Nexon Co Ltd (OTCPK:NEXOF) Q4 2022 Earnings Conference Call February 9, 2023 3:00 AM ET
Company Participants
Takanori Kawai – Team Leader, IR
Owen Mahoney – CEO & President
Shiro Uemura – CFO & Chief Administrative Officer
Conference Call Participants
Yoshitaka Nagao – Bank of America Merrill Lynch
Seyon Park – Morgan Stanley
Junko Yamamura – Citigroup
David Gibson – MST Marquee
Operator
Good day, everyone, and welcome to NEXON’s Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions].
At this time, I would like to turn the call over to Takanori Kawai, Team Leader of Investor Relations.
Takanori Kawai
Hello, everyone, and welcome to NEXON’s earnings conference call. Thank you for joining us today. With me are Owen Mahoney, President and CEO of NEXON; and Shiro Uemura, CFO.
Today’s call will contain forward-looking statements, including statements about our results of operations and financial condition such as revenues attributable to our key titles, growth prospects, including with respect to the online games industry, our ability to compete effectively, adapt to new technologies and address new technical challenges, our use of intellectual property and other statements that are not historical facts.
These statements represent our predictions, projections and expectations about future events, which we believe are reasonable or based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information on some of these risks and uncertainties can be found in our earnings-related IR documents. We assume no obligation to update or alter any forward-looking statements.
Please note, net income refers to net income attributable to owners of the parent as stated in NEXON’s consolidated financial results. Furthermore, this conference call is intended to provide investors and analysts with financial and operational information about NEXON, not to solicit or recommend any sale or purchase of stock or other securities of NEXON. A recording of this conference call will be available on our Investor Relations website, www.ir.nexon.co.jp/en/ following this call. Unauthorized recording of this conference call is not permitted.
I’d now like to turn the call over to Owen.
Owen Mahoney
Thank you, Kawai-san, and welcome everyone. I’d like to start today’s call by setting context. Like most companies in our business, at NEXON, we regularly do comprehensive reviews of other companies that we might want to buy. Recently we’ve been challenged to find potential targets that have not expressed serious concerns about the future.
Private and public game companies have each been telling us a very similar story, largely around four themes. First, the global economy is in bad shape and that is impacting consumer spending. Second, competition, especially from highly-funded AAA games, has been even more fierce than usual. Third, the end of COVID and return to work has eliminated the surge in players and play time we saw during the pandemic. Fourth, for many companies in the mobile space, the IDFA changes from Apple have destroyed their unit economics and their hope to generate any material profit.
This all sounds pretty bleak. And certainly, the gloom we’ve been hearing in games is even worse in the broader consumer media and tech space where even the most respected companies are slashing ad spending and laying off tech workers by the tens of thousands. In sharp contrast to that gloomy operating environment, NEXON’s performance has never been better and is getting even stronger. NEXON achieved its best ever revenue year in 2022. We just completed an outstanding Q4 where we grew our top-line 36% on a constant currency basis. That brought us to 19% growth for the year on a constant currency basis. And that great performance extends to Q1 of 2023. As Uemura-san will detail for you, our guidance calls for revenue growth of 19% to 28% growth on a constant currency basis. Performance of all of our largest live games has been excellent. Now we’re launching a number of major new Virtual Worlds in 2023.
In a moment, we will give you details of our performance by franchise and by region. Before doing so, we think it’s worth pausing to underline a key point to help investors. That is, NEXON’s business, the business of deeply immersive Virtual Worlds, is so different from other game companies as to constitute a wholly different entertainment industry category altogether.
Virtual Worlds is different in almost every way; different in how we operate our business on a day-to-day basis, the kind of people we hire, what metrics we use to gauge our success, what technology investments we make, how we communicate our business performance internally and to outsiders, and perhaps most importantly, the mindset of our management and operating teams. The sharp contrast of our performance to other companies that we are usually grouped together with, presents an opportunity to reconsider and reframe what investors think they know about Virtual Worlds companies like NEXON. In this call, Uemura-san and I will endeavor to explain what we mean by this difference, so you can better analyze our performance and our future.
I’ll start by summarizing the highlights of the quarter and the year. Q4 2022 marked the highest Q4 revenue in NEXON’s history and 2022 marked the highest annual revenue in NEXON’s 28-year history. Fourth quarter revenue grew 49% year-over-year to JPY81.1 billion and included a year-over-year increase in operating profit of more than 200%. For the full year 2022, NEXON delivered a 29% increase in year-over-year revenue to JPY353.7 billion and a 13% year-over-year increase in operating profit.
In the full course of 2022, NEXON delivered strong results in key franchises. FIFA ONLINE 4 delivered record high annual revenue. We’re extremely pleased with the result, especially since we think the core product, the performance of our live game team and our live ops tech stack backing the game are working so well together. World Cup clearly provided a boost for 2022, although we should note we’ll have a tough comp in 2023 for this product as there will be no World Cup.
Meantime, following a drop we experienced back in 2021, MapleStory in Korea continued its growth trajectory that began in Q2 of 2022. Both revenue and MAUs increased year-over-year. Also in Korea, the mobile version of D&F, which we introduced in March 2022, has continued to perform well. In Q4, the game also won Game of the Year from the Korean Association of Game Industry known as K-Games. The live operations team celebrated this achievement by lowering monetization in the game. Why would they do this? Because they understand that in a well-run Virtual World, building long-term engagement year-over-year — engagement over years and decades is more important than near-term monetization.
In China, after significant preparation work by the live development team, the PC version of Dungeon&Fighter showed very strong performance. And overall, our business in China grew by 55% year-over-year. Importantly, the game saw a meaningful increase in active users in Q4. The Lunar New Year update released this January is proving to be very popular, and our China business is tracking toward double-digit year-over-year growth in Q1. It’s too early to project how this trend will continue across the full year, but we are pleased with the recent results we’re seeing in China.
I will pause here to note that the rebound in both MapleStory in Korea and Dungeon&Fighter in China reflect our experience over and over again. Live Virtual Worlds fluctuate up and down in the near-term, but when managed well, can show steady growth over years and decades. Second, and as important, NEXON has a portfolio of such robust Virtual Worlds. So when one goes down, the others very often make-up for the difference. This inherent stability to our portfolio enables us to make thoughtful investments in the community of each game over time.
Next, I want to provide an update on new Virtual Worlds in development for release in 2023. In mid-January, KartRider: Drift debuted with an open play test on PC and mobile platforms. The test which we dubbed, Preseason, was conducted with only a limited marketing support and was designed to evaluate stability, network code, new features and gameplay with a large number of consumers in Asia, Europe and the Americas.
KartRider: Drift is fully cross-platform, meaning players can compete across PC, console or mobile. It is also global, so that players in the U.S. can play against others in Korea or Japan. The game is scheduled to begin official service from March 9 on PC, iOS, Android, Xbox and PlayStation. KartRider: Drift is an example of how we are approaching Virtual Worlds by focusing on building a robust community over time. While KartRider is virtually unknown in Japan and the West, in Korea, it’s been played by over half the population. The consensus of the community around the world is that KartRider: Drift is a lot of fun, but even more, it redefines the genre of kart racing.
Of course, it starts by being free, and it’s also available with full cross-play on 5 different platforms, not just one. But because it’s online, players love to express their personality through the deep customization features we’ve put into the product. So the Virtual World of KartRider is about players’ own individuality, not limited to someone else’s IP. This sentiment of individuality and self-expression is a powerful aspect of successful Virtual Worlds, and one that we will build out much more deeply in the quarters and years ahead.
Speaking of deep customization and self-expression, I’ll now turn to THE FINALS, from Embark in Sweden. We plan to follow-up from the successful closed Alpha last quarter to a much larger closed beta this quarter as planned. We are very excited with the technology underpinning the game, and most importantly, with the gameplay that technology and other innovations enable. Despite these innovations, development has continued to move rapidly. The upcoming beta will enable us to test these features at a scale of hundreds of thousands globally.
Meantime, development for the second game from Embark, ARC Raiders, has been proceeding apace. We are conducting an internal UXR test in March, followed shortly by a closed Alpha with a limited number of outsiders, just as we did with THE FINALS. Our external play tests of both KartRider: Drift and THE FINALS are conducted with limited marketing support. At the early stages, our focus is on player engagement and fun, so that we can build a robust community over time. That community of engaged players enables us to build a strong, stable revenue base that we hope to extend and grow over future quarters and years.
As a Virtual Worlds company, we’ve learned from experience how important those early stages are for the long-term success. So we discourage investors from making assumptions about early stage revenues until these games are launched and established in the market. In addition to these, several other Virtual Worlds are in later stages of development, including WARS OF PRASIA, VEILED EXPERTS, The First Descendant, Warhaven and MABINOGI MOBILE.
To summarize, NEXON delivered record-breaking revenues in Q4 and full year 2022. Performance of our portfolio of live Virtual Worlds has never been stronger and our pipeline of upcoming Virtual Worlds has never been more robust. We think our strong performance reflects both the extraordinary effort by NEXON teams around the world, but also the power of the innovative business model of Virtual Worlds that NEXON has pioneered. We believe the next 12 to 18 months will be very exciting.
With that, I will turn the call over to Uemura-san.
Shiro Uemura
Thank you, Owen. Now, I’ll review our Q4 and FY 2022 full year results. For additional details, please see the Q4 2022 Investor Presentation available on our IR website.
We achieved record-breaking fourth quarter revenue of JPY81.1 billion, up 49% year-over-year on an as-reported basis and up 36% year-over-year on a constant currency basis. Our performance continued to be driven by the growth of multiple major titles as well as contributions from new titles, HIT2 and Dungeon&Fighter Mobile. Overall, our top-line performance was within the range of our outlook. Dungeon&Fighter in China and FIFA ONLINE 4 exceeded our expectations, while revenues from our mobile business in Korea were lower than planned. By region, revenues from China, North America and Europe exceeded our outlook, while revenues from the Rest of World came in at the high end of our expectations. Revenues from Japan were within the expected range and revenues from Korea were at the low end of our outlook.
Looking at the total company performance by platforms, PC revenues exceeded our outlook, while mobile revenues were lower than expected. Operating income was up 269% year-over-year and within our outlook at JPY11 billion. Net loss was JPY7.9 billion, which was below our outlook. This was mainly due to an FX loss of JPY25 billion related to the appreciation of the Korean won and Japanese yen against the U.S. dollar and its corresponding impact on U.S. dollar-denominated cash deposits.
Let’s move on to results by region. Revenues from our Korea business were at the low end of our outlook. On a year-over-year basis, revenues increased by 62% on an as-reported basis and by 50% on a constant currency basis, coming in at JPY51 billion, representing record-breaking fourth quarter revenues in Korea.
FIFA ONLINE 4’s PC and mobile combined revenues exceeded our outlook, driven by successful World Cup-related events and sales promotions. MAUs, paying users and ARPPU all increased year-over-year. As a result, its revenues grew significantly and marked record-breaking fourth quarter revenues.
MapleStory’s MAU and revenue increased year-over-year driven by the well-received Winter update. Dungeon&Fighter’s revenue grew by 65% year-over-year, which exceeded our expectations and achieved record-breaking fourth quarter revenue driven by well-received update. For Sudden Attack, revenue decreased year-over-year due to the challenging comps with last Q4 when it grew 124% year-over-year. All in, PC revenues in Korea increased by 61% year-over-year.
As for the mobile business, revenues from HIT2 and Dungeon&Fighter Mobile were lower than expected. HIT2’s revenue was below our outlook as the impact from the update introduced during the quarter was lower than expected. We are preparing multiple major updates that we anticipate will help maintain high user engagement in 2023.
For Dungeon&Fighter Mobile, the user community was excited about the news that the game was selected as the Best Game of the Year at the Korean Game Awards in November. Given this positive event, we decided to focus on keeping the good momentum and canceled the planned item sales, and instead, offered large scale rewards to players. As a result, while the revenue was below our outlook, the number of active users increased quarter-over-quarter.
On a year-over-year basis, mobile revenues in Korea increased by 63%. Contributions from HIT2 and Dungeon&Fighter Mobile as well as growth of FIFA ONLINE 4 M and FIFA MOBILE, were partially offset by revenue decreases in Blue Archive, V4, The Kingdom of the Winds: Yeon and KartRider Rush+. On a quarter-over-quarter basis, mobile revenues decreased by 15%, primarily due to a decrease in Dungeon&Fighter Mobile’s revenue and a seasonal decrease in FIFA ONLINE 4 M’s revenue.
Revenues from our China business exceeded our outlook driven by Dungeon&Fighter’s strong performance. On a year-over-year basis, revenues increased by 55% on an as-reported basis and by 37% on a constant currency basis. For Dungeon&Fighter, revenue exceeded our expectations. Last quarter, we adjusted the game to be more user-friendly and saw a recovery in active users after the introduction of the National Day update at the end of September. Amidst this positive trend, we strengthened our communications with players and conducted various events during the quarter, which resulted in further improvement of user engagement and increase in active users. On a quarter-over-quarter basis, MAUs and paying users increased as a result of these initiatives, while ARPPU decreased due to seasonality. On a year-over-year basis, MAUs, paying users and ARPPU all increased.
Revenues from Japan increased by 14% year-over-year driven by the growth of Blue Archive and a contribution from TalesWeaver: SecondRun despite revenue decreases from FIFA MOBILE, TRAHA and V4. Revenues from North America and Europe decreased by 6% year-over-year due to revenue decreases from Choices and Blue Archive despite the growth in MapleStory. Revenues from the Rest of World increased by 25% year-over-year driven by the growth in MapleStory M and contributions from new games.
Next I’ll review our FY 2022 full year results. We achieved record-breaking revenue in FY 2022 driven by the growth in existing games backed by the strength of our live operations and the launch of new games. Group revenues for the full year 2022 were JPY353.7 billion, up 29% on an as-reported basis and up 19% on a constant currency basis.
FIFA ONLINE 4 significantly grew driven by successful marketing as well as well-received events and sales promotions. It marked record-breaking full year revenue for the fourth year in a row. Dungeon&Fighter and MapleStory, which experienced decreases in active users and revenues in 2021, showed signs of recovery in 2022 and increased revenues year-over-year as we strengthened our relationships with players and increased the volume of content and events. As a result, overall PC revenues grew by 24% year-over-year.
As for the mobile business, revenues grew by 41% driven by significant contributions from Korea Dungeon&Fighter Mobile and HIT2, which launched in March and August 2022 respectively. Operating income was JPY103.7 billion, up 13% year-over-year on an as-reported basis and up 2% year-over-year on a constant currency basis as the increase in revenues was larger than the increase in costs. HR costs increased year-over-year, primarily due to recruitment of staff for development of new games as well as bonuses for outstanding financial performances from our games. Marketing expenses also increased, primarily due to promotions for new game launches.
While operating income was up year-over-year, net income was JPY100.3 billion, down 13% on an as-reported basis and down 21% on a constant currency basis. The year-over-year decrease in net income is primarily due to a comparison with last year when tax expense was at the low level due to recording of additional deferred tax assets on overseas subsidiaries. Also, we recorded valuation losses for investment funds, bitcoins and affiliates due to changes in the market environment.
Moving on to our FY 2023 first quarter outlook. In Q1 2023, we expect our three major titles, Dungeon&Fighter, FIFA ONLINE 4 and MapleStory to continue to grow year-over-year. We also expect good contributions from HIT2 and KartRider: Drift, which we started pre-season in January.
Consequently, we expect record-breaking quarterly revenues in Q1 2023 in the range of JPY116.7 billion to JPY125.6 billion, representing 28% to 38% increase year-over-year on an as-reported basis and a 19% to 28% increase year-over-year on a constant currency basis.
We expect our Q1 operating income to be in the range of JPY45.3 billion to JPY52.5 billion, representing 18% to 36% increase year-over-year on an as-reported basis and 11% to 28% increase year-over-year on a constant currency basis. I’ll discuss the details on this shortly. We expect net income to be in the range of JPY34.4 billion to JPY39.8 billion, representing a 15% to 1% decrease year-over-year on an as-reported basis and a 19% to 6% decrease year-over-year on a constant currency basis. The year-over-year decrease in net income is due to a JPY12.7 billion FX gain that we recorded a year ago. As you know, our guidance does not factor FX gains or losses.
In Korea, we expect growth from our major existing franchises as well as solid contributions from HIT2 and KartRider: Drift, which we started pre-season in January. Consequently, we are looking for revenue in Korea to be in the range of JPY62.7 billion to JPY67.2 billion, representing a 31% to 40% increase year-over-year on an as-reported basis and a 20% to 29% increase year-over-year on a constant currency basis.
As for the PC business, we expect our three major titles, FIFA ONLINE 4, Dungeon&Fighter and MapleStory to maintain their strong momentum from Q4 2022 and to grow year-over-year. We also expect an initial contribution from KartRider: Drift, as its pre-season started on January 12 with the grand launch on March 9. Regarding the mobile business, we expect Q1 revenues to increase year-over-year. We expect contributions from HIT2 and KartRider: Drift. In addition, we expect year-over-year growth in FIFA MOBILE. We expect these to be partially offset by year-over-year revenue decreases in older mobile titles.
Turning to China. We expect revenues from our China business to be in the range of JPY39.3 billion to JPY42.4 billion, representing a 32% to 43% increase year-over-year on an as-reported basis and 25% to 35% increase year-over-year on a constant currency basis, driven by the anticipated increase in Dungeon&Fighter’s revenue.
For Dungeon&Fighter, in Q4 2022, we saw a turnaround in the number of active users, which increased year-over-year. Under this positive trend, we introduced the Lunar New Year update on January 12. We expect revenues to grow year-over-year driven by the excellent start of the Lunar New Year update accompanied by strong sales of the avatar package. Throughout 2023, we will continue to focus on promoting communication with players to stably operate the game.
In Japan, we expect revenues in the range of JPY2.7 billion to JPY3.0 billion, representing a 3% decrease to 8% increase year-over-year on an as-reported basis and an 8% decrease to 3% increase year-over-year on a constant currency basis. We anticipate contributions from new games and growth in Blue Archive to be offset by decreases in older mobile titles.
In North America and Europe, we expect revenues to be in the range of JPY4.8 billion to JPY5.2 billion, representing a 2% to 11% increase year-over-year on an as-reported basis and an 8% decrease to flat year-over-year on a constant currency basis. We anticipate contributions from new games, including KartRider: Drift to be offset by decreases from MapleStory M and Choices.
We expect revenues in the Rest of World in the range of JPY7.2 billion to JPY7.8 billion, representing a 22% to 32% increase year-over-year on an as-reported basis and a 12% to 21% increase year-over-year on a constant currency basis. While we anticipate contributions from new games, including KartRider: Drift, we expect these to be partially offset by a decrease from MapleStory.
In Q1 2023, we expect operating income to be in the range of JPY45.3 billion to JPY52.5 billion, representing a year-over-year increase of 18% to 36% on an as-reported basis and a 11% to 28% increase year-over-year on a constant currency basis. An increase in revenue is expected, which will contribute to an improvement in year-over-year operating income. However, compared to Q1 last year, we expect increases in costs due to business growth.
First, we expect increased royalty costs due to revenue increases in FIFA franchises and a contribution from KartRider: Drift. Also, we expect increased PG fees due to revenue increases in mobile titles. Since KartRider: Drift is developed by the joint venture, royalties to them will be recognized following the launch. Second, we expect increased HR costs related to additional headcount for the development and operation of our major games as well as an annual salary hike. Third, we expect increased marketing expenses primarily associated with promotions for new games such as KartRider: Drift. Lastly, we expect increased other costs under COGS and SG&A in relation to outsourcing costs associated with new game development and cloud service costs due to mobile business growth.
Operating income is expected to increase year-over-year as we anticipate the increases in costs due to business growth to be more than offset by revenue increase. Overall, in Q4 2022, we saw increases in user engagement and active users in our three major titles driven by our strength in live game operations. This positive trend continued into Q1 2023, and therefore, we expect revenues from these titles to increase year-over-year.
In addition, the development of new games is progressing well. KartRider: Drift started its pre-season on January 12 and is scheduled for grand launch on March 9. We plan to reflect player feedback during the pre-season as well as even after the grand launch and to focus on maximizing player experiences through communication. For Embark Studios’ first title, THE FINALS, we plan to conduct a beta test in Q1. In addition, we are preparing for the launch of multiple new Virtual Worlds. We believe that NEXON could grow our business in the long-term by layering these titles on top of our strong revenue base.
On the other hand, lastly, I would like to make some comments on our short-term outlook. First, last year, while revenue in the first quarter grew just 3% year-on-year, it grew roughly 30% to 50% from Q2 to Q4 respectively, which means we will face high hurdles for the rest of the year. Secondly, we focus on long-term growth over short-term financial performance and we sometimes scale back our short-term monetization strategy to sustain long-term strength in our titles. Finally, unlike traditional games, we gradually grow our Virtual Worlds following their launch as we nurture the user community and enhance player engagement. We think it’s important to consider these three points when considering our business from the second quarter onwards.
Last, I would like to provide an update on the shareholder return. Based on our 2022 shareholder return plan, we plan to pay year end dividends of JPY5 per share to shareholders recorded on our shareholder registry as of December 31, 2022. We will continue to pay the semi-annual dividends of JPY5 per share in 2023. As of the end of January, we have completed approximately JPY24.7 billion of our 3 year JPY100 billion share repurchase policy that we announced on August 9, 2022. We expect to have completed JPY50 billion in share repurchases by April 2023. As for the remaining JPY50 billion, we plan to complete the rest of the repurchase authorization after May 2023 and by August 2025 at the latest, by considering several factors, including investment opportunities, financial conditions as well as the market environment.
This concludes my comments. Back to you Owen.
Owen Mahoney
Thanks, Uemura-san. To summarize our thoughts, in the face of a very difficult global economy, NEXON has never been stronger or its future brighter. We grew 49% year-over-year in Q4 and we expect to grow 28% to 38% year-over-year in Q1. NEXON teams around the world are clearly firing on all cylinders. But as happy as we are by our results, we think there’s an additional factor at work that is vital for investors to understand.
The business of NEXON is commonly misclassified as games, as if making casual games or single-player RPGs is similar to making and marketing online Virtual Worlds. It’s not. We operate a different category of the entertainment business altogether. This legacy misclassification is a trap for analysts. But since so many market participants use legacy mental models, there is a significant opportunity for the analysts who uses an updated set of tools.
So what do we mean by the category of Virtual Worlds? First, we obsess about the time spent in a game over what a user pays us in an individual month. Second, we focus on assembling a community of dedicated players over near-term monetization. We’d rather miss our quarterly revenue forecast for the game than hurt the economy — excuse me, hurt the community. We have made this decision many times in the past and it has served our shareholders extremely well.
Third, over a period of years, a successful Virtual World will have ups and downs over the short-term, but we will see through those near-term fluctuations to achieve our objective of growing a community of players who are highly engaged. Fourth, player lifetime in a Virtual World is indefinite, spanning years, and in some cases, decades. In our world, a whale is not someone who spends a lot of money in the near-term, it is someone who is highly engaged and has a large and active network of friends in their chosen Virtual World. Finally, a concentrated portfolio of well-run Virtual Worlds may double revenues in the period of a few years without launching a single new game. Very few people understand this.
Now why do we take this approach? We see ourselves as investors, not as traders. As investors, we look for compounding growth over the long-term. Our objective is to make NEXON a strong, resilient business.
So what does this mean for you the analyst or investor? Our view is that it’s best to start over and recognize we’re talking about an entirely different industry, one that has similarities to the game business, but is in fact operating from a different set of principles. One example of where to start over is the game lifecycle fallacy, where a game starts, grows and then dies in a relatively predictable pattern. That pattern does not apply to a well-run Virtual World. A second useless analytical fallacy is the focus on timing of product launches to predict revenue. Again, this matters a lot in the games business, but is of very limited use in Virtual Worlds.
So what should you do instead? Here’s how we think of NEXON in the coming couple of years. Our base of live Virtual Worlds has proven again and again to be very solid. Within any quarter, some will be up and some will be down year-over-year, but we believe our portfolio is anti-fragile and serves as a stable base of revenue and profit in the coming years.
On top of that base, we then have 8 major projects in the pipeline over the next 18 months. If one hits, we’re looking at another year of strong double-digit growth. If two hit, we’re a whole different company. We don’t know the exact timing of most of these launches, but that doesn’t affect your investment decision much because the impact of whatever month they launch will be dwarfed by the performance in following quarters and years.
Net, we see our business as an asymmetric opportunity with limited risk to the downside and much opportunity to the upside. We have in fact designed it that way. We expect you to come to your own conclusion on how to forecast the NEXON business, but it’s important for you to see the business through our eyes so you can make more informed decisions.
Thank you very much for your time. With that, Uemura-san and I would be happy to take your questions.
Takanori Kawai
Thank you, Owen. Next, we would like to open up the lines to live Q&A. Q&A session will be conducted with Japanese-English or English-Japanese consecutive interpretation. Please be noted that interpretation will come between your questions and our answers. Please hold for interpretation before you hear our answers. Our answers will also be followed by interpretation. So please hold until the interpretation finishes before moving on to the next question. For those of you who have more than one question, we will take your questions one-by-one.
Now we’d be happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions]. The first question is from Mr. Nagao from BofA Securities Japan Research.
Yoshitaka Nagao
I have several questions. So I would like to pose you the first question, which is on China situation. I would like you to add more color to the situation in China, especially around China Dungeon&Fighter. You mentioned that you are seeing an increase in the number of active users, which means that you have once again built a solid revenue base of China Dungeon&Fighter. And having said that, in your materials, you stated that you are emphasizing the stability of the community and operate accordingly. So when you look at the situation in China in 2023, especially around Dungeon&Fighter, do you think that FY ’23 will be the year for investments or do you think you will be able to gain revenue from Dungeon&Fighter more than ever before or do you think year 2023 will be both, i.e., investment and generating revenue? So can you give me the full picture of what will happen in FY 2023?
Owen Mahoney
I will answer about the details of China Dungeon&Fighter. As I have mentioned in my previous briefing, we believe that we have bottomed out in Q1 of 2022. And then afterwards, we were able to see the steady improvement of this title throughout the last fiscal year. And under the new leadership, in particular, we emphasize communications with the players and increase the frequency in which we have dialogues with the users. And as a matter of fact, Korean developers actually directly got in touch with Chinese users, so we were able to understand what are the needs and wants of the users in China. And we had implemented those feedbacks into the improvement we made in the games.
And I will give you some particulars of what kind of improvements we made. Firstly, for example, we included mechanism, which will enable the players to grow more easily than before. And secondly, we made the game more action oriented. And with those two endeavors as examples, drove our steady improvement of this title in 2022. And that improvement became very conspicuous in Q4 of 2022. And fortunately, we are seeing the continuation of such momentum in Q1 of 2023.
Now, talking about the outlook for FY 2023; I mentioned that we were able to see the gradual growth of this game in Q1 of 2022 and therefore, when you try to compare the result of FY ’22 Q1 vis-a-vis that of FY ’23 Q1, the hurdle is not that high. And so we will continue growing this fiscal year, but please do not apply the growth rate that we are seeing in Q1 for the rest of the quarters of FY 2023. We gradually made improvements in Q1 of ’22, and that momentum further increased throughout Q2 to Q4 Therefore, the comp between the sequential quarters will be very high. And as Owen mentioned in his remarks, we as a company emphasizes longevity. Therefore, we do not just look at the short-term revenue or growth. And so going forward, as far as China Dungeon&Fighter is concerned, we are going to work on the steady operation of this title.
Yoshitaka Nagao
My next question is once again on China. I know that you were able to get the regulatory approval of MapleStory M. And this title is very popular in Korea, whereas I do not think that is necessarily the case in China. Having said that, I have three questions. Firstly, on will be the launch timing? And secondly, how much marketing investment you plan to make? Thirdly, what is the expectations of the management towards this game in China?
Shiro Uemura
It is indeed true that we were able to get the approval of MapleStory M in China. But as far as the launch timing or what kind of marketing investment we will be making, we do not have any definitive information that we can share with you today. Talking about the expectations towards this game in China, needless to say, we do not think that China users will be in the same magnitude as that of the ones we have in Korea.
But having said that, we still do have some amount of plans surrounding Maplestory in China as well. As you know, we already have MapleStory PC version in China. And China itself is such a big market. So the management does believe that we can expect to some extent the success of MapleStory M in China as well. But again, once we know the details of the launch and other matters that you have mentioned, we will disclose that as soon as those details are finalized.
Operator
We will take the next question from Mr. Seyon Park from Morgan Stanley.
Seyon Park
I have two questions. One is on FIFA and the other is on KartRider: Drift. For FIFA Online 4, we’ve seen very strong trends starting beginning of actually 2022. And looking at some of the PC Cafe stats, it looks like that strength is still continuing this year. Yes, I understand that the World Cup probably played a factor in it, but it does kind of seem that this improvement in revenue seems a lot more structural. And hence, I kind of wanted to get some sense as to why looking back, the company feels that this game has done so well recently. And whether it’s part of the overall trends for FIFA Online in other countries or whether it’s something a bit more specific to Korea? That’s my first question.
My second question is on KartRider: Drift and looking at — I know it’s still pre-season. It seems like in terms of the game dynamic, no pay-to-win, no random [indiscernible] kind of system. And please correct me if I’m wrong, but it seems like it’s obviously making it easier to cater to some of the western gamers who have not tried this.
Can I get maybe some thinking of how — what kind of I guess, end state, you’re kind of aiming for this game. I know you’re — it’s fully cross-play and obviously, you’re expanding to other geographies. But obviously, it sounds like it’s going to be a lower monetization-based game. So I kind of wanted to hear some philosophy of where the company is trying to take this over the longer term.
Shiro Uemura
So thank you very much for your question. Allow me to answer your first question on FIFA Online 4. And as you mentioned, it is very true that we are finding a very good performance at this moment. And that is why for the past quarters, we have always been able to mark record high. And certainly, we do believe the World Cup did have a good effect to that. And of course, we had been preparing ourselves to make sure we’d be able to materialize the momentum. But then what is really crucial is something that we already mentioned in operating Dungeon&Fighter.
In other words, we believe it is crucial that we always have communication with the users so that we’d be able to invigorate the community. And at the same time, we need to make sure we have good seasonal updates that matches the needs of the users. And I think that is very crucial in operating PC online games. So again, it’s really about daily operations and to make sure we have the good content update on appropriate manner. And theoretically, that is what is supposed to give you a long-term growth. And on top of that, we now have the tailwind of the World Cup, and that is why we’re seeing this very good performance.
And on top of that, we did really well on the marketing promotion. So all of these multiple factors is what created this very good performance of FIFA and we’re still seeing the good momentum continue to today. But with that said, we cannot deny that 2022 was a particular year where we were able to enjoy the contribution from the World Cup itself. And so in 2023, we do not want to be that bullish. We would not be surprised if we started to see the numbers start to turn off from what we have been seeing. So that’s something that I’ll be able to comment. And also when it comes to operations in other countries that’s not something that I would be able to comment because that’s not something that we’d be doing.
Owen Mahoney
Seyon, this is Owen. I just want to add to what Uemura San said, and then also answer your second question about KartRider: Drift. I think another way to sort of frame what he said is what I referenced in my prepared remarks, which is there’s probably three factors in addition to World Cup providing a tailwind, I think there’s three factors at work that are providing satisfying long-term performance here. Obviously, the product — the core product itself is very, very good, and it’s very unique in the market. That really matters.
And really that in combination with how the team is operating the game is a very big deal. That’s number one. Second, the tech stack that we’ve developed over time has helped us a lot. And then third, I’d say, sort of our approach, our overall management and operating team approach to taking a long-term view on how to build the community over time, which seems obvious, but it is in fact, hard to do in practice. That’s — those things have all compounded over time that is provide a longer-term support for the experience for the users and therefore the performance of the game.
But just to make a point that leads into the KartRider question, I think one of the key things is it starts by being a great game. I mean the core game and our partnership with EA, it’s very satisfying to work with a partner like them who are making a great game. So that would be the point number one. That would be the most fundamental point of all is the great game experience.
So that leads to a question on KartRider and I think your — the core of your question is how do you see that developing over time, if I understand that correctly. To answer your question, I want to go back to what the fundamentals are of KartRider: Drift. Let’s remember what the kind of key pillars of the game are. Number one, it’s free. Number two, its cross-platform, that means PC, mobile, meaning iOS and Android and console, meaning PlayStation and Xbox. So it’s cross-platform. It’s online from the ground up. So it’s got very sophisticated things like matchmaking and community building for online.
And then fourth is about customization. And customization doesn’t really matter so much if it’s an offline game, meaning if you’re playing with — by yourself or with one or two other players, but it matters immensely in a Virtual World. If you think about a Virtual World is like a virtual city. And if you never go out of your house, it kind of doesn’t matter what you wear every day. But if you go into a city and you’re surrounded by other people, it matters a lot what you wear and people really self-express through what they were. Well, the same thing happens in the Virtual World. So with that as background, I’ll stop there and allow for translation and then get to the point of your question.
So, during the pre-season, just getting back to the core of the game, during the pre-season I’ve been playing a lot of the game and more importantly, talking to a lot of players through Twitch and other forums, pretty much daily. And each of them tells me — talks about the game and talks about one or more aspects of the four pillars that I just told you. I ask them if they like it. Are they having fun? And they’ll say, yeah, it’s great because the online of it is so terrific — or yeah, I really like customizing my card or certain aspects of my character or yeah, it’s great that it’s free.
And I’m really looking forward to the console version being out. I’m really loving playing it on whatever platform. And it’s great that we’re all playing together. They mentioned one or more of these aspects. And fundamentally, what they’re saying is that it’s a really great game. They really enjoy participating and playing in this Virtual World. So at that point, what our key job is, is to build a community over time. That’s what it’s all about.
And it starts by being a fun experience and then what — which is very, very important. But what it really does is it’s redefining the whole category of Kart or racing games. And it sort of takes the concept of a Kart or a racing game and brings it into the world of Virtual World with these several key features. And we think that, that’s something that is a great basis to build a large Virtual World over time, very much along the lines of what we did over time with FIFA and what we did over time with the first generation of KartRider and what we’ve done so many times before. So we think it’s got all the core ingredients to build over time; a strong, robust Virtual World. I hope that answers your question.
Seyon Park
Yeah, thank you for the color, Owen, Uemura San and looking forward to playing the game as well.
Owen Mahoney
Great. Look forward to seeing you online.
Operator
So the next question is from Ms. Yamamura from Citigroup Global Markets Japan.
Junko Yamamura
Thank you very much for your presentation. And I want to refer back to what Owen has mentioned a few minutes ago about Virtual World. And I have one follow-up question around that. I fully agree that your business is based on making constant improvement and to build a long-term community. And I remember you mentioning using the analogy vis-a-vis the theme park. And I fully agree with you that Virtual World is akin to theme park.
But when you look at the real tangible physical entertainment world, you have to understand that we only have one body. And if people tend to go more towards the Virtual World, the tendency of people is such that we be feed back to the entertainment that is being provided in the real world. And I think that, that has been this issue that digital entertainment industry has been facing so far — and you’ve talked about the probability of coming out with 10 million virtual cities.
And once those 10 million virtual cities are being built, one by one, the later you come into the game and the hurdle, I believe, will get higher because as I mentioned before, we only have one body. So there will be a limitation in the number of virtual cities or virtual communities that you as an individual can belong to. And I think it all boils down to the balance that you have mentioned. So I want to know how you plan to embrace the players in your Virtual World? And how do you plan to strike the good balance? So can you give me some tangible ideas about what kind of strategy you plan to pursue in growing your Virtual World?
Owen Mahoney
Sure. Thanks for your question. It’s certainly a very, very interesting question, and we could probably spend several hours talking about that question alone. But if I understand the core of your question, I think what you’re saying is we only have limited time in a day, and people tend to revert to their physical life in their entertainment life. Look, what I — I don’t think that, that has proven to be the challenge for the industry.
The challenge for the industry is as an industry if you look — and I say this as a consumer, as a game consumer, if a Virtual World is really entertaining and if someone — if I’ve got lots of interesting things to do in that Virtual World, I will definitely play that game. And if the game is — if that Virtual World is undifferentiated, it looks like everything else, it becomes uninteresting over time; I won’t. And so much of what we do or what the industry does is create things that are very similar. And yet, what we find over and over again is when there’s innovation, when there’s new types of experiences when we bring a high-quality product to market, people immediately start gravitating in very, very large numbers.
And through the history of the last 20 years, we’ve seen this over and over again across not just Virtual Worlds, but games. And so it’s really — and I could name Virtual World from NEXON, I could name games and Virtual Worlds from other companies over and over again where that has been the case. And then people get blown away. People get so surprised by how many people end up playing and how many hours they end up playing. So to us, it really comes down to a question of quality. And if we deliver a great online experience to customers, they will definitely play.
Their playtime will be indefinite. They will keep coming back to that Virtual World for years and, in some cases, decades. And the management team — we’re all gamers and our personal experience has certainly borne this out. The experience of our kids has borne this out. We’ve seen this among our friends, and we think the industry has borne this out over and over again. So if that is gets to the crux of your question, I hope I’m understanding your question correctly. But what I would summarize is it’s about meaningful differentiation and meaningful quality. And if we deliver those things well, we find that that online games especially Virtual Worlds are incredibly compelling form of entertainment.
Junko Yamamura
I understood it very well. Thank you very much.
Operator
We will take the next question from Mr. David Gibson from MST Financial Services Limited.
David Gibson
Well done on a great quarter and guidance. On the costs, I wanted to ask about, in particular, HR costs in 2023, your guidance for 1Q is up JPY6.3 billion year-on-year. Can you talk a little bit about the rest of the year and how you think the costs will grow? And will it be moderate — more moderate growth versus last year’s growth? That’s my only question.
Shiro Uemura
So thank you for your question. So your question was around our cost, especially HR cost. Now I do believe the circumstance that we are experiencing this year versus last is a bit different because last year, it was the time when we wanted to make sure that we’d be able to strengthen the pipeline that we had in line. And so for that, we wanted to make sure we have good increase in the talent that’d be able to look after it. And so this was an investment to make sure we’d be able to have the right number of people to look after these pipeline.
But then this year, we are better — we are in like getting better prepared for the launch of these titles now. And so when it comes to like the increase on the HR side, it will not be on the magnitude that we did last year. It’s not going to be as much. But then, of course, with that said, we will keep on adding appropriate number of people if we find it necessary.
And also another part of the cost, which you didn’t ask, but it’s about marketing, we do believe we will be spending more for marketing this year because, again, any title, any large title that we have high expectation, we do believe we need to spend marketing appropriately to make sure we’d be able to secure future growth. And so that is why for marketing, we are going to expect a cost increase. But overall, when it comes to our overall cost, we do believe that in 2023, we will be able to secure the same level of margin that we secured back in 2022. But with that, we do believe we will be spending costs accordingly.
Owen Mahoney
This is Owen. Just to add on to what Uemura San. So maybe helpful for everybody to sort of remember how our P&L works. Remember, we have, as I mentioned before, for existing live Virtual World, we have a very strong base of revenues, very stable. We also have a very stable cost base for those live Virtual World. That doesn’t change much. But then remember, we have several major new products, new live — or new Virtual Worlds that we’re launching, which are really about, of course, development spend and about live operations in preparation for those launches.
And currently, until those launch, we generate no revenues against those costs. But we’ve got real major ones on the way. But as those Virtual Worlds launch, we generate revenues and those revenues flow through our P&L and end up after those costs that we’ve been incurring, they end up as operating profit. So it’s sort of a special time right now because we have several major new Virtual Worlds in production getting ready for launch. So it’s important to remember that when you think about the long-term cost and how we’re investing against investing towards our future business.
Operator
This concludes the question-and-answer session. Mr. Kawai, at this time, I’d like to turn the conference back over to you for any additional or closing remarks.
Takanori Kawai
Thank you very much. And with that, we would like to end this conference call and allow us to take this opportunity to thank everyone for your participation. And if you have any further questions, please contact the IR team. You can contact us by e-mail, investors@nexon.co.jp. So thank you very much.
Operator
Thank you. That concludes today’s conference. Thank you for your participation. You may now disconnect.
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