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Edited Transcript of 3659.T earnings conference call or presentation 8-Aug-19 9:00am GMT

Q2 2019 Nexon Co Ltd Earnings Call

Tokyo Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Nexon Co Ltd earnings conference call or presentation Thursday, August 8, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Maiko Ara

NEXON Co., Ltd. - Head of IR

* Owen Mahoney

NEXON Co., Ltd. - President and Representative Director

* Shiro Uemura

NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director

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Conference Call Participants

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* Junko Yamamura

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Keiichi Yoneshima

Crédit Suisse AG, Research Division - Analyst

* Masaru Sugiyama

Goldman Sachs Group Inc., Research Division - Associate

* Seyon Park

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to NEXON's 2019 Second Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Maiko Ara, Head of Investor Relations and Corporate PR. Please go ahead, Ma'am.

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Maiko Ara, NEXON Co., Ltd. - Head of IR [2]

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Hello, everyone, and welcome. 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 operation and financial condition, such as revenues attributable to our key titles, growth prospects, including with respect to online game 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 and are 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 document. We assume no obligation to update or alter any forward-looking statement.

Please note net income refers to net income attributable to owner 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 the 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.

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Owen Mahoney, NEXON Co., Ltd. - President and Representative Director [3]

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Thank you, Ara-san, and thank you all very much for joining us today.

Before we get to the second quarter results, I would like to open by thanking the NEXON employees around the world for their incredible dedication and focus amid the media reports about the potential sale by our founder of his stake in the company. Our team stayed firmly focused on delivering great experiences for customers. Solid results in Q2 are certainly evidence of their hard work.

As you know, the management team cannot speak for any of our shareholders, but at this point, as the external noise has now settled down, NEXON is focusing on its work and is in the middle of an ambitious agenda to transform its business, which I will describe more in a minute.

First let's recap our Q2 results. NEXON delivered another great quarter, marking the highest Q2 revenues in our history and recorded strong double-digit year-over-year growth in key territories. Both the PC and mobile business grew year-over-year. Our key franchises such as Dungeon&Fighter, MapleStory and FIFA Online 4 all showed strong performance.

In June, Dungeon&Fighter celebrated its 11th anniversary in China. As we discussed last quarter, we expected Dungeon&Fighter to face a tough comparison this quarter given that Q2 last year was the best second quarter since the service began in the region.

Despite the high bar, Q2 local currency basis gross revenue came in just slightly lower than in 2018 and within our expected range.

As you will hear from Uemura-san, we expect that Q3 revenues will be down year-over-year from Q3 2018. Two important points to remember about D&F when interpreting our results and our guidance. The first is to reiterate that 2018 was an extraordinary year for growth of D&F in China. So the hurdle in 2019 is very high. Second, throughout our history, we've seen near-term ebbs and flows in the performance of our biggest online franchises even though the long-term trend remained robustly positive. Certainly, this has been the history of D&F, and we have seen the same pattern in other long-lived franchises as well, such as MapleStory over its 16 years.

MapleStory experienced year-over-year decline at several points in its history, while today it is bigger than ever and its recent performance has been extraordinary.

KartRider is another example of dramatic year-over-year revenue growth after a previous period of decline. Properly managed for the long term, this is the nature of major online franchises. While we are very dedicated to the performance of each content update, our primary focus is on the long-term health of the game. In that regard, we remain very confident. Our team at Neople and our partners at Tencent are hard at work to deliver even greater experiences for our customers.

D&F is one of the most successful games franchises of all time anywhere in the world, and we believe it's long-term potential is solid.

Now on to MapleStory, which continues to amaze. In Q2, Korea MapleStory celebrated its 16th anniversary and had another fantastic quarter growing 15% year-over-year. This was on top of 61% year-over-year growth the year before.

MapleStory M, the mobile version of MapleStory, which is in its third service year in Korea, also grew 43% year-over-year. This marks another milestone for both MapleStory and MapleStory M growing double-digit or more for their sixth consecutive quarter.

We launched the Japan service of MapleStory M in April and its performance so far has exceeded our expectations. And the global service that started in July 2018 has continued to be very steady.

Q2 was also a strong quarter for FIFA Online 4 in Korea. Combined PC and mobile revenues increased significantly year-over-year, exceeding our expectations.

Revenues were even higher than the level of the original FIFA Online 3 in Q2 2017 just prior to the service transition last year from FIFA Online 3 to FIFA Online 4. The franchise is in great shape. It was also another great quarter for NEXON's 15-year-old casual racing game, KartRider, which had a significant resurgence last quarter. The strength continued and its Q2 revenue in Korea doubled year-over-year.

Speaking of KartRider, the mobile version of KartRider in China called the KartRider Rush Plus, has showed outstanding performance. While the game started small after its launch back in 2013, it has surged in recent weeks due to a major update, which provided a deeper, more PC-like experience. We've been working with the local publisher Tiancity since the launch and Tiancity has appointed Tencent as a joint operator for the updated build in order to leverage Tencent's know-how and reach in the Chinese market.

KartRider on PC in China has over 340 million y-to-date registered users, and we're very excited about its potential in mobile, especially after seeing the success of the recent update.

We think this is another great proof point for our thesis. The mobile devices can now support much deeper PC-like experiences and this creates great opportunity for NEXON. Our development teams will be much more along this thesis in coming quarters.

More broadly, the performance of MapleStory, FIFA and KartRider in recent quarters demonstrates an idea we've stressed many times that good live game operations can make a game grow over very long time frames even though such games may fluctuate in the short term. Now while this pattern can be very difficult to discern in any given quarter, it is extremely important for long-term success for our business as it enables us to feed investments in the new generation of growth.

This leads us to the topic of the recent announcement of our acquisition of Embark Studios. Following the strategic investment in November 2018, over the last month, we brought Embark into the NEXON family.

In July, we acquired an additional 32.8% of the outstanding shares of the studio raising total ownership to 66.1%. 3 days ago, we announced that we will acquire an additional 6.9% stake as well as have the option to fully purchase the remaining stake in the studio over the next 5 years. This additional transaction is expected to be ratified at the NEXON extraordinary shareholder meeting scheduled in late September. Details of the transaction are available on our IR website.

With this combination, Embark's leadership will be a centerpiece of our game development in the West. Embark is less than a year old, but it is not a new team. They are, in fact, one of the most successful development teams in the games industry, responsible for building some of the biggest hits on console and PC. This is a major addition to NEXON's global game development capability.

Embark's team has a consistent track record of making hits in the West. NEXON has a consistent track record of making online games grow for many years on it. We think that this combination is very powerful. Over the last few months, we observed Embark making incredible progress on its games under development over a very short period of time. We also realized that the 2 companies' visions are even more closely aligned and that the creative synergies are even greater than we originally planned. So we jointly decided to combine the companies sooner rather than later in order to lean into the creative synergies we've already been experiencing.

The number of people playing fully online games in the West is exploding. Our purpose is to develop AAA level games that match westerners' taste and then grow them over many years.

In the meantime on the publishing side, we recently streamlined our western publishing organization by integrating the PC, console and mobile businesses into one unit and location. Our belief is that as platforms converge, so should our operational approach to these different platforms and therefore our teams.

Previously, NEXON America was responsible for PC and console publishing and NEXON M was responsible for mobile publishing in the West. We have now merged these functions into a single location at NEXON America. We made a similar change in our Korean organization and merged our operations teams and support mobile with the team that supports PC.

As in the West, we think that in the near future deeply multi-player game experiences, where NEXON focuses, will not differ much between platforms whether the platform is mobile, PC, counsel or cloud-based. So operationally, we need to combine our teams.

I would like to close briefly by talking about where the industry and NEXON are headed. The coming 1 to 3 years will be ones of massive change for the business of online games. The advance of Moore's Law has put staggering, computing and networking power into the pockets of billions of people around the world. Each of these devices is a portal into a virtual world. This means that the market for deeply immersive games the kinds of games that NEXON specializes in is exploding and it's several orders of magnitude bigger than it was even a couple of years ago, when immersive online games required a PC.

Building and maintaining these games is difficult, but the reward for doing it well, rewards for doing it well have gotten substantially bigger than even a few years ago. In the meantime, new technologies like AI and cloud computing enable whole new game experiences that couldn't exist before. We think these developments spell great news for NEXON so we are working to seize the opportunity.

We are thrilled about our acquisition of Embark, not just for the games they are building and the technology they have developed, but for the talent they bring. We have been retooling our operations to reflect the convergence of mobile, PC and console.

Our development teams are leveraging our substantial IP bench and we'll be making more announcements soon about games based on NEXON's key intellectual property. And we are sharpening our focus and our resources around key franchises that are likely to deliver the highest returns to our shareholders.

We are leaning in heavily to this future, going to where the market is going and leveraging both our substantial capabilities in online games as well as new technology to build experiences that have not existed before.

We look forward to making more announcements about future actions based off these themes in coming quarters.

And with that, I will turn the call over to Uemura-san to discuss the Q2 results and the Q3 outlook.

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [4]

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Now let's move on to the Q2 results. For additional details, please see the Q2 2019 investor presentation available on our IR website.

Q2 revenues were JPY 53.9 billion, up 13% year-over-year on an as-reported basis and up 20% year-over-year on a constant currency basis in the range of our outlook. Revenues from China were below our outlook due to FX headwinds following the appreciation of the Japanese yen during the second quarter. Revenues from Europe and others were also below our outlook while in Japan revenues were in the range of our outlook and revenues from Korea and North America business exceeded our expectation. Net group revenues in Q2 were in the range of our outlook.

Applying our 2Q outlook basis FX rates, revenues came in at the high end of our outlook. By platform, both PC and mobile revenues were in the range of our outlook.

Our operating income was JPY 13 billion. We recorded a total of JPY 3.6 billion in payment loss primarily on right-of-use assets related to the adoption of IFRS 16 basis, which we baked into our Q2 outlook as well as on prepaid royalties.

Meanwhile, costs were lower than planned benefiting from the appreciation of the Japanese yen against the Korean won during the quarter. As a result of operating income was in the range of our outlook.

Net income was JPY 19.1 billion, which exceeded our outlook due to a JPY 5.9 billion FX gain mainly on our U.S. dollar-denominated cash deposits related to the depreciation of the Korean won against the U.S. dollar during Q2.

As I explained earlier, revenues from our China business were below our outlook due to the appreciation of the Japanese yen against the Chinese yuan during Q2. Applying our Q2 outlook basis FX based revenues were in the range of our outlook. China Dungeon&Fighter local currency basis revenues were in the range of our outlook.

As-reported basis, revenues decreased year-over-year due to a decrease in Dungeon&Fighter revenue as well as an unfavorable FX impact. However, constant currency revenues were just modestly lower even compared to the high base set in Q2 2018.

For Dungeon&Fighter in Q2, we introduced a Labor Day update from April 23 until June 6, which was associated with Avatar package sales. We also introduced the 11th anniversary update on June 18, which included a content update and in-game events.

Revenues and ARPPU decreased quarter-over-quarter due to typical seasonality, while MAUs and paying users increased sequentially. MAUs increased year-over-year. ARPPU also increased year-over-year, driven by higher sales from the Labor Day package sales compared to a year ago. Meanwhile, paying users decreased year-over-year, mainly due to the high comps with last year's Q2 when the number of paying users was high driven by the strength in small item sales for seasonal events.

Paying users decreased while ARPPU increased resulting in Dungeon&Fighter's local currency basis revenue decreasing slightly year-over-year.

Revenues from Korea in Q2 exceeded our expectations, primarily driven by stronger-than-expected performances of FIFA Online 4 and FIFA Online 4M. The strength was driven by the successful introduction of players with new ratings, package sales and promotions.

As a result, both PC and mobile revenues in Korea exceeded our outlook. FIFA Online 4s PC and mobile combined revenues increased significantly compared to last Q2 when it received an adverse impact from the service transition and they were even higher than FIFA Online 3 revenues in Q2 2017 before the service transition.

By platform, PC revenues increased year-over-year driven by increases in FIFA Online 4, MapleStory and KartRider. Mobile revenues increased year-over-year. While revenues from OVERHIT and AxE decreased year-over-year, we benefited from the increase in FIFA Online 4M and contributions from TRAHA, which began service on April 18 and link launched in Q1.

Revenues for both PC and mobile grew year-over-year resulting in a year-over-year increase in our Korea business for Q2.

Revenues from our Japan business in Q2 were in the range of our outlook. Revenues increased year-over-year, driven by contributions from MapleStory M, which launched on April 10 and MapleStory 2, which launched on June 5 as well as Dynasty Warriors: Unleashed, FAITH and DarkAvenger Cross all of which began service in/or after the second half of 2018. And these were partially offset by decreases in OVERHIT and mobile browser games.

Revenues from North America in Q2 exceeded our outlook, primarily driven by stronger-than-expected contributions from OVERHIT which launched on May 30.

While choices decreased year-over-year, revenues were up driven by contributions from OVERHIT as well as Darkness Rises, MapleStory M and AxE all of which began service in/or after Q2 2018.

Revenues from Europe and others in Q2 were below our outlook due to lower-than-expected contribution from OVERHIT.

Revenues increased year-over-year primarily driven by contributions from MapleStory M, Taiwan service of Moonlight Blade and AxE which all began service in/or after Q2 2018 as well as OVERHIT, which began service on May 30 as in the case of North America.

Now turning to our Q3 2019 outlook.

In Q3 2019, we expect that Chinese yuan, Korean won and U.S. dollar, major currencies in our business, to depreciate against the Japanese yen as in the case of Q2 2019 and negatively impact the as-reported basis performances.

For Q2 2019, we expect revenues in the range of JPY 51 billion to JPY 56 billion, representing a 26% to 19% decrease year-over-year on an as-reported basis and a 21% to 14% decrease year-over-year on a constant currency basis. We expect our operating income to be in the range of JPY 20.6 billion to JPY 24.4 billion, representing a 13% decrease to 3% increase year-over-year on an as-reported basis and an 8% decrease to 9% increase year-over-year on a constant currency basis. I will discuss details of this shortly.

We expect the net income to be in the range of JPY 21.8 billion to JPY 25 billion, representing a 2% decrease to 12% increase year-over-year on an as-reported basis and a 3% to 18% increase year-over-year on a constant currency basis.

In China, while we expect the benefit from KartRider Rush Plus, which had been performing well since the introduction of a major update on July 2, we expect this to be more than offset by the decrease in revenue for our key PC online game, Dungeon&Fighter.

Overall, we expect revenues from our China business to be in the range of JPY 20.9 billion to JPY 23.3 billion, representing a 33% to 25% decrease year-over-year, on an as-reported basis and a 29% to 21% decrease year-over-year on a constant currency basis.

Since the introduction of the major update, KartRider Rush Plus has been jointly operated by Tiancity as publisher in China and Tencent. While this is our in-house title, its contribution to our financials is limited compared with that of a typical PC online game in China as it is a jointly operated title as well as due to the payment of mobile platform fees.

As for Dungeon&Fighter, we introduced December update on July 4. As in every year, we are also scheduled to introduce the National Day update in September.

Benefiting from the positive impact of the successful 10th anniversary update in June, Q3 2018 was off to a strong start, which also led to strong sale of the National Day package sale. Meanwhile, we were unable to obtain the benefit we had hoped for in the 11th anniversary in June this year, which was an important update in terms of activated user numbers. In addition, we could not achieve the result we had expected from the summer update, which began in July. As a result, MAUs, paying users and ARPPU for July this year were all lower than those of July last year.

Reflecting these factors, we expect both paying users and ARPPU to decrease year-over-year as well as sales for the National Day update to be lower than those of Q3 of last year. As a result, we expect Dungeon&Fighter's revenue to decrease year-over-year.

We plan to take some measures to improve the user metrics by leveraging our know-how of online game operations.

KPIs, including the revenue of an online game, fluctuate depending on the type and nature of content updates and benefits those playing in accordance with this long-term plan designed to last for years. While we expect Q3 revenues to decrease year-over-year, we will continue to operate the game stably over the long term, our core online game operation policy.

In Korea, we expect an increase in FIFA Online 4's revenue versus last 3 when it was negatively impacted by the service transition.

On the other hand, we expect revenue from MapleStory to decrease due to the extraordinary high comps in last Q3 when it was the record high quarterly revenue with the year-over-year growth of 129%, driven by the largest content update since the service began in the region. As a result, we expect PC revenues in Korea to decrease year-over-year.

We expect our mobile revenues in Korea to increase year-over-year, while we expect KAISER, OVERHIT and AxE to decrease year-over-year, we expect FIFA Online 4M to increase year-over-year as well as benefits from TRAHA and Lyn.

Overall, we expect the decrease in PC revenues to be larger than the increase in mobile revenues. As a result, we expect revenues from our Korea business to be in the range of JPY 20.3 billion to JPY 21.3 billion, representing a 12% to 8% decrease year-over-year on an as-reported basis and a 5% to 1% decrease year-over-year on a constant currency basis.

In Japan, we expect revenues to be in the range of JPY 3.1 billion to JPY 3.4 billion, representing a 13% to 4% decrease year-over-year on an as-reported basis and a 10% to 2% decrease year-over-year on a constant currency basis. While we expect to benefit from MapleStory M, MapleStory 2 and FAITH as well as ArkResona which is scheduled to launch on August 14, we expect these to be more than offset by decreases in OVERHIT, Dynasty Warriors: Unleashed and mobile browser games.

In North America, we expect Choices as well as MapleStory M and Darkness Rises, both of which just started their services last Q3, to decrease year-over-year. As a result, we expect revenues in North America to be in the range of JPY 3.3 billion to JPY 2.6 billion, representing a 32% to 26% decrease year-over-year and an as-reported basis and a 29% to 24% decrease year-over-year on a constant currency basis.

In Europe and other regions, we expect revenues to be in the range of JPY 4.0 billion to JPY 4.4 billion, representing a 39% to 33% decrease year-over-year on an as-reported basis and a 36% to 29% decrease year-over-year on a constant currency basis.

While we expect to benefit from OVERHIT, Moonlight Blade and AxE, we expect these to be more than offset by the revenue decreases in Choices as well as MapleStory M and Darkness Rises, both of which just started their services last Q3 as in the case of North America.

In Q3 2019, we expect the operating income to be in the range of JPY 20.6 billion to JPY 24.4 billion, representing a year-over-year decrease of 13% to increase of 3%.

A negative factor compared with Q3 2018 regarding the operating income is the revenue decrease, including the high-margin China business. Favorable factors compared with Q3 2018 regarding the operating income are: first, decreased marketing costs compared with Q3 2018, while we had promotions for new titles including global services of MapleStory M and Darkness Rises.

Second, decreased variable cost. We expect increased royalty cost in relation to the increased contribution from publishing titles such as FIFA Online 4 and TRAHA, while we expect decreased PF fees due to the decrease in our mobile revenues.

Third, increased other income. On July 1, we acquired additional shares of Embark Studios and turned it into a consolidated subsidiary. The amount of gain on the step acquisition under other income is currently under examination. However, we have reflected an expected gain of JPY 4.7 billion in our Q3 outlook.

Lastly, a decreased impairment loss of JPY 7.3 billion recorded in Q3 2018, which will not be repeated in 2019.

The high end of the range reflects the fact that we expect the impact of positive drivers to be larger than that of negative drivers, resulting in a year-over-year operating income increase.

Next, I would like to explain the impact of the consolidation of Embark Studios on our consolidated financial statements. We expect additional cost of approximately JPY 0.5 billion, including HR costs to our quarterly P&L as well as a JPY 4.7 billion gain on the step acquisition, as I explained earlier.

We are currently reviewing the amount of goodwill and intangible assets to be booked and are scheduled to disclose these in/or after the Q3 earnings. Therefore, we have not included an additional amortization cost related to these in our Q3 guidance. The impact on our consolidated financial statements in relation to the consolidation of Embark Studios is tentative and subject to change.

Lastly, I would like to give you an update on the shareholder return. Today, the Board of Directors approved the policy to initiate a new share repurchase program with the maximum amount of JPY 30 billion in a 6-month period beginning on August 9, 2019. Details of each specific share repurchase will be announced separately upon Board resolution.

Please note that this is an announcement on new policy, thus as of today, nothing specific has been decided as to share repurchase. We plan to continue to maintain financial flexibility to be able to invest in future growth. We will also continue to place importance on the shareholder return, including share buybacks in addition to creating shareholder value by growing our business.

Now we'd be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) [Interpreted] So this is a question from Mr. Keiichi Yoneshima of Crédit Suisse Securities.

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Keiichi Yoneshima, Crédit Suisse AG, Research Division - Analyst [2]

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[Interpreted] I have 3 questions altogether. And the first question is on the acquisition/making or converting Embark Studios into your subsidiary. I understand that you are not going to conduct this all at once but rather this will be a step acquisition. And I want to know why?

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [3]

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[Interpreted] Thank you very much for your question. It is indeed true that we are going to acquire Embark Studios in a step manner. And basically this is the equity-based acquisition and there are 2 reasons why we are doing the step acquisitions. Firstly, we want to definitively confirm the milestone and secondly we want the members of Embark Studios to get good incentives.

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Owen Mahoney, NEXON Co., Ltd. - President and Representative Director [4]

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And this is Owen, just to add to that a little bit. The basic idea of this is, as you've noted, there is a front end, but then there is a back end is the way to think about it. And the back end is really about pay-for-performance. If they deliver operating income to us then they get paid more. So that's the idea. We wanted to make sure that we had aligned its incentives.

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Keiichi Yoneshima, Crédit Suisse AG, Research Division - Analyst [5]

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[Interpreted] Thank you very much. Then let's move on to the second question. My second question is on the outlook of China and Korea. I do understand that regarding China, you have given the explanation as to why you are coming up with the forecast as you did and I do understand to some extent and I believe that it has something to do with the seasonality and you also mentioned that the revenue share portion of the title of KartRider Rush is not that big. But given that backdrop I still believe that the forecast that you are giving from China is quite weak.

And also regarding Korea, looking at the trend of Q2 to Q3, I know that year-on-year Korea is trending well, but still given the seasonality, I still believe that Q2 to Q3 comparison-wise your outlook for Korea Q3 is very weak. So I want to know even with the seasonality factor, why are you giving such a forecast for those China and Korea?

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [6]

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[Interpreted] I understand that your question is comprised of 2 components, one being the forecast for China and another one being the outlook for Korea. So let me start by talking about the China forecast. As you know, KartRider is trending very well in China and that momentum is still going. But as I have mentioned already, there are 2 points to note about KartRider. Firstly, KartRider is the mobile franchise and also we have joint operators, namely Tiancity and Tencent. So we have several stakeholders in both, which will lead us to get less revenue share.

And as you look at title ranking, it is indeed true that KartRider is ranked in the top, whereas Dungeon&Fighter's ranking is going down. But the relationship between the 2 might not be rightly understood because even though KartRider is ranking high, the contribution is still low. And also regarding Dungeon&Fighter for Q3, we are forecasting some downward trend. And we are incorporating such view in Q3 because when you look at Q3 of 2018, we did well and actually for the full year of 2018, we did very well. And if you can kindly look at Slide or Page 16, which shows the historical China revenues, you can see that the trend is very robust and we are actually delineating a favorable growth. And especially if you compare the forecast of 2019 in Q3 with that of 2018 Q3, you see there is some decline. But please do note that if you look at 2017 and 2018, we have -- grew very dramatically. And I will let the interpreter interpret at this point of time and give you some color to my explanation after the interpretation.

In our Q3 forecast for China, including that of Dungeon&Fighter, we are basing on the KPI trends that we are seeing right now. ARPPU is going down and in the past, we have seen the downtrend paying user, but at the same time ARPPU is going down as well. And so given that situation of KPI now, we have forecasted the figures that will go down vis-à-vis the track record of Q3 2018.

Now why are we seeing downward trend in some of the KPIs. Let me explain to you that. Firstly, in June, every year, we have the anniversary update. And unfortunately, the June anniversary update did not resonate with the users. Usually, by conducting anniversary update, we try to activate the user traffic. So on that context, anniversary update is a very important event. And also the revenue gets strong usually in Q1 and Q3 and anniversary update contributes to the increase of traffic. But unfortunately regarding this past anniversary update, the content that did not resonate very well with the users. And with that behind, we went on with our summer update. And summer Update is comprised of package and package contains Avatars and once again the Avatar that we have included in the summer package did not resonate well with the users once again. So because of these 2 reasons for us temporarily, we are seeing some downward trend in KPI. But, of course, we are going to make some improvements to this situation regarding KPI using the upcoming several quarters. Specifically speaking, we are planning content updates and we are putting our effort to execute on the improvement based on the plan we have.

And PC online game actually goes through up and down depending on the content update and we have been talking about this to you already. So we do have abundant experience regarding this up and down related to a PC online game. So what we're seeing right now happening with Dungeon&Fighter is not a surprise at all and this is not an unusual phenomenon. And so we will leverage on the PC online operation know-how that we have and Dungeon&Fighter is a very dear title to us. So we will try to inject our know-how to operate this title for long term.

Let's move on to Korea. And I would like to talk in 2 categories, one being PC and another one being mobile. Firstly, PC. In FY '18, MapleStory did extremely well. And as you know,, MapleStory was launched 15 years ago, and last year's revenue was record high, and it is quite difficult to continue that year-on-end. Last year-end, it was 2016, that we had Black Mage in the content update and because of the resonance of Black Mage amongst the users, we did very well and that is the reason why the past fiscal year’s figures are very good. But given that backdrop, PC for Korea in Q3, we believe will go down because of the comparison with previous fiscal years.

Now talking about FIFA. In Q3, FIFA will grow to some extent, but then Q3 of 2018 was very high. So the comp is relatively high, I should say. And so in terms of PC, the title of that is driving the figure to be down is MapleStory more or less.

Now let's talk about mobile. The simple story is that we do not have any new title for Q3, that's the forecast that we have given to you for Q3. So it all boils down to the timing issue of when we are going to launch the new titles. Now, my answer was very long, but this will be my end of the narrative.

I would like to correct what I have mentioned in my answer regarding Black Mage as the content update. I said that it was the content update 2 years ago, but that is not right. It was the content update for 2018 Q3. And also in terms of history of MapleStory in Korea, it was launched 16 years ago. So this year is the 16th year.

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Keiichi Yoneshima, Crédit Suisse AG, Research Division - Analyst [7]

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[Interpreted] And my final question is about your shareholder return. You mentioned earlier that there is a share repurchase program and you think -- you were saying that the amount is going to be JPY 30 billion, but I do also remember you saying that it could be subject to some specific changes. But then my question is basically JPY 30 billion, this amount is not going to change and I'm trying to make sure that you don't at this moment foresee any reason that you may want to change this JPY 30 billion repurchase -- share repurchase?

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [8]

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[Interpreted] About our shareholder policy, again, it's about the buybacks. And basically, yes, so we are trying to put forth -- put on a go this maximum JPY 30 billion amount of buyback. And recently, I mentioned a bit of a disclaimer type comment because we wanted to make sure that we be able to flexibly approach the situation if there will be any, for example, legal reasons or any reasons behind any regulatory changes then we would not be able to go forward with this plan.

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Masaru Sugiyama, Goldman Sachs Group Inc., Research Division - Associate [9]

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[Interpreted] This is Sugiyama from Goldman Sachs. There's one thing I would like to confirm and it goes back to what Mr. Uemura was mentioning earlier about the contribution coming from KartRider franchise. And you mentioned the contribution is going to be quite slim due to royalty, the royalty rate. Now can I say that this probably would be same scenario we're going to be hearing in the future launch of Dungeon&Fighter Mobile? Or is the reason behind this slim contribution coming from KartRider series simply because you have this joint operator and that happens to be a great factor behind?

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [10]

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[Interpreted] So I think it really has to do with the specific reasons or the situation behind our KartRider franchise. And it is going to be different to the situation we will be seeing with Dungeon&Fighter Mobile. Again, the reason why the share ratio with KartRider will be low for us is because first of all, we have joint operator and also we have localized support from Tiancity. So again I would like to emphasize, again, that the situation is going to be different with Dungeon&Fighter Mobile.

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Operator [11]

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Our next question comes from Seyon Park, Morgan Stanley.

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Seyon Park, Morgan Stanley, Research Division - Equity Analyst [12]

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I have 2 questions. First, would there be any update to Dungeon&Fighter Mobile that you can provide to us? I recall at the beginning of the year, it sounded as if it could come out quite early -- or I wouldn't say early, but it is when it's ready, but it was presented to investors. Is it -- can we still expect the game to come out by year-end? This is my first question. Second question is just as a follow-up on the buyback, is there a timeline as to when this would be presented to the Board? And if so, when it would be executed?

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [13]

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[interpreted] So first of all to answer your first question about the timing of the launch of Dungeon&Fighter Mobile, it really depends on how we'd be able to do our CBT. I think this is something that we did discuss. And so in other words, at this moment, we have not really clarified, which point of time would we be conducting the CBT. We currently are under preparation. So first of all, we need to put forth the CBT. Once we have the results of the test, then we'd be able to analyze this in determining when would be the appropriate time to launch.

And your second question about the buybacks, the timing of the buybacks. So what we mentioned was, we are looking into the 6 months' time span. We would like to flexible looking at all the circumstances and the maximum amount is to be JPY 30 billion. And so as we go down the road, we'd like to look at the appropriate timing for obtaining -- putting this on the resolution, and once we obtained the resolution approval, we would be able to tell you as we try to execute the buyback.

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Junko Yamamura, Nomura Securities Co. Ltd., Research Division - Research Analyst [14]

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[Interpreted] So this is Junko Yamamura of Nomura Securities Company asking you a question. I have 3 questions. First one, I might not have done my homework, but I want to know more about the operational scheme of KartRider. You mentioned that KartRider has a three-party joint operating scheme and I want to know why? And I want to know whether the same structure is taking for the operation of PC? And if the answer to my second part of the question is no, then I want to know why just for mobile you decided to have 3-partied operation. Does that mean that NEXON and Tencent were not suffice to conduct the operation of KartRider mobile?

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [15]

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[Interpreted] About KartRider in China, regarding PC to begin with, it has been operated by Tiancity and mobile is not a new title, rather it was already launched in 2013 and it was being operated with Tiancity. And this time around, we made a major update. And in China, Tencent has much know-how and has broad reachability to the users. Therefore Tiancity appointed Tencent to be one of the operators as well. And so we had the major update and we wanted to leverage on the know-how and power of Tencent and that's why we came up with the tri-party scheme, and our intention and objective was met and that is demonstrated by how well this title is being received in China.

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Junko Yamamura, Nomura Securities Co. Ltd., Research Division - Research Analyst [16]

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[Interpreted] I would like to move onto the second question, which is on the plan of Dungeon&Fighter here in China. You mentioned about the fact that the June anniversary update and summer update were not well received by the users. And I want to know the reasons why? Did you change any taste, so to speak, that you incorporate in the design of the anniversary as the summer package? Or if you haven't changed on your part, do you think that the preference of the users is changing? Regarding this title, I understand that in the past, users with low ARPPU started playing the game and more people started to participate in the play. Therefore, it contributed to the eventual growth of the ARPPU, and also the growth of the revenue. And do you think that the attributes of the users are changing? Because when you look at the past Lunar New Year's update, it seems that players are not being paying users as much as before. So I want to know where that user attribute of the profile has changed. And not only the Lunar New Year, but it seems that the general trend not trying to be a paying user is seen in the national update as well. So when you look back at how you trended in June and July this year, you already have some analysis of what had evolved back then. So can you share with us what is the result of the analysis that you have?

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [17]

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[Interpreted] I do not think that the attributes of users of Dungeon&Fighter have changed. We have been operating this title for more than 10 years. Therefore, some of the users are becoming core users and that kind of trend is continuing. And I believe that the participants of this game are more or less are core users. So once again the attribute hasn't changed. And regarding PC online games, as I have already mentioned, content update is the key. And regarding this franchise, it is indeed true that for the past several quarters, all the content update that we have conducted were in line with what the users were expecting. So we did very well. But unfortunately, this time around, it was otherwise. And we will try to make improvement so that the content will resonate. But regarding the anniversary content, unfortunately it was not well received by the users and also as already explained about the Summer Update, the Avatar package design was not in line with what was being expected by the users. In the past 10 years we did well, and especially 10th anniversary update that we did last year was extremely well received. So perhaps for this year's anniversary update, maybe the users were trying to expect something that is on par with the 10th anniversary update. So the bar was quite high. We are analyzing our KPIs right now so that in the next several quarters, we want to stabilize the operation.

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Junko Yamamura, Nomura Securities Co. Ltd., Research Division - Research Analyst [18]

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[Interpreted] My last question is on impairment laws. You have factored in JPY 1.4 billion and in totality, you have mentioned JPY 3.6 billion? So there is a difference of JPY 2 billion between JPY 3.6 billion and JPY 1.4 billion? And I want to know whether there is any potential for this increase in impairment loss to be reported? Looking at the figure that you have posted for Q3 2018, the number that you have posted today regarding impairment loss is quite high. So I would like you to explain about why this is the case to the extent that you can share with us today?

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [19]

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[Interpreted] For Q2, we have recorded impairment loss of JPY 3.6 billion and as we have given you the guidance at the time of Q1, the major reason for this impairment of loss posting is 50% due to the changes in accounting principle, i.e. IFRS. So this is quite unique case. So excluding this unique factor, we can say that regarding the JPY 2 billion impairment loss that we have indicated, this is all related to the investment that we make in the games. As you know, game industry is very difficult to maneuver through, and we want to challenge different waters so that we will be able to enjoy future growth. So given such a nature of the business that we are in, we have to live with the fact that there will be a time in which we have to incur some amount of impairment loss. But having said that, we will put our full-fledged effort to manage the situation, which means that we will try to foresee what will be the valuation of the asset we have and also we will try to manage the milestone that we define for ourselves, and we will put our very best effort to do so. But once again, I think given the nature of the business, we have to live with the fact that there might be impairment loss incurred every now and then. But it's not that we will incur impairment loss every quarter, it goes up and down, sometimes we might have impairment loss of about JPY 2 billion and other time it might be about JPY 500 million.

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Operator [20]

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Next question comes from [Robert Zekoski] [PKL Asset Management].

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Unidentified Analyst, [21]

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Can you please elaborate on whether you assume deterioration of the KPIs for the mobile version of KartRider in the second part of the quarter versus July in your guidance? And maybe also could you kind of quantify in more detail, how much of the Mobile KartRider is in the quarter guidance?

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [22]

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[Interpreted] So at the moment KartRider Mobile is enjoying a very good momentum and we do believe it will keep on contributing to our Q3. But then at the same time, it's not that we are scheduling another major update, we just did one in July and so we're going to keep track for this upcoming 3 months. Now the only thing that I wanted to mention was the contribution to the revenue would be quite limited. But then in terms of KPI, we find no issue. And China KartRider at the moment is enjoying very good momentum and we think the trend will continue on in Q3.

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Operator [23]

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Robert, do you have any more questions?

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Unidentified Analyst, [24]

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If you could sort of quantify how much of the mobile version of KartRider was in the -- is included in the guidance for the first quarter?

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Shiro Uemura, NEXON Co., Ltd. - CFO, Administartion General Manager and Representative Director [25]

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[Interpreted] So again KartRider Mobile, we expect that it will keep on offering a certain level of contribution even in the Q3. The thing is we don't disclose the specific performance we expect per title. And so we're trying to use the language that would give you more or less a hint or the nuance that we are looking as we look ahead. So it's not that we'd be able to specifically give you a certain number in this sense. So again, I would like to emphasize that, yes, we expect it will keep on showing a level, some certain level of contribution, but then it's not like we're expecting a major, major performance from this title alone.

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Operator [26]

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This concludes our question-and-answer session. Ms. Ara, at this time, I'd like to turn the conference back over to you for any additional or closing remarks.

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Maiko Ara, NEXON Co., Ltd. - Head of IR [27]

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Thank you. If there are no further questions, I would like to take this opportunity to thank you for your participation in this call. Please feel free to contact the NEXON IR team at investors@nexon.co.jp should you have any further questions. We appreciate your interest in NEXON and look forward to meeting you, whether it's here in Tokyo or in your corner of the world.

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Operator [28]

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Thank you. That concludes today's conference. Thank you for your participation. You may now disconnect.

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