Investor Presentation NEXON Co., Ltd.
Results 2
Highlights First quarter performance exceeded high end of our outlook 44.4 bn revenue, up 46% year-over-year, and up 26% on a constant currency basis 20.7 bn operating income, up 24% year-over-year, 47% operating margin China performed better than expected due to successful content updates Against a significant comp in Q1 2012 (up 89% year-over-year in Q1 2012) Strong Dungeon&Fighter performance in China with solid user engagement: Lunar New Year update a hit Good start to the year in Korea Against a significant comp in Q1 2012 (up 34% year-over-year in Q1 2012) Successful launch of FIFA Online 3 Strong performance from key titles, especially Dungeon&Fighter and Sudden Attack Favorable currency trends Additional benefit provided by weakening Japanese yen 92.4/USD and 8.5/100KRW quarterly average versus initial rate assumption of 85.1/USD and 7.9/100KRW Implemented IFRS to provide globally comparable financial information 3
Q1 Financial Results (Unit: millions, except per share data) Selected Consolidated Financial Data 1 Q1 2012 Outlook (IFRS 2 ) YoY % Revenues 30,377 35,975 ~ 38,529 44,364 46% PC 30,151 28,554 ~ 30,346 36,877 22% Mobile 226 7,421 ~ 8,183 7,487 33.1x Operating income 16,760 13,514 ~ 15,562 20,716 24% Net income 3 12,996 9,140 ~ 10,618 15,150 17% Earnings per share 30.26 20.98 ~ 24.38 34.77 15% Cash and cash equivalents 111,786 n/a n/a 110,510 FX Rate 100 KRW/JPY 7.03 7.94 7.94 8.53 CNY/JPY 12.55 13.34 13.34 14.73 USD/JPY 79.28 85.08 85.08 92.42 1 Nexon has voluntarily adopted IFRS beginning in the first quarter of the current fiscal year. 2 The initial outlook disclosed on February 13, 2013 was restated according to IFRS and disclosed on May 9, 2013. 3 Net income refers to net income attributable to owners of the parent, as stated in Nexon s consolidated financial results. 4
Revenues and Operating Income (Unit: millions) 50,000 Revenues 25,000 Operating income 45,000 44,364 20,716 40,000 20,000 35,000 16,760 30,000 30,377 15,000 25,000 20,000 10,000 15,000 10,000 5,000 5,000 - Q1 2012 Q2 2012 Q3 2012 Q4 2012 - Q1 2012 Q2 2012 Q3 2012 Q4 2012 5
Regional Revenue and Selected Performance (Unit: millions) Q1 2012 (As- Reported) (Constant Currency) 5 YoY % Change (As- Reported) (Constant Currency) 5 Revenue by Region 1 China 15,175 20,409 16,867 34% 11% Korea 8,857 10,589 8,730 20% -1% Japan 3,097 9,927 9,927 221% 221% North America 1,398 1,418 1,215 1% -13% Europe and Others 2 1,850 2,021 1,686 9% -9% Nexon Total 30,377 44,364 38,425 46% 26% Revenue by Platform PC 30,151 36,877 30,981 22% 3% Mobile 226 7,487 7,444 33.1x 32.9x Nexon Total 30,377 44,364 38,425 46% 26% FX Rate 100 KRW/JPY 7.03 8.53 7.03 CNY/JPY 12.55 14.73 12.55 USD/JPY 79.28 92.42 79.28 3 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Selected Performance MAU (millions) 82.8 77.4 78.8 68.3 71.5 Pay Rate 10.9% 10.3% 9.6% 10.5% 11.5% ARPPU 4 1,761 1,521 1,729 1,683 2,532 ARPPU (constant currency) 5 1,761 1,478 1,714 1,531 2,131 1 Based on the region in which revenues originate; not a representation of our revenues according to Nexon entities. 2 Others: United Kingdom, other Asian countries, and South American countries. 3 Selected Performance data is not dependent on accounting methods. The selected performance above excludes the mobile business. 4 ARPPU (Average Revenue per Paying User) is the average of monthly ARPPUs for the quarter. 5 On a constant currency basis (using Q1 2012 currency exchange rates). 6
Regional Revenue Composition 100% 75% EU & Others, 6% EU & Others, 5% NA, 5% NA, 3% Japan 10% Japan 22% Korea 29% Korea 24% 50% 25% China 50% China 46% 0% Q1 2012 7
Q1 Operating Margin Lower-margin mobile business representing larger portion of revenues Higher development and support costs from new title launches Increase in PC-related royalty payments for titles under licensing contracts, such as FIFA Online 3 60% Margin Structure Shift Illustration 1 50% 40% - 7% - 2% - 1% 2% 30% 20% 55% 47% 10% 0% Q1 2012 Operating Margin Revenue Mix Development & Support Royalty 2 Other Operating Margin 1 Chart is an approximation. 2 Other consists of reclassified items from non-operating expenses and extraordinary losses under J-GAAP. This category decreased year-over-year due to the absence of impairment recorded in Q1 2012. 8
IFRS Implications for Nexon (1) Income statement structure will change under IFRS Non Operating Income (Expense) is separated, with items that are not Financial Income (Cost) or Equity in Profit (Losses) of Affiliates included in Other Income (Expense) No Ordinary Income under IFRS Unrealized gains (losses) from investment securities are recorded below the Net Income line J-GAAP Income Statement Revenues Operating Income (+/-) IFRS Income Statement Revenues Other Income (Expense) (+/-) Non Operating Income (Expense) Operating Income Ordinary Income (+/-) Financial Income (Cost) (+/-) Extraordinary Income (Loss) (+/-) Equity in Profit (Losses) of Affiliates Net Income Ordinary Income (-) Interest Tax Expense Net Income 1 (+/-) Gains (Losses) from Revaluation of Investment Securities 2 Other Comprehensive Income For a detailed reconciliation of J-GAAP and IFRS, please refer to pages 24 to 46 of Nexon s Consolidated Financial Results. 1 Net income attributable to owners of the parent, as stated in Nexon s consolidated financial results. 2 Under IFRS, a company is able to choose if the difference between book value and market value of investment securities, after tax effects, is recorded either as finance income (cost) on the consolidated income statement or as other comprehensive income on the consolidated statement of comprehensive income. 9
IFRS Implications for Nexon (2) 1) Goodwill: - Under IFRS, goodwill is no longer amortized - Goodwill is tested for impairment quarterly, same as J-GAAP - Goodwill impairment impacts the Operating Income line 2) Investment Securities: - Investment securities are marked to market, consistent with J-GAAP - Under IFRS, writeups and writedowns are recorded under Other Comprehensive Income Investment securities impairment 1 NO investment securities impairment 1 J-GAAP Investment securities recorded at fair value on the balance sheet Impairment will hit the Net Income line of the income statement Investment securities recorded at fair value on the balance sheet No changes to the Net Income line of the income statement IFRS Recorded Marked at to fair market value on the balance sheet Differences recorded Changes under recorded Other under Other Comprehensive Income Income For a detailed reconciliation of J-GAAP and IFRS, please refer to pages 24 to 46 of Nexon s Consolidated Financial Results. 1 Impairment refers to an impairment according to J-GAAP. Under IFRS, the difference between book value and fair value is recorded as other comprehensive income. No impairments are made on investment securities under IFRS. 10
Regional Highlights 11
China Highlights Revenues in China were 20.4 billion, an increase of 34% (Unit: millions) 25,000 China YoY% change: As reported: +34% Constant Currency: +11% year-over-year (89% year-over-year increase in Q1 2012) 20,409 Strong Dungeon&Fighter revenue from successful Lunar New 20,000 Year update Counter-Strike Online achieved double-digit year-over-year revenue growth 15,000 15,175 10,000 5,000 0 Q1 2012 Q2 2012 Q3 2012 Q4 2012 12
Korea Highlights Revenues in Korea were 10.6 billion, an increase of 20% yearover-year (34% increase year-over-year in Q1 2012) (Unit: millions) 12,000 Korea YoY% change: As reported: +20% Constant Currency: - 1% 10,589 Strong momentum from Q4 updates continued in Q1, especially Dungeon&Fighter and Sudden Attack 10,000 8,000 8,857 6,000 Successfully launched FIFA Online 3; currently top-ranked sports game in Korea 4,000 2,000 0 Q1 2012 Q2 2012 Q3 2012 Q4 2012 13
Japan Highlights (Unit: millions) Revenues for Japan were 9.9 billion, led by mobile business performance 12,000 PC Japan YoY% change: As reported: +221% Constant Currency: +221% Mobile Three Kingdoms Guild Battle, launched in May 2012, continues to grow 10,000 9,927 Popular browser title, Barbarossa, launched as a full native 8,000 app in Q4 contributed to revenues 7,217 Launched key titles: FIFA World Class Soccer S 1 and Crystal 6,000 Crusade 4,000 3,097 2,000 2,710 Three Kingdoms Guild Battle 0 Q1 2012 Q2 2012 Q3 2012 Q4 2012 1 EA. gloops is the developer. 14
North America / Europe and Others Highlights Revenues in North America were 1.4 billion, an increase of 1% year-over-year Revenues in Europe and other regions were 2.0 billion, an increase of 9% year-over-year Weakening Japanese yen provided additional benefit Strategic investment in Robotoki, whose founder was the creative strategist behind the Call of Duty franchise (Unit: millions) 2,000 1,800 North America YoY% change: As reported: + 1% Constant Currency: -13% (Unit: millions) 2,000 1,850 1,800 Europe and others YoY% change: As reported: + 9% Constant Currency: - 9% 2,021 1,600 1,400 1,398 1,418 1,600 1,400 1,200 1,200 1,000 1,000 800 800 600 600 400 400 200 200 0 Q1 2012 Q2 2012 Q3 2012 Q4 2012 0 Q1 2012 Q2 2012 Q3 2012 Q4 2012 15
Q2 2013 Business Outlook 16
Q2 2013 Business Outlook (Unit: millions, except per share data) Q2 2012 Q2 2012 (Reclassified J-GAAP 1 ) Q2 2013 Revenues 22,876 22,877 34,021 ~ 35,991 PC 22,696 22,697 27,246 ~ 28,448 Mobile 180 180 6,775 ~ 7,543 Operating income 10,678 11,363 11,356 ~ 12,325 Net income 6,768 7,377 8,393 ~ 8,890 Earnings per share 15.63 17.04 19.22 ~ 20.36 FX Rate Assumptions 100KRW/JPY 7.00 7.00 8.53 8.53 CNY/JPY 12.62 12.62 14.73 14.73 USD/JPY 79.74 79.74 92.42 92.42 Goodwill amortization: Q2 2012 goodwill amortization under J-GAAP was 0.6 billion yen. Currency sensitivity 2 : Based on the assumptions above, every one Japanese yen move against the U.S. dollar would have an impact of 0.27 billion yen on revenue and 0.12 billion yen on operating income for the second quarter of 2013. 1 Q2 2012 J-GAAP results reclassified to provide an approximation of IFRS. 2 In most situations, the exchange rates of both the South Korean won and Chinese yuan are linked to the U.S. dollar. 17
Q2 2013 Operating Margin Outlook Expect operating margin of 33% to 34% due to: Lower-margin mobile business represents larger portion of revenues Investment in marketing for mobile and PC, with expected contributions from Q3 onward Royalty costs associated with new title launches, such as FIFA Online 3 Increase in PC-related development and support costs, primarily for new title launches J-GAAP results for Q2 Q4 2012 with non-operating income (expense) and extraordinary gain (loss) reclassified above the operating income line, and with goodwill amortization added back to provide an approximation of results under IFRS 60% Margin Structure Shift Illustration 1,2 50% 60% Operating Income Margin 2 50% 40% 30% - 6% - 5% - 3% - 3% 50% 40% 30% 45% 30% 47% 33% 20% 50% 33% 20% 10% 10% 0% Q2 2012 Operating Margin (Reclassified J-GAAP) Marketing Expense Revenue Mix Royalty Development & Support Q2 2013 Low-end Operating Margin 0% Q2 2012 (Reclassified J-GAAP) Q3 2012 (Reclassified J-GAAP) Q4 2012 (Reclassified J-GAAP) Q2 2013 Low-end 1 This chart is an approximation. 2 Q2 2012 J-GAAP results are reclassified to provide an approximation of IFRS. 18
Q2 2013 PC Online Revenue Outlook China: Modest growth from key titles Expect continued strength in Dungeon&Fighter Counter-Strike Online remains our second largest title in China Korea: Year-over-year growth from new title launches and growth of key existing titles Expect FIFA Online 3 to continue to grow Expect continued strong performance of Sudden Attack and Dungeon&Fighter Launching Pro Baseball 2K and Warface 19
Q2 2013 Mobile Revenue Outlook Existing titles: Expect continued solid performance Investing in marketing campaigns to support titles with high user retention Joint promotional campaign with DeNA including Three Kingdoms Guild Battle (launched May 2012) and other key titles New titles: Native and browser apps launching in Japan and internationally Guardian Break (Royal Tactics) as first native app in North America Dragon Girls for Kakao in Korea Jointly developed titles with DeNA on Mobage in Japan Guardian Break (Royal Tactics ) Three Kingdoms Guild Battle TV Commercial 20
2013 Tier 1 Content Updates and Launches Tier 1 Content Updates Major Titles Q1 Q2 Q3 Q4 Korea China Launches First Half 2013 Second Half 2013 Korea (Launched on Jan 17) China 21
Appendix 22
Summary of Results and Key Operational Metrics (Unit: millions except per share data) Q1 2012 J-GAAP Q2 2012 J-GAAP Q3 2012 J-GAAP Q4 2012 J-GAAP Q1 2012 IFRS IFRS YoY% (By Region) Korea 8,856 6,251 6,578 7,057 8,857 10,589 20% China 15,175 10,737 11,404 11,074 15,175 20,409 34% Japan 3,096 2,826 3,231 10,037 3,097 9,927 221% North America 1,397 1,515 1,340 1,117 1,398 1,418 1% Europe and RoW 1,850 1,545 1,701 1,651 1,850 2,021 9% (By Platform) PC 30,151 22,696 23,567 23,867 30,151 36,877 22% Mobile 225 180 689 7,070 226 7,487 33.1x Revenue 30,377 22,876 24,256 30,937 30,377 44,364 46% Operating income 17,384 10,678 10,032 9,778 16,760 20,716 24% Net income 12,377 6,768 6,348 (94) 12,996 15,150 17% Earnings per share 28.82 15.63 14.63 (0.22) 30.26 34.77 15% Cash and cash equivalents 146,977 129,089 139,659 127,604 111,786 110,510 FX rate 100 KRW/JPY 7.03 7.00 6.98 7.10 7.03 8.53 CNY/JPY 12.54 12.62 12.55 12.64 12.54 14.73 USD/JPY 79.28 79.74 79.37 79.82 79.28 92.42 Key Performance (excluding mobile) MAU 82.8 77.4 78.8 68.3 82.8 71.5 Pay Rate 10.9% 10.3% 9.6% 10.5% 10.9% 11.5% ARPPU 1,761 1,521 1,729 1,683 1,761 2,532 ARPPU (constant currency) 1,761 1,478 1,714 1,531 1,761 2,131 For a detailed reconciliation of J-GAAP and IFRS, please refer to pages 24 to 46 of Nexon s Consolidated Financial Results. 23
COGS and SG&A (Unit: millions) FY2012 FY2012 FY2013 Q1 Q2 Q3 Q4 Q1 Q1 J-GAAP J-GAAP J-GAAP J-GAAP IFRS IFRS Total Cost of Revenue 4,409 3,813 4,527 5,800 4,405 7,831 Royalty 1 1,568 933 1,433 1,488 1,569 2,673 HR Cost (COGS) 2 1,615 1,646 1,690 2,337 1,624 2,875 Other (COGS) 3 1,226 1,234 1,404 1,975 1,212 2,283 Total SG&A 8,582 8,384 9,696 15,358 8,031 15,343 HR Cost 1,858 1,962 2,019 2,687 1,912 3,004 PG Fee 4 1,122 881 1,047 1,989 1,260 2,259 R&D 591 767 644 562 587 659 Marketing / Advertising expenses 1,023 869 1,856 2,429 1,023 1,878 Depreciation and amortization 1,912 1,939 1,907 2,203 1,903 2,488 Goodwill Amortization 592 608 671 1,372 - - Other 5 1,484 1,358 1,552 4,116 1,346 5,055 Other Income 6 78 367 294 932 78 164 Other Expense 7 1,259 292 131 2,723 1,259 638 1 Royalty costs include royalties paid to third-party developers for the right to publish their games. 2 HR cost includes salaries, bonuses and benefits for our live game developers, who support post launch servicing, updating and support for our games. 3 Other (COGS) primarily consists of depreciation and amortization of assets related to existing games, connection fees (mainly comprised of co-location and datacenter fees, Internet bandwidth and access fees), and the costs of purchasing and maintaining our servers and computer equipment. 4 PG fees increased in Q4 2013 due to the consolidation of gloops, which resulted in increased carrier payment commission. 5 Others includes mobile platform commission fees. 6 Other income is a non J-GAAP financial measure consisting of rent income, other non-operating income, reversal of deferred revenues, gain on sale of properties, and gain on change in equity. Q1 Q4 2012 other income is provided for reference purposes. 7 Other expense is a non-j-gaap financial measure consisting of other non-operating expenses, loss on sale/disposal of properties, loss on impairment of tangible fixed assets, loss on impairment of intangible assets, prior year adjustment (loss), loss on impairment of other fixed assets, loss on change in equity, and loss on liquidation of subsidiaries. Q1 Q4 other expense is provided for reference. 24
Balance Sheet (Unit: millions) Q4 2012 Asset Current Assets Cash and cash equivalents 84,736 110,510 Other current assets 70,428 60,294 Total Current Assets 155,164 170,804 Non-current assets Property, plant and equipment 10,527 12,593 Intangible assets other than goodwill 30,800 30,060 Goodwill 46,475 46,868 Others 77,222 83,209 Total Noncurrent Assets 165,024 172,730 Total Assets 320,188 343,534 Liabilities Current Liabilities Income tax payable 9,491 12,771 Current borrowings and current portion of non-current borrowings 11,505 11,479 Other current liabilities 23,324 24,715 Total Current Liabilities 44,320 48,965 Non-current liabilities Non-current borrowings 42,670 38, 401 Other non-current liabilities 10,953 10,440 Total Noncurrent liabilities 53,623 48,841 Total Liabilities 97,943 97,806 Update 5/7 Equity Capital stock 51,342 51,449 Capital surplus 50,188 50,292 Other equity interest 11,905 21,861 Retained earnings 105,293 118,265 Non-controlling interests 3,517 3,861 Total equity 222,245 245,728 Total Liabilities and Total Equity 320,188 343,534 25
Key Cash Flow Statement (Unit: millions) Q1 2012 Net cash flows from (used in) operating activities 18,895 2,424 Net cash flows from (used in) investments (25,099) 26,557 Net cash flows from (used in) financing activities (1,918) Update (6,663) 5/7 Net increase (decrease) in cash and cash equivalents (8,122) 22,318 Effects of exchange rate changes on the balance of cash held in foreign currencies 2,309 3,456 Cash and cash equivalents at the beginning of the period 117,599 84,736 Cash and cash equivalents at the end of the period 111,786 110,510 26
Japanese Mobile Market (Unit: billions) 180 160 Native App Revenue Browser App Revenue 140 (Approx. 20%) 120 100 80 60 40 (Approx. 80%) 20 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q (E) 2008 2009 2010 2011 2012 2013 Source: Company and Credit Suisse data 27
Disclaimer This presentation is prepared to offer reference information about NEXON group to the investors. NEXON Co., Ltd. ( Nexon ) has not verified and would assume no responsibility for the accuracy, appropriation, or completeness thereof. This presentation does not contain all relevant information relating to Nexon or the sale of its shares, including, without limitation, the information that would be stated under the captions Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations and Business in an annual report. Any investment decision with respect to any shares of Nexon should be made solely upon the basis of the information contained in the disclosure documents and is qualified in its entirety by reference to the detailed information appearing in the disclosure documents. This presentation includes non-gaap financial measures, including but not limited to revenues, operating income and net income, as well as ratios calculated on the basis thereof. These non-gaap financial measures should not be considered in isolation or as a substitute for the most directly comparable financial measures included in our consolidated financial statements and presented in accordance with IFRS. This presentation includes forward-looking statements. In some cases, you can identify forward-looking statements by terms such as anticipate, assume, believe, estimate, expect, forecast, may, plan, potential, predict, seek, should, or will, or by other similar terminology. These statements discuss expectations, identify strategies, contain projections of Nexon s financial condition or results of operations or state other forwardlooking information. The forward-looking statements in this presentation are subject to various risks, uncertainties and assumptions about Nexon s business and results of operations. The expectations expressed in these forward-looking statements may not be achieved, and actual results could differ materially from and be worse than expectations. Potential risks and uncertainties that could cause actual results to differ materially from expectations include, without limitation: Continued growth and popularity of Nexon s key titles; Nexon s ability to maintain favorable relationships with key licensing partners; Nexon s continued ability to offer games in China, through local partners or otherwise; Nexon s ability to compete effectively in the online games industry; Nexon s ability to address hacking, viruses, security breaches and other technical challenges; Fluctuations in currency exchange rates; Nexon s ability to maintain and further develop its brand name; Effective acquisition of new companies, businesses, technologies and games from third parties and the possibility of recognizing impairment losses; Continued growth of the online games market, including the underlying infrastructure, and free-to-play/item-based revenue generation model; Nexon s ability to adapt to new technologies; Nexon s ability to enter into licensing arrangements for third-party titles on terms favorable to it; Effective defense of Nexon s intellectual property; and Legislative, regulatory, accounting and taxation changes in the countries in which Nexon operates. Nexon does not intend, and disclaims any duty, to update or revise any forward-looking statements contained in this presentation to reflect new information, future events or otherwise. We caution you not to place undue reliance on the forward-looking statements contained in this presentation. 28