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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone, and welcome to Nexon’s 2023 First Quarter Earnings Conference Call. Today’s call is being recorded.
At this time, I would like to turn the call over to Takanori Kawai, Team Leader of Investor Relations. Please go ahead, sir.
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.
Thank you, Kawai-san, and good afternoon, everyone. On today’s call we will review Nexon’s performance in the first quarter and our outlook for the second quarter. We’ll provide an update on the development of new Virtual Worlds and how the combination of existing franchises and multiple new games in development offer a unique asymmetric investment opportunity for Nexon shareholders. And we’ll conclude by looking a little farther out into the future, to how we are building a business to grow not just in the next several quarters, but over many years.
To start, Q1 was another record-breaking quarter for Nexon, in revenue and operating income. Q1 revenue was up 36% and operating profit was up 46% year-over-year. Net income bolstered by a foreign exchange gain was up 31% year-over-year, exceeding our outlook.
Results were driven by FIFA ONLINE 4, which maintained momentum even after last year’s World Cup, and Dungeon&Fighter in China, which grew both players and revenue year-over-year. We also saw solid results globally from Blue Archive, the mobile role playing game we launched in 2021.
By platform, PC revenues were within our outlook, while mobile revenues were higher than expected. And on a regional basis, revenues from China and Japan exceeded the expected range, while revenues from Korea, North America, Europe, and the Rest of World were within our outlook.
In Korea, MapleStory came in lower than our expectations, due in part to player perception of an imbalance in difficulty levels between the game servers. However, our live operations team was aggressive in addressing our players’ concerns, and we expect that a significant update in Q2 tied to the 20th anniversary celebration of our MapleStory franchise, along with other updates will drive further growth.
The Q1 start of KartRider: Drift was slower than planned due to lower-than-expected retention and lower-than-expected pay rates. Feedback from players identified 2 key areas for improvement: first, some users who are familiar with the franchise expected even more content than was provided at launch, comparing the volume with the original KartRider, which has been in service for close to 2 decades; second, some players felt the user interface on different platforms, especially on mobile devices, was either confusing or not optimized to their play patterns.
Our development and Live Operations teams are aggressively addressing these issues. We are of course remedying the volume of content, with a strong, consistent cadence of updates planned and in development for the game. Recently, we’ve seen improvements in retention rates and we believe that consistent additions of new content will improve engagement and monetization on all platforms. Given its long history and massive player base, we are very committed to the KartRider franchise, and know from experience that if we focus relentlessly on incorporating feedback from customers, the community will grow over time and ultimately become very robust.
In March of Q1, we also launched Wars of Prasia, an MMORPG for PC and mobile in Korea. The game is off to a great start, quickly attaining a Top-5 ranking on both iOS and Android. Our objective is to continue to grow the game content and build a substantial community of players in the coming months and years.
Net, our record-breaking first quarter reflects the robustness of Nexon’s business model and our careful management of our portfolio of large and growing Virtual Worlds. Our foundation of established franchises provides a base of revenue. Not all perform as expected at all times but, typically, the collective performance of multiple Virtual Worlds delivers to shareholders consistency over time. When we get feedback from our large community of players, we move quickly to adapt and adjust, knowing that well-managed Virtual Worlds can achieve strikingly robust growth over the long-term.
We have designed our business to create asymmetric upside opportunity. That strategy is based on steady growth from a portfolio of global titles, augmented by the release of new games, each of which offers the potential for significant new revenue streams from large communities of deeply engaged players.
Okay. Having reviewed for you our base of live franchises that offer stability while limiting downside risk, I’d now like to talk about our upcoming slate of Virtual Worlds, that constitute the significant potential upside part of the business equation.
We’ll start with THE FINALS, the first game from our Embark Studios in Stockholm, Sweden. Following the successful Alpha in October of last year, in March this year, we conducted a much larger beta test that generated enormous positive buzz, and also valuable feedback for improvement on the road to launch. On a very small marketing spend, Embark registered more than 2 million players to participate in the test. Feedback from players, critics and influencers praised the game’s visual appeal, cutting-edge destruction physics, and the intuitive ease of interacting with the game environment. THE FINALS is currently tracking to begin early access later this year.
Meantime, Embark’s second product, ARC Raiders, a free-to-play, third-person action shooter for PC and console continues to make very gratifying progress. Although the 2 products are very different, we are as excited about ARC Raiders as we are about THE FINALS. Like THE FINALS, ARC Raiders significantly expands its genre, with innovative technology that enables highly unique gameplay. We will be revealing more about this product to fans later in the Summer.
Next is VEILED EXPERTS, a third-person tactical shooter developed in our studios in Korea. It completed a beta test in April and showed good retention. We plan to begin early access to the product on May 19. Other major new titles in development include Warhaven, The First Descendant, and MABINOGI MOBILE. And we are currently preparing the launch of MapleStory M and Blue Archive in China.
Nexon currently has its strongest collection of new titles in development in our history. A hit by any one of these could deliver double-digit revenue growth. And if 2 or more become hits, it will fundamentally change our profit profile.
Nonetheless, it is important to remember that our revenue planning is not focused on product launch schedules, since the success of a Virtual World is determined over years and decades, not the first few months or quarters. That means our operating focus early on is to deliver a fun and unique experience, and build a robust community of players. Doing so enables us to build the next generation of Forever Franchises to augment and expand on our existing base of Virtual Worlds.
We are able to do this since the nature of our Virtual Worlds model does not require us to replace old revenue with new revenue. We drive growth with a carefully-constructed balance of growing revenue from our existing portfolio, boosted by additional streams from new Virtual Worlds. This approach is by design, and it is relatively unique in the games business.
Lastly, I want to highlight a recent announcement that points to how we see our largest franchises evolving in the coming years. In March, at the annual Game Developers Conference in San Francisco, we introduced MapleStory Universe, our new initiative for MapleStory that leverages blockchain technology. We heard a lot of positive feedback.
We think that positive reaction is a result of us taking a very different approach from other blockchain-related announcements. Many companies have attempted and failed to build blockchain-based games that are actually fun for the gamer, or they simply viewed blockchain as an opportunity to monetize more. And as a result, players have become understandably suspicious of new blockchain announcements.
Our view is that the right way to approach any new technology is to ask how does this new technology significantly improve the user experience, or create a new experience that was not possible before? If it doesn’t make the user experience better, it is not going to make our business better.
And that approach led us to consider the many ways a gamer interacts with a live Virtual World. As one example, a player of a virtual world spends time not just in the game world, but often in many activities around the game as well. These include making videos, making and watching live game streams, adding to forums and wikis, creating fan fiction, and creating fan art. All of these activities contribute to a fun and positive customer experience and strengthen the community of fans.
Our team calls this the “out-game,” and it can be highly meaningful activity that expands the reach and enjoyment of the game itself. Developments in blockchain can enable us to bring those external experiences into the world of MapleStory, giving credit to players who contribute and participate, and to extend that credit across different Virtual Worlds. This has the potential to significantly deepen the ways players participate in a Virtual World. MapleStory Universe is the first step in what will be multiple different ways we expand the MapleStory franchise.
A second major project currently in beta, MapleStory Worlds, enables creators to build their own games, leveraging a powerful and easy-to-use development environment available on PC or mobile, and any of the many thousands of game art assets built for MapleStory over the last 2 decades. Today, game makers of all ages are making and sharing highly creative new experiences that are surprising even the MapleStory game developers.
These two initiatives are part of our larger objective of deepening the MapleStory experience, by enabling players and creators to build out the world themselves. MapleStory is already one of the biggest game franchises in the world. As we celebrate the 20th Anniversary of the franchise, we are busy creating new and highly innovative experiences for the next 20 years.
With that, I’ll turn the call over to Uemura-san to walk you through our Q1 performance and Q2 outlook.
Thank you, Owen. Next, I’ll review our Q1 results. For additional details, please see the Q1 2023 Investor Presentation available on our IR website. In Q1, we achieved record breaking quarterly revenue. Group revenues were ¥124.1 billion, up 36% year-over-year on an as reported basis and up 28% year-over-year on a constant currency basis. Our performance was primarily driven by the growth of FIFA ONLINE 4 and FIFA MOBILE in Korea, Dungeon&Fighter in China and Blue Archive.
Overall, our top-line performance was within the range of our outlook. FIFA ONLINE 4 and FIFA MOBILE in Korea, Blue Archive, and Dungeon&Fighter in China all exceeded our expectations, while revenues from MapleStory in Korea, Dungeon&Fighter Mobile, HIT2 and KartRider: Drift were lower than planned. By region, revenues from China and Japan exceeded our outlook, while revenues from Korea, North America and Europe, and the Rest of World were within the expected range.
Looking at the total company performance by platforms, PC revenues were within the range of our outlook and mobile revenues were slightly higher than expected. Operating income was up 46% year-over-year and exceeded our outlook at ¥56.3 billion as HR costs were lower than expected due to lower-than-planned new recruitment and as we controlled marketing expenses on KartRider: Drift. Net income was up 31% year-over-year at ¥52.8 billion, which exceeded our outlook. This was mainly driven by higher-than-expected finance income including an FX gain of ¥5.6 billion.
Let’s move on to results by region. Revenues from our Korea business were ¥64.9 billion, representing record-breaking quarterly revenues in Korea. This performance was within the range of our outlook. On a year-on-year basis, revenues increased by 36% on an as reported basis and by 26% on a constant currency basis. FIFA ONLINE 4’s PC and mobile combined revenues exceeded our outlook driven by successful events and sales promotions.
We were able to maintain the high base of active users who entered the game during the World Cup at the end of last year. MAUs and paying users rather significantly increased year-on-year. As a result, its revenues grew significantly and marked record-breaking quarterly revenues.
MapleStory’s revenue was below our outlook. In February, the number of active users decreased due to user dissatisfaction with the imbalance in the difficulty of character development across servers.
We took user feedback seriously and have taken immediate steps to eliminate imbalances between servers, and to improve the player experience. We also started the large-scale 20th Anniversary update and provided rewards from April 20th and have seen improvements in user sentiment and user numbers. We will continue to thoroughly communicate with our users to build a good momentum from the 20th Anniversary onwards.
KartRider: Drift’s revenue was below our outlook following the launch of Season 1, the official service, on March 9th as the game did not meet our expectations for attracting new users in the West and Japan nor retaining existing users in Korea and Taiwan.
All in, PC revenues in Korea increased by 35% year-on-year. While MapleStory’s revenue slightly decreased, revenues from FIFA ONLINE 4 and Dungeon&Fighter increased year-over-year. As for the mobile business, FIFA MOBILE maintained its strong momentum from last year, like FIFA ONLINE 4, and exceeded our outlook. Blue Archive’s revenue also exceeded our outlook driven by its successful content update. For Dungeon&Fighter Mobile, revenue was below our outlook.
The number of its active users decreased due to deterioration of user sentiment caused by bugs in the game as well as shortage of content, while we focused on addressing this issue. However, we saw improvements in the number of active users and revenue after we fixed these bugs and introduced the 1st Anniversary update at the end of March.
HIT2’s revenue was below our outlook as its users decreased more than expected due to the intense competition among MMORPGs in Korea. On a year-on-year basis, mobile revenues in Korea increased by 37% primarily driven by a contribution from HIT2 and growth of FIFA MOBILE and FIFA ONLINE 4 M, which were partially offset by revenue decreases in Dungeon&Fighter Mobile, and The Kingdom of the Winds: Yeon and KartRider Rush+.
On a quarter-over-quarter basis, mobile revenues increased by 12% driven by revenue increases in FIFA ONLINE 4 M, FIFA MOBILE and Blue Archive, which were partially offset by revenue decreases in HIT2 and Dungeon&Fighter Mobile.
Revenues from our Korea [ph] business were ¥43.1 billion, which exceeded our outlook driven by Dungeon&Fighter’s strong performance. On a year-over-year basis, revenues increased by 45% on an as reported basis and by 39% on a constant currency basis.
For Dungeon&Fighter, revenue exceeded our expectations. Since last quarter, we have been working on initiatives to enhance user engagement such as optimizing the game balance and promoting communications with users. Amidst this positive trend, the package for the Lunar New Year update introduced on January 12th was well-received by users.
On a quarter-over-quarter basis, MAUs, paying users and ARPPU increased due to seasonality. On a year-over-year basis, MAUs, paying users and ARPPU all increased due to the continued initiatives to enhance user engagement as well as the successful Lunar New Year update.
Revenues from Japan increased by 29% year-on-year primarily driven by the growth of Blue Archive; revenues from North America and Europe increased by 10% year-on-year driven by the growth in MapleStory and Blue Archive, while revenues from Choices and MapleStory M decreased year-over-year. Revenues from the Rest of World increased by 24% year-on-year driven by the growth in Blue Archive and contributions from other mobile games.
Moving on to our FY 2023 second quarter outlook. In Q2 2023, we expect our overall business to grow driven by the continued stable growth of our existing portfolio, as well as the impact of recent launches, including Wars of Prasia. As a result, we expect Q2 revenues in the range of ¥88.4 billion to ¥96.7 billion, representing a 5% to 15% increase year-over-year on an as reported basis and a 7% to 17% increase year-over-year on a constant currency basis.
We expect our Q2 operating income to be in the range of ¥22.1 billion to ¥28.7 billion, representing a 3% decrease to 26% increase year-on-year on an as reported basis and a 1% to 30% increase year-on-year on a constant currency basis. I’ll discuss the details on this shortly.
We expect net income to be in the range of ¥18.1 billion to ¥23.1 billion, representing a 27% to 6% decrease year-on-year on an as-reported basis and a 24% to 3% decrease year-on-year on a constant currency basis. The year-on-year decrease in net income is due to a ¥27.7 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 existing titles such as the FIFA ONLINE 4, FIFA MOBILE, and MapleStory, as well as contributions from Wars of Prasia and HIT2. Consequently, we are looking for revenue in Korea to be in the range of ¥58.4 billion to ¥63.2 billion, representing a 14% to 23% increase year-on-year on an as reported basis and a 16% to 26% increase year-on-year on a constant currency basis.
As for the PC business, we expect FIFA ONLINE 4 to maintain its strong momentum and to grow year-on-year. We also expect a year-on-year revenue increase from MapleStory, which celebrated its 20th anniversary in April and is scheduled to conduct a large-scale summer update in June. We expect a year-on-year revenue increase in Mabinogi, while year-over-year revenue decreases from Dungeon&Fighter and Sudden Attack. In addition, we expect a significant contribution from Wars of Prasia, which launched on March 30 across mobile and PC platforms.
As a result, we expect a year-over-year increase in PC revenues. Regarding the mobile business, we expect Q2 revenues to be roughly flat year-over-year. We expect contributions from Wars of Prasia and HIT2. In addition, we expect year-over-year growth in FIFA MOBILE. We expect these to be offset by a year-over-year revenue decrease in Dungeon&Fighter Mobile, which had an extremely strong performance in Q2 2022 right after launch.
Turning to China, while we expect Dungeon&Fighter to maintain its strong performance, we anticipate its revenue to be roughly flat year-over-year due to a tough comparison with Q2 2022 when revenue grew significantly year-over-year. Accordingly, we expect revenues from our China business to be in the range of ¥17.2 billion to ¥19.4 billion, representing a 10% decrease to 1% increase year-over-year on an as reported basis and 8% decrease to 4% increase year-over-year on a constant currency basis.
For Dungeon&Fighter, we introduced the Labor Day update on April 20th, which includes avatar package sales. In April, the number of active users increased year-over-year, while paying users and ARPPU slightly decreased. In Q2, we will focus on stable operation.
In Japan, we expect revenues in the range of ¥2.0 billion to ¥2.2 billion, representing a 7% decrease to 5% increase year-over-year on an as reported basis and a 6% decrease to 6% increase year-over-year on a constant currency basis. We anticipate growth in Blue Archive to be offset by decreases from terminated mobile titles.
In North America and Europe, we expect revenues to be in the range of ¥4.1 billion to ¥4.5 billion, representing a 28% to 22% decrease year-over-year on an as reported basis and a 29% to 22% decrease year-over-year on a constant currency basis due to decreases in mobile titles.
We expect revenues in the Rest of World in the range of ¥6.6 billion to ¥7.3 billion, representing a 15% to 27% increase year-over-year on an as reported basis and a 16% to 29% increase year-over-year on a constant currency basis driven by contributions from HIT2, which is scheduled to launch in Taiwan, Hong Kong, and Macau on May 23, and VEILED EXPERTS, for which global early access is also scheduled on May 19.
In Q2 2023, we expect operating income to be in the range of ¥22.1 billion to ¥28.7 billion, representing a 3% decrease to 26% increase year-over-year on an as reported basis and a 1% to 30% 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 Q2 last year, we expect increases in costs due to business growth. First, we expect increased royalty costs primarily due to revenue increases in the FIFA ONLINE 4 and FIFA MOBILE. Second, we expect increased HR costs related to an annual salary increase as well as additional headcount for the development and operation of our major Virtual Worlds as we expand our business.
Third, we expect increased marketing expenses associated with promotions for existing titles such as FIFA ONLINE 4, which continues to perform well, and MapleStory, which celebrated its 20th Anniversary. We also plan to market new games including Wars of Prasia and HIT2 in Taiwan, Hong Kong and Macau. Lastly, we expect increased other costs under COGS and SG&A in relation to outsourcing costs and cloud service costs. Operating income is expected to increase year-over-year as we anticipate revenue increase to be partially offset by the increases in costs due to business growth.
Overall, Nexon has been building a business model in which we can grow stably by launching new Virtual Worlds onto a solid foundation of existing franchises. In Q1, existing franchises such as Dungeon&Fighter and FIFA significantly grew as we continued to demonstrate our strength in live operations in a quarter, which features a significant concentration of large updates, events and sales promotions.
In Q2, we expect our overall business to continue to grow driven by the stable growth of our existing portfolio and contributions from new games such as Wars of Prasia and HIT2 in Taiwan, Hong Kong, and Macau.
Last, I would like to provide an update on the shareholder return. By April, we completed ¥50 billion of our 3-year ¥100 billion share repurchase policy that we announced on August 9, 2022. We plan to retire all the shares we have acquired at the end of May. As for the remaining ¥50 billion, we plan to complete the rest of the repurchase authorization 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.
Thanks, Uemura-san. Before moving on to your questions, I thought we’d offer a bit more about how Nexon is building its business over the medium-term. As I mentioned earlier in the call, Nexon’s management team has been designing the business to deliver solid and stable cash flows, combined with strong potential for significant upside. Our base of live games has demonstrated unprecedented stability, which translates to the investor as downside protection. And in the coming quarters we are introducing several major new Virtual Worlds projects, any one of which could bring step-function growth to our revenue and operating income line.
In short, for investors this means a significant asymmetric upside opportunity. We limit the downside, and we create large potential upside. The Nexon management team has been very intentional about this over the last several years. This is the type of company we want to own, and it is certainly the type of business we feel most comfortable operating.
So let’s discuss how we see expanding on this idea in the coming years. Earlier I discussed MapleStory Universe, our extension to MapleStory that leverages blockchain technology. Why are we embarking on such a project, when merely continuing what we’ve been doing is demonstrably working?
The answer is that we see projects like MapleStory Universe and MapleStory Worlds through the lens of franchise management. Great entertainment franchises merit careful cultivation, because that investment pays back so well over time. MapleStory is one of the largest and most enduring entertainment franchises in the world, loved by tens of millions of players. Our objective is to bring these players an even deeper entertainment experience, meaning they can both have richer experiences within the Virtual World, and benefit even more from contributing to the community.
We build our Virtual World franchises to grow for decades into the future. There are multiple vectors in which we can and will build out our largest franchises. In the coming quarters you’ll hear much more from us on this topic, including ways we plan to bring many more people into our Virtual Worlds. By both opening up the experience to new fans, and by deepening the experience they have, we plan to make the next 20 years of growth in MapleStory and other key franchises even more astounding than the first 20 years.
With that, we would be happy to take your questions.
Thank you, Owen. Next, we would like to open up the lines to live Q&A. Q and 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.
[Operator Instructions] The first question is from Mr. Seyon Park from Morgan Stanley. Please ask your question, Mr. Park.
Hi, thank you for the opportunity. I have 2 questions. The first is, I guess, regarding KartRider: Drift, it seems like the initial response from gamers has not been up to expectations. And I just kind of wanted to see how you would be or how the company would be addressing this? We’d seen games in the past, which initially did not have a good start, but then you guys were able to get it back and, I guess, revitalize the game. And I just kind of wanted to see what your plans are for that franchise?
My second question is regarding THE FINALS maybe can you provide a little bit more details on where the status of development is? And maybe some kind of – what steps are still kind of remaining for that game to come out live? My sense is that the game launch does seem to be getting pushed back a little bit more than maybe what initial expectations are? And I kind of wanted to get a little bit more background of what’s kind of behind that? Thank you.
[Interpreted] Hi, Seyon, this is Owen. So I’ll take your 2 questions in turn. First, regarding KartRider: Drift. So the short answer is it’s not where it needs to be now, and as we said in our prepared remarks, it didn’t start as strong as we hoped. But we have very clear feedback from a lot of fans, and we’ve got an incredibly talented group of people working on it right now. So we’re very focused right now on the content program, and we’re doing a very consistent cadence of updates that addresses the feedback that we got about the game and fills out the game world. And it’s been our experience that when we focus on the user experience rather than on near-term revenue, the world ends up building a very strong base of players over time. And that’s really what we’re focused on, is the user experience.
I’d also add that we’re especially incredibly dedicated to this franchise. It’s loved by tens of millions of people, and we’re very focused on bringing it to an even larger audience around the world. So that’s the short answer to your question.
And then your second question was about the finals, and we finished the beta about a month ago, and I think it’s fair to say we had a tremendous beta. First, we had no major network issues in the client or the server, which is a big deal given all the new tech that’s involved in this game. And we got a lot of feedback that it’s really fun, the IP really resonated. So if the question is, will it attract players? I think the answer is a resounding yes, frankly, more than we ever could have imagined.
As we said in our prepared remarks, over 2 million people signed up for the beta. Even today, I was just talking to the Embark team the other night and they informed me that between 5,000 and 15,000 players are signing up to the beta a month after it closed every day. So that’s for a game that’s already – for a beta that’s already closed. However, as with any beta, we identified areas that need to be improved for the game to be successful in a commercial state. And I’ll wait for the translation and then I’ll just list through that in a little bit more detail.
So, again, we’re really happy with how the beta went. But, as you know, the objective of beta is to figure out what we need to improve for the game to be successful for a commercial launch and we identified several, I would say a handful of things. First, we saw some performance problems, so we had a number of areas that need optimizing especially around movement and player control. We have some issues on performance and lower spec machines. There were some issues the way some players played together, especially in light of the destruction physics that we introduced into the game.
And we came to the conclusion that we need more ways to play the game and to enter the game. What I would say is that for each one of these, the areas to improve are very clear. That’s what you hope to get out of a beta and that’s really what we want. So we got a very clear roadmap of what we need for it to be successful when the game is commercially launched and, again, that’s our point. Since the beta closed about a month ago, the team has been moving really fast pace and they are helped by the proprietary game development tech that they created before the development of the game started. So that’s making the iteration a lot faster than it would have before.
So we’re really looking forward to launch and in the short-term I would caution or just highlight that our objective is to build a community of players and build up a very strong user experience that really works for players so that the community will build up a – will build the community, the Virtual World that lasts for many years. So that’s what we’re focused on right now.
Thank you for that.
[Interpreted] I hope that answers your question.
Yeah. No, I think that gives a lot more background. Thank you.
[Interpreted] Thank you.
The next question we will take from Bokyung Suh-san from Sanford C. Bernstein Limited. Please?
Thank you for the opportunity. This is Bokyung from Bernstein. I have just one question also from many western investors especially. So my question is about the company’s longer term future in ex-Asia countries. So when we see the revenue contribution by the regions, the revenue from western countries have been around just like 3% to 5% over the last decades. So my question is, can you elaborate a little bit more about the future vision and key initiatives or some key hurdles you feel do you have for the global expansion toward the western countries? I think it will be also very useful for the potential western investors as well.
[Interpreted] Thanks for your question. So this is a very important topic for us and this is something we have been working on for several years and you’re going to hear us talk a lot about this, a lot more about this in the coming 18 to 24 months. It really starts with product. And as you may recall if you’ve been covering us for a while, you’ve heard us talk about a major reorganization we did around the company in 2019, but that was really focused on our game development studios.
And the general theme was sort of two-fold, but it was basically around doing fewer, bigger, better things, in other words, rather than doing many different smaller projects or offline games or more casual games. We just want to focus on what we do best, which is deeply immersive Virtual Worlds on all platforms around the world. And so that represented a major studio reorganization that we did in 2019. So that was a key step in that. And it takes several years for those games to come out of a studio. And since that was 2019 and we’re now in 2023, you’re starting to see, or you will be starting to see those games come out at a fairly rapid clip in the coming few months, as we’ve talked about.
The second thing we’ve done around game development, as you recall, is we first invested in and then purchased all of Embark Studios in Stockholm, Sweden. And our view is that this is the premier set of developers in the West at this time. This is the team that their previous, basically the founder of the studio used to run studios for Electronic Arts until 2018, very, very successfully. And the team around him or the team that all created the Battlefield franchise. And they have been doing incredible work that we’re so excited to be showing to the world in the very near future. Starting with THE FINALS, followed on by our creators, and they’ve got more in the pipeline. So we think this is a fantastic studio that is in the West.
And our objective is to combine their chops, their capability in AAA Western online game development with what we know best, with what Nexon has been doing for 25 years, which is to make a game an online virtual world last and grow forever. So that’s what we’re working very hard on now. So that’s about development.
And the second leg in the stool is about marketing. And as you know, in the West, marketing is changing at a very rapid rate, especially in the video games business, how you reach the customers, what’s the best way to break through. And that whole science of marketing has been changing very, very rapidly over the last few years. We just actually hired a new Chief Marketing Officer, a CMO, reporting directly to me, and he focuses solely on western marketing. He works very closely with both our development teams in Korea and with our development team in Stockholm, and he’s actually in Korea this week and he’ll be heading to Stockholm, and he just started and he’s building up a team so that we have world class marketing in the West.
And, third and finally, is about live game operations. And our view is that Nexon’s live game operations capability is among the very best in the world. And we have established that based off of a whole lot of experience, augmented more recently by a lot of advanced technology that we have put together. And so there’s a whole team of our most case live game operators, who is working with our regions around the world to bring that technology and that know-how and make sure everybody in around the world is as strong as our live game operations team in Korea. So that’s something that we haven’t been all that global about, but we think that’s very, very important in the coming years as we bring very high quality Virtual Worlds around the globe.
This type of operational work on all three topics is probably something I’d enjoy spending all night talking about. But since our time is limited, I’ll cut off my answer here.
The next person is Mr. David Gibson of MST Financial Services Limited. Please, Mr. Gibson.
Thanks. Three very short questions. Firstly, on Q1, the HR and marketing costs were lower than planned. Have they been effectively deferred from 1Q to 2Q, if you would expand, please? Second question, do you feel that in China with DNF, have you over monetized in 1Q? Is there perhaps a blowback from the strong success in the first quarter into the second quarter? And the third question is on KartRider: Drift. You had a beta, why didn’t find the issues that have come up post-launch? Why was this not fixed before the launch? That’s all. Thank you.
[Interpreted] So regarding the first question, why the marketing in HR cost was lower than expected? As I have mentioned in my prepared remarks, we were initially planning to conduct marketing as well as promotion activities for KartRider: Drift. But the initial response of the players was not as we have expected. Therefore, we decided to defer the marketing investment until we can fix the problem. That is why the marketing and HR cost were lower than we have planned for Q1. Excuse me, correction upon the interpreter. I was only talking about the marketing cost.
Next about the HR cost, we were not able to proceed with the recruitment as we have initially planned. Therefore, some of it might be shifted to the second quarter and also so we did not incur much overtime expense as well as incentives as we have initially planned. So there are ins and outs between Q1 and Q2. And regarding the investment in HR, we have conducted tremendous advanced investment in talent last year. So this year the ratio of HR cost vis-à-vis the revenues will not be as high as the one that we have incurred in the previous year. So please note that as compared to last year, our expense on HR will not be as high as the previous year.
So your second question pertains to China Dungeon&Fighter, and for the past few years we have been putting our effort to stabilize this game, and starting from the end of last year we succeeded in stabilizing the game and also enhancing the user engagement. And, thankfully, we were able to succeed in the Lunar update as well. Therefore, in terms of year-on-year comparison in Q1 we were able to grow close to 40%.
And with that, we believe that our forecast for Q2 is flat. And we do not see any problem, because in terms of Q1 of the previous year YoY was 5%, whereas it was 40% this year. And in terms of last year’s Q2 YoY comparison it was 25%. So this year we believe that it will be flat.
And all-in-all, China Dungeon&Fighter is trending very steadily and players are having fun and none of the KPIs shows any signs of problem. So we do not have any concern for China Dungeon&Fighter and, I think, we are just troding [ph] the natural course of how this game evolves in the future. And given all those factors, we forecast Q2 to be flat.
The third question was what happened in the commercial launch of KartRider: Drift that we didn’t pick up in the beta. I’ve got a kind of a short answer and slightly longer answer and I’ll give you both. As we said in our prepared remarks, the key pieces of feedback that we picked up in the commercial launch were really around two factors. Number one was user interface issues or challenges that people had with the user interface. And really it’s important to remember this is 5 platforms launched at the same time, 2 on mobile, 2 on console, and 1 on PC global one build where gamers are playing around the world.
So the key thing there is we have a much wider group of people playing all at the same time than we had during the beta. And you’re going to pick up more user interface type issues with a broader group of people.
The second key piece of feedback we got was about the amount of content. And as you know, the original KartRider has been around for nearly two decades. The mobile version of KartRider has been around for about a half a decade. So in both cases we’ve built up a lot of content. Now, remember that the people who play oftentimes, who sign up for betas are oftentimes the biggest fans. And when you bring in a more casual group of people, they’re going to come back without any expectations other than they have an anticipation of an amount of content that they like to see. And they may have a particular content piece that they especially liked about the old one. And we picked that up more during the commercial launch than during the beta.
And then the piece of context that I would add is that I would refer back to how we manage all virtual worlds that last for a very long time. And I would say that we’ve just found over and over again that when you put out a new content plan, sometimes that content plan works better than you expected, sometimes it works out worse than you expected, and in a particular quarter. And this is a case where it didn’t work out as well as we hoped, as we said in our prepared remarks.
But the way you manage that is that you listen very carefully and are very close to the community, hear what they feedback, make sure that it’s clear, and then prioritize and enter into a relentless cadence of content updates. And that has worked with us time and again over the decades. And we are very dedicated to this franchise and that’s the approach that we’re taking here.
So the last thing, I think, I would say to summarize is that when you feel, as we do here that we’ve got the core of a very good online gameplay experience, then the launch of a new game, or in this case, the sort of the next generation of a game, which is significantly more ambitious than the previous generation of KartRider.
If you feel that the quality is good, then the launch of that new generation is not the end of a process. It’s not the end of our work. It’s actually just the beginning and that process will continue for the years going forward. That’s how we’ve treated it and that’s how we’re treating this situation. And it’s worked very well for us in the past. I hope that answers your question.
Thanks very much.
[Interpreted] Thank you very much.
[Operator Instructions] 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.
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 Investor Relations at investors@nexon.co.jp, should you have any further questions. We appreciate your interest in Nexon and look forward to meeting with you, whether it is here in Tokyo or in your corner of the world.
Thank you. That concludes today’s conference. Thank you for your participation. You may now disconnect.