Nexon Co Ltd

TSE:3659

Earnings Call Analysis

Nexon Projects Strong Future Amid Challenges

Despite facing operational challenges and an impairment loss of JPY 44.2 billion, Nexon remains optimistic about its future, anticipating step function growth in 2024. A focus on the user experience in live operations is set to pay off after a period of stabilization over the next few quarters. The company's solid performance is reflected in its 20% revenue increase and 30% operating income growth in 2023, a testament to effective cost management. Nexon also showcases confidence through a new JPY 100 billion stock purchase program to be completed over the next three years.

A Stellar Year Despite Q4 Challenges

Nexon has celebrated an extraordinary year with record revenues reaching JPY 423.4 billion and an operating income of JPY 134.7 billion, a testament to the robust performance of its key franchises. However, there's a contrasting tone when it comes to the fourth quarter. Unforeseen difficulties such as marketing mishaps in MapleStory and issues in Dungeon&Fighter, alongside FC ONLINE's content update not meeting player expectations, led to a revenue and net income below the company's projections for Q4.

Anticipating Q1 Struggles but Maintaining Strong Outlook

As it looks ahead, Nexon foresees a decline in Q1 2024's revenues, estimating a range between JPY 97.1 billion and JPY 107.1 billion, representing up to a 27% decrease on a constant currency basis from the previous year. This is attributed to business model changes for MapleStory and issues within Dungeon&Fighter's in-game economy, among other factors. Despite the anticipated dip, the company maintains that Q1 2024 is projected to be its second-best Q1 performance in history. On the expenditure side, larger human resources costs are expected due to business expansion as well as one-time losses from transactions, with a projected operating income ranging from JPY 15.2 billion to JPY 23.4 billion.

Confidence in Future Content and Operations

Nexon reassures investors of its ongoing commitment to building global gaming franchises. Steady investments in content for enduring titles like MapleStory and new ventures like Dungeon&Fighter Mobile in Korea, alongside the initial success of THE FINALS, are strategic moves to enhance its global presence, particularly in Western markets. The company credits its live operations, a backend essential for engaging and growing online games, as a core strength, supporting new titles by addressing security concerns and maintaining game integrity.

Strategic Investments and Tangible Results

Nexon's strategic decisions have been pivotal in driving success. An example is the completion of JPY 100 billion stock repurchases and the approval of another JPY 100 billion repurchase policy anticipated to close within the next three years. Moreover, the company has been agile in addressing an impairment loss of JPY 44.2 billion related to its stake in AGBO due to unexpected industry challenges, asserting confidence in AGBO's business and no foreseeable risks with other assets like Embark Studios.

Prioritizing Effective Cost Management

The company has been effectively managing costs, evident by the larger growth of operating income at 30% compared to revenue growth at 20% year-over-year. With a headcount increase by approximately 1,000, focusing 50% on new pipelines and the rest on existing titles, Nexon underlines the significance of judicious human resource allocation to ensure its future growth and sustainability.

The Leadership Transition

On a poignant note, this earnings call marks the final one presided over by Nexon's CEO, closing a chapter in the company's leadership history as they venture into future endeavors.

Earnings Call Transcript 2023-Q4

[Takanori Kawai, executive]

Hello, everyone, and welcome to Nexon's Q4 earnings conference call. Thank you for joining us today. With me are Owen Mahoney, President and CEO of Nexon; Shiro Uemura, CFO; and Junghun Lee, who is scheduled to become Nexon's CEO in March of this year.

Today's call will contain forward-looking statements, including statements about our results of operation and financial conditions such as revenues attributable to our key titles, growth prospects, including with respect to the online games industry, our ability to compete effectively, adapt to new technologies and address new technical challenges, our use of intellectual property and other statements that are not historical facts. These statements represent our predictions, projections and expectations about future events, which we believe are reasonable or based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information on some of these risks and uncertainties can be found in our earnings-related IR documents. We assume no obligation to update or alter any forward-looking statements.

Please note net income refers to net income attributable to owners of the parent as stated in Nexon's consolidated financial results. Furthermore, this conference call is intended to provide investors and analysts with financial and operational information about Nexon, not to solicit or recommend any sale or purchase of stock or other securities of Nexon.

A recording of this conference call will be available on our Investor Relations website, www.ir.nexon.co.jp/en/ following this call. Unauthorized recording of this conference call is not permitted.

Now I'll pass the call to Owen.

[Owen Mahoney, executive]

Thank you, Kawai-san, and good afternoon. Before we get to Q&A, we'd like to start with some short remarks framing our results and outlook. The investor letter we posted earlier today provides details on our results and outlook.

Highlights include record-setting full year 2023 revenue of JPY 423.4 billion and operating income of JPY 134.7 billion driven by the overall performance of key franchises. Q4 results came in below expectations with revenue of JPY 84.6 billion and operating income of JPY 4.5 billion.

While Q4 included unanticipated challenges, we are particularly proud of our launch of THE FINALS in December, a brand-new IP which surpassed even our expectations in both bookings and breadth of popularity. Launched into a murderer's row of AAA titles in Q4, backed by runaway marketing budgets, THE FINALS debuted with a fraction of the spend and quickly emerged as a top 5 game on Steam in December.

Embark created THE FINALS using new technology that allowed us to deliver new content in days rather than in months. Since the launch, the Embark team has been leveraging those tools to be highly responsive to player feedback and build new content at a torrid pace, and we're now looking forward to the launch of Season 2 coming up in March.

We believe THE FINALS will become another powerful and enduring franchise for Nexon, a fourth major virtual world pillar of our long-term growth. And we believe that it represents a revolution in how AAA virtual worlds are built and serviced.

Now I'll turn the call over to Uemura-san.

[Shiro Uemura, executive]

[Interpreted] In Q4, we had both setbacks and successes. We had a marketing challenge in MapleStory and an unexpected issue in Dungeon&Fighter. FC ONLINE also performed lower than our expectation as the content update offered in Q4 did not resonate with players to the degree we had expected.

As a result, our fourth quarter revenue fell short of expectations. On the other hand, THE FINALS got off to a fantastic start in December. Q4 operating income was below our outlook. In addition to the revenue shortfall, we had some one-off expenses, including an updated retention incentive plan and an impairment loss as well as a regulatory penalty in Korea, which weighed on our profitability.

Q4 net income was also below our expectations. We took an impairment loss on our investment in AGBO. This impairment reflects recent events such as an entertainment industry strike and lower demand for new streaming content, which has slowed our progress. This impairment, along with the FX loss on our cash deposits, further pushed down our Q4 net income.

Despite the challenges in Q4, 2023 was a strong year for Nexon. We achieved record-setting full year revenue and operating income growing 20% and 30%, respectively, year-over-year. All 3 of our biggest franchises grew, and we launched several successful new games, including THE FINALS.

Looking ahead to Q1 2024, we expect group revenues to be in the range of JPY 97.1 billion to JPY 107.1 billion, representing a 22% to 14% decrease on an as-reported basis or a 27% to 19% decrease on a constant currency basis year-over-year. We expect contributions from THE FINALS and MapleStory M in China to be offset by year-over-year decreases in revenue from Dungeon&Fighter, FC ONLINE and MapleStory.

We expect a decrease in revenue due in part to changes to the business model of one of the major items for MapleStory as well as an imbalance in the in-game economy for Dungeon&Fighter. We also have tough comparisons for Dungeon&Fighter and FC ONLINE owing to the strong performance we achieved in the year-ago quarter. Despite the anticipated decrease, Q1 2024 is on track to be our second highest Q1 revenue of all time.

And we expect Q1 operating income to be in the range of JPY 15.2 billion to JPY 23.4 billion, representing a 73% to 58% decrease on an as-reported basis or a 74% to 60% decrease on a constant currency basis. In addition to the top line decrease, we expect higher HR costs due to headcount increases for business expansion last year.

We are also expecting onetime losses that are likely to occur due to the transactions in Q1. These costs are expected to be partially offset by lower royalties, PG fees and marketing expenses. Also, we expect Q1 net income to decrease year-over-year.

Finally, I'd like to provide an update on our capital allocation. We executed share repurchases of JPY 30 billion worth of shares from November 2023 to January 2024 and completed our JPY 100 billion share repurchase plan in January 2024.

And today, our Board of Directors have authorized a new JPY 100 billion stock repurchase policy that we expect to complete over the next 3 years. We plan to conduct the share repurchase by February 2027 by considering several factors, including investment opportunities, financial and market conditions.

I will now turn the call over to Junghun.

[Junghun Lee, executive]

Thanks, Uemura-san. Today, I want to provide a quick perspective on what investors can expect in the months ahead. Our focus on creating and sustaining large global game franchises remains unchanged. Periods of flat or declining growth in our existing portfolio will be addressed with large volumes of new content coupled with new initiatives designed to reengage the large base of existing players and to attract new ones.

In 2024, players can look forward to all new experiences in big franchises like MapleStory and FC ONLINE plus a series of updates for Dungeon&Fighter that add up to double the amount of new content offered in 2023, delivered at a faster pace. And there are more new games in development, including The First Descendant, MABINOGI MOBILE, The First Berserker: Khazan and the second title from Embark Studios, ARC Raiders.

Our primary focus during my 20-year career at Nexon has been dedicated to developing the live operations capability that keeps our biggest franchisees fresh and exciting for years. Think of live operations as the back end of sustained and growing an online game. It's a multitude of critical functions that including matching players with similar skills, fixing the inevitable bugs that appear when millions of players join, community building and combating cheaters to ensure the game is fun for both experienced and new players.

The initial success of THE FINALS and the East/West collaboration on our live operations offer a good lens on Nexon's strategy for expansion in Western markets. When Embark Studios launched THE FINALS in December, the game was supported by the world-class live operations developed by our teams in Korea. Before and after the launch, the teams worked together to address security issues and keep the game fair and safe.

Finally, I want to say how pleased we are with the news that Dungeon&Fighter Mobile has been granted an ISBN license to operate in China. We received confirmation on February 2 and immediately began working on plans for marketing and launching the game with our local publishing partner, Tencent. We are working closely with Tencent to provide a great experience for players in China.

As many of you know, Dungeon&Fighter Mobile was released in Korea in 2022 and succeeded in attracting new players and exciting the core. Like our players in China, we are extremely excited about this news and look forward to launching the game as soon as possible.

Please note that this event is not reflected in our Q1 2024 outlook, but we believe this represents significant positive impact on our revenue and operating income in the future. We will be sharing more details on our plans in the weeks ahead.

With that, I will turn the call back to Owen.

[Owen Mahoney, executive]

Thanks, Junghun. As you know, this is my last earnings call as Nexon CEO. I want to thank each of you for your interest in our company and for your many thoughtful questions over the years.

In my 24 years as a game industry executive, including 13 years at Nexon, I've developed some sense of pattern recognition. And I've spoken from time to time publicly about the hype cycles that regularly overrun our industry.

Over the years, we've taken aim at fad and trends that have collectively garnered hundreds of billions of investment dollars, topics like eSports, early attempts at VR/AR, most recently, the so-called metaverse. Our view is that the hype surrounding each of these topics did no favors for investors, confusing many smart people about what really matters to players and therefore, what really provides financial returns to investors.

Conversely, from the time of Nexon's IPO in 2011, my colleagues and I have emphasized and then demonstrated the power of our unique business model and how robust the growth can result from a portfolio of well-run virtual worlds, building close cooperation with a community of players for the long term. While perhaps less sexy than the techno fads I mentioned above, this insight about the enduring and growing power of virtual worlds has been highly lucrative for those who have understood our business.

And it's helpful to remember that lesson at this earnings call. Many times during my tenure, I've seen periods of slow or declining growth in blockbusters like MapleStory and Dungeon&Fighter, only to be followed by the next great era of dynamic growth.

When we experience short-term declines, our live teams focus on user experience and being responsive to player feedback and then on rapidly executing thoughtful updates. The experience of our live operations team enables us to develop a massive, robust virtual worlds business over time despite near-term ups and downs. We have done this countless times.

Some investors with a shorter time horizon or those who are less familiar with our model may be distracted by our near-term performance. Successful long-term investors in Nexon have done well by recognizing the pattern and leveraging it for long-term gain.

With THE FINALS off to a very gratifying start, with the approval of Dungeon&Fighter Mobile in China, which represents a game-changing watershed moment in Nexon's history, with a strong slate of new franchises in the pipeline and with the backing of a revolutionary tech stack that enables us to radically increase the speed of new content and then operate live virtual worlds at scale, Nexon is extremely well positioned for step function growth in 2024 and beyond.

And Junghun is the perfect leader to take this incredible company to the next level. I, Junghun and the rest of the Nexon executive team are highly confident that Nexon's brightest days are ahead of it. And as a reflection of our strongly positive views in the future, Nexon's Board of Directors has approved a new JPY 100 billion stock purchase policy that we expect to complete over the next 3 years. Thank you.

Operator, we're ready to take questions from investors.

[Takanori Kawai, executive]

Thank you. And next, we would like to open up the lines to live Q&A. Q&A session will be conducted with consecutive interpretation. [Operator Instructions] Now we'd be happy to take your questions.

[Operator]

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

[Seyon Park, analyst]

I think this is probably -- the 2 questions are a question that a lot of investors probably are going to be curious on. I guess, first of all, in terms of this imbalance related to Dungeon&Fighter in China. Maybe can you provide a little bit more detail of exactly what kind of led to this or what triggered this?

And in terms of getting this fixed, is this something that we can maybe wait a couple of quarters and things kind of come back to normal? Or as you saw with, I think, MapleStory or Dungeon&Fighter in the past, some of these fixes can take 3, 4 quarters to get it right. And is that kind of the horizon that we should be looking at? That's the first question.

The second question is regarding THE FINALS. Obviously, as investors, one of the things that we can track is the traffic on sites like Steam. And over the last, I guess, 1.5 months, 2 months or so, that traffic has seen a meaningful decline. And I'm not sure if that's really representative of the actual activities by players. But I was just kind of curious as to how management is assessing this, how serious it is and what are some of the plans that the company is making to get this back on a rising trend.

[Junghun Lee, executive]

[Interpreted] I am Junghun Lee, the first question. Yes. In October, there was some unexpected [indiscernible]. We saw the decline in paying users, and this had an impact, a negative impact on our December and quarterly numbers and also on the ARPPU.

So to go over this very briefly, I think there was some imbalance between the supply and demand of some of the in-game products and items that are supplied into the game. So managing the balance of [indiscernible], factors including the content of game, the content of the update, the cycle of the update, the speed of the update and so on.

And what I can confidently say that this [indiscernible] continuously face while we manage and operate our games. And we have experience of successfully overcoming these challenges. As you know, our track record will be evidence of it.

So I'd like to get your attention on the full year 2023 results. And if you look at the full year, our performance was quite strong. Even compared to the previous year, we were able to record and generate further growth.

This year, starting from the first half, we will be updating interesting content on a monthly basis to give you more kind of content that we provide will be double that of what we did in 2023. But we will be offering players with additional interesting content throughout the year quite aggressively.

So to give you a little bit more detail, we will be accelerating the speed of update. We will be reviewing existing characters and items. We will be introducing new characters, and we will be also collaborating with popular external IPs to aggressively offer new content to our players.

So in 2024, we are planning a series of interesting aggressive updates. And we believe that the users will be responding to this possibly. So we are expecting that this issue will be addressed in a couple of quarters.

[Owen Mahoney, executive]

And Seyon, this is Owen. I'm going to take your question about THE FINALS. Let me just summarize what I'm going to say, and I'll give you much more detail, but I'm going to say, really, the game is right where we expected it to be 2 months after launch.

Frankly, as I -- as we said in our prepared remarks, we had high hopes for the game. And frankly, it took off way faster than we expected. Q4 was a murderer's row as we say in the industry, unlike anything we've ever seen before. And the marketing budgets that we saw by our competitors, including in the FPS space, really just surprised even us.

But despite all that, THE FINALS became a top 5 game of Steam and registered 10 million players and outperformed all of our internal expectations for usage. And all of that was with a very small launch marketing spend.

And as anybody who's followed us for very long knows, for many years, we've told investors that in the business of virtual worlds, deep virtual worlds, our types of virtual worlds and games start slowly, and then they build engagement and revenue over a period of months and quarters. And our focus at the early stages is really to engage gamers and influencers and do targeted marketing and word of mouth in the player, the community to get started. And then once that game has established a player base, we ramp up the marketing to engage the core and to attract new players.

So we thought that we would get all that good stuff down the line, that it would come later. But it came fast, faster than we expected. So the fact that it's off by a bit brings us in line with where we expected to be at this point, basically.

Meantime, if you've been playing the game, you know that the team, the development team has been incredibly focused on incorporating player feedback and developing content. And it's been happening at an incredibly fast pace, the new content coming out.

And the next big beat is Season 2, which, as I mentioned, is going to come up in March. Junghun and I just did a studio review meeting with the development team 2 nights ago. And we agree that we're very, very excited about Season 2.

So I would summarize just again by saying, basically, we think that the thesis that we had going on is very much playing out. And I know I speak for Junghun and believing strongly that this is the fourth major pillar for Nexon's large IP. We think this will constitute the fourth major pillar for our IP.

[Operator]

[Interpreted] Next, we'd like to take questions from Ms. Yijia Zhai from Macquarie Capital Limited.

[Yijia Zhai, analyst]

[Interpreted] So I'd like to ask my 2 questions, and I'd just like to go one by one. My first question is about the China mobile Dungeon&Fighter. And I do want to know more about, for example, the time of the launch.

And I have thought that this was a title that already had gone through the development process. But then when I look at Chinese media, there's also a talk about doing another beta test. And so I was wondering why another beta test, and so that's something that I would like to hear from you.

But then at the same time, in terms of marketing, how long do you think this marketing would take? And so for example, as a reference for ourselves, like back in 2020, I think there was also the time when you tried to do the marketing for Dungeon&Fighter in China. And compared to that, what would be the difference this time? Like how long do you think it would take for the beta test as well as how long do you think it would take for the overall marketing?

I'd also like to have your comment about what revenue or performance scale you expect? I know I do remember that back in 2020, you also offered guidance in that perspective. But then this time around, what is different is there's also the Korean release at this -- Korean release. And so compared to then, what -- do you think there's been any change to the expected size of revenue for this title?

[Unknown Executive]

[Interpreted] Yes. Thank you very much for your question. So your question about mobile Dungeon&Fighter. And just like you mentioned, this is a title that we've already developed. But then during this course of time, we've also continued our updates, and so we are doing development. We are making sure that we are well prepared for the launch.

And at the same time, we're also working very steadily with our partner, Tencent, so that we once again would be absolutely sure that we have the strong preparation in place, which means we want to keep on running a good test. We want to make sure that we are all confident that everything is all prepared.

And in the course of time, this also means that we be doing good marketing plan so that we have better idea when is going to be the timing for the launch. In other words, we're looking at the test. We're looking at preregisteration and assuming what kind of a sales -- scale of sale we'd be able to expect. And of course, we do hope that we'd be able to tell you more as soon as possible when would be the launch timing and what kind of scale of sales we'd be able to expect.

[Yijia Zhai, analyst]

[Interpreted] My second question is about your South Korea, the Korean MapleStory. Now it is about your probability item, and it has been stopped. And so I'd like to ask why was that decision made? And did it require for you to really stop selling the probability item? Do you have any plans to revive this particular item?

And then also, if you're expecting some decline in the revenue side, how much would that be? And so if you're going to be stopping the offering a probability item, does that mean you aren't really expecting recovery of ARPPU? Or do you think that you've said you would want to set another timeline to see what you'd be able to do to find some recovery in this performance.

[Unknown Executive]

[Interpreted] And in regards to our Korean MapleStory, you mentioned -- as you mentioned, probability item of a particular profitability item, we have stopped offering this as part of our business model.

Now to give you some background, it was back in January 3 when there was this comment coming from the Korean FTC that they have reported this unfair action. And what that caused was negative reaction from our user base.

And when we found this negative sentiment amongst our user base, we decided to respond quickly to think what we'd be able to do. And one thing we did was to offer rewards so that the players would want to keep on playing. And at the same time, like you mentioned, we have ended offering this particular probability item.

And what the -- the thinking behind that was instead of using cash, the users will be able to use in-game currency to obtain the same experience. And that, we believe, is going to help in the end have our users enjoy, having fun and playing our games even more.

And with that in mind, we, at the moment, do not have the plan to restart offering this probability item. And of course, in the short term, it is true that we would find this decline in revenue. But then again, this is really about enhancing our user experience. And so in the mid- to long term, as our users would be able to have more fun in the game, we can very much expect for further growth opportunity.

And so what was behind the revenue decline in Q1 did have to do with the decline in ARPPU. But then if we look at the user base, we are able to maintain a very steady trend. It tells that we are able to really have our existing users with us having -- enjoying the fun playing our game. And so we do believe in the mid- to long term, there's a great possibility that we should be able to keep on growing the revenue. So that was a confirmation that -- Yijia Zhai's question. That was the end of her question, and so we have confirmed.

[Operator]

[Interpreted] The next question is from Mori-san of JPMorgan Securities Japan.

[Haruka Mori, analyst]

[Interpreted] I have 2 questions, and I would like you to respond to one question at that time. The first question is a confirmation about China Dungeon&Fighter, and this is the follow-up, so to speak, to the answer that was provided to the first question.

You mentioned in that -- the response that you will be dramatically increasing the number of content. And that should be the measures for recovering the China Dungeon&Fighter. And heading towards Q4, we want the active user base to return to the original basis. But of course, I know that you cannot tell what will happen in Q4 until go through the exercise of recovering Dungeon&Fighter in China. But can you tell me what is the speed of recovery that you expect?

And another relevant question is the relationship between Dungeon&Fighter Mobile and the PC version. Do you think there will be an impact on the release timing of Dungeon&Fighter Mobile depending on how Dungeon&Fighter PC will trend? Or do you think these 2 platforms are not related to each other, meaning that regardless how PC version will do, you will stick to your plan of releasing Dungeon&Fighter Mobile?

[Unknown Executive]

[Interpreted] Thank you for your question. Regarding China Dungeon&Fighter, it is very clear what we should do in order to rectify the in-game imbalance. And I will shed more color to what we mean by the in-game economy imbalance.

There was oversupply of gold, which caused gold inflation. And as mentioned by Junghun, the way to go about this is to increase the volume of content at a delivery speed that is faster than before so that we can make the users more active, meaning that we can solicit them to consume more gold in the game.

And regarding how much time it will take, it will be maybe a few quarters. And once we can strike a good in-game economy balance, then we will buckle our belt once again to head towards further growth.

As to your question related to mobile Dungeon&Fighter as mentioned before, our vision is to expand the platform of Dungeon&Fighter, thus we can increase the user base in totality. The target user is quite different between the PC and the mobile version. So there is no direct relationship between PC and mobile version. Having said that, we will steadily continue with our preparation with mobile Dungeon&Fighter so that we can launch as we plan to.

[Haruka Mori, analyst]

[Interpreted] My second question pertains to THE FINALS. You explained in your presentation, and it was in the investor letter as well. But I understand that the booking exceeded, and some of it has been deemed as the deferred revenue.

And based on the Q4 guidance, our understanding was that it will provide you with the revenue up about JPY 2 billion. And does it mean that the booking actually went above this guidance figure? I'm sorry to ask you a nitpicky question, but I would appreciate if you can elaborate on this.

And also, when you look at what is happening at this moment in time, in the previous question, it was stated that most of the investors can only look at the Steam traffic to understand how THE FINALS is trending. And is it correct to understand that the revenue trend is quite stable?

And in your Q1 guidance, I did not really understand what was happening. So if you can shed more color on what is happening in THE FINALS, I will appreciate it. And if possible, I would like you to give us a breakdown by region and talk about the sales per region. So in short, I want to know what has actually happened and happening. And I want you to provide us not only the qualitative explanation, but also quantitative explanation as well.

[Unknown Executive]

[Interpreted] I would like to take the first part of the answer, and it will be followed by Owen. So regarding Q4, THE FINALS, you mentioned the figure JPY 2 billion, and you are right. But in actuality, we were able to enjoy revenue far exceeding this number.

But then due to the accounting practice that we have to exercise, some part has been registered as deferred revenue. Therefore, when you just look at the absolute number itself that is disclosed, it looks as if, but it is below our guidance. But then in actuality, we far exceeded our expectation.

[Owen Mahoney, executive]

And this is Owen. Mori-san, I will try to get to all the points of your question as best I can. Maybe I can fill out the picture a little bit from what you're seeing on Steam charts.

As you know, this was a global launch on multiple platforms, and the data you're not seeing is from console, which is Xbox and PlayStation. What I can tell you about regions is that it was roughly 1/3, 1/3, 1/3. That is 1/3 North America, 1/3 Europe and 1/3 Asia.

And I can tell you that was a bit of a surprise for us. As you know, it was built in the West from a team in Stockholm. So the fact that it performed so well in Asia surprised us and of course, gratified us. So we're very happy with that.

But I think one of the things that may be throwing people right now is the game came out so strong in its beginning. It looked like it had the characteristics almost of like a mobile title. But let's remember, it's not a mobile title. It's a AAA virtual world game. And as you know from our conversations going back to before the IPO all the way in 2011, our view has -- we've repeated our view is that a really well-managed virtual world starts small and builds up over time, over several quarters.

And we take player feedback, and we incorporate that player feedback. And we'd be as responsive as we possibly can be. And then from that base of enthusiastic core players, we build up a great virtual world over time.

So what you will see us be doing in the coming months and quarters is a series of relentless content updates backed by very strong global marketing. And that's very important to understand, and we've been doing it all along. We just did the 1.6 patch, and we've got the Season 2 coming up, as we said, in March.

And the key thing to know about those content updates is that with a small targeted team, we are able to update the product and provide more content at an incredibly fast pace. And one way to say it is we're running a marathon, which is what the live games business is, deep virtual worlds, but we're running that marathon at a sprint pace. And the sprint is enabled by the proprietary technology that we've been talking to you about for several years now. And it is working exactly as well, if not better than we expected all along.

So when you hear the confidence from the executive team, myself, Junghun and the others, it's -- I can tell you that it is going exactly on the plan, which we set out to do. So we're thrilled.

[Haruka Mori, analyst]

Congratulations on the successful launch.

[Owen Mahoney, executive]

Thank you, Mori-san.

[Operator]

[Interpreted] The next question will come from Junko Yamamura from Citigroup Global Markets.

[Junko Yamamura, analyst]

[Interpreted] So I also have 2 questions. And my first question, I'm sorry, I'm going back to this question over and over again for you, but I'd also like to confirm about PC Dungeon&Fighter for China. And I do recall that there were several times when you discussed in this type of meeting about what operation troubles that you experienced. And every time, I was convinced in listening to the explanation what was going on. I did understand that, yes, that can happen. And so I basically have no worries.

But this time, I was a bit surprised because you changed the person responsible. You changed -- you revisited how you'd be able to operate. And then you also changed how you'd be able to [indiscernible] to user base. Now you're seeing this trouble. And so I was a bit surprised why are we seeing this pattern now.

And looking at how you're doing and the pace of this troubles coming up, I feel like the intervals between the trouble is getting shorter. And so I am a bit worried now.

And so what I'd like to hear from you is, do you think that perhaps your reaction and how better you be able to operate the game, it's coming a bit behind to what happens to for example, user reaction, especially because all your titles is becoming even more complicated. That's my first question.

[Unknown Executive]

[Interpreted] So to answer your first question, so in these long years of operating virtual world titles, we know that various things, incidents can happen. And none of them happen with the same reason. They all have their own unique reasons.

So today, I'd like to give you a little more background of what the trend has been, what we've been observing. So I think it was back in last year, Q1 to Q3 when we were talking about having this very sound, stable recovery.

And to remind us of what actually what we said is the fact in the previous earnings call, we did say that we are going to make sure that we respond adequately in the Q4 so that we'd be able to get ourselves prepared for the very exciting, very important Q1.

So what we specifically would have to do for Q1 is to make sure, again, to control, it's really about controlling in-game inflation, in other words, soliciting our user to really consume gold. And so we have been doing our activities all the way through Q4. And back then, everything was in line with our expectation.

What happened after that was towards the year-end, unexpected incident happened. And it became far more difficult for us to really strike the right game balance.

So that was what was behind when we were heading towards the Lunar New Year package in January 11. We have not been completely able to strike the right in-game balance. And so what we found was we did not -- we were not able to find the expected sales of this, the Lunar New Year package that had to do with this offering the gold, which was not really incentivizing -- was not felt as really large incentive for our user base.

So that's the overview of what have been going on and for this incident of what's been happening. And so again, just like I mentioned earlier, it's really about doing what we need to do. In other words, we are going to implement what needs to be done so that we'd be able to expect recovery in the few quarters ahead.

[Junko Yamamura, analyst]

[Interpreted] So my second question has to do with the equity held shares and the impairment loss. I think in Q4, it totaled to JPY 44.2 billion, and I am a bit surprised because of the sheer size of this impairment loss.

And so what was behind this, the difference in this assumption that caused you to book this JPY 44.2 billion and then -- as an impairment loss? And do you think there's any other asset that you may have to also, again, mark impairment loss in the future?

[Unknown Executive]

[Interpreted] So it is true that we booked an impairment loss for the equity held entity that was -- so this was in Q4. The company's name is AGBO. And we did mention about this in our investors' letter. But we do not believe that AGBO's business itself is in dangerous situation.

But what happened at AGBO was -- is a very tough situation that AGBO had to face. In other words, there was this very long-term strike among the strikers. And so that created a disparity between the business results that we'd expect versus the amount of investment that was made at the very outset.

And so that is why, at this moment, we are booking impairment loss. But then again, impairment loss is really something that we do for the accounting practice purpose, and it does show some conservative attitude thinking about -- there's no change to the fact that we hold a lot of expectation to what AGBO be able to do.

We certainly do think there's a lot we'll be able to do in terms of collaboration and growing our IP. We are thinking of various ways into -- so that we'd be able to foster more collaboration. And so that attitude, that thought has not changed.

You also asked about whether or not we'd expect other assets to [indiscernible], looking at our balance sheet. But then perhaps one name we might be able to raise would be Embark Studios. But like we mentioned earlier, we hold no risk with Embark Studios.

This is a studio that's been able to make a very successful launch 2 years ago. We know the second and third title. And looking at how things are trending, we have -- we hold no risk. We feel no risk.

[Owen Mahoney, executive]

This is...

[Unknown Executive]

[Interpreted] Sorry, a restatement. So we so far feel no risk.

[Owen Mahoney, executive]

So this is Owen. I'll just add to what Uemura-san said regarding AGBO. What I can also tell you to fill out the picture a bit more is that we remain and are very excited about our future with AGBO and their ability to benefit our major IP.

And I would just remind for those of you who are familiar with AGBO, they -- you know that they are very much in the habit of making massive hits and have an unparalleled track record of making massive hits out of IP.

And as Uemura-san said, we remain very excited about that relationship. And we look forward to updating you about that -- about our relationship with them and what we're working on soon.

[Operator]

[Interpreted] The next question is from Munakata-san of Goldman Sachs Japan.

[Unknown Analyst]

[Interpreted] I am Munakata of Goldman Sachs, and I have 2 questions. The first question might sound like a repeat, but it pertains to THE FINALS. You mentioned about the part of revenue being posted as a deferred revenue. Can you add more color to this?

For example, I want to know what is the characteristic of the portion of the booking that has been posted as a deferred revenue. And also, what is the period of the deferment?

And also, you mentioned that the revenue surpassed your expectations. And when you say expectations, are you referring to all the parameters, namely number of users, amount of booking and ARPPU?

And another relevant question is on Embark. I know that Embark doesn't have experience in live operation, and Nexon Korea has been assisting Embark on the operation of the game itself. Going forward, there will be more titles coming out from Embark. Do you think the capacity of Nexon Korea might be a bottleneck going forward in operating those titles coming out from Embark?

Of course, in the course of launching different titles, Embark will be accumulating experience in conducting live operations. So given that background, do you think there will be no problem with the live operation going forward?

[Unknown Executive]

[Interpreted] So I will take the first part of the question, which is referred to deferred revenue. And let me explain using an example. Say there are different items. And one item might be consumed at that point in time, and that will be the end of the story. And in that instance, that booking will be realized there and then whereas on the other hand, there will be items that will be consumed over time. And in that instance, that portion of the booking will be deferred revenue in portion.

So simply put, this is just an accounting practice. And in Q4, it so happened that the nature of the bookings that were realized in Q4, a large amount has the nature of having to be deferred. And going from now on, meaning from Q1 and forward, we will look at the nature of the bookings and act accordingly.

Regarding the reason why the revenue outpassed our expectations, we can say that each and every KPI outperformed our expectations. So live operations is a very important part of our core platform, and the world-class live operations capabilities of Nexon will be continuously supporting the game of Embark Studios, including the new titles of the future, and I believe that this is a very good form of East/West partnership.

THE FINALS and some of the recent titles will be continuously supported by the live operations team in Korea. And we believe that we will be continuously working with Embark Studios in terms of security updates, the updates.

So I believe that the live operations is a critical part of our platform. And Nexon's world-class live operations will be continuously supporting Embark Studios' new titles. And I believe that this is a very good example of East/West partnership.

We have been continuously investing in the live operations capabilities in Korea. So this is the heart of live operations. And we will be continuously working together like the past in terms of security updates, content updates, the speed of content updates for new games and so on. So the Nexon live operations in Korea is a core part of our overall game platform.

[Unknown Analyst]

[Interpreted] My second question is related to HR cost. I understand that you have revised the retention incentive policy. And since this is the revision of the policy, this portion of the cost will continue going forward.

And having said that, I want to know more of year-to-year comparison of the HR cost. And also, if you can talk about if there is any change in the ratio of the HR cost related to the revenue, can you talk about that?

[Unknown Executive]

[Interpreted] Regarding HR cost, when you look at how we trended from Q1 of 2023 all the way up to the recent 2024, there has been an increase of about 1,000 people. The breakdown is about 30% was allocated to deal with the existing titles and the remaining 50% for the new pipeline. And so from this breakdown, you can tell how important it is to allocate our talents for the existing title to grow.

And in 2023, we were able to enjoy the record high revenue as well as operating profit. So going forward, we will try to secure the top line and plan the HR accordingly. And we did revise our retention incentive policy, and this is driving further growth of our company.

But then it does not mean that we will grow our HR cost in an uncontrollable manner. That is not the case. We will definitively secure the top line and also invest in people who are our major assets.

[Takanori Kawai, executive]

[Interpreted] This is Kawai of IR, and I would like to apologize to the English listeners because some portion of the English has not been replayed. But please be assured, we will upload this in our homepage tonight. So please refer to our home page later.

[Owen Mahoney, executive]

This is Owen. Just to add one point to what Uemura-san was saying, and I'm speaking largely on behalf of Junghun here. You may have noticed that in 2023, our revenue grew by 20% year-over-year. Our operating income grew by 30%. So that's a delta of 10 percentage points.

I would say this is a management team that is committed to properly managing our costs to benefit everybody, certainly our customers, but our shareholders and making sure that we properly manage costs as you saw us do in '23.

[Operator]

Thank you very much. It is now time. So with this, we'd like to end today's earnings results call, and once again, thank you very much for taking part in this earnings call despite your busy schedule. Thank you very much.

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