Nexon Co Ltd

TSE:3659

Earnings Call Transcript 2018-Q4

[Junko Tomita, executive]

Thank you for taking the time out of your busy schedules to attend NEXON's earnings presentation. [Operator Instructions] I am Junko Tomita, a member of Investor Relations, and I will be the moderator for this presentation.

First, let me introduce the attendees. From the right, Owen Mahoney, our Representative Director, President and CEO; and then, we have Shiro Uemura, our Representative Director and CFO. Lastly, Maiko Ara, the Head of Investor Relations.

Now let me explain today's program. First, we will have President Mahoney give you an overview of the full year 2018, introduction on highly anticipated new titles and then development in the investment strategy in English.

Next, we will have CFO, Uemura, give you some highlights for the full year and Q4 of 2018 as well as brief view of the outlook for the Q1 of 2019 in Japanese.

The presentation will take approximately 30 minutes, and we will take 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. Q4 2018 investor presentation, consolidated financial results and 4 press releases. Please make sure you have 6 documents. Please raise your hand to let us know if you find any missing documents.

Now we will begin our presentations. President Mahoney, please start.

[Owen Mahoney, executive]

Thank you all for joining NEXON's FY 2018 Fourth Quarter Earnings Presentation today. Thank you also to all of you who are joining us remotely through live broadcast. Before we get into the full year and fourth quarter results, I'd like to offer a few comments regarding the recent media reports about NXC Corporation. The news reports are that NXC, which currently owns a stake of approximately 47% of NEXON, has been considering selling itself, and with it, its stake in NEXON.

For those of you who are not familiar with NXC Corporation, NXC is a separate entity from NEXON, and the majority of its ownership is held by our founder and his family.

As you probably saw in the release we posted on our IR website on January 4, while it may be true that NXC or its shareholders are considering various options for a transaction, nothing has been decided at this point.

It would be inappropriate for NEXON to comment on what actions NXC might take. However, whatever may or may not happen as a result of this, the entire NEXON management team and I remain completely dedicated to creating the biggest and best game company in the world by building great online games and bringing them to a massive audience of gamers around the world.

It's also worth reiterating that our founder has not been involved in the day-to-day operations of NEXON for many years. Thus, any decisions he may take are independent of the NEXON management team. If there is any major change or news to report, we will certainly update you.

Now getting into our FY 2018 results. We are extremely happy to report record-high annual results for the full year of 2018. Revenue, operating income and net income were all up year-over-year with a record full year results for both PC and our mobile games business. We had a lot of amazing news in the fourth quarter and throughout the year. So let me take a moment to recap those briefly.

Our PC business grew year-over-year, driven by the strong performances of our key titles in China and Korea despite the headwinds of the FIFA service transition impact in Korea throughout 2018.

On the mobile side, Pixelberry, which joined our group in November 2017 integrated very well, and its key title, Choices, contributed a lot to our mobile revenue growth, especially in North America.

The global service of MapleStory M and Darkness Rises began in mid-2018. They did really well internationally, and also contributed to the growth of our mobile business.

In 2018, Dungeon&Fighter celebrated its tenth anniversary in China. And in its tenth year, we delivered another year with double-digit growth on top of the high comps of the year before. This makes it 3 consecutive years of China and Dungeon&Fighter recording double-digit year-over-year growth in local currency terms.

Most recently, we introduced the Lunar New Year update to Dungeon&Fighter in China on January 21. We also released its maximum cap to a level of 95 from 90 on the same day. Uemura-san will share the details of these with you shortly.

It was also an exceptional year for MapleStory. In Korea, MapleStory celebrated its big 15th year anniversary in April, along with a lot of exciting offline events. This was followed by an incredibly successful large-scale update during the summer, resulting in its full year revenue growth by 67% year-over-year. MapleStory not only did well on PC, thanks to the great work of our live operations team, the mobile version also showed outstanding performance, growing 81% year-over-year in Korea alone. This growth further accelerated with the launch of its international service in over 140 countries around the world in the second half of 2018. With its global results combined, MapleStory M grew its revenues over 6x year-over-year.

Another achievement in 2018 was the successful service transition of FIFA in Korea from FIFA Online 3 to the upgraded FIFA Online 4. It was the biggest transition we've ever had, but the live operations teams along with our partners, who've managed it extremely well. Both PC and mobile versions are on track, and we're very satisfied with how FIFA Online 4 is ramping up.

And last but certainly not least, we made a major announcement of a strategic partnership with Embark Studios. The Embark team is an extremely accomplished group of developers based in Stockholm, Sweden. The founders were responsible for starting and growing some of the biggest game franchises in the West, as well as key technologies underlying some of the biggest console and PC games. NEXON purchased a minority investment in their studio along with rights to publish titles that they produce. Given the demonstrated quality, consistency and creativity of this team, we think our investment will produce great returns for us in coming years.

As we mentioned last quarter, Patrick Söderlund, the CEO of Embark Studios, has been nominated to serve on NEXON's Board of Directors, which will be voted on at the shareholder meeting next month.

Patrick is one of the most respected and accomplished development heads in the Western games industry, and we think his counsel on our Board of Directors will be invaluable as we expand our development capacity, especially in the West.

So to sum it up, our existing games remain extremely stable. And our approach is to leverage the incredible opportunity they provide to create more opportunity for growth in the future.

So now let's talk about some upcoming products. First, I'd like to talk about the mobile expansion of one of our largest franchises, Mabinogi.

The PC version of Mabinogi was first launched in 2004 and has quietly built up a very large fan base. Since mobile devices now support fully synchronous networked gameplay on a massive scale, just like a high-end PC, we can now bring a deeply immersive, massively multiplayer game like Mabinogi to these devices.

This wasn't possible even a few years ago as the platform was not able to handle it. We had hands-on demos of the game at the recent G-STAR show in Korea, and it received the best reviews among all the games we showed. By its nature, it appeals to a broad audience, both male and female. There is nothing like it on mobile, and the IP is wholly owned by NEXON. So let's look at some gameplay.

[Presentation]

[Owen Mahoney, executive]

As you heard us say before, Dungeon&Fighter appears to be one of the top 2 or 3 largest franchises in like-to-date revenue in the entire games industry. It also -- it is also several billion dollars bigger in life-to-date revenue than the largest movie franchise box office of all time, which is Star Wars. So given the scale of this franchise, we get a lot of questions from investors about the mobile version of the product.

In November, we showed off the most recent version of D&F mobile at the Annual D&F Fan Festival in China. As we get closer to the launch of the game, we are able to talk about D&F mobile more openly. So for the first time in an investor presentation, let's take a look at the actual gameplay footage.

[Presentation]

[Owen Mahoney, executive]

We have not yet announced a launch date, but what we can tell you is that development is very far along. Last month, we and our partner Tencent conducted a closed beta test in China. Both NEXON and Tencent have become increasingly confident about the game meeting the quality bar we've set for it as we keep working closely on its development.

While keeping the core identity of D&F, the mobile version will also have new scenarios and optimized content to deliberate style of action gameplay on mobile devices. We've also decided to bring the game to Korea. We will keep you updated in future earning calls on this product. But that's not all we're doing on the D&F IP. We're also developing a 3D action RPG that is based on the Dungeon&Fighter universe. The game will use the Unreal 4 game engine and is targeting the PC platform for now. Well, we've not yet announced an expected launch date and do not expect it to launch in 2019, we are excited about the gameplay in our early internal tests and think that, like D&F mobile, it will open up the D&F universe to new types of

[Audio Gap]

So let's look at some gameplay footage.

[Presentation]

[Owen Mahoney, executive]

Finally, let's talk about how we are evolving our game development and investment strategy. Our teams are making breakthrough innovations to develop exciting new content for our pipeline. When you see these new titles, you'll likely notice a few themes. The first theme, as in never before, our teams are focused on wholly-owned NEXON intellectual property. Over the last 25 years, NEXON has created some of the largest, the most beloved franchises in the games industry including wholly-owned IP such as Dungeon&Fighter. We see a huge opportunity in updating and extending those franchises to new markets, which now have better access to powerful game platforms.

The second theme is how we leverage major technological change. Let me highlight just 2 that we think are highly disruptive.

First, mobile platforms are now fully capable of delivering a deep, immersive world with thousands of online players in the same game world at the same time. This is about to get even better because Google, Microsoft, Amazon and now Apple have each announced plans to spend massively to deliver cloud-based game streaming services to any device. The distinction between mobile and PC development is disappearing. Your mobile device is your PC. For developer like NEXON, which makes massively multiplayer games, these developments mean that our target market is many times bigger than it was in the days of PC-only online games.

The second way we will leverage technology is about AI. AI will revolutionize online games. AI enables us to manage our live services in a much more sophisticated and replicable manner, which will translate to greater attention for our user base. We've been investing heavily in AI for 2 years and are already seeing material benefits from the performance of our games. Beyond creating a better experience for our players, we think AI will significantly lower the cost of game development through procedural generation of content, which is being pioneered at Embark Studios.

In terms of gameplay, AI will power self-learning automated agents. In an online game world, you'll be playing not just with other human players but bots who have learned to play game by playing it thousands of times. You won't be able to tell the difference between a bot and a human. This is going to revolutionize online virtual worlds.

Game platforms and AI are only 2 categories of major technology developments that spell great news for any games company that is willing to innovate. There are many others, and that's great news for both players and for our investors.

This is a time of great technological disruption, maybe the great, the biggest since the advent of the Internet in the mid-1990s. Like the dawn of the Internet, there is great opportunity for companies willing and able to innovate.

NEXON's development strategy of balancing powerful franchise annuities with innovation on new intellectual property means we have a uniquely stable financial base to support innovation in an otherwise chaotic industry. Today, NEXON generates about $1 billion a year in EBITDA. We also have about USD 4 billion of cash in the bank. We spent about 7% of our annual revenues on building and launching new games. And while we've only spent a very small portion of our cash position on M&A and equity investments, our cash flow and cash balance gives us great flexibility for when the right innovative ideas come along.

Our management team believes that taking creative risks on innovation is the key to growth over the long term. But what many people in the games industry forget is the creative success requires a willingness to take risks and financial stability to recover when some of those risks fail. In developing new intellectual property, you have to recognize that only 1 or 2 out of 10 game projects will be a hit. Innovation and creative risks are the hardest, most often criticized decisions a management team can take on. But in the long term, it's essential to growth and the only way to avoid stagnation and failure. The companies not willing to risk failure are going to be the ones that are left behind.

To avoid stagnation and to grow our company, NEXON is encouraging its creative teams to push themselves, to take creative risks and to innovate. That's why we are boldly developing new IP and why we invest in creative teams like Pixelberry and Embark.

I'll now hand it over to Uemura-san to discuss the 2018 fourth quarter and our guidance for 2019 Q1. Thank you very much.

[Junko Tomita, executive]

Thank you. CFO, Uemura, please continue.

[Shiro Uemura, executive]

Now let's move on to FY 2018 results. FY 2018 revenues were JPY 253.7 billion, up 8% year-over-year on an as-reported basis. On a constant currency basis, full year revenues were up by 7% year-over-year.

FY 2018 operating income was JPY 98.4 billion, up 9% year-over-year on an as-reported basis and up 7% year-over-year on a constant currency basis. FY 2018 net income was JPY 107.7 billion, up 90% year-over-year on an as-reported basis and up 86% year-over-year on a constant currency basis.

Continue on to the Q4 results. For additional details, please see the Q4 2018 investor presentation included in the handouts. Revenues were JPY 46.1 billion, down 13% year-over-year on an as-reported basis and down 10% year-over-year on a constant currency basis in the range of our outlook.

By platform revenue spend, PC online games were in the range of our outlook. While revenues from mobile games were below our expectations, primarily due to lower-than-expected contribution spent on new mobile games Japan as well as mobile games in Korea, the total revenues of NEXON group were in the range of the outlook.

Operating income was JPY 3.9 billion and net income was JPY 6.5 billion, both of which were below our outlook due to the JPY 3 billion impairment loss primarily on NAT Games, game IP and goodwill. Adjusted for the impairment loss, operating income and net income would have been JPY 6.9 billion and JPY 9.5 billion, respectively, both in the range of the outlook.

Our China business in the fourth quarter proceeded as planned, and the revenues were in the range of our outlook. Revenues were down year-over-year as the comps were very good last year in Q4, driven by strong performances of Dungeon&Fighter as well as MapleStory2.

In the fourth quarter, our China and -- China Dungeon&Fighter had no major updates except for the National Day update continued from the third quarter, which includes limited time offer in Dungeons as well as avatar package sales.

Revenue, ARPPU, MAUs and paying users for Dungeon&Fighter, all decreased quarter-over-quarter due to typical seasonality. Revenue, ARPPU and MAUs decreased year-over-year, while paying users remained flat. MAUs decreased year-over-year primarily due to the brought sanctions, and therefore, did not impact the game itself.

Dungeon&Fighter's revenue for the full year 2018, first half and second half, all grew year-over-year on local currency basis.

In Korea, PC revenues were in the range of our outlook, while mobile revenues were below our outlook due to lower-than-expected contributions from titles including OVERHIT and KAISER. As a result, revenues from Korea were around the low end of our outlook.

PC revenues were roughly flat year-over-year while MapleStory increased year-over-year. This was offset by decreases in Dungeon&Fighter and FIFA Online 4, which was comparison with last Q4 before it received service transition impact. Mobile revenues decreased year-over-year due to declines in the titles launched in the second half of 2017, including AxE and OVERHIT. PC revenues were roughly flat, while mobile game revenues decreased year-over-year, resulting in a year-over-year decrease in our Korea business for the fourth quarter.

For FIFA Online 4 in the fourth quarter, we focused on bolstering user engagement such as increasing user traffic buyer in game events, and we delivered the good results that we hoped for.

MAUs has reached the level of FIFA Online 3 in 2017, which was its fifth year of service. FIFA Online 4's revenue in the fourth quarter was down slightly year-over-year. However, with the gradual release of content and players, we plan to grow the sequel bigger than its predecessor, FIFA Online 3.

Revenues from our Japan business in the fourth quarter were below our outlook, primarily due to lower-than-expected contribution from FAITH, a new mobile game released in Japan during the fourth quarter. Meanwhile, revenues increased year-over-year driven by contributions from Dynasty Warriors: Unleashed, which launched in the third quarter as well as FAITH. These were partially offset by the year-over-year decline in mobile browser games, HIT and HIDE AND FIRE, all of which have been in service for multiyear.

Revenues for our North America in the fourth quarter were below our outlook, primarily due to lower-than-expected performances of PC online games including MapleStory and MapleStory2. Revenues were up year-over-year driven by contributions from Pixelberry Studios, which we started to consolidate in November 2017 as well as contributions from MapleStory M, which began service in the third quarter, and Darkness Rises, which launched in the second quarter.

Revenues from the EU and others in Q4 were in the range of our outlook. Revenues were up year-on-year driven by contributions from MapleStory M, Darkness Rises and Pixelberry Studios as seen in the case of North America. In November, we started the service of Moonlight Blade that published in PC online game developed by Tencent in Taiwan, Hong Kong and Macau, and they also contributed to the Q4 results.

Now turning to our Q1 2019 outlook. In Q1 2019, we expect the Chinese Yuan and Korean Won, major currencies in our business, to depreciate against the Japanese Yen and negatively impact as-reported basis performances in China and Korea.

For Q1 of 2019, we expect revenues in the range of JPY 79.7 billion to JPY 87.4 billion, representing 12% to 3% decrease year-on-year on as-reported basis, and 8% decrease to 1% increase year-on-year on a constant currency basis. By region, we expect revenues to increase year-on-year in Japan, Europe and others; decrease in China and Korea; and slightly decrease or increase in North America.

We expect our operating income to be in the range of JPY 40.7 billion to JPY 47.4 billion, representing 26% to 13% decrease year-on-year on as-reported basis and 20% to 7% decrease on year-on-year on a constant currency basis. We expect the net income to be in the range of JPY 37.9 million to JPY 43.7 billion, representing 19% to 6% decrease year-on-year on an as-reported basis and 13% decrease to flat year-on-year on the constant currency basis.

In China, we expect revenues to decrease year-on-year as we expect our key PC online game Dungeon&Fighter to decrease year-on-year.

On January 21, we conducted the Lunar New Year update for Dungeon&Fighter, which will have our greatest impact to Q1 financial performance. As in the past years, the Lunar New Year update consists of limited time offer at Dungeon and Avatar packet sales. We also introduced the Level Cap release on the same day.

In 2018, the Lunar New Year package sales marked record high sales since the service began in China. While this year's Lunar New Year update also has been going well and MAUs are stable, based on its performance to date, we expect the number to -- of paying users will not reach the high bar set in 2018, resulting in the year-on-year decrease in itself.

Dungeon&Fighter recorded double-digit year-on-year growth for 3 consecutive years from 2016 to 2018 in local currency terms. While we expect the Q1 revenues to decrease year-on-year, both the Lunar New Year update and Level Cap release have been received very well by the users and are on track.

The cadence of the online game business is over years, and our policy is to operate our games stably over the long term. Therefore, we view the year-on-year revenue fluctuations as one of the typical characteristics of the online game business.

For Dungeon&Fighter, we'll continue to prioritize operating the game stably in accordance with our policy by keeping the current steady in-game condition. As for the large scale content update scheduled in 2019, there are no major changes from FY 2018. We expect to conduct these at the pace of 1 to 2 times each quarter. Details are available in the investor presentation.

In Korea, we expect revenues to decrease year-on-year due to the headwind of our ForEx conversion rate with the Korean Won depreciating against Japanese Yen. On a constant currency basis, we expect revenues to be roughly flat year-on-year. We expect the PC revenues in Korea to increase year-on-year, driven by the key titles including FIFA Online 4 and MapleStory.

On the other hand, we expect mobile revenues in Korea to decrease year-on-year, while we expect contributions from Spiritwish, which launched in January 2019 as well as increase in FIFA Online 4M. We expect these to be more than offset primarily by decreases in OVERHIT, AxE as well as in Durango, which launched in Q1 2018.

In Japan, we expect revenues to increase year-on-year driven by contributions from FAITH and Dynasty Warriors: Unleashed as well as Dark Avenger X, which is scheduled to launch on February 13. In North America, we expect the revenues to slightly decrease or increase year-on-year while we expect to benefit from the MapleStory M, Darkness Rises and AxE global service, which is scheduled to launch in February. We expect these to be offset by decreases in Choices and DomiNations. In Europe and other regions, we expect revenues to increase year-on-year, primarily driven by contributions from MapleStory M, Moonlight Blade, Darkness Rises and AxE global service.

In the Q1 in -- of 2019, we expect operating income to be in the range of JPY 40.7 billion to JPY 47.4 billion, representing a year-on-year decrease of 26% to 13% on as-reported basis and year-on-year decrease of 20% to 7% on a constant currency basis.

Negative factors compared with the 2018 Q1 on the operating income were: first, decreased revenues, primarily from the high-margin China business. Second, the increased HR costs, primarily due to an increase in headcount in relation to the mobile business expansion as well as consolidation of NAT Games in Q2 2018. Lastly, increased outsourcing costs and cloud service costs in relation to the mobile business expansion. Due to these factors, we expect the Q1 operating income to decrease year-on-year.

Now we'll be happy to take your questions.

[Operator]

[Operator Instructions]

[Keiichi Yoneshima, analyst]

[Foreign Language] I am Keiichi Yoneshima of Credit Suisse Securities. I have three questions, and I would like to ask one at a time. First question is on 2D Dungeon&Fighter in mobile. I know that you have conducted closed beta test. So can you tell us the impression, for example, what were the good points? And if there were any challenges, can you tell me what were the challenging points? And maybe it might be quite difficult for you to talk about the timing of the launch, but can you give us some ballpark timing, for example, will you launch this scheme in 2019 or will it be in 2020?

[Shiro Uemura, executive]

[Foreign Language] Regarding Dungeon&Fighter in mobile, we conducted the test for about a month using the total month of January. Unfortunately, I cannot disclose you the details of the status as well as the results of the test, but I can say that there were some reactions that we expected, and at the same time, in the feedback, we learned what are the challenges that we have to overcome. But as I have mentioned before, all in all, we are quite satisfied with the results of the test. And we will try to learn from the feedback we receive so that we can fine-tune our Dungeon&Fighter in mobile as much as possible and try to launch this title as soon as possible. Regarding the exact timing on the launch of this game, I cannot give you any definitive date, but we are putting our very best effort to launch as soon as possible.

[Keiichi Yoneshima, analyst]

[Foreign Language] My second question pertains to your view on long-term cost. Last year, your revenue grew. So along with that, even though the expense went up, you were able to cover the increase in the cost through the increase of revenue. But looking at the growth rate of the revenue, it seems that comparatively speaking, the increase in R&D expense as well as HR expense is quite strong. So I understand that you aimed at long-term operation and stable revenue. So can you tell me about your impression about the fixed cost as well as R&D and HR cost increasing and that impacting the profitability of your business?

[Shiro Uemura, executive]

[Foreign Language] Regarding cost, it is indeed two that are personnel expenses increasing. But this increase is not only attributable to organic growth, But about half of the increase in personnel cost is attributable to the acquisition that we have made. So on a need basis and on appropriate level, we will increase the number of head counts. Another point is that we are increasing our mobile business, therefore, on a need basis, we will increase the talents, and also the pipeline is increasing as well. So we will increase our personnel on a need basis as well. So it does not mean that growth in the personnel cost will continue in the way it is growing right now. I repeat myself to recap on my answer. Firstly, the growth in the personnel cost is largely attributable to the acquisition that we have made. And because of the nature of the game industry, as you know, talents are assets of the company. Therefore, we need to acquire high-caliber people so that we will be able to capture revenue in the future. Therefore, we can say that hiring more people is in a way an investment for us. But at the same time, once again, we will have appropriate control over the cost. But please bear in mind that the growth in revenue is not necessarily in line with the growth of cost, and there might be some time lag in recording these numbers.

[Keiichi Yoneshima, analyst]

[Foreign Language] My last question is on NXC. And this might be quite a delicate matter, but I hope that you will respond to this question. My question is if NXC decides to sell their stocks to a buyer who might not be most preferable for you, and maybe the definition of preferable is quite ambiguous, but in that instance, what kind of action do you think NEXON management can take?

[Owen Mahoney, executive]

This is Owen. Thank you very much for your question. As I said in my prepared remarks, it would be completely inappropriate for us to comment at all on any actions that NXC might or might not take or any impact of those actions that NXC might or might not take. All I can do really is to reiterate what I said upfront, which is, hopefully, it's very clear that NEXON, the management team and its employees have a very, very clear view of the future of our company, what makes -- what our strengths are and what we want to build. And we're in an extraordinary position as a game company at this time of great change in the industry. So we're very excited about our future. And that's just about all I can say on it. So I'm sorry, I can't offer more. [Foreign Language]

[Junko Yamamura, analyst]

[Foreign Language] I am Yamamura from Nomura Securities. My first question is on the China Dungeon&Fighter. It seems that there are fluctuations every quarter depending on the different types of the events. And if you look at Q4 and Q1 outlook, it seems that there are 2 consecutive negative numbers, Q4 is at double digit and Q1 is at a low single digit. So -- and it seems that the decline in Q4 is relatively large. And there was a low payment -- paying customers. So we -- I expected better recovery in Q1. So I'd like to know more details as a background behind this? And if this is flat or stably operated, Dungeon&Fighter could be a cash generator. So what are the reasons behind those declines?

[Shiro Uemura, executive]

[Foreign Language] Well, about the Dungeon&Fighter, as I explained earlier, it's going well. And as for the Q4, the phenomena that we saw in China, it is clear. But it's not only because of the Dungeon&Fighter, there was a decline of the MapleStory2. As you remember, MapleStory2 was launched in Q4 2017. And initially, it went very well, but then there was a major decline and that was the major factor behind this. And of course, the Dungeon&Fighter is also down, but this is related to the lower ARPPU. And as I mentioned, at the time of the briefing of our Q3, last year, the National Day update was closer to Q3. And also users expected the Level Cap release in Q1, so they refrained from making additional purchases. And if you look at all the KPIs, we do not have any concerns about it, and the Q4 results were as we expected. And as for Q1, since Q1 2018 was so good, the bar which was set was too high. And the paying user -- number of the paying user has not yet recovered to the level of the Q2 of 2018. But if you compare that number with the 2017 level, it is actually higher than that. And as I mentioned in my presentation, from 2017 to 2018, we realized a double-digit growth. So it's actually difficult to continue to grow at that level. And we believe that the Q1 Level Cap release, as well as the content update are going well. So we'd like to continue the stable operation. And from now on, we would like to promote the modest growth.

[Junko Yamamura, analyst]

[Foreign Language] My second question is about the results in Korea. I feel comfortable with the China results, but it seems that the Korean results is at the lower level, and probably, there were some weaknesses there. And some of the titles which were explained came down. And it seems that the retention of some of the original titles are not as long as expected. And on Page 8, you mentioned that you're more now focused on the wholly-owned IPs that you have. So it seems that it might be better to try to maximize the value of your own IPs rather than spending the marketing expenses to -- for the original titles. So any views on that? Any changes in your strategy?

[Owen Mahoney, executive]

Thanks for your question. I -- when we talk about our wholly-owned intellectual property, you know it occurred to us a while back that we have -- I mean, we already knew it, but we sort of shifted our -- some of our emphasis to some of our great wholly-owned IP. So as I mentioned in my prepared remarks, we will be -- you'll see more games from us coming out in 2019 and beyond that are wholly-owned IP, and we think that's a great opportunity. So that's number one, but then the other component is about technology that I talked about. And you know the iPhone 10 as an example and equivalent Android devices are just fantastically powerful machines that can render a much deeper, richer experience. And that kind of deeper, richer experience in an online game world with tens of thousands of players in the same game world at the same time lend itself -- lends itself better to the kind of retention that we've been able to build in our PC business. It's certainly something that's clearly on our mind, and that's one of the reasons why we wanted to show you one of the games that we're so excited about which is Mobinogi mobile. There'll be other games that we'll announce that are of that theme. So both of those themes are very important to us going forward. And we think technology moves the industry in many ways to our direction, to the types of games that we'd like to make. So we're very excited about that around the world. [Foreign Language]

[Junko Yamamura, analyst]

[Foreign Language] My third question is also about the Dungeon&Fighter PC online 3D action. As you explained with the iPhone 10 and other smart devices becoming -- or having the equivalent power of the PC, now that more resources would be invested for the PC-only or 3DS and so forth, so that will be different graphics from 2D, I presume. So personally, it seems that you might launch the mobile version first and then concentrate on that, and that could be one of the strategy. But could you tell us your Dungeon&Fighter-related IP strategy?

[Owen Mahoney, executive]

If I understand that question correctly, I think the way to think about Dungeon&Fighter is from 2 different perspectives: number one, Dungeon&Fighter is not just a game, it's also a very, very popular intellectual property overall, meaning an IP world. As I mentioned in prepared remarks, D&F is now clearly much bigger than Star Wars, which is the largest movie franchise of all time. So that means there's a whole lot of players who've been playing in for a very long time. So we think that there's different ways to bring a great D&F experience game -- bring that world to different types of play styles. So that's how we're thinking about D&F and some other IP -- not just D&F, but some of the other IP we wholly own. And we think that, over time, that's very, very exciting for us. In terms of how we bring it to platforms, we treat it in sort of a case-by-case basis. But as I've said, ultimately, we think that the platforms are converging. So in 5 years or so, it's going to be very hard to tell -- it's likely that we're not going to think about PC and mobile and console as very different platforms. They're kind of all converging into the same thing. The platforms themselves are just rendering devices for a game world. [Foreign Language]

[Haruka Mori, analyst]

[Foreign Language] I am Mori of JP Morgan. I have two questions. First question is on 2D Dungeon&Fighter in mobile. From the outset, you've mentioned that you do not assume any cannibalization between 2D Dungeon&Fighter mobile and PC Dungeon&Fighter, and you have completed your CBT. And I want to know whether what you have mentioned before stands true now or not? And can you tell me more in detail why you think that 2D Dungeon&Fighter mobile is different from PC Dungeon&Fighter? I do understand that since you are way along the development of 2D Dungeon&Fighter in mobile, you have some idea about the difference in the content between the PC version and 2D Dungeon&Fighter mobile version. So can you elaborate on the difference?

[Shiro Uemura, executive]

[Foreign Language] Regarding PC and mobile, we want to maintain the same nature of the game, whether it be PC or mobile and provide similar experiences on both platforms. But of course, when you compare PC vis-à-vis mobile, the actual tangible experience that you have at heart will be different. In China, we have PC Dungeon&Fighter for more than 13 years. That means that many players have accumulated abundant assets on their PC. So maybe, it is most unlikely that those people with many assets on PC will move on to mobile. So all in all, for mobile version, we are targeting at a new audience, the new target. So I guess, people will not just go from PC to mobile, but people who know about Dungeon&Fighter as a title, and since this IP is very popular, maybe they have not tried this game over PC in the past. And they might be casual gamers. And they might feel that, okay, now that it is available on mobile, I will just start on mobile instead of starting from PC. So instead of having a cannibalistic relationship between the two, I believe that there will be a positive, synergetic impact between the 2 platforms. Regarding the results of the test as mentioned before, I would like to refrain from disclosing the details, but right now, we are trying to capture large audience through the mobile version. And we are putting our best effort to continue with the development of the mobile version under the strategy that I have mentioned before. [Foreign Language] I would like to make one correction about the years that Dungeon&Fighter PC version has been played. In China, it was 10 years, and 13 years, I was talking about Korea.

[Haruka Mori, analyst]

[Foreign Language] This is a question to Owen about the usage of cash at hand. I do understand that on your balance sheet, you have about JPY 500 billion in deposit, and also, you mentioned that you have a very favorable cash flow. And I know that you have conducted M&As in the past, but the size of each M&A is not that large. And in your comment, you mentioned that for gaming industry, talents are assets. So given that environment, it might be difficult to go for antagonistic TLB. And also, the sizes of possible target companies are becoming very large. And I do understand that you would like to focus more on M&A rather than on shareholders return. So given that background, I want to know in tangible manner what kind of potential chances you're trying to capture in the future?

[Owen Mahoney, executive]

Thanks for your question. Of course, I can't tell you what our M&A target list is. And that would be inappropriate for me to talk about. But I can give you a sense of why we think the cash position we have is helpful to us, very helpful. In the games industry, M&A tends to come up very quickly and needs to be acted on very quickly. And we've seen this over and over again. And when an opportunity comes up, the -- that opportunity, it's a matter of people and bringing people in, and that means we have to move very, very quickly. And we've been faced with M&A opportunities in the past. We've seen certain things go on -- companies become available, which were just a little bit out of our price range, but they would've been terrific acquisitions for us. So in the past, going way back, we -- before we were public, we really liked the company, Riot Games, which was a fantastic company founded by 2 fantastic founders. But it was just a little out of our price range. We didn't have that much money available at the time. More recently, and -- let's see, Mojang, the creators of Minecraft, sold for, as we heard, about $3 billion. We had a little less than $3 billion at the time. So I'm not saying that we were actively involved in either one of those that's -- we don't comment on M&A specifically, but that gives you a sense of the types of opportunities that we like to look at, meaning, companies that have fantastic game experiences, teams that we think that can really grow in scale and have a vision for the future. And sometimes, that comes in small packages, and sometimes, it comes in very large packages. And because we have a great background of being able to take a game and make it last and grow for a very long time, we can bring that to a team that has great intellectual property and great gameplay, and we can do that around the world. So we like having that flexibility. We think it's very important. [Foreign Language]

[Operator]

[Foreign Language] It seems like that there are more questions on the floor, but we would like to now take questions from the teleconference system.

[Operator Instructions] The next question is from Han Joon Kim from Deutsche Bank.

[Hanjoon Kim, analyst]

I wanted to follow up on the Dungeon&Fighter PC current status of the guidance for the first quarter. I think, a few years ago, we talked about how our updates were bringing in lighter users or non-paying users and converting them to paying users. And then we -- performance updates has allowed them to spend a little bit more and more and so forth. And I would have sort of expected that we continue to see expansion of paying users and then a progressive improvement in ARPPU. But I think the current cadence, and correct me if I'm wrong, would suggest that we're seeing perhaps a little bit slippage of those maybe mid-to-lighter core spenders while probably the heavy spenders kind of persist. So is it something that, from your content update perspective, was intentionally designed? Or is it just kind of one of those things where certain content resonates more with the users and others, and sort of hit or miss from time to time, and just as kind of state of affairs. Is there an element that we want to perhaps throw back some of the monetization because we felt maybe we were facing a little bit resistance? Or was there some intentional acknowledgment that with Dungeon&Fighter mobile coming as well, we'd perhaps wanted to balance the audience between the PC and the mobile part. Just a little bit more understanding about the Dungeon&Fighter PC cohort, their movements, and what you're seeing underneath the hood, I think, will be very much appreciated. [Foreign Language]

[Shiro Uemura, executive]

[Foreign Language] One point of clarification -- your -- the question is basically on the Q1 Dungeon&Fighter? Is that right?

[Hanjoon Kim, analyst]

Correct, Dungeon&Fighter China progress.

[Shiro Uemura, executive]

[Foreign Language] So concerning the Dungeon&Fighter in China, the most important update is the Lunar Year update, which was conducted this year on the 21st of January. Last year, it was done on the 1st of February. So we cannot just simply compare the KPIs, the recent KPIs because of those differences, but we look at the initial trend. And I must say that, again, the hurdle, or the bar set last year is quite high. So in comparison to that, we see the decline in the paying user. However, if you look at MAU and ARPPU, you see that those are stable. Of course, we have to wait until the end of the fiscal year, but paying user is down. As a result, we expect some decline year-on-year. So again, we believe that this is basically doing well.

[Junko Tomita, executive]

[Foreign Language] So is there any question from the line?

[Operator]

That concludes the telephone Q&A. We will now go back to Junko Tomita in Tokyo.

[Junko Tomita, executive]

[Foreign Language] Are there any questions from the floor? If there are any, please raise your hand. No more questions? Thank you. We'll now conclude NEXON's 2018 Fourth Quarter Earnings Presentation. Please leave electronic interpreter device on the table when you leave. We'd appreciate your cooperation on filling feedback sheet to support our IR activities. Again, thank you very much for joining us today.