the rest of world in the range of JPY 3.2 billion to JPY 3.4 billion, representing a 15% to 25% increase year-over-year on an as-reported basis and a 16% to 26% increase year-over-year on a constant currency basis. We anticipate MapleStory's strong momentum to also continue in rest of world and grow double-digit year-over-year as well as to benefit from KartRider Rush+.

In Q4 2020, we expect operating income to be in the range of JPY 12.3 billion to JPY 16.0 billion, representing a year-over-year increase of 173% to 254%. The primary driver for the higher operating income in Q4 2020 is the revenue increase. Other favorable factors include decreased impairment loss of JPY 9.2 billion recorded in Q4 2019, which will not be repeated in Q4 2020. Unfavorable factors compared to Q4 2019 regarding the operating income include: first, increased variable costs associated with revenue growth; second, increased marketing costs associated with promotions for new mobile games, including KartRider Rush+, FIFA MOBILE and The Kingdom of the Winds: Yeon; third, increased HR costs associated with increase in performance-based bonuses as well as stock option costs. The high end of the range reflects the fact that we expect the impact of positive drivers to be larger than that of negative drivers, resulting in a year-over-year operating income increase.

Overall, Q3 results illustrated the strength of Nexon's portfolio, which consists of several of our major franchises, our live operation capability to make these franchises sustain and grow over the long term as well as the results from our focused strategy, leveraging Nexon's IP, focused on fewer but bigger, deeply immersive multiplayer online games are Nexon's sweet spot and to bring these games to multiple platforms.

In Q4, we expect our portfolio to again drive our group performance and both our group revenues and operating income to grow year-over-year. While we anticipate revenue from Dungeon&Fighter in China to decrease versus a year ago period, which once again reflects the strength and diversity of our portfolio.

Lastly, I would like to give you an update on the shareholder return and capital allocation strategy. As part of our capital allocation strategy, our Board has authorized a new JPY 100 billion stock repurchase policy that we expect to complete over the next 3 years. This is in addition to our M&A strategy as well as our dividend. The interactive entertainment industry is a high-growth sector with significant opportunity for investments to accelerate our growth. Our focus remains on driving growth for Nexon and our shareholders. But given the robust cash flow that we generate, we also want to return some of that capital to shareholders through the dividend and in the form of a share repurchase.

Besides these 3 strategies, we're also using a portion of the cash on the balance sheet to invest in leading global payment companies, principally to enhance the returns on our cash. As of Q3, Nexon completed investment totaling JPY 85.9 billion, which accounted for 54% of $1.5 billion that the Board authorized recorded an unrealized gain of JPY 18.6 billion under other comprehensive income.

This ends my comments. Back to you, Owen.

[Owen Mahoney, executive]

Thank you, Uemura-san. We hope that today's call clarifies Nexon's great performance in Q3, and importantly, we've provided a deeper understanding of the durability and the diversity of our business.

We strongly believe that Nexon is at the center of the biggest growth trends driving the entertainment industry. We start with a solid foundation of recurring revenue in a fast-growing segment, virtual worlds. In 2021, we will supplement this with multiple growth catalysts, catalysts, new games and investments to drive market expansion. This is why we are so incredibly excited about our future and why we believe Nexon is on a path to become one of the world's truly great entertainment companies.

With that, we'd be happy to take your questions.

[Maiko Ara, executive]

[Interpreted] Thank you, Owen. Next, we would like to open the line for live Q&A. The Q&A session will be conducted with Japanese-English or English-Japanese consecutive interpretation. Please note, the interpretation will come between your questions and our answers. Please hold for the interpretation before you hear our answers. Our answers will also be followed by interpretation. So please hold after 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 is Ms. Junko Yamamura from Nomura Securities Company Limited.

[Junko Yamamura, analyst]

[Interpreted] I have 3 questions altogether. This is Yamamura of Nomura speaking. And those 3 questions I want to pose are quite granular in nature. So let's start with the first one. First one is related to Korea's Q4. And you mentioned about the plan for Q4. And in Q3, the performance trended very favorably. I know that Q4 will be impacted by several seasonal factors. But even then, it seems that the revenue that you have forecasted for Q4 seems to dip pretty low.

And I listened to your presentation and also I look at different external data, but it seems that the trend has not changed much. So are you forecasting low numbers for Q4 in Korea because of the decline of the cocooning consumption that we have seen so far?

[Shiro Uemura, executive]

[Interpreted] You have mentioned regarding the prospects of Q4 in Korea, PC will be impacted by some seasonality. Therefore, we have factored in some decrease. But mobile games are not impacted by seasonality. And regarding The Kingdom of the Wind: Yeon, as I have such said in my presentation, it will slightly go down temporarily in Q4 because in Q3, we have seen performance that far superseded the expectation that we had and the performance was greatly about what we have forecasted in Q3. Therefore, many players were engaged, and they enjoy our content. And therefore, we came across the shortage of content. Therefore, we will be allocating resources so that we will be able to develop content for the future.

Having said that, even though the performance will slightly go down in Q4, please note that Q4 will be positioned more or less like a preparatory stage for us heading towards the future and realize continuous growth. And all in all, we can say that the momentum of all the titles in Korea is quite good, and the favorable trend will continue into Q4 as well. But once again, regarding The Kingdom of the Winds, we believe that there will be some temporary decline. And we have actually forecasted a slight decrease as compared to Q3.

[Junko Yamamura, analyst]

[Interpreted] I would like to ask you the second question, which is related to the marketing expense that you have factored in, in Q4. As a matter of fact, it will be more or less a question around your marketing strategy rather than just focusing on the marketing expense for Q4. I see that there will be a dramatic increase in the marketing expense for Q4, which is JPY 7 billion. And I want to know what are the particular titles that you will be allocating this budget for promotion. Are you thinking of using this expense for KartRider, FIFA and The Kingdom of the Wind? Because I know that these, title-wise, they are doing very great already. So considering the timing in which you are about to allocate the marketing budget, my first impression is that, so is Nexon go into beef up with the marketing activity so that you can further increase the momentum of these titles? Or is it because it's at the end of the year and you are planning to have more allocation of marketing expenses to these titles? Four, is it such that because of your promotion strategy, we should expect you to continue allocating a specific amount of budget for each title going forward?

[Shiro Uemura, executive]

[Interpreted] The basic principle is to consider the ROI impact in allocating marketing, promotional expenses. So this time around, we have a plan to launch FIFA MOBILE in Japan. So there will be one title in which we will be allocating the marketing expense. And also, there are several games that are trending very favorably in Korea. We will continue analyzing the KPIs and allocate the marketing budget accordingly so that we will be able to further expand the user base. So once again, heading toward Q4, we will conduct new analysis and allocate the marketing expense that we have secured for Q4.

[Junko Yamamura, analyst]

[Interpreted] My final question is on confirming the status of PC Dungeon&Fighter in China. In Q3, you had a National Day, but it seems that Q-on-Q-wise, the revenue went down. And I know that you have increased the core users. And in order to increase the core users, you conducted various events. And heading toward the Lunar New Year, I'm sure that you are applying different events. But can you tell me what is the core relationship between the events and the revenue that you can generate? And once again, talking about the Q3 National Day impact, even you put aside the royalty impact, still, we see the drop in revenue Q-on-Q.

[Shiro Uemura, executive]

[Interpreted] Regarding the Q2 Dungeon&Fighter PC, we had a major update in March. And the major update was really welcomed by the existing users, and we succeeded in stabilizing the basic users that already played Dungeon&Fighter on PC. However, the impact of major update in March wind as time passed by. And in Q3, both active users and pay users, they declined. So with that backdrop, we are seeing some challenges around Dungeon&Fighter. However, when you look at the recent KPIs, we can see that the remaining core players are continue enjoying this title, and we are seeing some stabilization of the core user group. So we will try our very best to retain such a core current user base.

And in Q4, because of the seasonality, ARPPU will go down by about 20%. And even though Dungeon&Fighter performance is declining, it is still a very important title for us. So we want to stabilize this title and aim at mid- to long-term performance growth. So in short term, our focus will be to stabilize the core users who are staying with the game right now.

[Operator]

We would like to take the next question from Mr. Han Joon Kim from Macquarie Limited.

[Han Joon Kim, analyst]

I also have 3 questions. The first one is on the nomination for Mr. Mayer on the Board. And I think we've had -- your management has discussed in the past that they feel the movie business or your media business have lower ROICs than the interactive business. And I presume nominating him to Board doesn't mean you want to go into linear entertainment. But how should we understand his nomination and what that means for how you utilize your IP and the direction of how you leverage this expertise to outgrow our business?

[Owen Mahoney, executive]

Han Joon, this is Owen. Thanks for your question. So quickly on Kevin, the short answer to your question is, do we plan on getting into the movie business? Or do we plan on becoming a major movie studio anytime soon? The short answer is no. But as a quick background, as you know, Ken was the Head of Strategy for Disney for a long time. And at -- during the time that he was there working for Bob Iger, the 2 of them basically put together, from what I can tell, is the most impressive media flywheel strategy that I've ever seen. I think when it goes down in history, it's going to -- they're going to go down as 2 of the best strategists in the entertainment business since Walt Disney himself. And so we've known Kevin for a while and have been enormously impressed with him.

But we also are of the belief that the media companies, the big entertainment companies in the next 50 years are going to be much different than the media companies and big entertainment companies in the last 50 years. And you've heard us talk about this before. We think that there's a massive secular shift going on in the entertainment business right now. It's not well understood. And to make a long story short, it's about the shift from off-line to online, from linear to interactive, from the physical to the virtual. And we think this is a very, very important secular shift that's going on.

So as we work through these strategies, there's going to be a new set of linkages and a new flywheel that develops. And we think that virtual theme parks are going to be the center of the next 50 years, the way that physical theme parks were at the center of Disney's strategy last 50 -- the last 10 and 50 years. So we're very, very happy to leverage his advice and counsel on the Board of Directors.

[Han Joon Kim, analyst]

Okay. Great. My second question is on the difference between, let's say, the Korea franchise right now and where the China franchise is. So the Korean Dungeon&Fighter, for example, has been doing fantastically well over the past few years, whereas I think the China version's going down a little bit. So I recognize that there's differences. But can you kind of illustrate for us what are some of the things that are working for us in the Korean franchise that we're operationally content optimized that seems to be working better? Or China, or is it just kind of more of a monetization and fatigue cycle, that's just kind of natural and just different timing of it?

[Shiro Uemura, executive]

[Interpreted] So thank you very much. Now the game

that we would have in Korea or China, the Dungeon&Fighter, it's all done under the same operations, same content, and of course, we do this same update. Of course, there are some -- a bit of a localization that we do. But then what we always do, usually, we, first of all, do the update in Korea. And what we do then is going to be -- after the update, we'll be looking at the results. And it's like a leading indicator before we'd be able to put some improvements before we do the updates in China. In other words, we basically are launching the same game. But then, of course, Korea and China would be in different phases.

To give you an example, Korea Dungeon&Fighter, you may remember that there were some areas that we've been struggling all the way until 2018. However, in 2019, we used that entire 12 months so that we'd be able to ratchet up the momentum bit by bit. And so when we did the very major update that we've been talking about, the Dungeon&Fighter in Korea was already in a very good situation. And so we were already in a very good situation in the game, and that was exactly the time when we did that major update. And that is why we have been able to find another growth in Korea Dungeon&Fighter.

Now looking at China, you may remember that from the latter half of last year, performance started to falter. And there, we also did the same update. And of course, that major update was well appreciated by the existing users. However, we were not really able to grasp back the last users, the users that left the game. So I think we can say this. PC online games is something that we want to operate for a long time. We'd like to make sure we do well in the contents upgrading as well as do the live operation. And like we've always been saying, there's always some ebbs and flows to the game performance. But then if you look at this in the mid- to long range, we want to make sure that we will be able to find some growth.

So China, it is true at the moment, it seems like we're struggling, but we want to make sure that we do stable operation, so that in the long term, we will be able to enjoy growth.

[Han Joon Kim, analyst]

Great. And lastly, my question, talk to that is, yes, there's obviously ebbs and flows, and I think we respect that. I think at the same time, you guys are ware that the capital market seems to be quite volatile and particularly these days. So in this environment, how do you think about the buyback that you just announced? And like what are the key triggers you're looking forward to kind of support the share price in the market, particularly with the kind of a volatility that we have seen over the past few days or a few years.

[Shiro Uemura, executive]

[Interpreted] Thank you very much. Now first of all, when it comes to share price, it's certainly something that we would not be able to directly control. But we do believe share price very much reflects on the performance, the growth that we'd be able to show to the market. But then, of course, it is going to be important that we try to strive that so that we'd be able to find our good business growth. And in that perspective, I do believe we have been able to generate very strong cash flow every year. And so this is something that we do want to make sure that we'd be able to use for this stable operation. And I think this is something that we'll be able to keep on doing as long as we be able to safely operate our game business that we do. So there's no change to that thought. But then at the same time, we always do want to make sure that whatever capital, whatever cash we have, we'd be able to use it in the most effective manner. And of course, we'd be thinking of shareholder return. But then at the same time, we do also want to keep an eye on how we'd be able to use the cash for our growth.

And looking at our cash position at this moment, we do believe we'd also be able to or return in a well-balanced manner. In other words, we're looking at this JPY 100 billion size of cash, and we do want to make sure we'd be able to utilize that, so that in the 3 years' time period, we'd be able to return offer returns to the shareholders. But again, we always are going to be mindful that we'd always be keeping an eye on the situation in the market, situation around our business. We also do want to keep an eye open to various factors that surround it so that we'd be able to keep on making investments for our future growth.

[Operator]

The next question is from Mr. Seyon Park of Morgan Stanley.

[Seyon Park, analyst]

I have 2 questions. I guess the first question is, I think a question everybody really is quite keen to hear, I guess, related to Mobile D&F. And I'm assuming that management is also in a situation where there's some things that you can disclose or not. But maybe can you provide a bit of an update on what is continuing to kind of play a role in the delay? And given that you've not included [ Mobile D&F into fourth quarter guidance ], should we take this as a message that it will not come out this year? Or are you open? Or does it mean that just given the uncertainty that the game can come out, but just to be conservative, you're not putting it into the fourth quarter guidance?

Some clarity on [ how we should think about this kind of on the longer term would be great ].

[Shiro Uemura, executive]

[Interpreted] We have announced the postponement of the launch of Mobile Dungeon&Fighter in August, and we have stated this during that announcement. But basically, Tencent is trying to update the anti-addiction program that they are pursuing. And so that is the reason of the postponement. But also, at the same time, we are thinking ahead in time, meaning the post-launch period, and we want to really enhance the content that we can provide to the users. And so with this content that's given to us, we are bolstering the content that we can provide to the players. And that's why we did not include the title in Q4 guidance.

So practically speaking, it's already mid-November. Therefore, we haven't yet announced a launch date for the title yet. And if we were to make the announcement after we definitively decide on the launch date, we have to conduct marketing activities again. So given the time frame, lead time-wise, I guess it is not very realistic to think about the launch of the title in Q4. And even if we did, the contribution will be negligible given the time frame. So that is why we did not include in the Q4 guidance.

[Owen Mahoney, executive]

Yes. This is Owen. I just want to emphasize, just from my end, we are really excited about the game. And we join our partner and 60 million preregistered users in being extremely excited to see it in the market.

[Seyon Park, analyst]

Okay. The second question is the other, I think, big title that investors are kind of looking forward to is the new title from Embark. I think there was some expectation that maybe we could at least get an update or just kind of some screenshots of it within this year. I was curious whether that's still kind of on track and whereas where you -- where management right now thinks the game can potentially come out in the future?

[Owen Mahoney, executive]

This is Owen. We -- what we said before is we'd start talking about at the end of the year. We are getting towards the end of the year, so we expect to start talking about it soon. What I can tell you is we are -- actually, we're a lot more excited and even more excited than we were before. We think this is going to be something really special coming from one of the most creative and disciplined developers on the planet right now. So I personally will be playing the build this coming weekend because we've got a new build coming out internally. We'll be doing an internal test, and we're really excited about it. And I think you're going to see stuff in the game that you haven't seen before.

[Operator]

We will take the next question from Mr. Atul Goyal from Jefferies Singapore Limited.

[Atul Goyal, analyst]

Owen, I had 2 questions, but first one has been partially asked already, which is, again, just trying to understand what's holding the D&F Mobile.

My second question, which is where we'll just focus on that is to understand in the mobile game space, until last year, you had not much success in most markets. This year, you've had a lot of success in Korea. And so far, while you do have some revenues in Japan, Europe and U.S., we can't call them real successes so far as the games are not showing up in top 5 or 10 rankings regularly.

What do you think is different in these markets? Are the markets very different? Or is it that in Korea, Nexon's IP is very well known, very powerful and that's why it is -- it has that success rate higher than elsewhere? Or is it because of marketing? What is different in these -- across these markets in your view?

[Owen Mahoney, executive]

Atul, thanks for your question. It's a really good question. And to give it justice, I'm going to just give a little bit of context. As you recall, last year, in the second half, we made a major strategic shift. And a big part of that strategic shift was to narrow down the number of products that we were making and to really focus on deeply immersive worlds and then bring those immersive worlds to mobile in addition to PC -- and to other platforms in addition to PC.

And as you noticed, we just brought up our percentage of mobile revenue from 26% a year ago to 40% -- 42% this quarter. So it's a pretty big change. But we really just started the strategy. We're into Q3 now, but it's been basically less than a year. And we've only got a few major products in the market in countries around the world. So for example, in Korea, we have MapleStory, KartRider, FIFA ONLINE, now Kingdom in the Winds. Those are all in mobile. And we plan to shortly launch Dungeon&Fighter Mobile, and then after that, Mabinogi Mobile.

So as that strategy of fewer bigger, better, fully immersive worlds on mobile plays out, that will flow throughout the world. And today in Japan, we just launched FIFA in Japan. And we plan on shortly launching Dungeon&Fighter Mobile in China, and we'll be launching other games. So this strategy will play out in the coming quarters and years. So I'll let the translator do her work for a second, and then I'll add to that answer.

Two other quick points. I think that you're right that these franchises that have launched are hugely -- are huge franchises, huge IP franchises in Korea. And we've also traditionally had great strength in China, and so that worked really well. But we also, keep in mind, our -- because we're focusing on fewer, bigger, better titles, we can put more effort on bringing them around the world. So I think you'll see a product like the next iteration of KartRider, the next-generation of KartRider that we plan to launch on multiple platforms. The marketing program that we're spending a lot of time talking about as a management team is not just about, for example, Korea and Taiwan where half of the populations of those 2 regions have played the game, but also in multiple different geographies around the world. So our ambitions are big about that. I hope that answers your question.

[Atul Goyal, analyst]

This is not a question, just a quick comment that fingers crossed, hopefully, these games work in multiple markets. Because as of now, we don't have too many companies which we can highlight to investors, which have had multiple success with mobile games. They've had some success in some markets, but it will be great to see Nexon succeed all the way.

[Owen Mahoney, executive]

Yes. Atul, I hope you don't mind me piling in here, and I want to watch our time. But you're asking probably a broader question. You're making a broader comment. Look, I'd like to just emphasize one point. We said it in the prepared remarks, I'll say it again because it bears repeating because you're asking a very good question. Look, we just grew 52% in Q3, and that was without Mobile Dungeon&Fighter. And we plan to grow about 30% in Q4. And I think this really highlights a few things that you're -- that are the source of your question. It highlights the strength of our live operations to build up a franchise over decades. It highlights the diversity of our geographies in our intellectual properties. And it highlights the effectiveness of our focused strategy.

So if we proved anything this quarter, it's that we're not reliant on 1 title or 1 geography. And we've been saying it for a while, but this quarter really proves that out. So if you remember one thing from this earnings call, it would be that point. It would be the diversity of our intellectual property and a growing diversity in our regional base of revenues.

[Operator]

Our final question for the call will come from Munakata-san of Goldman Sachs Japan.

[Minami Munakata, analyst]

[Interpreted] And I know that we are running out of time, and I should just stay with 1 question. And that question is on the Dungeon&Fighter Mobile. In the conference call this time around, you mentioned that you're spending at this time to enhance the content. But then when look back at what you have mentioned in your Q2 presentation, I remember you stating that you have sufficient content. So did you change your evaluation of the content that you have? Or are you trying to aim at satisfying higher level of users more than ever before so that you will be able to generate more revenue? So can you tell me what is the nature of this enhancement you're making on the content?

[Shiro Uemura, executive]

[Interpreted] So regarding the postponement of the launch of Mobile Dungeon&Fighter, it is basically for the reason of upgrading the anti-addiction program. And since that is giving time for the developers to further work on the content, we wanted to efficiently use this given time so that we can aim at realizing higher level of satisfaction amongst the players. And so these works are moving in parallel. It's not that we do not have sufficient quantum in August or we were not prepared to launch the game in August for the sake of the content that we have. So once again, I repeat myself, it is basically to upgrade the anti-addiction program, and we wanted to make full use of this time that is given to us to enhance the level of satisfaction that we can provide to our players.

[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]

[Interpreted] Thank you very much. It is time now. And so 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 [e-mail] should you have any further questions.

[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.]