Nexon Co Ltd

TSE:3659

Earnings Call Transcript 2017-Q4

[Yuki Hayakawa, executive]

Thank you for taking the time out of your busy schedules to attend NEXON's earnings presentation. This presentation will be streamed live on the Internet, including the Q&A session. I am Yuki Hayakawa, the Head of Public Relations and I will be your moderator today.

First, let me introduce the attendees. From your right, Owen Mahoney, our Representative Director, President and CEO; Shiro Uemura, our Representative Director and CFO; last but not least, Maiko Ara, the Head of Corporate Development and IR.

Now let me explain today's program. First, President Mahoney will give you an overview of the full year 2017 and introduce highly anticipated new titles in English. Next, CFO Uemura will give you some highlights for the full year and Q4 of 2017 as well as Q1 outlook of 2018 in Japanese. We would then have Q&A session.

The presentation will take about 30 minutes and we have about 25 minutes for Q&A. Today's presentation will be available on our IR website within a few days. Lastly, please make sure that you have all the handouts. First, today's investor presentation material, consolidated financial results and 3 press releases, 5 documents in total. Let us know if you are missing any documents. You have all the documents. Now let us begin our presentation. President, Mahoney, please.

[Owen Mahoney, executive]

Thank you all for joining NEXON's 2017 Fourth Quarter Earnings Presentation today. Thank you also for those of you who are joining us remotely through the live broadcast. Today we're extremely happy to report record breaking annual results for the full year 2017 in which our revenues were up over 25% year-over-year. Our operating income more than doubled and our net income nearly tripled from 2016. This excellent performance was driven by our key titles across the regions, as well as new games we launched during 2017.

We also recorded our highest Q4 revenues and operating income ever. Uemura san will be reviewing our results in more detail shortly.

Dungeon&Fighter had an outstanding year, and continues to be a powerful driver of our business. The Chinese service for D&F will be celebrating its 10th anniversary in 2018. The sustained robust growth of this franchise has continued to surprise many industry observers showing annuity-like performance year after year that much more closely resembles a software as a service model than a typical entertainment industry pattern.

From very early on our focus has been on the long-term growth of this franchise rather than harvesting short-term returns. This is an approach that has served our financial performance by first and foremost serving our customers. As a result D&F has achieved double-digit percentage year-over-year growth worldwide in 2017, which is particularly noteworthy given its strong double-digit percentage growth in 2016.

And to give you a sense of size the largest movie franchise of all time is Star Wars going back to 1977. And industry estimates for its life-to-date box office are USD 9 billion. Today D&F's life-to-date revenues are bigger than life-to-date box office of Star Wars franchise and it's just 1 quarter as old.

On February 1, we introduced the Lunar New Year updated Dungeon&Fighter in China and it's off to a very strong start. We look forward to giving you the full report on the performance of this update next quarter.

MapleStory also had a great year in 2017 with its global revenues recording double-digit percentage growth year-over-year. Like Dungeon&Fighter, MapleStory's sustained growth illustrates an important point about NEXON's approach. The game has continued to perform well, fundamentally because our live game teams have taken a long view, focusing on bringing its millions of customers back over a period of many years rather than driving near-term revenues. Our focus on long-term value for customers over short-term revenue has enabled us to deliver robust annuity-like returns for our shareholders over many years. It is a key example of how NEXON thinks differently about games and about product life cycles.

This is a great Q4 and 2017 as a result not of decisions we made in the last few months or few quarters but about hard decisions we made a year or more ago. So now let's talk about some decisions we've been making more recently as they will fuel our growth in the coming years.

As you recall, we purchased Pixelberry, the California developer of choices in the fourth quarter. The early integration between NEXON and Pixelberry has been going very well and we've been integrating our advanced data analytics platform with Pixelberry's game operation servers.

Choices delivered great results in the fourth quarter and is off to an excellent start in 2018. We think Choices represents a whole new form of mass media, emerging of games and storytelling targeted at an embarrassingly underserved market. Both the game and the company exemplify the kind of innovative thinking that is the hallmark of all great advancers in games in broader media. And while most of the rest of the games industry seems intent on copying either the specific game play or the business model of even the most basic innovation, we believe that sustainable growth can only come from relentlessly reinventing our business and including the definition of what a game is. NEXON can do this because of our massive consistent franchises are able to fund the kind of development risk-taking required to make tomorrows hits. Like many of NEXON's and the industry's biggest hits the game's surface level simplicity you see on the video masks great depth underneath the surface.

Okay, the next game to highlight is OVERHIT. We launched the game on November 2018 in Korea. OVERHIT was developed by our Korean partner NAT Games, which is also the developer of the previous gaming series HIT. We're very happy with the early results in Korea and will be launching in another regions soon starting with Japan.

And finally, I'd like to show you some gameplay video of Durango which we launched 2 weeks ago in Korea. It is off to an excellent start. 2.5 million people pre-registered for the game in Korea, the highest number of pre-registrations for any NEXON game in Korea, and fully 5% of the entire Korean population. It immediately took the #4 ranking on Apple and Google app stores prior to any featuring and despite relatively low monetization. Durango is a pioneering game of fully open-world MMORPG on mobile. The game is set in a primitive universe inhabited by dinosaurs. Players explore, hunt, collaborate and fight in an effort to survive and build societies both with and against other players. Durango expands the definition of what a mobile game can be. There is nothing like it on mobile anywhere in the world. Durango reflects our development team's relentless focus on thinking differently about games and about reaching beyond the typical conventions and genres in our industry. And you'll see many more of our exciting products launching around the world in 2018.

Supporting all these launches in our ongoing growth, we've made some changes in our management team. We named Jiwon Park, formally CEO of NEXON Korea as Global Chief Operating Officer, a newly created role in NEXON Group. He will oversee the global business and operations with primary focus outside of Korea. Jung-hun Lee formally, Vice President of Business of NEXON Korea has now been nominated for the role of CEO of NEXON Korea. These are 2 of our best executives who have made enormous contributions to building NEXON. Jiwon has expanded NEXON Korea's game lineup and rebuilt its life operations capability. Jung-hun has held various leadership positions in NEXON Korea and led the launch and success of the FIFA Online 3 franchise as well as the successful launch of various mobile games including HIT, Dark Avenger 3, AxE and OVERHIT. These changes are designed to grow our organization's capabilities as we grow our product lineup.

Lastly, I'd like to touch on our business in the west. We have recently made several changes to our Western organization by centralizing and integrating some of our operations there to better serve our Western player base. Previously we had 3 entities responsible for operations in the West. NEXON America for PC publishing in North America, NEXON Europe for PC publishing in Europe and NEXON M for mobile publishing in the U.S. and EU. We have now consolidated NEXON America and NEXON Europe and all of our future PC and console publishing operations in the West will be managed out of NEXON America.

Additionally, last year we set up OC studio in Irvine, California to enable us to better develop games that will resonate with -- well with players in the West. So going forward, our operations will be serviced out of 2 locations; NEXON M and NEXON America and games will be developed at OC studio in addition to big, huge games in Pixelberry.

Our industry is rapidly changing with technology advances that could alter our business massively over the next few years. We need to quickly adapt and these operational changes will put us on a strong footing to do so.

With that, I'll turn it over to Uemura san to discuss the fourth quarter and full year results and the Q1 2018 outlook.

[Yuki Hayakawa, executive]

Thank you. CFO Uemura, please continue.

[Shiro Uemura, executive]

Now let's move on to FY 2017 results. FY 2017 revenues were JPY 234.9 billion, up 28% year-over-year on an as reported basis. On a constant currency basis, full-year revenues were up by 25% year-over-year. FY 2017 operating income was JPY 90.5 billion, up 123% year-over-year on an as reported basis and up 123% year-over-year on a constant currency basis. FY 2017 net income was JPY 56.8 billion, up 182% year-over-year on an as reported basis and up 191% year-over-year on a constant currency basis.

Continue on to the Q4 results. For additional details, please see the Q4 2017 investor presentation included in the handouts.

We were pleased that revenues were at the high end of our outlook for the quarter. For Q4, revenues were JPY 52.7 billion, up 22% year-over-year on an as reported basis, and up 14% year-over-year on a constant currency basis. Operating income was JPY 11.8 billion and net loss was JPY 2.2 billion, both of which were below our outlook.

Revenues were at the high end of our guidance, primarily driven by Dungeon&Fighter in China, which performed well throughout the quarter. Operating income was below our outlook. It was positively impacted by the revenue outperformance of high margin China Dungeon&Fighter, as well as lower than planned HR costs and CSR donations. But those factors were offset by the impairment loss on items including goodwill on subsidiaries, prepaid royalties for publishing titles and game IP.

We had a net loss of JPY 2.2 billion, which was below our outlook, primarily due to the FX loss of JPY 15.5 billion on our U.S. dollar denominated cash deposits and account receivables related to the appreciation of the Korean Won against the U.S. dollar during the fourth quarter.

Revenues from our China business in the fourth quarter exceeded our expectations. Again, this was mainly driven by Dungeon&Fighterm, which showed strong performance throughout the quarter. While we did not conduct any large scale updates in the fourth quarter, we introduced multiple in-game events that were well received by users.

In the fourth quarter, revenues typically decrease quarter-over-quarter from the third quarter which is seasonally strong driven by summer vacation and the National Day holiday. This was true again this year with revenues, ARPUs, MAUs, and paying users for Dungeon&Fighter in China decreasing quarter-over-quarter. Revenues, ARPUs and paying users for Dungeon&Fighter in China in the fourth quarter grew year-over-year, while MAUs slightly decreased year-over-year. In addition to Dungeon&Fighter, MapleStory2 which began its open beta pre-test in September also contributed to the year-over-year growth in China.

Revenues from Korea in the fourth quarter were at the low end of our outlook. PC revenues decrease year-over-year, primarily due to year-over-year decrease in revenues from Dungeon&Fighter, which saw particularly strong performance in Q4 last year driven by successful updates in the second half of 2016.

On the other hand, mobile game revenues grew significantly year-over-year, driven by contributions from overhead, which was launched on November 28, as well as AxE and Dark Avenger 3. The year-over-year increase in revenues from mobile games more than offset the revenue decrease from PC online games. As a result, revenues for the Korea business as a whole grew year-over-year.

Our North America business grew year-over-year in the fourth quarter, primarily due to contribution from Pixelberry Studios, our new subsidiary in the region. We completed our acquisition of Pixelberry in late November and we consolidated about a month of its [ P/L ] in the fourth quarter.

Now turning to our Q1 2018 outlook. For the first quarter of 2018, we expect revenues in the range of JPY 81.9 billion to JPY 89.8 billion, representing a 10% to 20% increase year-over-year on an as reported basis and a 5% to 15% increase year-over-year on a constant currency basis. We expect NEXON Group revenues to increase year-on-year, primarily driven by strong performance in China, and an increase in revenues from North America driven by contributions from Pixelberry Studios which we expect will partially be offset by revenue decreases in Japan, Europe and other regions.

We expect operating income to be in the range of JPY 45.1 billion to JPY 52.3 billion. We expect net income to be in the range of JPY 40.4 billion to JPY 46.3 billion. In China, we conducted a large scale content update of our key PC online game Dungeon&Fighter on February 1 in time for the Lunar New Year and the game is off to an extremely strong start. We expect revenues to grow year-on-year, driven by the extremely strong start of the Lunar New Year update accompanied by the strong sales of avatar package.

In addition, we expect MapleStory2 to contribute as a driver for year-on-year growth in China. As for large scale update scheduled for Dungeon&Fighter in 2018, there are no big changes from '17, and we expect to conduct them at the pace of about 1 to 2 updates per quarter. Please refer to the investor presentations for the information on scheduled updates.

in Korea, we expect PC online game revenues to decrease year-on-year, mainly due to the revenues from key titles including FIFA Online 3 and Dungeon&Fighter, decreasing year-on-year, partially offset by the new PC online title Moonlight Blade, which started its open beta test in January and full launch in February, newly contributing to revenues.

In contrast, we expect mobile revenues to increase year-on-year with contributions from OVERHIT and AxE, which launched in the second half of 2017, as well as YulhyulganghoM and Durango which launched in January 2018. Overall, we expect Korea revenues to be flattish year-on-year due to the decrease in PC online game revenues, offsetting the increase in mobile revenues.

In Japan, we expect revenues to decrease year-on-year, mainly due to the deceleration of mobile games, including HIT and browser games. We have multiple mobile games slated for launch in 2018 in Japan, and preparations are currently underway. In North America, we expect revenues to increase year-on-year, driven by the contributions from Pixelberry Studios which became our consolidated subsidiary in November last year. In Europe and other regions, we expect revenues to decrease year-on-year, mainly due to the deceleration of the mobile game HIT in Europe and Asia.

In the Q1 of 2018, we expect operating income to be in the range of JPY 45.1 billion to JPY 52.3 billion, which is an increase of 14% to 32% year-on-year. Favorable factors compared to 2017 Q1 on operating income are; first, an increase in revenues primarily driven by our high margin China business; second, in Q1 2017, we recognized impairment losses of JPY 2.7 billion, which will not be repeated. These factors will be partially offset by; first of all, an increase in HR cost due to higher headcount, mainly in Korea and North America, annual salary hike and higher stock option expense; second, an increase in marketing cost associated with Pixelberry Studios, key title Choices and the launch of the new title including Durango.

The high end of the range reflects the fact that we expect the impact of positive drivers to be larger than the negative drivers, resulting in the operative income growth year-on-year.

Lastly, I'd like to inform you that today at the Board of Directors, we passed 2 resolutions. First is a resolution on stock split. This is aimed at increasing the liquidity and expanding the investor base. Each share of common stock as of March 31, 2018 will be spread into 2 shares. Second is the resolution on a policy to transit to a company with an Audit & Supervisory Committee. After the transition, the committee members will become a part of BoD. This will enable us to further strengthen the supervisory function of BoD and enhance the corporate governance, as well as execute business and make judgment with a speed by delegating decision making authority for business execution to the Executive Directors. We'll disclose the details including the appointment of directors and amendments to the Articles of Incorporation related to the transition as soon as they are determined. Details of those resolutions are available on our IR website.

Now. We're happy to take your questions.

[Yuki Hayakawa, executive]

[Operator Instructions]

[Junko Yamamura, analyst]

I am Nomura's Yamamura. I have 3 questions.

[Yuki Hayakawa, executive]

Excuse me. Can you ask 1 question at a time?

[Junko Yamamura, analyst]

Okay. Then first question about Dungeon&Fighter in China. On February 1 you have updated it. And I wonder now what kind of events you have conducted. Last year it trended very well. So as compared to the previous year how is it going? If there are any changes please answer what are the differences? That's question #1.

[Shiro Uemura, executive]

Thank you very much for your question. China Dungeon&Fighter's Q1 situation wise as compared to last year. Lunar New Year started later than last year thus update happened on February 1 which is 2 weeks later than the previous year. So regarding different KPIs we have to look at the situation after the Lunar New Year. But when you look at 2017 full year user base is very stable and it grew dramatically last year and also we were able to conduct a content update. Thus we can say that it is trending well. Last year we had Level Cap update. Therefore that further boosted our growth. But this year we do not have any Level Cap update but conducted only the update of the content. And we have a new character with a different profession, and that is the content of the update that we have conducted. So as far as the most recent situation is concerned, I believe that we can expect some growth.

[Junko Yamamura, analyst]

Now about Korean mobile business, you have AxE and OVERHIT and you have Durango and I understand that the launch of these games were successful. How do you plan to nurture these titles? Each game is quite different in nature. So if you have any particular strategy as to how to grow these titles, can you comment on it?

[Shiro Uemura, executive]

Regarding the mobile business in Korea NEXON as a group, once we launch a major title it can be ranked at the top list. So having said that we are doing well and the challenges are retention and how we can grow the title so that many people will continue playing the games, OVERHIT and also AxE. We will be updating the content and also [ cater double ] speed that is being sought for by the users. And I believe that if we can be successful in those areas, we can retain the players. Of course there are detailed strategic points that we will be pursuing. But all in all, we will try to make sure that the daily operation will go smoothly and conduct a content update. Say OVERHIT as an example, not only in Korea but it will be very popular in other parts of the world, especially in Japan, at least that is our take. So we launch new titles in Korea and we try to launch in other parts of the world once we deem it is a fit for other parts of the world as well.

[Junko Yamamura, analyst]

Last question, Owen you mentioned about the investment for technology. So mid to long-term perspective wise you mentioned about the investment in the past and I am quite interested in it. And do you have any particular technology that you are interested in? And if there is any priority in terms of the investment, can you update me on the status?

[Owen Mahoney, executive]

It's a great question and we were just talking about it before our presentation today and noting how some of those times when we talk publicly about technologies that we're particularly interested in. We find that some of our competitors very rapidly watch that and then copy what we do. So I'm going to be a little careful about that. I hope you don't mind. Yes, we are -- we're actually very conscious as we have a lot of different areas that we're very interested in, but let me just speak about one of them. Pixelberry looks -- Pixelberry's game choices looks like a very simple game on the surface. But as I mentioned in my prepared remarks, it's actually quite deep underneath. And we think that that's helped in already even without integrating much of our user acquisition and metrics -- or analytics technology into the game. It's helped to perform very well since we purchased the company already. But think about in the future a little bit what a game experience like that could be just with the advance of a little more AI and a little more with voice recognition. I personally have at home a Amazon Alexa device and I ask it to tell me the news and the traffic in the morning when I make coffee. Some people here in this room might use Siri or an equivalent technology from Google. But the idea that you could talk to your game as a form of input-output, when combined with a game like Choices could be pretty interesting when you think about a virtual friend or a virtual boyfriend or girlfriend. I think if you project out 5 years from now, 10 years from now, it's completely within the realm of possibility that we'll be talking to our games as if they were virtual -- we'll be talking to virtual characters in the game because voice recognition is getting very, very good. So that's one example of where we think that the game industry is going to change radically in the next 5 years. And we're very excited about some of those opportunities and we're working very actively inside the company to go explore them.

[Masaru Sugiyama, analyst]

Sugiyama from Goldman Sachs. I also have 3 questions, if I may.

[Yuki Hayakawa, executive]

Yes, 1 question at a time please.

[Masaru Sugiyama, analyst]

Yes. At the beginning during the Owen's presentation you talked about the Dungeon&Fighter in China. It's almost like a annuity business or SaaS model. So this time I think that unlike the entertainment industry you showed us certain growth. So could you talk about the background and also in order to repeat this with other titles what are the missing thing with other titles?

[Owen Mahoney, executive]

Again your first question, I'm not sure I understood the first question. So you mentioned software as a service and annuity like curves for Dungeon&Fighter in China and we think that's quite different from how entertainment or games industry trend. So wondering what signs you saw in the China business which led you to explain D&F in China as SaaS. Thank you for your question. Why I think that games like Dungeon&Fighter can look at times more or like a software as a service model or as an annuity like business than they do like a typical entertainment platform is because they're just -- because Dungeon&Fighter and several of our other games have repeatedly just simply shown that pattern. And I gave a presentation most recently at Nomura a couple of -- at the Nomura Conference a couple of months ago that is available for viewing on our IR website that you might have seen. But I think that the pattern that is in many peoples' heads when they look at a online game is that a game goes up and then it goes down within the first couple of quarters, and then it goes to maybe a long tail. But 90% of your revenues will be made within the first 1 or 2 quarters in a game. Now that's a mental -- a commonly held mental model and that's a commonly held mental model because it's oftentimes true. It's true for most games. It's been traditionally true in the packaged goods game industry, it was certainly true in the early days of Facebook games around the 2009 to 2012 period and it's been very true in the mobile business. But the problem with the model and that mental model is that it's not always true and the exceptions to that model are massive. So Dungeon&Fighter is an excellent example, perhaps our industry's best example about the exception to that rule. It sometimes goes a little bit down, sometimes it goes up, but it is following this general trend that is either very, very stable over time or increasing over time. And I find it to be a fascinating -- frankly, it's a problem for people when they understand our stock about how this is going to happen. And yet they have no -- they have no -- they're constantly looking for the day when Dungeon&Fighter goes away. And that was in fact our single biggest question that was asked of us during the IPO road show in 2011 when I was CFO. The #1 question was, when is Dungeon&Fighter going away. And today, Dungeon&Fighter is 2.5x or more bigger than it was during the IPO road show in 2011. So it is not a mental -- an accurate mental model for the biggest hits in the games industry. There are other examples by other companies. League of Legends has done continuously very well by Riot, which is now owned by Tencent. Several other Tencent games have done very well. Some games by Blizzard have continued to do extraordinarily well. So this mental model throws people off about NEXON's business and that's why I mention it, sometimes over and over. I hope that answers your question.

[Masaru Sugiyama, analyst]

Another question. In one of your slides, on Page 17, you talk about the full-year forecast and 2D Dungeon&Fighter you continue to make the preparation. So fiscal 2018, are you ready to distribute that by the end of 2018?

[Owen Mahoney, executive]

We have not made any announcements about that game yet. My apologies, we can't tell you more, but we have to tell our customers first.

[Masaru Sugiyama, analyst]

May I ask another question? LawBreakers, now you're going to enter data console business, the title is going to be terminated. But you are in the console business. Any takeaways from that? Any perspective on the console business in coming years?

[Owen Mahoney, executive]

LawBreakers are to the console business in general. It's a console business in general. Well, let's see. And there is -- let's call it the medium term of 2 years or so and then a longer term, call it 5 years or more. Over the longer term, 5 years or more, ultimately we see probably a consolidation or an integration between all the different platforms, the 3 major platforms that would be mobile, PC and console. We think that that day will probably come at some point. And in fact, I have in my pocket an iPhone X and I'm just surprised by what an incredible device that is. And 2 -- or let's say 5 years ago, we would not have been able to deliver a game like Durango on a mobile device. The networking layer was just not strong enough, nor was the graphics layer. But I think you're going to see more sophisticated games on mobile and ultimately things are going to be more and more portable. I also think that the console companies are thinking differently about their business than they were even a few years ago. And I think -- in fact Nintendo was a leader when you look at the Switch about the idea of bringing something that used to exist in a living room and bring that portably with you around. So my guess, I don't have any particular insight, but I think that Sony and Microsoft are thinking about their console businesses in a different way than they did even a couple of years ago. A couple of years ago they would talk about owning the living room. But as we all know, there really isn't a living room anymore. At least that's not where we consume the bulk of our media consumption in the living room. We consume it in the subway or out in the boudoir or in all different rooms in our houses. Getting back to your question on console, I think, in the meantime or in the more immediate term, in the next few years, the console represents a huge opportunity, particularly for online games. Console games used to be primarily single player or group player games and more and more there's an opportunity in a living room. And so we see that as an opportunity which is why we're going to be bringing more games to console coming up in 2018 and beyond.

[Masaru Sugiyama, analyst]

Thank you.

[Owen Mahoney, executive]

By the way, one other thing on that is, we don't know the exact timing or we're going to watch it closely. We're not in the business of forecasting far out into the future. If we were, we'd probably be like everybody else who forecasts things. It's a very hard business to be in. But we are watching it very closely and in the near term, we think there is a big opportunity in console.

[Yuki Hayakawa, executive]

Any other questions? Third row, from the front, a gentleman please.

[Keiichi Yoneshima, analyst]

Yoneshima of Credit Suisse Securities. I have 3 questions. So I will go one at a time. Firstly, about impairment loss. I want to confirm in 2017, when you look back at it, say you had a record year of about JPY 3 billion to JPY 4 billion. And I know that game itself is trending well, but every quarter you are recording impairment loss. So I want to know what is the area in which you are recording impairment loss. And I know that in Q1 2018, you don't expect any impairment loss. But looking at the past history, it seems that you have a tendency to have impairment loss. So can you tell me in what area you are recording impairment loss?

[Shiro Uemura, executive]

Regarding our thinking of impairment loss, firstly let me tell you what is the content of impairment loss. We acquired [ the game ] IP and also we prepared royalty fees. And when we closed that game or even after the launch of the game, there are cases in which we cannot recover the investment. And in those instances, we have to record impairment loss. We have multiple titles in our pipeline and we are conducting our development. That being the situation, we encountered impairment loss. Even though each impairment loss amount is not that high, but cumulatively speaking you see a ballpark figure. We want to continue challenging so that we can have abundant pipeline. And it's a destiny or a phase so to speak to have impairment loss. But as you know it is quite difficult to forecast the impairment loss in a concrete manner. So in our outlook, we do not factor in impairment loss. So in a way that is a downside, so if we were to record impairment loss, that will be a negative driver.

[Keiichi Yoneshima, analyst]

Second question about the China business. I know that Dungeon&Fighter is trending very favorably. And regarding MapleStory2, as you have commented, I know it is growing. Can you give me more tips, say, this quarter you see that it might grow by 5% to 10%. And in terms of the impact of MapleStory2, what will be the magnitude? Do you think there is an impact of about 10% or is this still too small? Talk about the contribution? It's becoming a hit so you mention it or can you detail me about the contribution rate of MapleStory2 to the whole business?

[Shiro Uemura, executive]

Regarding MapleStory2, we didn't have this title last year. So year-on-year, it is contributing greatly. Having said that, Dungeon&Fighter is such a big hit and a big title. So comparatively speaking, in the growth of China MapleStory2 is not playing a major role. Regarding PC online business, whether it be Dungeon&Fighter or not, we need to nurture it slowly so that it can have longevity. So we do not expect a dramatic growth of sales but rather we want MapleStory2 to grow gradually as we designed it. I know that in terms of China business there will be some contribution by MapleStory2, but then the major one is still Dungeon&Fighter. Yes, when you talk about China, you cannot just ignore MapleStory2.

[Keiichi Yoneshima, analyst]

Please turn to Page 22. In Q1 you have different titles and if you have any titles that you know that are coming in Q1, I will appreciate it. I know Durango is already in the market. Are there any other titles that will be launched in Q1? And if you can tell me any country in which you would be launching these titles, please let me know.

[Shiro Uemura, executive]

Let's start with PC. We have already announced the following. FIFA Online 4 will be launched before world cup and the preparation is underway accordingly. Next about Astellia, it will be launched sometime in Q2, i.e. around June. About Battlerite, will be launched sometime in 2018 and that was already announced. Now moving onto mobile titles. We have Durango and it was launched in Korea already. And we plan to launch it globally ex-China. Preparation is undergoing. OVERHIT is scheduled to be launched in Japan, but the timing is not determined yet. Elsewhere, we haven't decided on the schedule. And KAISER is scheduled to be launched in Korea, but timing wise it is not determined. DARKNESS RISES, this is a global version of Dark Avenger 3 and we will go global and preparation is underway. FINAL FANTASY and Dungeon&Fighter, these we haven't decided on the schedule. Project D, undecided and MapleStoryM we will go global and preparation is underway. And MabinogiMobile is scheduled to be launched sometime in 2018 and preparation is underway. That will be the overall flow.

[Yuki Hayakawa, executive]

I think there will be more questions. But we would like to now take questions from those people who are connected via phone. The next question is Han Joon Kim from Deutsche Bank.

[Hanjoon Kim, analyst]

I wanted to follow-up on Durango and I've been personally excited for this one and the other ones as well in the past. But sometimes we have a good start and then they fade for various reasons. And so -- the Durango is unique and it's got a lot of attention, the start is good. But like -- I would like to see if there is any quantitative way to think about where we are in Durango and how it might differ in terms of life cycle? What kind of maybe KPIs we're seeing that gives us [ some product structure ] for this game to be different from some of the other ones that we've seen recently? So any kind of quantitative KPIs to kind of gauge Durango I think that will be much appreciated.

[Owen Mahoney, executive]

Han Joon, thanks for your questions. This is Owen. I think it's -- the short answer to your question is it's just way too early to tell. As you know, this is a deep rich MMORPG and the play style implies a much longer period of play for customers. What makes this very different from anything that's really been tried before and makes it difficult to answer your question is it's the first time that something like this has really been tried on mobile. And as a result, it's going to skew sort of an interesting but hard to predict way from benchmarks that we usually look at, because it is so different. I would anticipate or we will get a whole lot of mobile users who would otherwise play much more simple games as an example, and some of those people will see, will not stick with a much deeper experience like Durango over time, because that's not what they really want. And so we will get -- especially when you get featuring on Apple and Google that will happen. So some of those people will not stay. On the other hand, it will open up a much deeper experience to people who otherwise wouldn't have been exposed to a, let's call it a PC style MMORPG. And so we don't know what the patterns are yet. I'd say qualitatively speaking the early returns are terrific. But as you know, in a game like this we're not paying too much attention to what happens over a period of a couple of weeks. We're much more interested in trying to figure out what will happen in a couple of years or over the period of a couple of years. So that's the source of your question, I would anticipate, and -- or I would imagine and that's certainly where the real question is. But I think it's way, way too early for us to figure out the answer to that question.

[Hanjoon Kim, analyst]

Okay. I appreciate that and I fully understand where you are coming from. But if I try to maybe press that point a little bit further, are we seeing -- have we seen anything that would make you kind of ponder -- make you pause a little bit and think that this could be on a different trajectory or so far we've been a little bit too busy trying to manage to get people into the game that we haven't been able to kind of do any diagnosis or again is it too early to be able to make any kind of diagnosis?

[Owen Mahoney, executive]

Yes, I think it's too early to tell. I mean, again, we've highlighted it. We're really happy with the start. That's what I definitely can tell you. And qualitatively the feedback that we're getting from our customers, as you probably well now the first couple of days, the demand for the game and given that it is such a deep rich game overwhelms our capacity given how deep of a game it is. So that was -- that was something that we really had to scramble to make sure that we could handle. It looks like we're -- we've done a -- we're in a much better shape than we were a few days ago. But that's a function of just having huge demand for the game that was even bigger than what we anticipated. But overall, the feedback [ that we're getting ] qualitatively from people is they're playing the game, they're really liking the game, they really are drawn into the world because it's such an immersive world. So we're very gratified by that. But I'll tell you there is just no -- when you do something and it's completely different and you think completely differently, the reality of that are, definitionally, you can't look to comparisons to other experiences you've had and that's just a function of being a pioneer and that's what we are with this game.

[Hanjoon Kim, analyst]

Okay. I appreciate that. My follow-up question is just on Dungeon&Fighter for the first quarter in China. Yes, I've been a little bit surprised with the first quarter guidance and I suspect you guys have seen some data to support that. But -- and I think we've always tried to stay away from pushing the envelope on the ARPU side. So I noticed that our MAU and our paying ratio kind of declined in the fourth quarter. But for the first quarter, are we seeing signs that your user base is -- actually MAU is picking back up and paying ratio is picking back up and perhaps it's a less function of the [indiscernible].

[Shiro Uemura, executive]

As I said concerning Q1 the Lunar New Year was later than the previous year. So we haven't really had the full analysis. But what we are hoping for is a slight decline at our MAUs and a slight increase of the paying user and an increase of the ARPU. So slight decline of MAU, there are 2 reasons. First is that due to the publisher, there was a support function. And the second, as I mentioned, the Lunar New Year was later and usually towards the Lunar New Year we have warming up events. But since it was later during the time period, we didn't really have a lot of warming events. So that led to the lower MAU. But up to Q3, the paying user increased significantly last year, as we mentioned. So in that sense from Q3 to Q4, paying user increase, there was a slight increase. So revenue is driven by ARPPU. So based on this trend, Q1 probably, we can expect higher ARPU, but Dungeon&Fighter and non-Dungeon&Fighter PC titles, if you look at ARPU and also mobile ARPU, it doesn't mean that they are much higher. So it is not going to be a big hike of the ARPU, which might lead to the concern. So those people who buy the small items, they enjoy, they pay, and they start to buy packages. So that's how the ARPU is increasing. So as you continue to see the Dungeon&Fighter in China, and we consider to be healthy.

[Yuki Hayakawa, executive]

There is one more person asking question over the phone, please.

[Operator]

The next question is Thomas Kwon from Daiwa Securities.

[Thomas Kwon, analyst]

[ I have always this ] question on Durango. As you mentioned, Durango is doing very well since its launch. But now we see that your company is not selling in-game items for Durango very aggressively. Eventually in-game item [ for the game ] performance and even though the rest is monetization plan in the future as well. I think there is video interview by the NEXON Korea's management. [indiscernible] from Durango, even after its potential launch in a couple of markets that shows the company's modified business strategy for Durango game.

[Owen Mahoney, executive]

Just to be clear, I want to make sure I understand your question. Your question is about monetization strategy for Durango. Is that correct?

[Thomas Kwon, analyst]

Yes. That's my question.

[Shiro Uemura, executive]

Regarding Durango, considering the genre of Durango, I do not think that this is a game for monetization per se, but rather we want people to continue playing for a long time. So more or less, it is closer to PC title. So far retention is good. Therefore, I believe that we can operate this team for a long time. And with that as a backdrop, we want Durango to contribute in both revenues and operating profit. As we have mentioned, it is contributing to the profit. But this is not the game that you should be focusing on monetization per se.

[Yuki Hayakawa, executive]

Now, we will like the people in the floor to ask questions.

[Haruka Mori, analyst]

Mori from JP Morgan. Later -- during our new year update, due to the time difference, the update was later. So this will continue, we believe until the end of March.

[Shiro Uemura, executive]

As for Q2, we cannot give you any numbers. But in that sense, probably, there'll be some effect remaining in Q2.

[Haruka Mori, analyst]

Second question. It's a kind of -- it's a question about the eSports, impact from the eSports on NEXON or your efforts in the area of the eSports [indiscernible]. PUBG is becoming popular. So this is an opportunity and this is also a competition. So eSports business opportunity, how do you think about that, any comments?

[Owen Mahoney, executive]

Well, oh boy, that's a big -- that's a long topic. Let me try to simplify a little bit. I first will make a blanket statement that may seem a little silly. But I think our industry sometimes gets hung up on individual topics that over the long term don't actually have a major impact, fundamentally on the totality, the whole industry. Certainly people used to talk about Facebook games a few years ago and we got asked a lot of questions about our Facebook strategy. Some of you remember those questions from the time of the IPO and we said respectfully, we have no Facebook strategy, because we think Facebook is a terrible platform. That's what we thought at the time, it turned out to be true. Now, I'm not saying the same thing about eSports. I think eSports is very interesting. I watch eSports games sometime myself. But I think the point that people miss is it's primarily a PC environment, not a console or a not a mobile environment, at least as of today and for the foreseeable future and there's a lot of reasons for that. So there seems to be a lot of discussion about eSports in Japan, but Japan is not particularly a PC oriented market. So I'm not quite sure why that is. The second thing I'd say is that if you take 1 or 2 of the big games out of eSports, people would be a whole lot less enthusiastic and those games are League of Legends would probably be the biggest one and may be Overwatch as well. But if you took 1 or 2 of those games out, I think it would be a lot harder for a lot of the companies, for example in California that are raising venture capital around this place did have much harder time to do it. And I also think, at least internationally, less so in Japan but certainly in North America, one of the things that's driving all the discussion about eSports is, frankly there is a lot of traditional sports franchise owners and other infrastructure that are very interested in this topic because frankly those sports are going away or on the decline. If you look at the statistics for baseball, it's just been happening for some time, it's more recently been happening in the NFL. The viewer numbers for the NFL have gone down from what I understand quite significantly. So if you are a team owner or if you're -- somehow if you're an agent or you are somehow involved in that, you look at the future and say, well I can see the future, this is going away, I need to think about something new, what's new, well, some of the big game executives are really pushing eSports, oh gosh, I better start trying eSports because I've got no future otherwise. That literally is happening. So I think there is a whole lot of reasons why people are interested in eSports. Some of them are real, some of them are not. But let's really back up so what is going on underneath and it's a much broader discussion. The broader discussion is about viewing games, and viewing games is actually a pretty fun activity. I do it a lot myself. My -- I have 2 boys. They are 12 and 14. They both love to watch people who are good at playing games, [ view that ]. And sometimes that's eSports, but oftentimes it's not eSports at all. Sometimes it's 2 guys on a couch making jokes while they play some game and they are broadcasting that over Twitch. It can make for some very good viewing. And -- so I think people who play a lot of games, people who watch a lot of games, I had several discussions around the industry, and I think we're all watching this pattern emerge that viewing games, other people who are good at playing games and commenting on them and the interaction between their viewers and themselves is actually really fun. It makes for a compelling viewing and that I'm very, very excited about. And in some cases that will come from eSports. I certainly watched a lot of great sports games, particularly watching StarCraft in Korea 10 years ago. But a lot of things have to be in place for that to be a real business, not just a lot of investments. So I don't have a huge prediction about how that will be, but I am somewhat cautious about this. Now as far as NEXON is concerned, NEXON has NEXON Arena in Korea. It houses -- it seats about 550 people. We have roughly 300 events a year. And I would encourage anybody in this room to come and see it. It's in the middle of Gangnam. And it's part of nightlife in Gangnam. It's very, very fun to watch, great players live play games. But what we find in eSports is that players determine what will become an eSports game. The gamers themselves determine that, the company doesn't determine that. And there have been a lot of examples where a company has designed what they thought was an eSports game and it just hasn't worked out. So, when you look at a game you have to watch what the players are doing and are they playing and broadcasting that online. So those are a mishmash of different comments about the future of eSports. I'm not sure if that's helpful. But it's certainly worth watching. It's certainly a topic that's worth watching.

[Yuki Hayakawa, executive]

So did he answer your questions? Thank you. Unfortunately, time is up. We will like to conclude NEXON's 2017 Fourth Quarter Earnings Presentation. Please leave electronic interpreter device on the table when you leave. We'd appreciate your cooperation on the main feedback sheet to support our IR activities. Again, thank you very much for joining us today.