Nexon Co Ltd

TSE:3659

Earnings Call Transcript 2022-Q3

[Operator]

Good day, everyone, and welcome to NEXON's 2022 Third Quarter Earnings Conference Call. Today's call is being recorded.

At this time, I'd like to turn the call over to Takanori Kawai, Team Leader of Investor Relations. Please go ahead.

[Takanori Kawai, executive]

Hello, everyone, and welcome to NEXON's earnings conference call. Thank you for joining us today. With me are Owen Mahoney, President and CEO of NEXON; and Shiro Uemura, CFO.

Today's call will contain forward-looking statements including statements of our results of operations and financial condition, such as revenues attributable to our key titles, growth prospects, including with respect to the online games industry, our ability to compete effectively, adapt to new technologies and address new technical challenges, our use of intellectual property and other statements that are not historical facts.

These statements represent our predictions, projections and expectations about future events, which we believe are reasonable or based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information on some of these risks and uncertainties can be found in our earnings-related IR documents. We assume no obligation to update or alter any forward-looking statements.

Please note, net income refers to net income attributable to owners of the parent as stated in NEXON's consolidated financial results. Furthermore, this conference call is intended to provide investors and analysts with financial and operational information about NEXON, not to solicit or recommend any sale or purchase of stuff 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, Kawai-san. And good afternoon everyone and welcome to NEXON's third quarter 2022 earnings call.

I'll start with a summary. Today we are reporting NEXON's best Q3 ever. During our discussion, Uemura-san will provide guidance that represents NEXON's highest Q4 revenue ever. Achieving that guidance would mean NEXON is experiencing its highest annual revenue ever in 2022. And we have by far our best pipeline of new games ever.

In a global business environment that is best described as ugly, particularly for tech and media companies 2022 is shaping up to be a tremendous year for NEXON and our confidence in 2023 has only grown.

Our vision for deeply immersive virtual worlds, backed by a highly experienced team of live operators, and a robust and growing tech stack for building and operating large-scale virtual worlds, is generating consistent growth and profits.

The business we will review with you in the coming hour represents safety and growth in a turbulent entertainment and technology world, a world that is increasingly aspiring toward the vision of virtual worlds that NEXON has been pioneering and evolving for over 2 decades.

Our third quarter was highlighted by record-setting revenue, up 28% year-over-year. This strong performance was driven by solid growth from our live virtual worlds, which we refer to as Forever Franchises, and the performance of key new virtual worlds on mobile.

Dungeon&Fighter Mobile launched 7 months ago in Korea, and continues to generate consistent revenue. As a result, the Dungeon&Fighter franchise has grown meaningfully overall in Korea, thanks to the addition of mobile on top of the PC business.

And, HIT2, a new mobile game that launched in August, is off to a great start, contributing revenue significantly above our expectations.

Importantly, our central thesis about mobile has been playing out as we planned it. While much of the industry has continued to treat mobile as a low-end computing device that allows only simple gameplay, we anticipated the rapid advances in GPU and networking power on mobile, well past what a PC or console was capable of even a few years ago.

That means our focus has been on delivering a PC-level experience to mobile, which translates to PC-like retention of players. That in turn means vastly better unit economics. And the number of such players is an order-of-magnitude larger than the PC installed base, literally billions of people around the world.

As a result, the post-IDFA issues that have plagued so many other companies in mobile have not been a factor for us, as our games have a higher retention rate and monetize at a greater level than casual titles.

Our business on mobile has instead been accelerating, with ballooning retention rates and expanding lifetime values. We think these strong metrics bode well for our future performance.

In addition to our successful new mobile products, several of our existing virtual worlds generated record-setting revenue thanks to our robust live operations capability, backed by our growing technology stack.

In Q3, Korea MapleStory, one of our longest lasting virtual worlds, achieved 47% growth year-over-year, nearly reaching its highest Q3 ever. Mabinogi delivered 66% growth year over year, its highest quarterly revenue ever, 18 years after launch.

And FIFA ONLINE 4 accelerated its recent strong performance, growing significantly year-over-year and delivering a third-straight quarter of record-breaking revenue.

The performance of these virtual worlds demonstrates several very important attributes of a healthy online games business. First, the commonly-held mental model of product lifecycle, or PLC for short, is wrong.

We are commonly asked when MapleStory will go into decline and end. It was the most asked question on our IPO roadshow 11 years ago. Today MapleStory in Korea is 4X the size it was at that time. This is why we call these virtual worlds Forever Franchises. They are designed to be just that.

Second, each virtual world goes through cycles of ups and downs as we make the world bigger, add new experiences, and experiment with new content. That means the decline in one quarter or one year is usually followed by further growth and all-time-highs later.

Third, our portfolio provides stability. If one franchise shows a short-term decline, another usually outperforms and makes up the difference.

These 3 components add up to the opposite of a hits-driven business. The idea that our business is hits-driven is a misnomer, held over from the traditional games business and linear entertainment, that has mistakenly been applied to NEXON's business of deeply immersive and long-lasting virtual worlds.

Next I would like to share our progress on NEXON's powerful pipeline of new games in development. I'll start with THE FINALS, a unique, fast-paced shooter in development at our Stockholm-based Embark Studios.

We conducted the game's first public alpha test, in September. Typically, when readying a major launch, an online game operator will conduct an early alpha, followed by one or more beta tests, in the months leading up to the full launch.

Our objective for the alpha was to test the core of the game and the server code in a live environment. 10 times our anticipated demand signed up for the alpha despite our minimal marketing, and during the test, it became the most-followed game on Steam. This clearly indicates the high interest in a shooter that breaks new creative ground in a genre that has recently become stale.

Performance of the test was much better than we anticipated, especially for an alpha. There were no major bugs in the game, and the server performance was very smooth. Remember there was significant, never-before-tried technology in this game, including server-side destruction.

And player feedback was extremely strong. Players told us overwhelmingly they enjoyed the game. Server-side destruction, which enables a deeply immersive and realistic experience that has not been implemented in any other game before, was especially well-received.

Based on the positive feedback of the alpha, and anticipated large audience, we want to expand our content plan at the time of launch, to ensure strong player retention over time. We also want to develop out additional meta-game elements to ensure player longevity.

Increasing the volume and polish of that content is where our focus is between now and high-polish public beta, which we expect in Q1.

Next I'd like to update you on KartRider: Drift, a wild arcade driving experience on mobile, PC, PlayStation and Xbox. Feedback from players during our recent cross-platform test has been positive. The remainder of the work prior to launch is about polishing the experience: matchmaking, fine-tuning the controls and balance across platforms, and making business model tweaks and additions. We plan to start the pre-season globally in January, followed by official launch in the first half of 2023.

Our launch pipeline for the coming 12 months is the most robust in our history, with major new virtual worlds on all platforms and in all regions. They represent a variety of genres and play styles, but the common thread is that they are deeply immersive multiplayer online experiences, designed to last a long time.

Some key upcoming titles include: TalesWeaver: Second Run, to be released on mobile in Japan in Q4; KartRider: Drift in first half will be available on PC, mobile, and console. THE FINALS from Embark on PC and console; VEILED EXPERTS from NEXON Games on PC; ARC Raiders from Embark for PC and console; Warhaven from NEXON Korea on PC and console; The First Descendant from NEXON Games on PC and console and Mabinogi Mobile from our devCAT studio in Korea.

This is the strongest pipeline of new releases in NEXON's history. Our execution on these new virtual worlds, in addition to continuing to deliver on our existing portfolio, will provide a step-function increase in our financial performance over the next several years.

With that, Uemura-san will provide more detail on the quarter and the outlook for Q4, and I'll return to briefly summarize our thoughts about NEXON's growth and the road ahead.

This is the strongest pipeline of new releases in NEXON's history. Our execution on these new virtual worlds in addition to continuing to deliver on our existing portfolio will provide a step function increase in our financial performance over the next several years.

With that, Uemura-san will provide more detail on the quarter and the outlook for Q4, and I'll return briefly to summarize our thoughts about NEXON's growth and the road ahead.

[Shiro Uemura, executive]

Thank you, Owen. Now, I'll review our Q3 2022 results. For additional details, please see the Q3 2022 Investor Presentation available on our IR website.

We achieved record breaking quarterly revenue. Group revenues were JPY 97.5 billion, up 28% year-over-year on an as-reported basis and up 16% year-over-year on a constant currency basis. Our performance was driven by the growth of major titles FIFA ONLINE 4 and MapleStory in Korea, and contributions from new titles Dungeon&Fighter Mobile and HIT2.

Overall, our topline performance was within the range of our outlook. HIT2 and Mabinogi exceeded our expectations, while Dungeon&Fighter Mobile and MapleStory in Korea were lower than planned.

By region, revenues from Korea, Japan, North America and Europe, as well as Rest of World were within the range of our outlook while revenues from China came in lower than expected.

Looking at the total company performance by platforms, mobile revenues were within the range of our outlook while PC revenues were lower than expected.

Operating income was up 6% year-over-year and within our outlook at JPY 31.5 billion. Net income, which exceeded our expectations, was up 14% year-over-year to JPY 43.3 billion. This was mainly driven by an FX gain of JPY 26.4 billion related to the depreciation of the Korean won and Japanese yen against the U.S. dollar 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 JPY 62.8 billion, representing record-breaking quarterly revenues in Korea. This performance was within the range of our outlook.

On a year-over-year basis, revenues increased by 56% on an as-reported basis and by 43% on a constant currency basis. FIFA ONLINE 4's PC and mobile combined revenues were at the high end of our outlook driven by successful events and sales promotions.

MAUs, paying users and ARPPU all increased year-over-year. As a result, its revenues grew significantly and marked a quarterly record high for the third quarter in a row.

MapleStory grew by 47% year-over-year and was close to record breaking Q3 revenue. The performance, which was slightly below our own high expectations, was driven by year-over-year growth in MAUs, paying users and ARPPU as well as the well-received Summer update, events and sales promotions.

Mabinogi's revenue grew by 66% year-over-year, which significantly exceeded our outlook driven by a highly well-received update. For Dungeon&Fighter and Sudden Attack, which showed strong performances last year, as expected revenues decreased. All in, PC revenues in Korea increased by 40% year-over-year.

As for the mobile business in Korea, revenue from HIT2, which launched on August 25, exceeded our expectations as we were able to attract many core MMORPG players while also achieving a PC-like high retention rate.

Dungeon&Fighter Mobile's revenue was below our outlook due to a decrease in its active users. In response, we conducted the Level Cap release on September 28 and adjusted the game balance. As a result, we are seeing an improvement in active users now. We will continue to closely monitor the game and stably operate it.

On a year-over-year basis, mobile revenues in Korea increased by 93%. Contributions from HIT2, Dungeon&Fighter Mobile and Blue Archive, as well as growth of FIFA ONLINE 4 M, were partially offset by revenue decreases in The Kingdom of the Winds: Yeon, V4 and KartRider Rush+.

On a quarter-over-quarter basis, mobile revenues increased by 16% primarily driven by a contribution from HIT2 and a revenue increase in FIFA ONLINE 4 M.

Revenues from our China business were slightly below our outlook, representing a 14% decrease year-over-year on an as-reported basis and a 27% decrease year-over-year on a constant currency basis. Dungeon&Fighter came in at the low end of our outlook and MapleStory was below our expectations.

For Dungeon&Fighter, revenue decreased year-over-year, as expected, due to a tough comparison with the strong performance in Q3 2021 driven by that year's Summer update and new initiatives.

Active users decreased in Q3 as the effect of the Level Cap release conducted in June did not last as long as expected. Also, we continued to focus on increasing user engagement over near-term monetization.

This resulted in ARPPU decreasing more-than-planned and Q3 revenue coming in at the low end of our outlook, however, the number of active users in October has recovered to last year's level driven by these initiatives.

On a quarter-over-quarter basis, MAUs and paying users decreased following the Level Cap release, while ARPPU increased due to seasonality.

On a year-over-year basis, MAUs, paying users and ARPPU decreased due to a tough comparison with the strong performance in Q3 2021.

Revenues from Japan increased by 13% year-over-year driven by the growth of Blue Archive and a contribution from CounterSide, despite revenue decreases from TRAHA and V4.

Revenues from North America and Europe increased by 10% year-over-year driven by the growth in MapleStory and contributions from new games, despite revenue decreases from MapleStory M and Choices.

Revenues from the Rest of World increased by 28% year-over-year driven by the growth in MapleStory and contributions from new games.

Moving on to our FY 2022 fourth quarter outlook. In Q4, we expect significant growth from FIFA ONLINE 4 and continued growth from major existing titles including China Dungeon&Fighter and Korea MapleStory.

We also expect strong contributions from HIT2 and Dungeon&Fighter Mobile, as well as TalesWeaver: SecondRun, which is scheduled to launch in Japan in the fourth quarter.

Consequently, we expect record-breaking Q4 revenues, in the range of JPY 75.5 billion to JPY 83.7 billion, representing a 39% to 54% increase year-over-year on an as-reported basis and a 27% to 41% increase year-over-year on a constant currency basis.

We expect our Q4 operating income to be in the range of JPY 7.5 billion to JPY 14 billion, representing a 153% to 369% increase year-over-year on an as-reported basis and a 116% to 311% increase year-over-year on a constant currency basis. I'll discuss the details on this shortly.

We expect net income to be in the range of JPY 5.5 billion to JPY 10.1 billion, representing a 75% to 54% decrease year-over-year on an as-reported basis and a 79% to 60% decrease year-over-year on a constant currency basis.

The year-over-year decrease in net income is due to a JPY 14.6 billion deferred tax asset and as well as JPY 3.2 billion FX gain that we recorded a year ago. As you know our guidance does not factor FX gains or other events such as deferred tax assets.

In Korea, we expect growth from FIFA ONLINE 4 and MapleStory, and solid contributions from HIT2 and Dungeon&Fighter Mobile. Consequently, we are looking for revenue in Korea to be in the range of JPY 51 billion to JPY 55.4 billion, representing a 62% to 76% increase year-over-year on an as-reported basis and a 51% to 64% increase year-over-year on a constant currency basis.

As for the PC business, we expect FIFA ONLINE 4 to grow significantly year-over-year driven by the continued year-over-year increases in active users and paying users. We also expect MapleStory to maintain its strong momentum and to grow year-over-year.

While we expect year-over-year growth from Dungeon&Fighter and Mabinogi, we expect Sudden Attack's revenue to decrease compared to its strong performance in Q4 2021. Consequently, we expect PC revenues in Korea to increase year-over-year.

Regarding the mobile business in Korea, we expect Q4 revenues to significantly increase year-over-year. We expect strong contributions from HIT2 and Dungeon&Fighter Mobile. In addition, we expect year-over-year growth in FIFA ONLINE 4 M and FIFA MOBILE. We expect these to be partially offset by year-over-year revenue decreases in Blue Archive, V4, KartRider Rush+ and The Kingdom of the Winds: Yeon.

Turning to China, we expect revenues from our China business to be in the range of JPY 13.1 billion to JPY 15.2 billion, representing a 15% to 34% increase year-over-year on an as-reported basis and flat to 16% increase year-over-year on a constant currency basis, driven by the anticipated increase in Dungeon&Fighter's revenue.

For Dungeon&Fighter, we adjusted the game to be more user friendly, and as a result, the number of active users in October has recovered to the last year's level. Based on current positive trends, we expect Dungeon&Fighter's revenue to increase year-over-year. Looking forward, we are focused on engagement, particularly retaining existing players and attracting returning players.

In Japan, we expect revenues in the range of JPY 2.7 billion to JPY 3.5 billion, representing a 10% to 44% increase year-over-year on an as-reported basis and a 5% to 37% increase year-over-year on a constant currency basis, driven by the new release of TalesWeaver: SecondRun in Q4.

In North America and Europe, we expect revenues in the range of JPY 4.1 billion to JPY 4.5 billion, representing a 17% to 8% decrease year-over-year on an as-reported basis and a 32% to 25% decrease year-over-year on a constant currency basis. We anticipate decreases from Blue Archive and Choices.

We expect revenues in the Rest of World in the range of JPY 4.6 billion to JPY 5.1 billion, representing a 13% to 25% increase year-over-year on an as-reported basis and a 4% to 14% increase year-over-year on a constant currency basis, driven by contributions from new games.

In Q4 2022, we expect operating income to be in the range of JPY 7.5 billion to JPY 14 billion, representing a year-over-year increase of 153% to 369% on an as-reported basis and a 116% to 311% increase year-over-year on a constant currency basis.

An increase in revenue is expected, which will contribute to an improvement in year-over-year operating income. However, compared to Q4 last year, we expect increases in costs due to business growth as well as upfront investments in talent and marketing, as we prepare to release a number of major new properties in the coming quarters.

First, we expect increased variable costs due to a revenue increase. Second, we plan to increase headcount in anticipation of launches of several major new virtual worlds, as well as accrue bonuses for outstanding financial performances.

Third, we plan to make investments in marketing for certain virtual worlds that have shown high returns around key events and updates, such as FIFA ONLINE 4, MapleStory, and HIT2. We expect these marketing investments will pay returns well into the future.

The high end of operating income is expected to increase year-over-year on a constant currency basis as a revenue increase will be larger than cost increases due to upfront investments.

Overall, in Q3 2022 we achieved record-high quarterly revenues. Our performance in Q3 reflects the strength and focus of our live game operations to improve user engagement, which led to growth across multiple major titles including FIFA ONLINE 4, Korea MapleStory and Mabinogi.

Our mobile business also grew significantly, driven by the successful release of HIT2, which exceeded our expectations following the successful launch of Dungeon&Fighter Mobile in Q1.

In Q4 2022, we manage our operations for stability and growth in our major titles and new mobile games, including HIT2 and Dungeon&Fighter Mobile through appropriate updates and carefully-managed daily operations.

We expect year-over-year growth from China Dungeon&Fighter. While we experienced a dip in active users in Q3, we now are seeing a recovery in that number in Q4 as we took appropriate measures in live operations.

In addition, we expect to launch KartRider: Drift and Embark Studios' first title, THE FINALS, as well as several other major new virtual worlds, in 2023 and beyond. We believe that NEXON could accelerate our future growth by layering these titles on top of our strong revenue base.

Last, I would like to provide an update on the shareholder return. Regarding our 3-year JPY 100 billion share repurchase policy that we announced on August 9, 2022, today the Board of Directors approved an execution of JPY 50 billion share repurchase in the market starting from tomorrow, November 10, to April 19, 2023.

As for the remaining JPY 50 billion, we plan to complete the share repurchase authorization by August 2025 at the latest by considering several factors including investment opportunities, financial conditions, as well as the market environment.

So this concludes my comments, and back to you Owen.

[Owen Mahoney, executive]

Thanks Uemura-san. To summarize our presentation. Today we reported NEXON's best Q3 ever, in which we grew 16% on a constant currency basis. Our Q4 guidance represents NEXON's highest Q4 revenue ever. We expect to grow between 27% and 41% on a constant currency basis.

Achieving that guidance would mean NEXON is experiencing its best year ever in 2022, with topline growth between 17% and 20% on a constant currency basis. And we have by far our best pipeline in our company's history.

With that as a backdrop, I'd like to talk a bit more about our reason for executing JPY 50 billion of the JPY 100 billion authorization of our open market share buy-back now.

As you heard today we are extremely confident about the performance of our existing live virtual worlds, as well as our pipeline of new online games. If just one or 2 of these new titles hit, they would represent a step-function change in our revenue and earnings power, on top of the stable growth of our live virtual worlds. That step-function change would make NEXON a meaningfully larger company in the near future.

Now, as you know we don't give annual guidance, as performance of new games is notoriously difficult to forecast, especially when they break new creative ground, as these games do.

As operators of our business, we play the upcoming games extensively, can review all the feedback from our player tests, and can see the KPIs, and it's fair to say we have very good reason to be excited about our pipeline.

And because we have several major new launches about to happen, we don't have to depend on any one of them, even though our confidence in each is high.

So we are putting our money where our mouth is. We think now is a very good entry point for us to buy our own shares, and we want to buy a significant amount of these shares before these key new virtual worlds launch.

With that, Uemura-san and I would be happy to take your questions.

[Operator]

[Operator Instructions] The first question is from Mr. Seyon Park from Morgan Stanley.

[Seyon Park, analyst]

I have 2 questions. The first question, I guess, is about China. I think there's been a lot of, I think, concerns about China, not specific to NEXON, but I think just the industry overall. We've actually seen very weak trends on mobile. And I think compared to those concerns, the trend that we are seeing with Dungeon&Fighter doesn't seem to reflect any of that weakness. I mean, yes, it is down year-on-year, but the guidance for the fourth quarter also seems to be quite strong.

So I just kind of wanted to get a little bit more color on whether you are seeing any changes, I guess, in terms of gamers' consumption patterns or behaviors which would impact the trajectory for Dungeon&Fighter in China? That's my first question.

And then the second question is regarding the Embark titles, I guess the timing of THE FINALS. If the beta test is in 1Q, would it be fair to assume then that a commercial launch is somewhere beyond that -- second quarter and beyond? And given, I think, the explanation you had given in the prior earnings call, would that imply that our creators would be more likely a second half 2023 launch?

[Shiro Uemura, executive]

Thank you for your question. I, Uemura, will respond to the first question. And the second question will be taken by Owen.

So regarding the situation in China, it is indeed true that our record of Dungeon&Fighter in China does not look that great. But it does not mean that the Chinese market is changing nor the user behavior is changing. And the situation is attributable to our own situation.

And as I have mentioned before, it is very important to manage both the daily operation of PC online game. And we have to continue conducting high-quality update. And if we can conduct these 2, theoretically speaking, it will be a Forever Franchise.

And for the past few years in China, Dungeon&Fighter has not been recording the performance that we have enjoyed in the past. But we will be able to return the gain back to its growth trajectory. And needless to say, China Dungeon&Fighter is a very important title for us in China, and we want to conduct stable operation and be very cautious in conducting the day-to-day operation so that we will be able to maintain the gain and return it back to the growth trajectory in the long term.

[Owen Mahoney, executive]

And Seyon, this is Owen. Thanks for question. Regarding Pioneer -- excuse me, regarding THE FINALS, as we mentioned in our prepared remarks, we expect the public beta to be in Q1. We haven't made any announcements beyond that. But just to be clear about what the beta means, as we say, it's a high polish beta, and it's a public beta. So this is not an early, early test. This is something that's rather complete and rather -- and very filled out. So that's our plan there. The development continues to move very quickly.

As for ARC Raiders, we haven't made any updates, but I would not assume that the timing of THE FINALS impacts the timing of ARC Raiders. Those are operated as separate and distinct projects.

[Operator]

The question is from Yamamura-san of Citigroup Global Markets, Japan.

[Junko Yamamura, analyst]

This is Yamamura from Citigroup. So my first question is about, so how do you proceed to launch your future new titles? In other words, I'd like to ask more about what is the timing that you would have in mind because it is quite difficult for us in the capital market to really anticipate what could be the right timing for this?

And I understand just like a mobile title, there will be this verticals that we'd be able to structures that we'd be able to look at. But then when it comes to like some of your previous successful titles, including MapleStory as well as Dungeon&Fighter, I do believe it did take some time before we'd be able to see some tangible success. And of course, I'm not saying that's bad in itself, I think that is how we should expect, and I do believe that it does have good in itself.

But then this also raises the concern that perhaps the tenure or the duration of this advanced investment will become longer than what we would expect. In other words, I do believe there could be some of the difference in understanding of the time line that you'd be looking at for success and the time line that we in the capital market will be looking at before it would be called as a success title. So I wanted to hear about what your view is from that perspective?

And if I may continue my second question?

[Shiro Uemura, executive]

I would like to answer one by one. So thank you for that first question. So I understand that your question is how -- what is the timing that we would see the success of a specific, especially new titles? And of course, it does depend on which genre we're talking about as well as what kind of expected steps that we'd be taking.

And just like you just mentioned, it is about like mobile games, we do usually would have this initial the start to ramp up. And then afterwards, after some time, there will be some churn, some users who will be leaving the game. And so the question is where can we really stabilize the performance.

But the situation could be different if we're talking about PC or console games and this is exactly where we are very good in operating. And of course, even if the first user population does not meet our expectation, we know we'd be able to take time so that we'd be able to do the correct marketing, do the correct operation, do the update. And so that's how we have been able to really see success and enhancement of each title over the 10 to 20 years' course of time.

And so it really depends on what kind of marketing, what kind of promotion we'd be doing and seeing when the investment we've made would be harvested. And each title, of course, we internally do have our expectation as well as for the growth curve and how we'd be able to capture the revenue performance. And we always do, keep in mind of ROI when we try to make any advanced investments.

And so even if we would -- so as long as we'd be able to operate the game as we plan, we know that we'd be able to have this very successful game.

[Junko Yamamura, analyst]

My second question is, what is your outlook? Or what is your expectation in terms of your margin and profitability as you look into the mid and long term? And you did mention earlier that, for example, in the marketing expense for Q4, you expect there's like JPY 10 billion worth. And of course, we do have to look at, for example, the currency impact. But then my question would be, is this JPY 10 billion going to be allocated to several titles? Or is this going to be more focused into a single specific title?

And for example, I raised this question because when I look at, for example, your titles like Dungeon&Fighter, I think the type of the trend that you would find could be a bit different from like other peers. For example, other peers, if they go for more multi-platform that usually enables them to find a better margin or profitability. But then in your case, it seems like the more you try to go for a multi-platform then your -- for example, your highest type of margin could, in the end, start to swim down to more to the average level closer to your peers.

And so that is why I wanted to ask. And for example, even if you see the margins start to decline, do you feel it's okay if your absolute operating profit still would be strong and growing? And so again, it's really about what your intention is or what is your expectation to especially your mid to long-term profitability?

[Shiro Uemura, executive]

And so first of all, I'd like to answer specifically about the marketing cost that you mentioned in other words, JPY 10 billion for Q4. And yes, it is going to be used for our existing titles that is doing well. We want to further polish titles, especially we'd be talking about polishing MapleStory or FIFA ONLINE 4 further growth.

But then we also do have newly launched titles, for example, HIT2 and also Dungeon&Fighter Mobile, which we'd like to make sure we'd be able to allocate some investments so that we'd be able to have even further growth.

And at the same time, for the first time after 3 years, we are going to be taking part in G-STAR. And so there is going to be some marketing promotion expense for that. And that, in total, would amount to JPY 10 billion.

So in terms of your second question, so I'd like to go into how we look at our cost. And of course, it's not like we're just blindly making these investments. We are trying to make sure that we control the amount of advanced investment we would make. In other words, we always make sure we'd be able to keep a certain ROI.

And so even we speak of our HR cost or perhaps our marketing cost, it is going to be spent so that we'll be able to grow top line. In other words, this expense compared to the size of revenue, the proportion, we do not -- we expect that it would be the same as last year. And for, in terms of the marketing cost, we know that the proportion versus the sales has been like 8% to 10% over these 5 years course of time.

And so we are going to be doing good cost control as we try to grow the top line. And if we'd be able to do that, we do believe we should be able to control our margin to some certain extent.

And yes, it is true that our China PC Dungeon&Fighter has been able to maintain a very high margin, which has been deteriorating. But still, we do believe we should be able to revamp the figure in the mid to long-term. And of course, at this moment, we were talking that we're doing really well with FIFA ONLINE or MapleStory. But then usually, if it is our own title, we usually be able to enjoy high margin. And then title in FIFA ONLINE, that is something that would be coming from EA. So then the situation will be a bit different in terms of the ease of gaining this profitability.

But then we -- it really depends on which title is doing well when talking about what kind of margin we are looking at the moment. But at any rate, the message here is we're not trying to just blindly spend our cost. We want to make sure that whatever cost we spend would contribute to growing the top line.

[Operator]

The next question is from Mr. Atul Goyal from Jefferies Singapore Limited.

[Atul Goyal, analyst]

I've got 2 questions both related to the games pipeline. Firstly, Owen, can you elaborate a little bit more on what exactly was the feedback given you mentioned there was not much marketing done for the final alpha test? So in which country markets was it tested? What was the feedback from users about its uniqueness? Because from a developer standpoint, obviously, they all develop something very unique. So, can you give some more color on that one?

And then second question is for Uemura-san about profitability angle limited to some previous questions, but these games are now multi-platform, console PCs and mobile. In general, console games typically launched in a quarter in itself for that year, whereas your PC games for the last 10, 15, 20 years. So, in terms of expectations for profitability and the amount of cost that you will book in the first year, can you give us some idea so that we can have a reasonable understanding of what kind of profit assumptions would have for some of these new games that will be coming out in 2023, including THE FINALS, KartRider: Drift and then also, if possible, on ARC Raiders, collectively, not specific on this? So those are the 2 questions.

[Owen Mahoney, executive]

Atul, first, thanks for your question. I will take it first, and Uemura-san will take your second.

So a little bit more about the alpha test and what we learned in the process. First, as I mentioned, we ran the alpha test, it went better than expected for sure. First, the tech work rate, which is really important. And keep in mind that we've got brand-new technology that nobody has ever done before, which is server side destruction.

So what is server side destruction? I'll give you an example, maybe to best illustrate it. Let's say you and I are playing in the same game world and I'm up with my crew hiding in the second floor of a building and you and your crew have a whole bunch of explosives. You can blow up the first floor and then we fall down or you blow up the ceiling in the first floor, we fall down from the second floor into the first floor and then you can attack us all. And so the first floor collapses, the second floor falls down. So that's -- I mean, that's one example.

The technology that I'm describing enables something really fun, but what it really enables is emerging gameplay that can only be done with realistic physics, not pre-rendered physics. Emerging gameplay means whole new and unexpected ways to play the game. Now this is our engine. Nobody has been able to do this before with realistic physics of this type non-prerendered destruction, meaning physical destruction. And one of the things that the alpha proved is that our tech works.

The second thing was the customer feedback was fantastic. They told us that for all the reasons I just mentioned and several others, we are in a very unique category. So I'll pause there for translation, and then I'll continue.

So what we learned in the alpha was that first, people really enjoy the game a lot, so they burn through the content at a very fast pace. And we learned a lot more about what emerging gameplay opportunities from server side destruction are, and we want to double down on that. So that's the first thing.

The second thing is we need to get the play balance right between the different classes and balance the weapons, especially in a world of a lot of emerging gameplay from destruction.

And the third is we want to add to the meta game to ensure high retention. So those are the 3 things that we took away from the alpha. Now we found those things as a result of the alpha, and that's why we run alpha test.

Now the things that I just described are doable things. It's not like there's a big creative unknown or a major technical issue that we've got remaining. So the alpha is a major milestone for us.

Now everyone who has played the game wants us to launch an ASAP for sure. But we know from experience that getting the content plan and the balance right is going to be the difference between a short-term success and a long-term franchise. So the impact on our Q4 and our 2022 is minimal in our core business of live games, as we said, is growing so nicely. So we have the luxury to make the right creative decision for the go to the product. That's what we concluded.

[Shiro Uemura, executive]

I understand that your second question pertains to product margin. The answer really depends on what genre of title you are talking about. And we need to identify which genre the new titles will fall into. And what we do is, as part of, we already have track records from the past performance. So we are going to try to compare the new title with some franchise that is like to the one that we are about to launch.

So the past title becomes our reference point. Not only that, but we will conduct alpha and beta test. And through those tests, we will get feedback. And especially, we will look at the retention rate because if the initial retention rate is high, then the probability of success will be high. So once again, there are 2 factors we will look at. One is our past record, and another one is the test results.

And based on these 2 kinds of input, we will try to estimate what will be our initial revenue. And given that estimated initial revenue, we will try to identify what will be the marketing and promotional cost. We need to invest in order to attain that revenue amount. So that will be an upfront investment.

But once again, it all depends on which genre you are talking about. And generally speaking, we need to understand what will be the initial investment and what will be the initial profit or margin, we will be able to get through different marketing activities. So once again, this was a very generalized response to your question.

[Owen Mahoney, executive]

Atul, this is Owen. I'm just going to add -- sorry, a couple of comments on top of what Uemura-san said. Actually, you're asking a really important question. I think the core of your question is very important. And essentially, the way we look at the world is, at this point, console, I mean, in a summary, console equals mobile equals PC.

There's a comment in way back in the sort of this common belief that mobile has to have bad margins, especially after IDFA. And we view the world very differently. We don't approach mobile in a traditional way. Ours is really a different business altogether. We're not actually talking about the same business.

We make online virtual worlds, not casual games. We build virtual worlds that are designed for years or decades of gameplay. And that means our business is about higher retention of players and therefore, high LTV. And the way that we do it leads to stronger margins, which we target the PC business.

And so when we described our approach is that we view it as a way to bring our virtual worlds, which started on PC to an audience that's 10x as big, thanks to the addition of mobile and console. And the computing power, as we've said before, in both the networking layer and the GPU layer are what equated to a powerful workstation just a few years ago, but they're in everybody's pocket. So it's a roughly 10x TAM expansion at this point.

Now you may have noticed that year-over-year mobile grew for us 40% life to date and the retention numbers and therefore, the profit margin numbers are what we hope to see. So although this is a nontraditional approach, we think it's showing great signs of success so far, and we think it's going to get better over time.

[Operator]

We will take the next question from David Gibson from MST Financial Services.

[David Gibson, analyst]

Just the one question, although a longer one. I just wondering if NEXON is looking to develop immersive games for others, who have a very strong IP. Perhaps do you have actually capacity to do that? Or are you already doing immersive games development for others that have not been announced, perhaps?

[Shiro Uemura, executive]

Excuse me, Mr. Gibson. Can you please repeat your question again?

[David Gibson, analyst]

Sure. I was wondering if NEXON is looking to develop immersive games for others who have a strong IP. Or actually, do you have the capacity to do that? Or actually, are you already developing games that have not been announced?

[Owen Mahoney, executive]

Thanks for your question. I think the -- this is Owen. The fundamental answer to your question is we really like our own IP. As you've heard us say before, probably part of focus is focusing on our own IP. And the good news is we have some of the biggest IP in the entire world. And you can see this in our investor deck, but Dungeon&Fighter for example, has generated well over JPY 20 billion in life-to-date revenue. It's got many, many players around the world.

And so these are huge. This is some of the biggest IP in the entire entertainment industry and all the benefits of that accrue to us when we build that out and do that well. So we like to do that.

Now we have, from time to time decided to work with some external partners who have or explore the ability to work with them in ways that we think are really interesting that people who have great intellectual property and are willing to work with us in a way that makes sense for both parties. Typically, that includes a reasonable sharing of upside and also a very, very long-term focus because virtual worlds are designed for decades.

We announced -- we made an announcement last year about our partnership with Games Workshop for the Warhammer Age of Sigmar franchise. We haven't talked about it much since then. We've been developing that. But it's unusual to do this. So those are special situations for us because we are so much focused on our own intellectual property, which is so big.

If I could just add one more -- a couple of more points here, just to give you some benchmarking. And just as a reminder, the Dungeon&Fighter franchise has been played by over 850 million people worldwide, just a very, very large number. MapleStory has been played by over 180 million people worldwide. In terms of life-to-date franchise revenue, it's roughly the size of one of Disney's biggest franchise, the Frozen franchise. So these are very, very big franchises. So they're big.

And then the second point that I would make relative to this question is it's our view that one of the most rare commodities in the world right now is the ability to make a game last and grow for decades on end. And that's very special indeed. So the opportunity costs are, therefore, very high, and we want to be very judicious and very focused in how we use those and how we leverage those very specialized capabilities.

[Operator]

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

[Takanori Kawai, 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 next Investor Relations at [e-mail] should you have any further questions.

We appreciate you're interested in NEXON and look forward to meeting with you whether it is here in Tokyo or in your corner of the world.

[Operator]

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

[Statements in English on this transcript were spoken by an interpreter present on the live call.]