Nexon Co Ltd (OTCPK:NEXOF) Q1 2022 Earnings Conference Call May 12, 2022 4:00 AM ET
Takanori Kawai – Team Leader, IR
Owen Mahoney – CEO & President
Shiro Uemura – CFO
Conference Call Participants
Kenji Fukuyama – UBS
Yijia Zhai – Macquarie Research
Seyon Park – Morgan Stanley
Junko Yamamura – Citigroup
Good day, everyone, and welcome to NEXON’s 2020 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 conditions such as revenues attributable to our key titles, growth prospects, including with respect to the online games industry, our ability to compete effectively, adapt to new technologies and address new technical challenges, our use of intellectual property and other statements that are not historical facts. These statements represent our predictions, projections and expectations about future events, which we believe are reasonable or based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information on some of these risks and uncertainties can be found in our earnings-related IR documents. We assume no obligation to update or alter any forward-looking statements.
Please note, net income refers to net income attributable to owners of the parent as stated in NEXON’s consolidated financial results. Furthermore, this conference call is intended to provide investors, analysts with financial and operational information about NEXON, not to solicit or recommend any sale or purchase of stuff 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 welcome, everyone, to NEXON’s first quarter 2022 earnings call. On today’s call, we will update you on the flawless launch of a new mobile virtual world. We’ll tell you about incremental improvements to our biggest game in China and steadily increasing performance on several games in Korea. And we’ll update you on our plan for international expansion with the global launch of multiple new virtual worlds.
We think our performance in the first quarter gives us momentum to deliver even better results in Q2 and that the momentum will carry across our full fiscal year. Last quarter, we told you that NEXON is a loaded spring, with multiple potential catalysts for growth. We believe the continuous improvements in our existing portfolio, compounded with new revenue from big launches in 2022 and 2023 will dramatically expand our trajectory for growth in the coming years.
With that context, I will now review highlights of our first quarter. On March 24, NEXON launched Dungeon&Fighter Mobile in Korea, the first of multiple new virtual worlds scheduled for release this year. While we measure success in years rather than weeks, we couldn’t be more excited about the quality of this game and the flawless launch delivered by our team. Dungeon&Fighter Mobile significantly exceeded the high end of our estimates for both engagement and revenue. Players and critics praised the gameplay, content and monetization strategy that distinguished Dungeon&Fighter Mobile from competitors. Since launch, Dungeon&Fighter Mobile has spent most of its time fluctuating between the #1 and #3 positions in rankings of top-grossing games on both the Apple and Google platforms.
Importantly, Dungeon&Fighter Mobile did not cannibalize our PC game, in either revenues or engagement. Rather, the PC game experienced as much as a 20% increase in active users since launch of the mobile game. We see this as another proof point, joining MapleStory, that mobile enhances, rather than detracts from our PC business.
Having now generated life-to-date revenue of well over $20 billion worldwide, Dungeon&Fighter is one of the world’s top grossing entertainment franchises. Its pattern of growth over the decades has been nonlinear â€“ sometimes it has dipped, sometimes it has grown robustly. That is a natural pattern in a longlived virtual world. But over time it has grown, and we believe strongly that its best days are ahead of it, on each platform.
Another of our blockbusters in Korea, FIFA Online 4, significantly outperformed our expectations, achieving the highest sales on record. We think careful management of live operations and well-received promotions have been 2 keys to its success.
Next, is MapleStory. The game performed as expected, down double digits year-over-year in Q1 based on a very high comp in Q1 of 2021. Nonetheless, in Q2 we expect the game will be up by double-digit percentage in year over year growth and that it will continue that growth trajectory for the balance of the current year, at least.
In China, Dungeon&Fighter PC was slightly lower than our expectations in Q1, but it nonetheless grew year-over-year, as we expected. Going forward, our view is that its growth profile will continue or potentially accelerate, despite or perhaps because of our care not to over-monetize.
Next I’d like to offer an update on new games in our pipeline. We are very excited about our pipeline over the coming 12 to 24 months, and as we’ve said before, several of our major new launches could represent step-function growth in our revenue- and earnings-generating capability, stacking on top of the strong performance of our existing games.
First, we will shortly be releasing DNF Duel, a new action fighting game based on the DnF lore. DNF Duel is a 1:1 action fighting game, and reflects our objective to introduce the DnF franchise to an even broader audience. DNF Duel is a departure from our F2P business model, and will be offered via paid download for PC and consoles. The game is being developed in partnership with Arc System Works, a highly respected creative team in Japan and is scheduled to launch on June 28 in key markets including Europe, Japan, Korea, and North America.
Next, KartRider: Drift is the next generation of one of our most popular online game franchises. Unlike other kart racing games, KartRider: Drift will be available on multiple platforms: PC, console and mobile, and be fully cross-platform. KartRider: Drift is fully free-to-play, and it is built from the ground up as an online experience, which means it benefits from sophisticated match-making and social features. And, unlike other franchises in the space, KartRider: Drift allows for significant customization by the player. KartRider: Drift is scheduled for a global launch in the second half of this year.
Next is ARC Raiders, an all-new Virtual World from NEXON’s Embark Studios in Sweden. The development team is iterating on gameplay, developing out modes, and adding content. Later this month, ARC Raiders will be conducting its largest community test with external players.
Another Virtual World being developed by Embark is code-named Discovery. Discovery is a first-person shooter virtual world, and we expect to launch it within the next 12 months. We haven’t yet released many details about Discovery, but the team recently completed a closed external play test that earned high marks from participants. I can tell you that development has been proceeding at fast pace, thanks in part to the tech stack Embark has built for rapid game development. We think the game experience is unlike anything FPS players have seen.
Finally, MABINOGI MOBILE, is a next-generation mobile version of one of our longest-running, most beloved MMORPG franchises. We are currently polishing the gameplay to provide great game experiences to our players. MABINOGI MOBILE will be a full MMORPG experience on mobile, similar to the approach we’ve taken to Mobile Dungeon&Fighter. So, we think it could have PC-level retention characteristics, but with a much bigger and more international total addressable market.
Before Uemura-san runs you through the details of Q1 and our outlook for Q2, I’d like to close by reflecting the confidence our management team feels about both our current performance, and the fundamental strategy that underpins that performance.
As we have been saying previously, we set out 2.5 years ago to narrow our focus to a fewer number of our key virtual world franchises, invest our resources much more heavily in those franchises, bring them to a much wider audience through mobile and other platforms, and leverage our unique technology stack for building and operating massive virtual worlds.
This strategy has been paying off, both in the operation of our existing virtual worlds, which have been performing very solidly, and in introduction of new virtual worlds, such as the success we’ve experienced in the introduction of Mobile DnF — Mobile Dungeon&Fighter in Korea.
In short, our strategy is working. More importantly, we believe we are in the early innings of a period of strong performance of live franchises as well as very exciting new launches. In the coming quarters, we expect the result of this activity will be a step-function growth in our revenue and earnings profile.
With that, I’ll hand the call over to Uemura-san.
Thank you, Owen. Now, I’ll review our Q1 2022 results. For additional details, please see the Q1 2022 Investor Presentation available on our IR website.
In Q1, Group revenues were JPY 91 billion, up 3% year-over-year on an as-reported basis and down 1% year-over-year on a constant currency basis, within the range of our outlook.
Dungeon&Fighter Mobile, which launched on March 24, is off to a good start, exceeding our expectations. In addition, FIFA ONLINE 4 and MapleStory in the Rest of World, were also better than our expectations, while the performance of Dungeon&Fighter in China was slightly lower than planned.
By region, revenues from Korea, North America and Europe, and the Rest of World each exceeded our expectations, and Japan was in the range of our outlook. Revenues from China came in slightly lower than expected.
Looking at the total company performance by platforms, PC revenues were in the range of our expectations while mobile revenues exceeded our outlook.
Operating income which was down 11% year-over-year was within our outlook at JPY 38.5 billion. As we explained on our last earnings call, the higher costs are due to increases in HR costs and marketing expenses.
Net income was JPY 40.3 billion, exceeding our outlook while down 13% year-over-year. The outperformance was primarily driven by an FX gain of JPY 12.7 billion related to the depreciation of the Korean won and Japanese yen against the U.S. dollar during the quarter and its corresponding impact on U.S. dollar-denominated cash deposits.
Let’s move on to results by region. Revenues from our Korea business exceeded our outlook as FIFA ONLINE 4 and Dungeon&Fighter Mobile, which launched on March 24, significantly exceeded our expectations.
On a year-over-year basis, revenues decreased by 5% on an as-reported basis and by 6% on a constant currency basis. MapleStory’s revenue decreased year-over-year as expected but was at the high end of our outlook driven by the well-received winter update.
Since last year, we have continued to focus on strengthening our mid- to long-term relationship with our players rather than seeking short-term revenues. As a result, Net Promoter Score continuously improved and recovered to almost the same level as the time when we had strong performance before the probability issue came up.
FIFA ONLINE 4’s PC and mobile combined revenues significantly exceeded our outlook driven by the well received package offerings and sales promotions, achieving record-breaking quarterly revenue.
Sudden Attack grew by 18% year-over-year while Dungeon&Fighter’s revenue decreased year-over-year as expected. While FIFA ONLINE 4 and Sudden Attack grew year-over-year, these were more than offset by revenue decreases from Dungeon&Fighter and MapleStory, which performed extremely well last year. Consequently, PC revenues in Korea decreased by 9% year-over-year. As for the mobile business, revenues exceeded our outlook driven by the strong performances of FIFA ONLINE 4 M and Dungeon&Fighter Mobile, which is off to a good start.
Driven by high recognition of DNF IP built up through the long-running operation on the PC platform, Dungeon&Fighter Mobile attracted many brand-new players as well as sleeping players of the PC version. We offered high-quality rich content, and prioritized delivering fun to our players over revenue gains. We also chose not to introduce an auto-play function which prevails in the mobile market in Korea. Instead, we provided fresh game experiences with manual play optimized for mobile devices. These initiatives were well-received by players and the game has continued to perform well since its launch.
As we have explained in the past, entertaining players and being customer centric would improve a game’s retention and lead to the success of the business. We believe that the great start of Dungeon&Fighter Mobile proves our thesis.
On a year-over-year basis, mobile revenues increased by 6%. Contributions from Dungeon&Fighter Mobile and Blue Archive, as well as the growth in FIFA ONLINE 4 M were partially offset by revenue decreases in V4 and The Kingdom of the Winds: Yeon.
On a quarter-over-quarter basis, mobile revenues increased by 34% primarily driven by a contribution from Dungeon&Fighter Mobile and seasonal revenue increases in FIFA ONLINE 4 M and MapleStory M.
Revenues from our China business were slightly below our outlook, but increased 15% year-over-year on an as-reported basis and 5% year-over-year on a constant currency basis.
For Dungeon&Fighter, revenue increased year-over-year driven by the well-received package offerings for the Lunar New Year update introduced on January 20.
We continued to focus on increasing user engagement rather than short-term monetization. As a result, user metrics trended stably, while revenue was slightly lower than planned. Quarter-over-quarter, MAUs, paying users, ARPPU and revenue increased due to seasonality. Year-over-year, MAUs and paying users decreased while ARPPU and revenue increased driven by well received Lunar New Year package sales.
Revenues from Japan decreased by 17% year-over-year. While there was a contribution from COUNTER: SIDE, this was more than offset by revenue decreases from TRAHA, V4 and Blue Archive. Revenues from North America and Europe decreased by 2% year-over-year due to revenue decreases from Choices and MapleStory despite a contribution from Blue Archive and the growth in MapleStory M.
Revenues from the Rest of World increased by 42% year-over-year driven by the growth in MapleStory and MapleStory M as well as a contribution from Blue Archive.
Moving on to our FY 2022 second quarter outlook. We reiterated that our focus on user engagement would lead to stable growth of our major franchises in the mid- to long-term. This strategy is working well, and in Q2, we expect to see a turn-around and year-over-year growth in Korea MapleStory, which experienced year-over-year revenue decreases over several quarters. We also expect China Dungeon&Fighter and FIFA ONLINE 4 to grow as in the first quarter.
As for Dungeon&Fighter Mobile, we expect it to maintain its strong momentum following the launch and to drive our group business significantly. Consequently, we expect our Q2 group revenues in the range of JPY 81.3 billion to JPY 87.3 billion, representing a 45% to 56% increase year-over-year on an as-reported basis and a 36% to 45% increase year-over-year on a constant currency basis.
We expect our Q2 operating income to be in the range of JPY 22.7 billion to JPY 27.3 billion, representing a 47% to 77% increase year-over-year on an as-reported basis and a 30% to 58% increase year-over-year on a constant currency basis. I’ll discuss the details on this shortly.
We expect net income to be in the range of JPY 16.1 billion to JPY 19.7 billion, representing a 80% to 120% increase year-over-year on an as-reported basis and a 55% to 91% increase year-over-year on a constant currency basis.
In Korea, we expect Dungeon&Fighter Mobile, which continues to maintain its strong momentum following the launch, to drive our business. Also, we expect year-over-year growth in FIFA ONLINE 4 MapleStory and Dungeon&Fighter. Consequently, we are looking for revenue in Korea to be in the range of JPY 49.0 billion to JPY 52.0 billion, representing a 50% to 59% increase year-over-year on an as-reported basis and a 43% to 52% increase year-over-year on a constant currency basis.
As for the PC business, we expect Sudden Attack’s revenue to decrease while FIFA ONLINE 4 to grow significantly year-over-year. We also expect year-over-year growth in Dungeon&Fighter. Its active users have increased, driven by a synergy effect following the mobile launch.
As for MapleStory, we expect its revenue to increase in Q2 as planned. We will increase player retention and achieve mid- to long-term growth by strengthening the relationship with our players and offering fun game experiences. As a result we expect PC revenues in Korea to increase year-over-year.
Regarding the mobile business in Korea, we expect Q2 revenues to roughly double year-over-year. We expect a contribution from Blue Archive and year-over-year growth in FIFA ONLINE 4 M in addition to significant contribution from Dungeon&Fighter Mobile. We expect these to be partially offset by year-over-year revenue decreases in V4, The Kingdom of the Winds: Yeon, and KartRider Rush+.
We expect revenues from our China business to be in the range of JPY 20.9 billion to JPY 22.6 billion, 55% to 67% increase year-over-year on an as-reported basis and a 36% to 47% increase year-over-year on a constant currency basis. This will be driven by the anticipated increase in Dungeon&Fighter’s revenue.
We introduced the Labor Day update for Dungeon&Fighter on April 21, including avatar package offerings. Since the update was well-received by players, paying users and ARPPU were all up year-over-year in April. We expect Q2 revenue to increase year-on-year.
We also hope to increase active users and paying users following the level cap release scheduled in Q2 and to operate the game to achieve mid- to long-term healthy growth.
In Japan, we expect revenues in the range of JPY 2.2 billion to JPY 2.6 billion, 2% to 20% increase year-on-year on an as-reported basis and 1% decrease to 17% increase year-on-year on a constant currency basis. We anticipate a contribution from COUNTER: SIDE to be partially offset by decreases from TRAHA and V4.
In North America and Europe, we expect revenues to be in the range of JPY 5.5 billion to JPY 6.1 billion, a 24% to 38% increase year-over-year on an as-reported basis and a 13% to 26% increase year-over-year on a constant currency basis. We anticipate contributions from DNF Duel, which is scheduled to launch on June 28, and Blue Archive, as well as growth in MapleStory M. These are to be partially offset by decreases from Choices and MapleStory.
We expect revenues in the Rest of World in the range of JPY 3.7 billion to JPY 4 billion, 14% to 23% increase year-over-year on an as-reported basis and 8% to 16% increase year-over-year on a constant currency basis. We anticipate growth in MapleStory and MapleStory M.
In Q2 2022, we expect operating income to be in the range of JPY 22.7 billion to JPY 27.3 billion, representing a year-over-year increase of 47% to 77%. Favorable factors compared to Q2 2021 regarding the operating income include a revenue increase.
Regarding costs compared to Q2 2021, we expect increased variable costs due to a revenue increase.
Next, we expect increased HR costs related to headcount for development and launch of multiple new virtual worlds as well as bonus accruals to teams with great performances.
Lastly, we expect higher marketing expenses mainly associated with promotions for Dungeon&Fighter Mobile. The high end of operating income is expected to increase year-over-year driven by significant revenue growth.
Overall, in Q1 2022, player engagement steadily improved in our major titles, Dungeon&Fighter in China and MapleStory in Korea. Also, the launch of the Dungeon&Fighter Mobile significantly exceeded our expectations. As a result, we are off to a good start in Q1 toward achieving growth in ’22 and beyond.
In Q2 ’22, we are pleased to expect significant growth. The existing franchises including 2 major ones and FIFA ONLINE 4 are forecast to grow robustly, and also expect strong contributions from new titles, Dungeon&Fighter Mobile and DNF Duel.
In addition, we are making good progress with KartRider: Drift, ARC Raiders, and other anticipated new titles for launch in second half. As we have reiterated, we are excited to achieve growth in ’22 and beyond by layering these highly anticipated titles on top of our stable revenue foundation of existing business.
Lastly, I would like to talk about the shareholder return strategy. Regarding our 3-year JPY 100 billion share repurchase policy announced on November 10, 2020, we have completed JPY 40 billion by April. As for the remaining JPY 60 billion, we plan to conduct the share repurchase by November ’23 based on several factors including investment opportunities, financial conditions, and the share price.
That is all from me. Back to Owen.
Thank you Uemura-san. Before we go to your questions, I’d like to offer some thoughts on NEXON’s bright future within the context of the larger entertainment world. As everyone on this call knows, the global entertainment industry is undergoing significant changes right now, and investors everywhere are justifiably struggling to decide which segment or business model of tech and entertainment is likely to thrive in this changing world.
It has been our view that a well-run virtual worlds company, deeply focused on a great customer experience, has extremely robust growth potential, no matter what is going on in the global business cycle, supply chains, or other disruptions. We believe we are proving this thesis out now. Let me briefly explain why.
First, we have significant catalysts upcoming, in the form of product launches of highly appealing virtual worlds, designed for global markets, delivered on platforms such as mobile and console that collectively represent an order-of-magnitude increase in our total addressable market. We have been laser-focused on making these products great. We think the launch of MDNF in Korea, while big, represents merely an early proof-point, and we have multiple additional launches on the way. Any one of these catalysts could result in a step-function growth in revenue and earnings.
Second, our new launches stack on top of our existing virtual worlds business, which is robust and growing in its own right. We are often asked whether NEXON is a “Metaverse company”. We struggle with a quick answer, since the term is so undefined, but more importantly misses the underlying business reality. That is, a strong, well-managed virtual worlds business is incredibly robust, and can in fact double in size over the course of a few years, even if we were not to launch any new virtual worlds.
This aspect means the business of virtual worlds is highly distinct from the traditional games business, which relies specifically on new launches to even stay in place. And such longevity at scale in fact justifies the hype that all the talk of the Metaverse has engendered. But it is a unique, hard-to-replicate skill set, so we have focused on continuous improvement in both our live operations capability, and our proprietary tech stack, so that this unique set of capabilities can grow over time, like compounding interest.
Third, we think we are in very early innings. This is a massive global opportunity. The US and Japanese markets are much bigger than some of our traditional markets, and several of our planned launches target these expansion markets. And, while we have traditionally been a PC-focused company, the installed base of mobile phones with high-end graphics and networking represent a 10x expansion from PC of our total addressable market.
Finally, and especially important now, we have built a business designed to thrive in any economic climate. We have been disciplined in our cost control and amassed over $6 billion in cash and financial assets, with no debt, and we generate $1 billion of additional cash each year. We are insulated from ForEx concerns and inflation, and we have never been affected by supply chain issues.
And our business has historically performed best in times of economic upheaval, since it is built on the idea of giving entertainment away for free, monetizing from a small percentage of active users, and avoiding over-monetizing those users in favor of giving more value for money than any other entertainment form.
Net, we think we have one of the great businesses on the planet, not just in games or even entertainment, but of any type, anywhere in the world. We have a great runway ahead of us, and we are more optimistic about the future performance of NEXON than we ever have been.
With that, operator we are ready to take questions.
A – Takanori Kawai
Thank you, Owen. Next, we would like to open up the lines to live Q&A. Q&A session will be conducted with Japanese English or English-Japanese consecutive interpretation. Please be noted that interpretation will come between your questions and our answers. Please hold for interpretation before you hear our answers. Our answers will also be followed by interpretation. So please hold until the interpretation finishes before moving on to the next question. For those of you who have more than one question, we will take your questions one by one. Now we’d be happy to take your questions.
[Operator Instructions]. The first question is from Fukuyama-san from UBS Securities.
This is Fukuyama of UBS Securities speaking. I have 2 questions. Would you please turn to Page 4. This shows the new mobile launch and what will be the revenue growth. And over here, I see JPY 10.7 billion increase in the revenue. And I want to know whether this is contributed by mostly Dungeon & Fighter Mobile. And the second question is about Korea. And say iOS as well as Android ranking, I suppose you rank #1. On the other hand, I suppose you rank #3. Between the differences in these 2 rankings, what will be the monthly revenue impact?
Thank you very much for your question. As to your first question pertaining to Page 4, on new launch revenue, as you have mentioned, most of this increase in revenue is attributable to Dungeon&Fighter Mobile. Now moving on to your second question about ranking #1 in Korea, I cannot give you any details about the individual title about — by ranking in #1 position, it contributed to the increase of revenue for sure. But I would like to refrain from giving you any more details.
I have another follow up question about Dungeon&Fighter Mobile in Korea. Regarding the breakdown between iOS and Android contribution to revenue, which has higher revenue contribution?
Generally speaking, we can say that the revenue contribution from Android is higher in Korea, but I cannot give you any particulars about the ratio of the contribution between iOS and Android.
My second question is on DNF Duel. I understand that the revenue contribution is expected in North America as well as Europe. But what is your expectation in Japan as well as Korea in which you are scheduled to launch DNF Duel? If you can give us some idea about the volume of sales by vision or any other information that you can disclose, I will appreciate it.
Regarding DNF Duel, we are scheduled to launch this title in Q2, and we expect to have revenue contribution from each region. And we are looking at the numbers internally by going into the numbers that we have. But this is a global launch. So as you have said, we have scheduled to launch in Korea, Japan, North America as well as in Europe. And we anticipate the most contribution from North America.
Next question comes from Mr. Yijia Zhai of Macquarie Capital Limited.
I have two questions. First question is about the Dungeon&Fighter in China. The revenue has been very strong. And in Q2, with the Labor Day update in the past, it has struggled to some extent. But this time, you are showing us a very bullish strong guidance. And I’d like to know the background behind it. Is it the changing in the user trend from the past? And do you think that the current trend is sustainable?
Yes. The question was about the China Dungeon&Fighter. As we explained in previous quarter and also two quarters ago, we have a new person in charge of this business. And we have been trying to listen to the voice of the user; what they want and clarify that, and we have tried to lessen the burden on the part of the users. And as a result of this, we have realized the year-on-year growth in Q1. So we think that we have already bottomed out. And the Labor Day update was well received and if we can maintain this momentum, we think that we can realize the recovery. But right now, we are still seeing the main users to be the core users. And so with the level cap release planned for Q2, we would like to reactivate the freebie users. We believe that is important. And we are seeing this sign of turnaround of the Dungeon&Fighter, and we believe that trend to continue in Q2. But at the same time, we’d like to be very prudent and cautious and will focus on the daily operation as well.
Second question is about mobile Dungeon&Fighter. You made a comment before the launch that you have prepared the development of the content — the various content. And so how long do you think that the current situation or status would continue? With the case of the Kingdom of the Wind, there was a shortage of the content that led to the quick decline after the launch. So unlike or in comparison to the Kingdom of the Wind, how do you think that you can maintain this sales trend? And how do you see that happening?
Yes. About the Dungeon&Fighter Mobile, as I mentioned earlier, the strength is, first of all, very popular and strong IP, and it’s a very well-developed title. And you can have a same experience as PC with the mobile devices. So high-quality content is provided. As you mentioned, we have sufficient content and optimization has been done. And as you pointed out, in the case of the Kingdom of the Wind, we are very short of the content. But unlike that, we have the high-quality content for Dungeon&Fighter Mobile. And the third aspect or the factor is that when you see the mobile market in Korea, it’s mainly MMORPG, and there is a heavy monetization and mostly, it’s autoplay. But in the case of Dungeon&Fighter Mobile it’s action RPG and it’s just like the experience of the PC, and we do not apply the autoplay. It’s manual play. So this can be differentiated from the other titles. And that is being highly evaluated by the users. So if we can maintain this momentum, as I mentioned earlier, we have already gained the long-term know-how through the Dungeon&Fighter PC. And so we can replicate that with the mobile, and we will fully utilize our know-how so that we can contain — sustain this current momentum and trends.
The next question is from Mr. Seyon Park from Morgan Stanley.
I actually have a bit of a larger, I guess, this question and I guess it’s really for Owen. You’ve started to kind of, I guess, use the expression that NEXON is an operator of virtual worlds. And I’m just trying to understand, as most investors are calling a game publisher kind of business, how you are aiming to define this market differently? And I guess you’ve mentioned how the entertainment business is changing. And I do realize that a lot of the popular games that are being run by NEXON are, I guess, in what we used to call persistent world kind of format, although not every game is in that way, I think like games like KartRider are not persistent worlds in some ways. So could you kind of share maybe your thoughts on when you are setting it’s a virtual world operator, how we should be thinking about this business and whether you are, I guess, over the longer term planning to expand the business scope beyond gains? That would be my first question.
Sure. Seyon, this is Owen. I’ll take a stab at your — at answering your question and you can maybe tell me or calibrate me if I’m off base on what you’re asking. So traditionally, the games business has been — you think about a game experience as a discrete experience. And when I started in the games business about 22 years ago, we used to think about putting boxes through the channel. And so we’d make a discrete experience. We’d burn it onto a CD or then to a DVD, and then we would stick it in a box with some documentation, we would sell it for $50, $60. And then that sort of transition sort of online with downloadable content, but it was still basically considered a discrete experience. And the thing that struck me, when I entered the games business, I’d come from online technologies is basically, it looked kind of similar to the movie business and it’s — and that’s sort of the way that the game companies started their business. So why don’t I pause there for translation and then answer more directly your question, but that is context.
Okay. So then go to where we are today. And as you mentioned, we used the word virtual worlds. We’ve never liked the word Metaverse. It’s too undefined. It can mean anything and nothing. But we consider ourselves an operator of virtual worlds rather than a publisher of a discrete experience, a discrete box. And so when you — the first place to start in how to think about this is from the experience of the user. And we think of it because we all play virtual worlds ourselves, we think of it as a world you go to. It’s a virtual world, but it’s a world that you go to. And you’ll have virtual experiences with other avatars, and it’s got a society and a currency. And so we think the first lens to look at it from is this view of the user and how they experience the world over time. Then the second thing, to viewpoint is then you go back and say, okay, I’m going to deliver for this experience. I really — I’m going to deliver a really compelling experience for the user, okay, what do we need to do as operators? Well, number one is we need to ensure the long-term continuation of the user experience.
Longevity is key to our business model. So how does — that immediately leads us to questions like how does the economy work and how do the interactions between the players work in this virtual world. And that is sometimes called the games business, sometimes it’s called the Metaverse, but we call it virtual worlds because we think it’s — those questions are much more precise, and that term is more precise for the questions we need to answer on behalf of our users. And we think this frame of reference is very helpful to us, not only in deciding how we operate our business, but also the things that we’re not going to do like super casual games or off-line games, those sorts of things. I hope that answers your question.
That I think it gives us a better, I guess, view of how you’re approaching it, which I actually do agree with given the perception from a lot of investors is that games is a hit or miss business? And as NEXON has proven, you now have multiple franchises which have been now for many, many years. And I do think that’s probably one of the reasons the stock has been able to outperform most of your competitors over the last 5 years. And I do expect that to continue.
I guess my follow-up question is a little bit more narrow, I guess, as we look forward to the launch of the new games from Embark. Would these games also embed the virtual world concept, which just given, I guess, ARC Raiders, please correct me if I’m wrong, appears to be a PvE sort of game and obviously, given the history of the Battlefield franchise and the like. Would this be something similar to, as you kind of put it, to the box kind of games? Or should you actually now be expecting this to be another potentially forever franchise virtual world, where the contents would continue to get updated and we could even potentially have a very massive PvP function as well.
Seyon, this is Owen again. So first of all, just to sort of finish off the last thought that we had with the last question, which actually leads this. It’s important to remember — thanks for your nice comments. Now on both Maple Story and Dungeon&Fighter, these — both of these games are coming up on 2 decades of operation. It’s important to remember that. And so despite how big they are, 2 decades has never been done before. So it’s pretty extraordinary. And that kind of leads to your next question about Embark and ARC Raiders and the other games in their portfolio. I’m not going to describe it really beyond what we’ve shown publicly so far.
I apologize for that, but we really need to let marketing take the lead on that. And we’ve been reasonably tight lipped on that to this point for the purposes of having the right launch and the right management of our marketing expectations. But what I can tell you is we are definitely thinking longevity. So longevity is the key word. And to describe why that is, let me back up and just remind everybody how we got together with Embark in the first place. As you mentioned, that’s the team that, among other things, created the Battlefield franchise. And they chose us. They chose NEXON over a number of other really good companies and — to work with.
And I had had a relation — a personal relationship with the founder, Patrick, and we went way back and we had — we were — we had other factors that they like. But really what it came down to was they looked at franchises like Dungeon&Fighter, MapleStory, Sudden Attack, KartRider other franchises that mainly said, longevity is what we want, as much success as we’ve had with Battlefield. What we really want is the longevity that you’ve been able to garner.
And nobody has ever done that before. And so our approach to how to make a virtual world last and grow indefinitely, what we call a forever franchise is what was most appealing to them about us. So you can imagine the yin and yang of NEXON and Embark is to take their capability in AAA games in the West and combine that with our capability in making forever franchises that have indefinite length. And we both thought that was really powerful. So that’s the thesis of what we’re trying to do with these franchises.
Next question comes from Ms. Junko Yamamura of Citigroup Global Markets, Japan.
This is Yamamura speaking. I have two questions. I was not in the call in the first half. So maybe you have already explained on this point, and some of them is already explained during the Q&A session, earlier. But my question is about the user mix of the China Dungeon&Fighter. In Q1, the paying user number is down, but the ARPPU is significantly higher. And as you mentioned, you might have bottomed out. But it seems that there is a concentration on the core users. And there’s a level cap release in Q2. But we have the impression that more for the core users. It’s an event for core users.
So in Q2, again, ARPPU might go up and then you would achieve the target numbers. But how do you revitalize the casual users because this is the event for the core user, and it seems that such event is being accelerated. So if you have too much concentration of the core users, how do you reactivate the sleeping or dormant users? And how do you try to strike the balance, if you can explain on that as much as possible.
I’m not sure from which point Yamamura-san joined us. So let me repeat myself about the China Dungeon&Fighter. About the China Dungeon&Fighter, we think that we have already bottomed out in Q1. Since the end of last year, we have tried to listen at the burden of the users to reintegrate and activate the in-game situation. So we realized the year-on-year growth in Q2. And it might appear that this has been driven by the ARPPU increase, but we see the increase of the paying users as well. And the Labor Day update also stimulated some of the increase of the paying user. So right now, current recovery or upturn, you say is driven by the core users still, but we think that we are starting to see some of the middle users and also the sleeping users are coming back.
So it’s not really the full fledged re-growth, but we are seeing the signs of the turnaround and the recovery. And so — and you mentioned that the level cap release is more for the core users, but that is not the case. And it just happened that in the previous level cap release, there were many core users. So it might have appeared that way, but that is not the case. And with the level cap release, we are trying to activate the game. So this time, we are starting to see a gradual recovery of the steeping users. And if this level cap release is effective, then we would see more recovery and increase of the sleeping users as well as middle users.
But that doesn’t mean that we are being optimistic, too optimistic in the Q2 and also half of the quarter is already over, and we see the potential for the growth. It’s not a full-fledged re-growth. But as I mentioned earlier, if I may repeat myself, we have — we believe that we have bottomed out, and we are seeing the signs of the recovery. So we’d like to make sure that we can realize that with the level cap release.
Next question is about the KartRider. So this is going to be the cross platform. And in your view, I think there are no really clear border lines between the different platforms. But as of now, the current situation, we still see the difference between the mobile and PC and how the consumers consume and so forth. So how do you plan to enable this cross platform? This is the first time I think you are doing this. So what kind of simulations have you done? And how do you see the trend of the users? And what about the monetization? Do you think that you can differentiate? And from the future titles, would that be the assumption that this will be also cross platform.
Sure. This is Owen. I’ll take it, answer this question. Look, I think the lesson of the last 5 or 10 years in mobile is that we’ve treated most games on mobile have been constructed very differently than they’ve been constructed on PC or console. And now today and certainly since the iPhone 10, the power of a mobile device is perfectly adequate to deliver a really great online gameplay experience. Today, an iPhone GPU is better than an Xbox One and much better than a Nintendo Switch. And if you measure it in teraflops, which is a measurement of GPU speed. And so our view is where the world is going is a mobile device is simply — it’s just a workstation, a workstation or a supercomputer in your pocket.
And today, billions of people own these workstations in their pocket. And they carry them around all day long. And in the future, everybody on the planet will have one — in the near future. And so the way we’ve — the approach we’ve taken to it is just treat it like a PC or treat it like a mobile device. And that’s, in fact, exactly what we did with Mobile Dungeon&Fighter. And we think it’s one of the reasons why, for example, its retention numbers are so good. And so although many companies treat mobile as a very different platform up to now, we’ve taken the approach that these are just all windows into a virtual world that is rendered in the cloud.
And if we take that approach, and then our business virtual worlds is virtually the same between PC and mobile and console. Now there’s some important differences in interface and a couple of other things, but they’re basically the same. And we think we’re starting to really prove out this thesis. A year or 2 ago, this would have been heresy to say or very, very unusual to take it this way. But there’s been some early examples from other companies as well. And we think it’s where the world is going. So that’s one of the reasons why we’re very excited about mobile because the total addressable market is 10x what the total addressable market is on PC. I hope that answers your question.
Thank you. Time is up. So 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 email@example.com 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.