Nitro Games Oyj (NITRO) Earnings Call Transcript

Good morning. [Foreign Language]. My name is Jussi Tahtinen and I am the loud and proud CEO and Co-Founder of Nitro Games. Welcome to this additional webcast that we're hosting today and the purpose of this webcast is that we wanted to have an additional set of information available for all of you in connection with the preferential Rights Issue that we are currently doing. And in addition to this webcast, we of course have our prospectus available on our website and that prospectus contains all the facts and information related to the Rights Issue. So you should always refer to that document when making your decisions about things. So in terms of today, what we're going to go through is go check out the recent business update with Nitro Games, what's happening and so on. We're also going to talk a lot about Autogun Heroes, which is our new and hot game launch that's currently ongoing, as well as little bit about the ongoing Rights Issue and how you can participate on that if you wish to do so. So without further ado, let's start with the presentation and after the presentation is done, we will of course take the questions and give answers to those as usual. And overall in terms of our summary, we're going through a very exciting point of time at the moment. And why is that? It's both because our strategy, our long-term plan is starting to pay off; but in connection with that, we're also seeing great opportunities for Nitro in the shorter term as well. Most prominent of those is of course the ongoing launch phase with Autogun Heroes and we have already communicated quite a bit about some really positive findings that we have had with the game first during the soft launch and now during the initial launch phase that we started at the beginning of June. These things all combined with our years of experience and the fantastic team that we have means that we are feeling very confident about our ongoing strategy and what we can expect in terms of the next years to come. For those of you who might not be that familiar with Nitro Games. In terms of a brief introduction, we're one of the oldest game companies here in Finland. We were founded back in 2007 so that means that we already have more than 15 years under our belt. We are listed in Nasdaq First North Growth Market Stockholm and basically what we do is we do mobile games, but these days more and more we also operate on other platforms when it comes to cross-platform gaming and cross-play gaming especially in our B2B service business. That's the part of our business where we sell our services to other leading industry companies and something where we have a very strong track record and a great outlook for the future. We focus on action and shooter games. That means that we have a very clear vision that we follow and basically everything we do fits to that vision one way or another. In terms of our strategy, we are obviously positioned on the mobile games market, but like said, more and more working with other platforms as well. And these shooter and action games, it's somewhat of a loose definition as a category because different parties define their categories little bit differently. But for us in Nitro, essentially a shooter and action game is a game for mid-core audience where things go boom. And shooter games are something that has been increasing their share of revenues on mobile for quite some time now. If you've been following Nitro for a longer time, we started to talk about this already before it kind of happened and now during the last few years we've been seeing this happen more and more. As of today or as of last year, mobile games represent roughly 1/4 of all revenues in this category and the other source of revenue are of course console and PC. And during the COVID years and the big pandemic, the whole games business saw big growth and after the pandemic was over, there's been a slight decline in the year-on-year growth, but still the market is growing and very much headed in the right direction. And why this is so important for Nitro Games is exactly because of our vision. We want to be the household name in the category of action and shooter games on mobile, but more and more also on cross-platform gaming. You don't have too many third-party studios out there who are capable of doing what we do technically and from experience and skill point of view. And what we're seeing on the market overall especially on the B2B market side is more and more of these big operators are seeking to move and add mobile in terms of their platform mix when they introduce their either existing or new IPs. And this makes a ton of sense because mobile games marketing is basically just so much better than what you can traditionally do on any other platforms because of the data-driven nature while at the same time the cost of producing a mobile game are typically pretty much peanuts compared to a large scale development of a AAA game on PC or console. And that's why adding a mobile game into the mix doesn't take too much, but it opens tons of new opportunities for monetizing the core brand. Our strategy, the current phase that we have basically started from the beginning of 2017. That's when we listed Nitro Games in Nasdaq First North and started to build our capabilities in self-publishing and live operations. Essentially for us, that means the whole funnel of data-driven development, having all the tools in our disposal to do game publishing and game marketing and the live operations for the games. The first phase of our current strategy ended in 2020 when Nordisk Games joined us as a leading investor. This was also the times when we did our first shooter game launch on mobile. The game was called Heroes of Warland that we launched towards the end of 2018. That game never took off and basically the most that we got out of it was a lot of great technology and especially a lot of great learnings and of course reputation because the game had great quality in so many ways. After that, in the recent years what we've been doing is expanding our project portfolio and doing more B2B projects, seeking larger order values with those and done some game launches. The latest game launch that we did in the end of last year was again called NERF: Superblast, which then again was a great game, and it's been rewarded by Apple and Google and selected as a nominee for several industry awards already. Now this year our plan is to take Nitro towards profitability and we also have a new game launch currently ongoing, Autogun Heroes, which combining that and what we're seeing in our B2B service business are the tools that we need to take us towards our goal of becoming profitable. And this development over the last few years step-by-step we are visualizing here with revenues trailing 12 months in Swedish kronas and our EBITDA margin also. So you can see our step-by-step approach quarter-by-quarter towards breaking even. And our next few years is when we expect to reach our vision. So we want to be the household name in the category of action and shooter games, we want to be known as the studio that crafts best experiences and that's also when we seek to deliver our scalable growth and the shareholder value moving forward. Our strategy is a portfolio strategy because we want to both maximize the upside while also protecting the downside and we have 2 different business areas in our strategy. The B2B service business is something that we've been doing for a long, long time and work with so many different partners out there and that is the part of the business that is profitable and growing. And the purpose of that business is to give us a steady stream of revenues and build the reputation of the studio; it helps us to attract talent, new partnerships and of course deliver profitable growth. And then again the games business is the part of the business, which is a lot more risky compared to the B2B service business. This is essentially where we have put in all the investments in the previous years, this is something that we are entirely self-funding and this is the part of the business where we're seeking hockey sticks. Most of the games in this business fail. That's the nature of free-to-play on mobile whether you like it or not. And now with Autogun Heroes, we believe that we definitely have a winner in our hands and that's why we're going to talk more about that today as well. But before we get into that, let's talk about the most important thing we have, which is our people. We have often said that people are our most important asset and that's what we really mean. And how we have structured things here in Nitro is pretty unique. We're based here in Finland where we have 2 studios, but our overall team is scattered almost across the world. So we have roughly 80 people here staffing currently as of June and with a total capacity of roughly 150 people working globally. And why that number deviates so much is because we scale up and down depending on the amount of people we need in our projects. We have basically 50 people here in our in-house staffing, which is the more or less nonscalable part where we seek to have the best possible industry talent that we can get to our payroll, and then we scale up and down with the help of our affiliated studios around the world. And this means that we can both react to new projects starting with a rapid scale and a rapid pace and also we can tolerate times when there is not so much work to do. So it really functions in both ways. And that's why we have a very experienced management team here in Nitro combined with several industry-leading talent that we have been able to attract during the recent years. Especially in the last, I would say, maybe 2 years' time we have been able to get our hands on the top talent in this business, which has also reflected very positively in the development of our business where we have seen bigger and better projects in the B2B service business side and also better and better games and operational marketing of our games in our games business side. Our management and operations are of course backed up by our fantastic Board of Directors who are visible on this slide where we have a healthy mix from different countries with different backgrounds ranging from being involved with the investment side, the very strong presence in the gaming business as well as international finance. And then let's get to the games business because this is the part where I have been receiving most of the questions so far. Now there's been quite a lot of activity from our shareholders who have wanted to learn more about how are we doing with our games, what's happening with Autogun Heroes, what's happening with NERF, how are we going to go about those moving forward? So let's talk about those now. Autogun Heroes is a fantastic action and shooter game that definitely lives up to our vision and what we like to refer to the game is as explosive action. If you've played the game, there's tons of explosions as you have seen. If you haven't, go check it out, you will love it. And this is something that basically describes our whole process of data-driven development and publishing. During the last, let's say, 6-ish years, we've gone through tens of different games in our MVP process, tested something that's been in development for maybe 1 month or something that's been in development for 6 months and so on and so on, seeking to find games where the audience and what we're seeing in terms of numbers is the best possible match. And Autogun Heroes is now something where we believe that we definitely have the winner in our hands. And essentially to simplify things a little bit, there's maybe 3 types of mobile games or free-to-play mobile games out there. And the first category is games that generate something like EUR 100,000 of lifetime revenues and that's because they don't really have scalability through marketing or they don't have big organic appeal. This type of viral effect doesn't happen for whatever the reason that is there. Our first shooter game Heroes of Warland very much fits this category. We did make more revenues than that with the game of course, but it never really scaled up because we were never really able to get the monetization and the cost of marketing to meet in a good way. The second category is games where you can operate them with roughly EUR 1 million annual revenues, but they like true scalability. They don't have that hockey stick potential in them at least not yet, but they maybe have strong organic appeal to sustain the game and keep delivering revenues and so on. Our second game NERF: Superblast at the moment is very much in this category where we are operating the game in a break-even scale. We're seeing revenues coming in and players playing the game and the game is of great quality while at the same time, we're still seeking to find ways to improve the marketability of the game and the revenue generation so that we could start scaling it up in a more aggressive fashion. The third category of free-to-play mobile games is games that are scalable, games that can deliver anything in the excess of EUR 10 million annually. And these are games where you can invest in user acquisition and you can see profitable returns which we call return on ad spending. This is the category where we believe that Autogun Heroes very much is and that is why we are so excited about the game because for us, it is a strong signal that what we have in our hands at the moment is something that we can grow in terms of revenues and profits moving forward not just for the next few months, but for years to come and seeking to get the game higher and higher and higher. How did we get here with Autogun Heroes is an interesting story of its own because as part of our MVP process, we test all types of games pretty much all the time. And in the last few years we've been expanding the testing to include not just the games that we have developed here internally, but also games from our closest partners and that's how we discovered Autogun Heroes. So we were testing the game during last year when it was still very much in early stages. It basically had the core gameplay mechanics into it, but was lacking a lot of the monetization and the meta game play and the whole back-end structure and so on. But what we saw in those early tests was an exceptionally strong retention curve in the game and retention describes how well your players are returning to your game. And this is something that's usually the most difficult thing to do because that's the component of our free-to-play game that includes that secret sauce. That magic that makes that game stand out and be so great that players just can't let it be, but they continue playing it. Everything after that when you come to monetization or getting the marketing funnel to work or live operations, those are more or less technicalities that you can keep improving with data; but retention is something where there's always a little bit of magic involved. So what we saw was again with great retention curve, but no monetization pretty much whatsoever. So we then figured that we want to acquire this game and do our magic on top of that and that's what we did after the summer last year after we had done some initial testing so then we secured the ownership of the game and also the core team. We have a handful of developers from the core team still working with the title and now we've been amending that with our team here in Nitro Games. And second half of last year we essentially spent in developing the so-called meta gameplay, adding tons of features into the game on top of the core gameplay while polishing and developing more content for the core gameplay and that's when we also implemented tons of different tech and tools for live operations, data pipelines, the whole back-end structure, all of those things. That meant that at the beginning of this year, we were finally ready to take the game to what we call a soft launch. That's when we introduced the game to slightly larger audiences and invest a little bit more into the user acquisition marketing with the purpose of validating the game and seeing how well it performs. And what we saw during the soft launch phase earlier this year was exceptional. The game exceeded all our expectations in terms of the performance and something that made us extremely happy was that we still saw a strong retention curve in the game. Usually what we have seen in the past and what's quite common is that once you start to apply monetization into the game and especially if you add really tight monetization where you essentially try to squeeze money from the players, that has a negative impact on the retention. With Autogun Heroes, that negative impact turned out to be very small if almost nonexistent. So we still continue to see very great retention curves as well as monetization exceeding our expectations. And as a result, we were able to see a payback window between 60 to 90 days in our user acquisition. So with those great results, we then decided to launch the game and start the launch phase and that's where we are at the moment. We have started a launch phase, which for us is typically something like 6 months roughly. We will talk more about that launch phase in next few slides. But essentially where we stand right now is at the beginning of that launch phase. We know what the performance was during the first month and we of course have initial insights into the second month. And what we are happy seeing is that everything is working out as planned so far and things are progressing as we wanted them to do. Once this launch phase is done, that's when we expect to be profitable with the game and that's when we intend to take the game into a more steady live operations phase. What that means is that we keep operating the game by adding new content, running more and more live events with the game and scale the game higher and higher and higher for the years to come. What we have now seen during the first month in this launch phase is displayed on this slide. So the great retention numbers that we saw during the soft launch phase have very much turned out true also in the larger audiences in the launch phase. The great monetization has stayed there. We are seeing a very, very nice looking combination of conversion to paying customers within in-app purchases and that results in the net IAP ARPDAU being more than EUR 0.25. What we're also seeing and that's something that we feel really proud of is great ad monetization and that's something where we are seeing AD ARPDAUs of way more than EUR 0.10. Currently I think in June we tracked EUR 0.14 in total. What this means to us is that we have a game that retains players well, it definitely returns money in terms of in-app purchases and converge players into paying customers; but in addition to that, it also delivers ad revenues. And why ad revenues are so important for us is because most of your users are always going to be nonpaying customers, most of your users are never going to purchase any in-app purchases. But monetizing them through ads is the safe way to getting some value out of them in addition to them populating the game. So as a result, what we're seeing is us steadily tracking towards our return on ad spend in 60 to 90 days, which means that in that time frame we expect to return the user acquisition investments in full and start to make profits after that. This is obviously very good for us because it's very well in line with our overall user acquisition scale-up and governance model now during this initial 6 months launch phase. So the first 1 month-ish we spend on making sure that everything works, whatever we saw in soft launch proves to be correct in little bit larger scale and based on those findings, we have now at the end of June and beginning of July decided to ramp up the user acquisition and start scaling it up. This is something that we have been now doing during the month of July as well and continue to do moving forward towards profitability and break even with this game. And that is something that you can expect from Autogun Heroes and Nitro Games moving forward. You can expect to see us investing more and more into user acquisition step by step every week, every month, every quarter more and more and growing the revenues and the profits with the game that way. And once we are done with this initial 6 months launch phase, that's when we plan to green-light the game with the so-called live operations phase, which is then the more steady phase where we no longer experiment as much. We're still in a mode where we're opening tons of new user acquisition channels and trying out with different campaigns and investing more into the ones that perform and investing less into the ones that don't perform and all that. But once we get into the live operations phase, which we aim to be still towards the end of this year, that's when we expect things to get more steady and also more predictable in the longer run. So with Autogun Heroes, all in all what we have in our hands is a great game that has functioned very well during the initial launch phase. We couldn't be more excited about what we're seeing ahead of us for the remaining part of the launch phase, but especially for the years to come after that. And more recently, we've been also happy to see that our expectations of both Apple and Google featuring the game have turned out to be true. We've gotten some solid placements in both stores and we of course expect more of those moving forward as well. The other game in our portfolio is again called NERF: Superblast. This is very much a different type of game compared to Autogun Heroes, which is a single player experience which makes several things very much easier to do. NERF: Superblast is a real-time synchronous multiplayer game. This is something, which we are super proud of in terms of what we've been able to do both technically and visually on how well we have been able to implement Hasbro's great brand into the game. And NERF is currently being operated in what we call a break-even mode. So we're essentially limiting investments in the user acquisition intentionally at the moment. We are still investing in user acquisition, but in smaller scale while we are seeking to hit the target performance with the game where we would start to scale it up. Should that happen, then we will of course plan to invest more into the marketing of the game. If we don't get to that levels, then we of course want to keep it operating without losses because our main goal this year is to take Nitro Games step-by-step towards profitability. And the other part of our B2B service business is a vehicle where we have been operating for many, many years in the history and this is something which is also helping us to reach our desired goal of getting to profitability and this is something where Nitro has probably the strongest track record out of everything that we do. So since we've been doing this for more than 15 years now, we've been working with so many different companies in this business on different platforms, different type of projects and all that stuff. And during these years, we've been involved with many different game launches, we've been involved with many different technical developments to some larger game products and everything in between. And some of the recent experience is very exciting for us because essentially what we're doing now is we're expanding our focus in our service business outside of mobile and more and more towards other platforms as well. We are currently working with Digital Extremes and with Supermassive Games. I'm sure if you've been following our news feed, you are familiar with those things, and recently we've been also working with other companies in this business delivering great games or a great service to them. Some parts of our B2B service business are what we call white label, which means that we are under very tight NDA so we can't really talk too much about what exactly was it that we did, but it's basically a consulting business where we get paid by the hour as we do those things for our customers. And the current projects in our B2B service business are exciting for us because they help us to get towards our vision of becoming a household name in the category of action and shooter games on mobile. With Digital Extremes, that's our largest customer at the moment, the current project that we have ongoing with them hasn't been announced yet so we can't go into too much detail about what it is. But what we can say about it is that it's a cross-play multi-platform game and that's something that we're very excited to work on. We also work with Supermassive Games. We are bringing their IP to mobile and this is also something that hasn't been yet announced so we can't talk too much about it. But you can expect to hear more about both of these moving forward. But in the long run and especially when you look at our strategy, it's not so much about the ongoing projects, but how is our position in the B2B service business market developing, how it has developed over the years and what we're seeing moving forward. And that's something where we have the most excitement at the moment. What we are seeing in our funnel in our business development is more and more interest from parties not just towards Nitro Games, but towards cross-platform and cross-play opportunities bringing world-class AAA IPs to simultaneous play on many platforms and having mobile games in the mix. What that means for us is an avenue to larger order value cases. We are currently seeking to do bigger projects. but it also means that we can take more and more advantage of our very strong understanding of the data-driven development and the mobile games marketing. And especially the recent results that everybody has seen what we've been able to do with Autogun Heroes definitely help us when we want to score those bigger and better opportunities moving forward. In terms of financials, we have published our numbers for the first quarter of this year and essentially what we've been saying in connection with our numbers is that we are improving our things step by step. So with the combination of B2B service business and very careful investments in our games business where we are very data driven, we are seeking to have the best balance between revenue growth and getting the profitability step by step. The numbers displayed on this slide are in Swedish kronas 12 trailing months in revenue and the EBITDA margin. And this describes the mindset that we have where we are seeking to not take too big of risks with anything, but we are willing to tone things down to make sure that we get to our goal step by step. Now with Autogun Heroes, we have green-lighted bigger and larger spendings on user acquisition and as we communicated in our prospectus, our overall budget during this launch pace is roughly EUR 2.5 million in the user acquisition during the first 6 months. Which conveniently takes us to this offering that we have at the moment. So like said in the beginning, we have an ongoing preferential Rights Issue of approximately SEK 77.4 million and the main idea behind this fundraise now is to help us in getting the funds that we need to support the ongoing launch phase with Autogun Heroes. Some of the funds will be steered towards marketing and user acquisition for the game and some of the funds will be steered towards paying for the acquisition of the game that we did last year. So those acquisition costs we pay to Doomsday step by step following the progress with the game. If you are interested in learning more about the Rights Issue and the exact terms and pricing and everything associated with that, you can go to our website where there's a link to the offer side containing the prospectus as well as all other information that you could need from the Rights Issue. So as a summary, we feel that we are in a very exciting point in time here in Nitro. We have a growing business taking us step by step towards profitability, which is well in line with our goals and well in line with our strategy. We have a very strong outlook in our B2B service business both in terms of the existing customers and the existing projects, but what we expect to see moving forward as well. And our games business is currently very hot because with Autogun Heroes, we have seen great results so far. We are super excited about the launch phase that we started now in June and we feel very confident and bullish about the game moving forward as well. That's all today. So thank you for tuning in. And now we can see if we have any questions that you might have sent.

There's some stuff I've received via e-mail earlier asking about what are we doing differently with Autogun Heroes compared to what we did with NERF: Superblast earlier and this question is related to that people didn't see NERF: Superblast being grown with marketing as much as they maybe had hoped for. So the big difference there is essentially the marketability of the game. So for us, the key what we call the North Star metric in our marketing is what we call return on ad spending. That's a very commonly used metric. And what that describes is that all the moneys that you invest in user acquisition, how quickly are you seeing return on that money? When are you seeing 100% return meaning break even and when are you collecting profits? And this gets described with our ROAs curve. So what we're seeing now with Autogun Heroes is that we are seeing the return on ad spend between 60 and 90 days. What that means to us is that we expect to return the funds pretty quickly compared to what you quite often see in this business. Some companies optimize towards 1 year payback time, some might optimize for even longer. It all depends about the game and the marketing budget that you have at your disposal. This is the biggest difference between Autogun Heroes and with NERF: Superblast. With NERF: Superblast, we have also been able to drive profitable user acquisition, but not in a way that we would have been able to return the funds so quickly at least not thus far and that's exactly what we're optimizing right now. Nitro is still comparably small compared to some of the giants in the mobile games marketing so we don't have the huge resources that we can fire tons of money into marketing and then sit back and wait for the returns to come next year maybe. So that's why we need to optimize all our business towards games where we see the return happening quicker and that's why we are now a lot more aggressive in investing in Autogun Heroes not because we think it's better, but because that's what we've seen in the data. So that's something that basically drives our investments in different games. It's not that we couldn't throw more money, but is that we want to control our spending because we want to take things step by step towards profitability. And because with Autogun Heroes, we're seeing so much faster return and so much better monetization compared to any earlier titles that we have done, that's why we're now investing into that game more aggressively than before. Let's see if there's any other questions that anybody would send. There's 1 question that what happened with Nordisk Games as investors? Nordisk Games is very much a shareholder in Nitro Games still currently. But as we have said in the prospectus, they have decided not to participate in the share issue. We can't of course go into commenting what the rationale is behind their decisions not to participate. But what we can say is that they have been very supportive towards this transaction and they have already voted in favor of this transaction in the general meeting before we started the thing. And I am very happy to see for example Mikkel Weider and some others who used to work with Nordisk Games joining us as private investors on this round. Let's see if there's any other questions there. Looks like no. So I think that means that we have pretty much answered all the questions. Let me just double check. Okay. Looks like there is no more questions. So thank you for tuning into this webcast and if you have any other questions, don't hesitate to reach out via e-mail for example. And thank you for your support and have a great day.