NHN Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

NHN Corporation operates a diverse portfolio, notably encompassing the gaming segment, cloud service, digital advertising, and webtoon distribution; it has undergone a significant shift in operations following its split from LINE Corporation in 2013.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

NHN, formerly known as Hangame, initially focused on online gaming, a segment that continues to be a core revenue driver. However, over the years, the company has strategically expanded into other areas, creating a varied portfolio. The business has evolved to include cloud services, a sector rapidly gaining traction across industries. The diversification also extends to digital advertising, which leverages its extensive network of online platforms. Furthermore, NHN has made a significant push in content distribution, particularly with its webtoon business, which has seen global expansion. In essence, they have become a multi-faceted technology company.

Business Overview

NHN’s revenue streams are primarily distributed among several key segments:

Gaming: This sector includes both PC and mobile games, generating revenue through sales of games, in-app purchases, and licensing agreements. This segment makes up about 20% of its total revenue.
IT Platform/Cloud: This segment provides infrastructure, security, storage, and other services to external parties, acting as both a core business and also supporting all of their other businesses. Revenue in this area has rapidly grown from 10% to almost 25% of its total revenue in recent years, indicating a strong push for development and investment in this area.
Advertising: NHN operates digital advertising platforms, generating revenue by placing advertisements across different websites and online services they provide or use (like webtoons). Digital advertising revenues make up about 17-18% of its total revenue, showing strong and steady growth.
Content Distribution: Primarily focused on webtoons, this segment includes publishing and distributing web-based comics internationally, generating revenue by both subscription and ad-driven options. This part of the business is growing very quickly and contributes about 30% to its total revenue.
Others: This segment contains smaller or recently developed businesses, including e-commerce, digital payment, and the like, as well as smaller scale projects within their other businesses. While the revenue of “other” businesses remains around 13-16% of total revenue, the company often uses this segment to pursue high-growth opportunities, making the revenue trends a potential signal for future revenue distribution for other segments.

Industry Trends

Gaming: The global gaming market is growing steadily, particularly in mobile gaming, with continued player and in-app purchases being a growing driver for profits. The increased popularity of e-sports is also creating an avenue for monetization.
Cloud Services: Cloud adoption is booming, and this has been especially accelerated by technological innovations (AI and data-driven technologies), as more companies move to cloud-based infrastructures. The industry is projected to continue to grow at a rapid pace.
Digital Advertising: Digital advertising spend is growing steadily, driven by the increasing time consumers spend online and the ability to accurately target audiences through data collection and analytics. As digital ad spending is becoming a larger percentage of total advertisement spending, advertising revenue is steadily climbing.
Webtoon and Digital Content: Demand for digital content is growing across all age groups, leading to rapid expansion in the webtoon market. This segment is expanding fast beyond its home region as new platforms open and new strategies are developed for monetization.

Competitive Landscape

Gaming: The gaming industry is intensely competitive, with established giants and new entrants vying for market share. This area experiences intense competition in marketing, advertising, and developing new unique game concepts.
IT Platform/Cloud: The cloud services market is also fiercely competitive, with massive cloud giants like AWS, Microsoft Azure, and Google Cloud. Given their vast resources and the competitive advantage of their ecosystems, new entrants struggle to gain traction. However, there are also some cloud areas that are less competitive (such as those related to the video game industry) or specialized.
Advertising: Digital advertising is very competitive with the market dominated by a few large players such as Google, Meta, and Amazon. Smaller advertising networks and platforms often struggle to make a significant impact as brand advertising is often bundled into larger platforms and ecosystems. Small or specialized networks have little to no bargaining power.
Content Distribution: While it is growing quickly, the webtoon market is very fragmented, with many players trying to make their place in the market, particularly through local offerings.

What Makes NHN Different

Diversified Portfolio: Unlike many focused tech companies, NHN’s diverse portfolio helps it hedge against cyclical nature of specific markets and offers a way to leverage resources and ideas across different business areas.
Global Presence: While they have a substantial presence in South Korea, they have expanded to other areas, establishing a platform for content creation and distribution and expanding their growth strategy. They are also making efforts to capitalize on the growing market for Asian entertainment.
In-house Technology: NHN maintains a strong emphasis on in-house technical capabilities. This, combined with its history of gaming, creates an environment for innovation. They are able to quickly adapt and capitalize on market trends and changes, creating a positive environment for experimentation and innovation. This advantage has allowed NHN to enter new industries and also helps support its core operations.
Emphasis on Content: Unlike other platform companies, NHN has a direct stake in content development and distribution that allows them to control user experiences from start to finish, create a competitive advantage through vertical integration, and create high customer satisfaction.

Financial Overview

Revenue Growth: The company has been demonstrating strong revenue growth over the past decade across all of its business areas, specifically in cloud and digital content (webtoons). They have used strong growth in a few core areas to fuel continued expansion into other high growth sectors.
Margins: The gross margins have been high-ranging between 40% to 50%. However, due to large operating expenses, the net profit margin is much lower- around 2-10%. This is common for many technology companies, who need to invest heavily in operations and R&D. This lower level of net income and margins makes the business inherently less predictable as the company’s profitability changes more frequently due to their high expenses.
Liquidity: The company has a strong current ratio, above 2, which indicates a healthy liquidity position. Having more than two times as many assets as liabilities means there is little risk of bankruptcy due to short-term obligations. However, the company has also been taking on more debt and has seen debt levels nearly double since 2018.
Profitability: For most of its history as an independent company, NHN’s profits have been limited and volatile. However, for the last two years (2022-2023), NHN has been steadily reporting higher profitability and, while not as high as their ROIC, they are showing continued promise in both growth and profits. This seems to stem mostly from increased operational efficiencies across the different business segments and continued growth in their high-revenue businesses like webtoons and cloud services.
Capital Expenditures: Capital expenditure levels remain modest and within reasonable ranges based on cash flows, indicating sustainable investments in growth and maintenance. However, they have not always followed the same principles and have gone on acquisition splurges to capture the gains of other successful businesses.
Cash Flows: Cash flows are typically strong in the operating side, particularly as seen in the last few years, while investment and financing cash flows tend to fluctuate. This shows that the company is capable of creating sustainable value.

Moat Assessment: 2 / 5

NHN has some moats, but it is not nearly as strong or as easily definable as other market leaders. NHN’s “moat” consists of several factors:

Network Effects While not very strong, the network effect is present within some of their businesses like webtoons and payment system (though it is very small). Because these business are not the core part of their revenue, these network effects are very small.
Scale: In particular business areas, the company has created localized scale that can produce an economic advantage compared to other competitors. They have managed to gain local market share in gaming (through its previous success with hangame) and webtoons, using this to create economies of scale within these business areas.
Intangible assets: In certain parts of their business, such as their video game platform, distribution rights for their webtoons, and unique technology and expertise, NHN has built intangible assets that might be able to protect them from competition.

However, most of these points lack the strength to reliably protect the company from competitors. NHN is also primarily active in the highly volatile technology sector, where innovation is constant and it is difficult to maintain a long-lasting competitive edge. For the reasons above, their moat strength is rather weak, but it still exists. We can give NHN a 2/5 for moat quality.

Risks to Moat and Business Resilience

Intense competition: Many of NHN’s businesses face intense competition, particularly in cloud, gaming, and advertising. This is a threat to their performance and can also erode profitability as margins are decreased.
Rapid Technological Changes: The technology sector is subject to rapid and unpredictable innovations. This could render NHN’s advantage outdated or obsolete as competitors come up with new and more popular technology.
Reliance on Acquisitions: Since much of the company’s growth strategy is based on acquisitions, they are vulnerable to high valuations, integration problems, and the risk of acquired assets not living up to expectations. This could cause severe volatility in future profits and cash flow.
Economic Cyclicality: While NHN has diversified its revenue, some of their core segments, like gaming, advertising, and certain portions of the IT sector, are prone to fluctuations with changes in the broader economy. These industries may experience downturns during economic downturns, leading to revenue declines.
Lack of Brand Awareness: While they are popular in South Korea and certain parts of Asia, the company has little international brand recognition compared to other tech giants. This means its growth strategy will face additional difficulties as there is no inherent interest in any of their products.

Understandability: 3 / 5

While NHN operates in a wide variety of different industries, the basic mechanics of each sector, and how they individually generate revenue, is relatively easy to understand. However, some of their financial statements can be confusing (for example, differentiating between operating and non-operating income). Therefore, it requires some knowledge of how accounting conventions can influence the reported financials, and how a company’s business model influences its revenue streams. It also requires a decent level of understanding in multiple different technology and business sectors, as they are operating in many. For these reasons we rank its understandability as 3/5.

Balance Sheet Health: 4 / 5

The company has a strong current ratio, suggesting a decent liquidity. It also has not traditionally been saddled with large debt obligations compared to its cash flows. However, due to recent increases in debt to fund growth strategies, its balance sheet is not the strongest. It is also worth noting that we are not treating the company’s stock options as a debt like many other investment firms, which could change the debt profile, although the change would likely be minimal. It has been generating sufficient cash flows to cover those obligations in the past, but these cash flows may vary significantly given the business’s dependence on high growth sectors and its large operational costs. Overall we are rating the company’s balance sheet health as 4/5.

Recent Concerns

Decreasing profits: The company has struggled with profitability for much of the past decade. However, more recently they have started to turn a profit and the trend is increasingly positive. These profitability concerns seem to be the main catalyst for the dip in its stock price. The company’s management has recognized the need to improve profitability and have publicly noted efforts to reduce expenses, streamline operations, and focus on high-growth revenue segments.
Acquisition strategy: The company has historically spent a significant portion of its resources on the acquisition of other tech companies. Many of these acquisitions have failed to generate significant growth, indicating poor due diligence or a flawed strategy. Management is aware that not all acquisitions are a great use of resources and is making efforts to acquire and invest in fewer but better companies.
Market valuation: Due to poor performance over the last few years, and a perceived inability to generate long term profits, the company’s share price has taken a beating, with the shares falling sharply compared to its high point during the tech bubble of 2020. The management has acknowledged the need to make the company’s value more readily visible to shareholders by demonstrating long-term performance.