NEXON Co.,Ltd. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥351.50B
• Operating Income: ¥116.84B
• Net Income: ¥79.93B
• EPS: ¥100.56

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: FY2025 Q3 was solidly profitable with best-in-class margins for a game publisher, but earnings declined YoY and cash conversion fell below our quality threshold. Revenue came in at 3,515.03 (−4.1% YoY), while operating income was 1,168.37 (−7.2% YoY) and net income was 811.95 (−21.0% YoY). Gross profit was 2,356.17, yielding a high gross margin of 67.0%, reflecting a scalable digital content model. Operating margin was approximately 33.2% this quarter. Using the YoY rates, we estimate prior-year Q3 operating income of about 1,259.43 on revenue of about 3,664.64, implying operating margin compression of roughly 112 bps YoY. Net margin was 23.1% versus an estimated 28.1% in the prior-year quarter, indicating a sharper compression of roughly 497 bps. EBITDA was 1,242.52 with an EBITDA margin of 35.3%, underscoring resilient core profitability despite top-line softness. Below the operating line, equity-method losses of −43.26 and a high effective tax rate of 41.4% weighed on bottom line. ROE stood at 7.7% (DuPont: NPM 23.1% × Asset Turnover 0.270 × Leverage 1.22x), showing margin-led returns with conservative leverage. Cash flow quality deteriorated: OCF was 628.05 versus net income of 811.95, putting OCF/NI at 0.77x (<0.8 threshold). That said, Free Cash Flow was strong at 684.92, aided by light capex (−24.61) and positive investing cash flow this quarter. The balance sheet remains robust with an equity ratio of 81.0% and D/E of 0.22x, providing significant financial flexibility. Capital returns were meaningful: dividends paid were −102.94 and buybacks were −390.98, largely funded within internal resources. ROIC was 6.4%, below the 7–8% benchmark, suggesting room for improvement in capital efficiency. Forward-looking, the key swing factors are live-ops performance of core titles, new title cadence, FX, and normalization of equity-method losses and tax rate. Overall, the quarter shows resilient operating profitability but pressure from non-operating items and weaker cash conversion that merit monitoring.

Profitability Analysis

ROE decomposition: ROE 7.7% = Net Profit Margin 23.1% × Asset Turnover 0.270 × Financial Leverage 1.22x. The biggest driver of the YoY ROE decline is the contraction in net profit margin: net income fell 21.0% YoY against a 4.1% revenue decline, implying greater compression below operating income (equity-method losses and a higher effective tax rate). Operating margin also compressed by an estimated ~112 bps YoY (current ~33.2% vs prior ~34.4%), reflecting modest negative operating leverage as revenue declined. The business reason: softer topline (likely content/title mix and regional performance), coupled with below-the-line headwinds (−43.26 equity-method income and 41.4% tax rate) which reduced net margin disproportionately. Sustainability: operating margin at 33%+ is structurally supported by digital distribution economics, but net margin at 23% could normalize upward if equity-method losses abate and tax rate reverts; conversely, further hit-driven volatility could depress margins. Watch for SG&A trends in future disclosures; we note that operating income fell faster than revenue (−7.2% vs −4.1%), indicating mild negative operating leverage, but SG&A breakdown was unreported, limiting granular diagnostics.

Growth Assessment

Revenue declined 4.1% YoY to 3,515.03, suggesting a softer content cycle or regional/title mix headwind. Operating income declined 7.2% YoY to 1,168.37, reflecting negative operating leverage. Net income declined 21.0% YoY to 811.95, driven by equity-method losses (−43.26) and a high effective tax rate (41.4%). EBITDA margin at 35.3% indicates core profitability remains intact, implying the decline is more about mix and below-the-line items than structural erosion. ROIC at 6.4% is below the 7–8% benchmark, pointing to subdued capital efficiency this period. Outlook hinges on bookings trajectory of live-service titles, cadence/scale of new launches, geographic performance (notably China/Korea), and FX trends. Equity-method contributions are currently a drag; normalization would aid net growth. With strong cash/FCF and a low-leverage balance sheet, Nexon retains capacity to invest in pipeline, M&A, and user acquisition to re-accelerate growth. However, absent new catalysts, near-term growth is likely constrained by a challenging comparison base and hit-driven dynamics.

Financial Health

Liquidity: Current ratio not disclosed; however, current assets are 8,342.64 and cash & equivalents stand at 5,265.73, indicating substantial liquidity even though formal ratios are not calculable. No warning triggered on current ratio because it is not reported. Solvency: Equity ratio is 81.0% and D/E is 0.22x, indicating a conservative capital structure; well below any leverage concern thresholds (D/E < 1.5 is conservative). Maturity mismatch: Current liabilities unreported, so we cannot assess short-term debt coverage; nevertheless, cash holdings appear ample relative to total liabilities (2,383.48). Off-balance sheet: No disclosures provided; cannot assess lease or contingent liabilities. Overall, balance sheet strength is high with ample buffer for volatility.

Cash Flow Quality

OCF was 628.05 versus net income of 811.95, yielding OCF/NI of 0.77x, which flags potential earnings quality pressure this quarter (below the 0.8 threshold). Free Cash Flow was 684.92, supported by low capex (−24.61) and positive investing cash flow (56.87), implying FCF benefited from non-recurring inflows or asset recycling. Working capital details are not provided; we cannot parse whether the OCF shortfall vs NI was driven by receivables, deferred revenue changes, or other timing effects. Given the live-service model, fluctuations in deferred revenue and platform payables can cause quarter-to-quarter variability. Sustainability: underlying OCF should track NI over time, but near-term monitoring is needed to ensure cash conversion normalizes above 1.0x. With large cash balances and low debt, short-term liquidity risk is low despite the quarter’s weaker conversion.

Dividend Sustainability

Payout ratio is 22.9%, well below the <60% benchmark, indicating ample coverage by earnings. FCF coverage is 3.69x, suggesting dividends are comfortably funded even after capex. Total cash returns in the quarter included dividends of −102.94 and buybacks of −390.98; both were largely supported by internal cash generation and balance sheet capacity. With equity ratio at 81% and sizable cash & equivalents (5,265.73), dividend sustainability is strong, contingent on maintaining mid-20% net margins and stabilizing OCF/NI above 0.8–1.0x over time. Policy outlook: continued shareholder returns look feasible; scope for flexibility exists depending on pipeline investments and M&A.

Risk Assessment

Business Risks:

• Hit-driven revenue model: dependence on performance of a limited number of titles and live-ops events
• Content pipeline timing risk: delays or underperformance of new launches
• Regional regulatory risk (e.g., China/Korea content approvals and playtime regulations)
• Platform dependency and fees impacting gross-to-net (Apple/Google/PC platforms)
• Competition intensity in F2P games affecting UA efficiency and ARPPU

Financial Risks:

• Cash flow quality risk: OCF/NI at 0.77x below threshold
• Equity-method losses (−43.26) dragging below-OP earnings; potential for continued volatility
• High effective tax rate (41.4%) suppressing net income and ROE
• FX exposure impacting reported revenue/profit translation and in-game purchasing behaviors
• ROIC at 6.4% below 7–8% benchmark, signaling softer capital efficiency

Key Concerns:

• Net margin compression of ~497 bps YoY driven by non-operating headwinds
• Operating margin compression of ~112 bps YoY amid negative operating leverage
• Limited disclosure on SG&A and working capital restricts visibility into cost drivers and cash conversion
• Potential persistence of affiliate/equity-method underperformance
• Execution risk around live-ops cadence and monetization in mature titles

Investment Implications

Key Takeaways:

• Core profitability remains strong (gross margin 67%, operating margin ~33%) despite revenue dip
• Net income decline (−21% YoY) was driven by equity-method losses and a high tax rate rather than operational collapse
• ROE at 7.7% is margin-led with conservative leverage (1.22x), but ROIC at 6.4% indicates room to improve capital efficiency
• Cash conversion slipped (OCF/NI 0.77x), requiring monitoring for normalization
• Balance sheet strength (equity ratio 81%, D/E 0.22x, cash & equivalents 5,265.73) underpins sustained shareholder returns

Metrics to Watch:

• Bookings growth and deferred revenue movements (leading indicator of future revenue)
• OCF/NI ratio and working capital drivers (receivables, deferred revenue, payables)
• Equity-method results trajectory and any turnaround plans
• Effective tax rate normalization
• Title pipeline milestones, DAU/MAU, ARPPU, and cohort retention
• ROIC progression toward 7–8%+
• FX sensitivities and hedging effects

Relative Positioning: Within Japan-listed gaming peers, Nexon maintains superior operating margins and a fortress balance sheet, but current-period net margin and ROIC lag due to non-operating drags and elevated taxes; execution on pipeline and stabilization of below-the-line items are key to regaining outperformance on earnings growth and returns.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis