Course: Financial Accounting & Analysis Date: Mar 20, 2013 Reference: NCSoft Q4/2012 Financial Report

1.
Financial Statement Analysis
IM516 Financial Accounting and Analysis – KAIST Business School
By: Daniel Munoz-­‐‑Smith & Anggriawan Sugianto – March 20, 2013
1

2. Outline
1. Business Environment
2. Financial Statements Analysis
a. Balance Sheet
b. Income Statement
c. Cash Flow Statement
3. Earning Quality
a. Irregular items
b. True income
4. Activity analysis
5. Risk analysis
6. Profitability analysis
7. Conclusion
8. Appendix
2

3. NCsoft – Financial Statement Analysis
1. Business Environment
3

4. Company Profile
NCSOFT Corp.
NCSOFT Corporation
Consolidated Subsidiaries
Equity method investees
• Developer and publisher of online
games
NC
West
Holdings
(100%)
NC True (49%)
• Founded March 11, 1997, by Taek Jin
NC Europe (100%)
Crazy Diamond (34%)
Kim (CEO)
• Listed on KOSDAQ, September 14, NC Taiwan (85%)
Zepeeo (30%)
2000
NC Japan (60%)
• Listed on Korea Stock Exchange on
Ntreev Soft (76%)
May 22, 2003 (revoked registration
with KOSDAQ).
NCSOFT Service ( 100%)
• Locations: Korea (HQ), China, Japan,
NextPlay (80%)
Taiwan, Thailand, UK, US
• Employees: > 3,000 (est.)
Orion Soft (100%)
NC Dinos Baseball Club (100%)
Hotdog Studio (58%)
4

5. Game Industry Overview
• Online is the fastest growing game platform with CAGR 21% 2009~2014.
• China is the biggest online game market with CAGR 23% 2009~2014.
5

6. Online Game Industry
• Online is the a faster growing game platform than mobile.
• China and MMORPG genre are one of the biggest growth drivers for online games.
6

7. Core Competence
Products:
1. MMORPG
Lineage, Lineage II, Aion, Blade and Soul, Sales Breakdown by Game Title
Guild Wars, Guild Wars 2, Wild Star, Lineage
Eternal
Others
2. Casual Games
50,764
7%
Love Best, Metal Black, 마법천자문, Food Lineage
Force, Free Rice
Guild Wars2
205,261
30%
3. Web/Board Games
164,854
24%
Golden Land, 명인장기, 선언맞고, 클래식맞고,
Golden Poker
Hybrid Business Models:
1. Free-­‐‑to-­‐‑play / Premium subscription
Blade&Soul
Lineage II
65,082
2. In-­‐‑game item sales
62,147
9%
9%
Aion
Strength:
141,311
1. World-­‐‑class development capabilities & strong 21%
distribution pipeline
2. Global publishing network
Unit: KR Million Won
3. 14 years of operational know-­‐‑how and skills
7

8. Industry Analysis
New Entrants
Public Policy
• Sizable barriers to entry and • 2012: Selective shutdown system
learning curve in game industry, aiming to curtail online gaming
especially in MMORPG addiction among young students.
development.
• 2011: Cinderella Law prohibiting
players under 16 playing between
12 am and 6 am
Suppliers
Competition
Costumers
• Korea: Webzen, Actoz Soft, Neowiz • China market: MMORPG will be the
• In order to publish more quality
Games, Golfzon, Gamevil, Com2Us
most favored genre with 50-­‐‑60%
games (role: game publisher), • Japan: Sega Sammy, Tecmo Koei, market share.
NCsoft needs to cooperate with Konami, Nexon
• Korea market: Online games will make
several game developer companies.
• China: Shanda Games, Changyou, up 88-­‐‑89% of Korean gaming market.
NetDragon Websoft
• US & EU market: Online is expected to
• US: Zynga, Electronic Arts
grow faster than mobile (CAGR 17%
vs. CAGR 10%).
Substitutes
• Mobile/casual game is growing fast
now (with CAGR 14%). However,
it’s still relatively slower than the
growth of online game.
8

9. Gaming Industry Peer Group
• International
Name
Sector
Ctry
Webzen
Inc
Toys
KOR
Actoz
So8
Co
Ltd
Toys
KOR
Neowiz
Games
Corp
Toys
KOR
Sega
Sammy
Holding
Inc.
Toys
JPN
Tecmo
Koei
Holdings
Co.
Ltd.
So8ware
JPN
Golfzon
Co
Ltd
RecreaFonal
Services
KOR
Shanda
Games
Ltd
Toys
CYM
Konami
Corp
Toys
JPN
Changyou.com
Ltd.
Toys
CYM
Zynga
Inc
Toys
USA
Electronic
Arts
Inc.
Toys
USA
Gamevil
Co
Ltd
Toys
KOR
NEXON
Co
Ltd
Toys
JPN
Com2uS
Corp
Toys
KOR
NetDragon
Webso8
Inc.
Toys
CYM
9

10. NCsoft – Financial Statement Analysis
2. Financial Statements Analysis
10

11. Balance Sheet
Cash increased dramatically
mostly from operating
activities. Please refer to CF/S
Consolidated (million KRW)
Area
Accounts
2012
2011
%
Current Assets
674,304
650,829
4%
Cash & cash equivalents
123,041
60,183
102%
Short-­‐‑term financial instruments
313,035
421,993
-­‐‑26%
Significant change in
Available-­‐‑for-­‐‑Sale Assets,
Account receivables
76,702
71,983
7%
and Inventories
Others
161,525
83,506
93%
Assets
Non-­‐‑current Assets
642,522
470,183
37%
Investment assets
45,522
36,149
26%
M&A activity affected
Tangible assets
425,828
366,698
16%
intangible assets
Intangible assets
133,317
31,550
323%
Others
336
361
-­‐‑7%
Total Assets
1,316,826
1,121,012
17%
Current Liabilities
235,652
189,874
24%
M&A activity also affected
the amount of payable
Borrowings
12,175
12,380
-­‐‑2%
Payables
25,474
16,342
56%
Current tax liabilities
5,317
7,613
-­‐‑30%
Other provisions
7
-­‐‑
-­‐‑
Liabilities
Others
192,679
170,093
13%
Non-­‐‑current Liabilities
60,610
46,285
31%
Defined benefit obligations
35,284
34,115
3%
Long-­‐‑term employee benefits
4,549
5,391
-­‐‑16%
Others
20,776
26,288
-­‐‑21%
Total Liabilities
296,262
255,669
16%
Paid-­‐‑in Capital Stock
10,949
11,425
-­‐‑4%
Other Paid-­‐‑up Capital
117,910
112,113
5%
Other Components of Equity
991
4,613
-­‐‑121%
Equity
Retained Earnings
870,734
733,318
19%
Non-­‐‑Controlling Interests
19,979
12,872
55%
Total Stockholders Equity
1,020,563
865,243
18%
Total Liabilities + Shareholders’ Equity
1,316,826
1,121,012
17%
11

12. Balance Sheet Analysis
Increased by nearly 100%
between 2011 and 2012
Important to determine
Other Current Assets
materiality of assets; may
distort liquidity.
(million KRW)
2012
2011
%
Other Current Assets
161,525
96,084
93%
Other Receivables
10,732
25,584,1
-­‐‑58%
Short-­‐‑Term Loans
2,039
2,097
-­‐‑3%
Available-­‐‑for-­‐‑Sale Financial Assets
125,000
50,000
150%
Held-­‐‑to-­‐‑Maturity Securities
-­‐‑
127
-­‐‑100%
Inventories
2,038
1,265
61%
Other Quick Assets
15,748
17,009
-­‐‑7%
Income Tax Assets
5,966
• Other Current Assets increased by nearly 100% between 2011 and 2012
• The most significant changes happened in Available-­‐‑for-­‐‑sale financial assets.
• Available-­‐‑for-­‐‑sale Financial Assets (AFS) are any non-­‐‑derivative financial assets
designated on initial recognition as available for sale
ü Any other instruments that are not classified as as (a) loans and receivables, (b) held-­‐‑to-­‐‑
maturity investments or (c) financial assets at fair value through profit or loss.
12

13. Balance Sheet Analysis
Increase in intrinsic
business value
Intangible Assets
(millions KRW)
2012
2011
2010
‘12-­‐‑’11
‘11-­‐‑’10
Non-­‐‑current Assets
642,522
470,183
291,884
37%
61%
Investment assets
45,522
36,149
49,546
26%
27%
Tangible assets
425,828
366,698
189,517
16%
93%
Intangible assets
133,317
31,550
16,142
323%
95%
• Increase in intrinsic business value: Significant increase intangible assets which
reflects Nexon’s acquisition of Ntreev, and Nexon’s purchase of NCSoft.
13

14. Income Statement
Sales increase from new
(millions KRW)
online games (“Blade &
Soul”, “Guild War 2”),
Accounts
2012
2011
2010
%
(2012)
%
(2011)
royalty, and from
merchandise
Net
Sales
753,520
608,904
649,748
24%
-­‐6%
Cost
of
Goods
Sold
226,175
139,099
142,991
63%
-­‐3%
There is room
to improve
Gross
Profit
527,344
469,804
506,757
12%
-­‐7%
Selling
&
AdministraEve
Expenses
376,091
333,997
263,876
13%
27%
Company is
doing well
OperaFng
Income
151,252
134,682
242,881
12%
-­‐45%
Opera2ng
Profit
Margin
(%)
20%
22%
37%
Decrease in
Non-­‐operaEng
Income
18,290
23,617
38,209
-­‐23%
-­‐38%
interest revenue
Non-­‐operaEng
Expenses
865
1,462
556
-­‐41%
163%
Equity
Income
on
Investments
7,026
Significant increase
from “Misc. Gains” &
Other
Income
24,912
16,165
54%
Gains on Evaluation
of Investments under
Other
Expense
17,708
17,290
2%
Equity Method
Income
before
Tax
Expenses
182,907
156,837
228,293
17%
-­‐31%
Pre-­‐tax
Profit
Margin
(%)
24%
26%
35%
Income
Tax
Expenses
29,240
39,537
228,293
-­‐26%
-­‐83%
31% increase in
consolidated net
income
Consolidated
Net
Income
153,666
117,300
173,803
31%
-­‐33%
Non-­‐Controlling
(Minority)
Interest
-­‐2,135
-­‐2,515
-­‐
1,780
15%
41%
Controlling
Interest
155,802
119,815
175,584
30%
-­‐32%
14

15. Game Sales
Year 2012 – in million KRW
Year 2011 – in million KRW
Title
Total
Growth*
%
Title
Total
%
Lineage
205,261
5%
30%
Lineage
195,702
35%
Lineage
II
65,082
-­‐35%
9%
Lineage
II
100,574
18%
Aion
141,311
-­‐37%
20%
Aion
223,248
40%
Blade
&
Soul
62,147
414%
9%
City
of
Heroes
12,086
2%
Guild
Wars2
164,854
1985%
24%
Guild
Wars
7,905
1%
Others
50,764
296%
7%
Others
12,816
2%
Total
Game
Sales
689,419
25%
100%
Total
Game
Sales
552,331
100%
Game Sales (2012)
Game Sales (2011)
Lineage II
Aion
Lineage II
65,082
141,311
100,574
9%
21%
18%
Blade & Soul
Aion
62,147
223,248
9%
40%
Lineage
Lineage
205,261
195,702
30%
36%
Others
Guild Wars2
12,816
City of
164,854
2%
Guild Wars
Heroes
Others
7,905
24%
50,764
12,086
2%
7%
2%
15
Significant growth was made by new game launched in 2012: Blade & Soul, Guild Wars 2

16. Cash Flow Statement
Operating activities are the
most influential factors
affecting company’s cash
(millions KRW)
CASH
FLOW
2012
2011
2010
%2012
%2011
Net
Income
153,666
117,676
167,396
31%
-­‐59%
Cash
From
OperaFng
AcFviFes
210,641
138,554
217,189
52%
177%
Cash
From
InvesFng
AcFviFes
-­‐146,451
-­‐127,420
-­‐246,453
-­‐15%
-­‐50%
Cash
From
Financing
AcFviFes
5,512
-­‐11,650
-­‐4,533
147%
489%
Net
Change
Cash
63,887
-­‐299
-­‐33,797
21420%
143%
• NCSoft’s program of Liability driven acquisitions and disposals between 2011 and 2012 are reflected
in the Cash Flow statements highlight significant increases in cash from operating and financing
activities.
• In 2012, NCsoft Corp increased its cash reserves by 108.00%, or 63.89bn. The company earned
210.64bn from its operations for a Cash Flow Margin of 27.95%. In addition the company generated
5.51bn cash from financing while 146.45bn was spent on investing.
• Most of this increase in cash reserve was from Operating Activities, which is positive.
16

17. Footnotes
Significant Transaction between 2011-­‐‑2012
Major Acquisitions:
Discontinuance/Disposals
• December 2012 • Aug 2012
NCSoft folded NC Interactive Inc. into a new wholly NCSoft liquidated Paragon Studios and shut-­‐‑down of
owned subsidiary, NC West Holdings to manage its ‘City of Heroes’ game
Western subsidiaries
• Jun 2011
• Jul 2012 NCSOFT shut -­‐‑down 'ʹLinage'ʹ in North American
NEXON acquired 14.7% interest in NCSoft for $688 M
servers
• Feb 2012
NCSoft purchased 76% of Ntreev for US$96.7 M
• Jul 2011
NCSoft acquired 58.3% interest in Hotdog Studio
Litigation:
Write-­‐‑Downs
• Aug 2012 -­‐‑
EN Masse Entertainment seeles NCSoft lawsuit
• End of 2011
NCSoft defendant in 2 pending lawsuits
• Oct 2011:
Richard Garrioe-­‐‑Lawsuit seelement; NCSoft paid $36
million USD in damages
17

18. NCsoft – Financial Statement Analysis
3. Earning Quality
18

19. Irregular Items
Discontinued operations
• On August 31, 2012, NCsoft closed Paragon Studios (formerly known as NCsoft
NorCal), one of its subsidiaries that developed “City of Heroes”.
(millions KRW)
2011
Title
Total
Lineage II
100,574
Lineage
195,702
18%
Lineage
II
100,574
Aion
(in
million
KRW)
Game
Sales
Aion
223,248
223,248
40%
City
of
Heroes
12,086
Lineage
Guild
Wars
7,905
195,702
36%
Others
12,816
Others
12,816
Total
Game
Sales
552,331
2%
Guild Wars
7,905
City of Heroes
2%
12,086
2%
Changes in accounting principles applied
• Since January 1, 2011, NCsoft has applied K-­‐‑IFRS as their accounting principle
standard, replacing K-­‐‑GAPP.
19

20. True Income
(millions KRW)
2012
%
2011
%
Operating Income
151,252
83%
134,682
87%
Non-­‐‑operating Income
18,290
10%
23,617
15%
Non-­‐‑operating Expenses
865
0%
1,462
1%
Equity Income on Investments
7,026
4%
0
0%
Other Income
24,912
14%
16,165
10%
Other Expense
17,708
10%
17,290
11%
Income before Tax Expenses
182,907
100%
156,837
100%
• The income statement, indicates that operating income in 2012 is 12% larger than in
2011.
• However, the percentage of operating income to total income before tax expense in
2012 is lower than in 2011. This reflect situation that NCsoft become a somewhat
dependent to unsustainable income such as non-­‐‑operating or other income.
20

21. NCsoft – Financial Statement Analysis
4. Activity Analysis
21

22. Short-­‐‑term Activity Analysis
2012
2011
Change
Inventory Turnover
136.90
98.91
38%
Avg. Days Inventory in Stock
2.67
3.69
-­‐‑28%
Receivable Turnover
10.14
8.69
17%
Avg. Receivable Outstanding
36.00
41.99
-­‐‑14%
Payable Turnover
81.69
72.54
13%
Avg. Days Payable Outstanding
4.47
5.03
-­‐‑11%
Working Capital Turnover
1.68
1.15
45%
Receivable Turnover: Increased it’s efficiency in collecting on accounts
receivable
Payable Turnover: increasing, which indicates that NCSoft is paying off its
suppliers at a faster rate than in 2011
More sale compared to cash used to fund sales
22

23. Long-­‐‑term Activity Analysis
2012
2011
Change
Fixed Assets Turnover
1.90
2.19
-­‐‑13%
Total Assets Turnover
0.62
0.56
10%
Fixed Assets Turnover decrease indicates that NCsoft has been less
effective in using the investment in fixed assets to generate revenues
Total Assets Turnover increase confirms that NCSoft is growing
revenues in proportion to sales
23

24. NCsoft – Financial Statement Analysis
5. Risk Analysis
24

25. Risk Analysis
Horizontal
Vertical
2012
2011
Peer Group
Current Ratio 286% 322% -
Short-­‐‑Term Quick Ratio 218% 321% 201%
Cash Ratio 185% 243% -
Debt to Total Capital 22% 22% 14%
Solvency
Debt to Equity 29% 28% 6%
Liquid: Strong position to pay back short –term debt obligation
Debt Financing: Growth being financing with debt
25

26. NCsoft – Financial Statement Analysis
6. Profitability Analysis
26

27. Profitability Analysis
Horizontal
2012
2011
Gross Margin
70%
77%
Neeing $.020 for each $ of revenue
generated
Operating Margin
20%
22%
EBITDA Margin
25%
22%
Operations have become more
profitable
EBT Margin
24%
26%
Profit Margin
21%
19%
Significant increase in the
company’s ability to turn
Return on common equity
21%
11%
investment capital into profits
Earnings per share
6,450
5,529
EPS increase of KRW 921
Price-­‐‑to-­‐‑Earnings ratio
23
56
Investors anticipating lower growth
Price-­‐‑to-­‐‑book value ratio
301
615
Financial Leverage
83%
86%
27

28. Profitability Analysis
Vertical
NCSOFT
Peer Group Median (14 Co.’s)
EBITDA Margin
25.16
22.09
EBT Margin
24.27
17.24
Profit Margin
20.68
11.45
Return on common equity
20.97
25.09
• Operations beeer managed and more profitable relative to its Peer Group
• Earned significantly more before taxes than its industry Peer Group
• Sales – relative to cost – nearly doubled its Peer Group in 2012
• Industry Peer group was beeer able to turn its capital investments into profits during
2012.
28

29. NCsoft – Financial Statement Analysis
7. Conclusion
29

30. Conclusion
• NCsoft is a leading developer and publisher of online games, with core
competence in developing MMORPG.
• NCsoft is in beeer financial situation in 2012 compared to in 2011, especially
if we look at their cash flow which its growth is powered by operating
activities.
• NCsoft’s risk position is positive with a strong ability to meet short and long
term debt obligations.
• M&A activities affected NCsoft in term of both tangible and intangible
assets, and made its financial statement look beeer.
• Compare to its competitors (peer group), NCsoft has competitive advantage
because they have strong operating activities in online game development.
30

31. NCsoft – Financial Statement Analysis
8. Appendix
31

32. References
• NCsoft website : www.ncsoft.com
• NCsoft Audit Report : 2011
• Bloomberg Businessweek: hep://investing.businessweek.com/research/stocks/
financials/financials.asp?ticker=036570:KS&dataset=incomeStatement&period=A
¤cy=native
• Reuters: hep://www.reuters.com/finance/stocks/financialHighlights?
symbol=036570.KS
• Infinancials Analysis: hep://www.infinancialsanalytics.com/en/financial
%20analysis,Ncsoft%20Corp,30238FK.html
• Financial Times: hep://markets.ft.com/research/Markets/Tearsheets/Financials?
s=A036570:KSC
• Gamespace: hep://www.gamespace.com/gamelist.cfm/game/446/view/forums/
thread/371752/page/1
32

33. Team Meeting Chronology
1. Date: 04 March
Discussion: Knowledge of Ncsoft, Korean online and general online gaming issues
Assignments:
• Anggri: Research on general online gaming industry
• Daniel: NCSoft general overview (latest news, overview of competitors
2. Date: 07 March
Discussion: Review of findings; overview of analysis components discussed during class lectures
Assignments:
• Anggri: Obtain Ncsoft financial statements and Auditor’s reports
• Daniel: Obtain financial data on industry competitors (Nexon, Neowiz, Webzen, etc.)
3. Date: 11 March
Discussion: Update on data collection; Assignment of analysis responsibilities
Issues: Obtaining English language data and analysis; only 2011 Auditors Report is available
Assignments:
• Anggri: Business Environment, Irregular Items, Short-­‐‑term activity, Liquidity, Profitability
analysis
• Daniel: Financial Statements & footnotes; True Income, Long-­‐‑term activity, Solvency,
Integrated analysis; Appendices
33

34. Team Meeting Chronology
4. Date: 15 March
Discussion: Update on progression and target-­‐‑seeing for weekend
Assignments:
• Anggri: Complete Business Environment and Irregular Items
• Daniel: Financial Statements and Footnotes, and True Income
5. Date: 17 March
Discussion: Review of progression and issue problem solving
Issue: Data in non-­‐‑Korean currency – Nexon a more complicated option
Assignments:
• Anggri: Finalize weekend work and begin Short-­‐‑term activity, Liquidity, Profitability
• Daniel: Finalize weekend work, research appropriate competitor option, and begin Long-­‐‑
term activity, Solvency and Integrated analysis
6. Date: 18 March
Discussion: Review of progress
Assignment:
• Anggri; PPT compilation
• Daniel: Editing
7. Date: 19 March
• Discussion: Finalization of report and presentation preparation
• Assignments: Finalization
34