Nitro Games Oyj

STO:NITRO

Earnings Call Transcript 2020-Q1

[Jussi Tähtinen, Co]

Good morning, everybody. It's Jussi here from Nitro Games and also with me is...

[Antti Villanen, Co]

Antti. Good morning.

[Jussi Tähtinen, Co]

Good morning. And as you can probably see -- you cannot really see us. This is due to the coronavirus. We're, today, going to be audio only, but you will get to see the presentation, of course.

[Antti Villanen, Co]

Welcome.

[Jussi Tähtinen, Co]

Welcome. Welcome. So what we have on the agenda today is to go through the latest and greatest from Nitro, which is really our Q1 report earlier this morning. So let's start going through what's been happening earlier this year. Next slide, please. Here, at Nitro Games, we are 35 professionals who focus on free-to-play mobile games. So we operate in the global mobile games market. And our team -- and building the best possible team for this purpose has been one of our big focus points as of last year. And this year, we have continued strengthening our team, not that much in terms of increasing the head count, but focusing on filling in the expertise needs in the team. And during the first quarter, we have done 2 new hires: we have hired a senior producer for our Helsinki studio, and we have also hired a new design director to strengthen our capabilities in free-to-play. And also during this quarter, what's been affecting us is obviously the outbreak of the COVID-19. But I'm happy to say that for Nitro, it hasn't really influenced us that much. What it means, in practice, is that we don't travel because traveling is a big no, no on times like these and that's why, we are working remotely. But since we operate in the mobile games business, we are very used to remote working practices, and since we have 2 studios, we are used to working remotely between those 2 studios. So all in all, in our daily lives, things go pretty much as usual with the exception of we just don't see each other physically.

[Antti Villanen, Co]

It's also seems that the mobile gaming and gaming and entertainment in general have been booming during the COVID-19 times, and we see that also in our operations and the mobile games in general. The downloads are going up and people have more time and maybe a little bit more money to spend on mobile games. And we have been lucky on these difficult times.

[Jussi Tähtinen, Co]

Yes, indeed. Indeed. Let's go forward. So next slide, please.

[Antti Villanen, Co]

Short recap on our history. As Jussi said, we have 3 offices, empty offices nowadays: in Finland; in Kotka, where we have our development and management; and Helsinki, the capital, where we have one development team and our marketing and publishing operations. We founded the company already 2007 by me and Jussi. And the first years, we focused on PC console, working as a software developer, and then took the ambitious jump into the self-publishing and self-funded operations and went into the mobile roughly 6 years ago, and ever since been focusing on a mobile free-to-play with a two-leg strategy: by self-publishing and self-developing our own games and offering our services for third-party publishers and developers on the market. 2017, we listed the company in Stockholm Nasdaq First North growth market. What makes Nitro Games special is our own technology. We will tell more about that later on, but that has been kind of leading key USP for the company, that we've been investing heavily and leveraging that in our all projects.

[Jussi Tähtinen, Co]

Indeed, indeed. So let's jump on to the next slide and talk more about our technology. We call this Nitro Games Platform, so NG Platform, in short. And basically, our technology is something that we've been developing for a little bit more than 6 years now already, all at the same time when we've been focusing on mobile games. And the purpose of Nitro Games Platform is to bring cost efficiency, stability and scalability into our operations. And basically, this technology goes hand-in-hand with our development processes and our publishing processes where we seek to operate in a very lean fashion. We seek to operate in a scalable fashion in terms of keeping our fixed costs low while having scalability through technology. And essentially, the focus point with Nitro Games Platform last year and this year as well has been in further developing our shooter engine inside the platform and capabilities when it comes to both developing and operating shooter games.

[Antti Villanen, Co]

Our platform is not only for our own use but with the partner projects with the existing partner network that we have, like companies like Netmarble, Avalanche Studios war Gaming. We leverage technology on those partner projects also, and working with Tier 1 companies in the industry both gives us credibility through our tech and our development capabilities but -- and also brings secure revenue through those projects. We also cooperate with our technology partners like Amazon Web Services and Unity with our platform. And constantly those companies, Tier 1 technology providers, they are doing revisions and validations to our technology so that we are on top of the notch and the best quality, what comes into the network and usability of the games and that kind of things.

[Jussi Tähtinen, Co]

Yes. And those type of partnerships and the evaluations that we get from these partners are paramount to us since, essentially, when we do free-to-play mobile games, we produce games as a service. So it's all about having a reliable service and 100% uptime or uplift as close to that as humanly possible. Let's talk about some bigger things about our vision and so on, and let's move to the next slide, please.

[Antti Villanen, Co]

A bit of a high level, our vision is to be a household name in the shooter category, especially on mobile. We've seen shooters to become one of the leading category on mobile, as it has done in PC and console. So mobile seems to be living same kind of evolution as the older platforms where the casual games first dominated the platforms, then strategy games. Going forward, what happened in other platforms seems to be happening in mobile also. The next step most likely will be open world gaming and open world games into the mobile. And we have some happy news to share on that front also, that we have taken our first steps on that. And it's safe to say that we are one of the few companies in the world who are capable of developing and publishing open world mobile games at this point to the market.

[Jussi Tähtinen, Co]

Indeed, indeed. The category of shooter games overall has been sort of rewriting the rules of mobile gaming in so many ways. And the development with the hardware on the phones, combined with the technology that we have developed, that's a good-looking combo moving forward when we'll take advantage of the latest developments on the market. Let's move forward to the next slide, please, where we talk about our strategy. So our approach to taking advantage of this opportunity in the mobile games market, but especially in the category of shooter games, is to build a portfolio of the shooter games on mobile. And by having this portfolio approach, we maximize the usability of our technology, we maximize the business potential within our games since we are able to build different type of shooter games and build a portfolio where these titles sit nicely next to each other without cannibalizing each other in terms of sales. And also it, of course, act as a risk managing component since we are not dependent on the success of any one particular game, but we are focusing on several productions at any given time. But to talk more about what's happening in the portfolio, let's move forward to the next slide. theHunter: Mobile is something that we just announced recently after the reporting period, together with the Expansive Worlds. So Expansive Worlds is the -- they are part of the Avalanche Studios Group, and we have worked on this title together with them since summer last year. And now, finally, it's in a moment when the title was announced and when the soft launch, which means that we are starting to measure the performance of the game while the team is still developing the game towards completion and towards the actual hard launch that is going to happen later. So far, we are really excited about the cooperation and the process overall. We here, at Nitro Games, we're big fans of theHunter series on PC and console platforms, and we feel that the timing couldn't really be better to introduce this title now on mobile as well.Let's move forward to the next slide, please.

[Antti Villanen, Co]

For me, theHunter: Mobile is not just a game. It sits very close to my -- one of the dearest hobby, the hunting. And as we all know, the hunting is quite common hobby here in the Nordics but also in the very big gaming markets in the North America, especially U.S. -- Northern U.S. and Canada. Also, Southern Europe, is the -- hunting is a big hobby. What we tried to achieve, and I think we accomplished quite well on the game, was the feeling of the open world immersion, that you have a limitless area to explore, to improve your tracking skills like in real-life hunting. Of course, the hunting itself, shooting the animal is a big part of the game, but I would say that exploring the environment and tracking -- and improving your tracking skills are as big of the part of the game itself, and then, of course, the collecting and upgrading the weaponry, showing off your results for the other players. The game itself, it's not a simulation but it's an immersion of the hunting on a mobile-friendly way with a reasonable play session times and giving the rewards quick enough for the mobile usage. And what we see and an experienced ourselves, it's really addictive. It brings the immersion and feeling of the hunting, even though you are looking it from the quite a small screen and using the mobile device for that.

[Jussi Tähtinen, Co]

Yes. And also for us non-hunters out there, it also provides us a sort of fantasy of this type of ethical real-life hunting without going too much in the simulation, and especially on times like this when people are more or less locked indoors are having the gateway to experience wild nature and go explore the nature is also something that feels really refreshing. Let's move forward to the next slide, please, where we see how does our portfolio look like now during the first half of this year. Firstly, let's talk about Heroes of Warland. That's a game that we've been working on for quite some time now already. And the latest and greatest with Heroes is that we started working on what we call a road map of updates last summer. And since then, we've been rolling out new features and bigger and smaller updates to the game step by step. Roughly every 3 weeks, there's been an update to the game. And in the beginning of this year, we rolled out the biggest update so far, where we introduced a completely new meta game layer to the game, a whole new progression system and other smaller goodies. And what the team has been -- is working on lately has been introducing a, what we call, first-time user experience. It's often referred to as a tutorial sequence in the game, but basically building the first couple of days of gameplay for new players with introduction on how to play the game. And parallel to that, the latest thing in development has been various improvements to the core battle gameplay. So basically, polishing the overall gameplay, the movement, the controls, the balancing of the heroes and making everything top-notch, that's been the last step now in the road map of updates. And we have now concluded the development work on that, and the game is currently in the QA process. And we're looking to release the next update pretty soon, to be honest. And after that, we expect to be done with this road map, and then we will measure the performance of the game and see where it leads. So really exciting times going now with Heroes, and we're happy to see that the long development work is finally nearing to its end.

[Antti Villanen, Co]

Well, with theHunter, we announced a soft launch some time back, and we are in the middle of the -- transforming from the project into the process. So from the development of game, now we are going into the measurement period of the game and transforming the team also from the project-based working methods to the process-based working methods and focusing more on the game ops, some live ops of the game. We are getting more and more data, more and more data projects, more and more analysis of the data, and tweaks and adjustments for the game will be done based on a real player database. It's been -- the early soft launch, early metrics have been promising and encouraging. And now it's time to find all the small things that are still is in the game and tweak those out and then head for the bigger launch later.

[Jussi Tähtinen, Co]

Yes. And this is also something where the benefits of our technology and the scalable way of working comes through. So it is the same publishing team inside Nitro that operates both Heroes of Warland at the moment, theHunter: Mobile, and moving forward, also the new game, Lootland, which is currently in production. So the team is busy developing the game. And the next step in the road map for that is a soft launch starting, which we will, of course, then announce separately once that happens.

[Antti Villanen, Co]

On top of these 3 shooters that we have, our portfolio, currently, we have a constant flow of new concepts, new ideas, new shooter projects that we are already testing on the market. We are further developing some of the ideas. We have some internal resources working for this. We have some external resources working for this. And we are expecting to find some new game, new concepts to be in a stage of pre-production during the next months.

[Jussi Tähtinen, Co]

Indeed, indeed. But overall, when we look at the portfolio that we have during the first half of this year, and if we, say, compare it to where we stood 1 year ago, for example, we have much more things happening in our portfolio. And these are now the times when all the hard work that we did during last year, especially on the development front, starts to get released one by one[Audio Gap] this and have a look at the actual financials, so what did we achieve now during this first quarter. Let's move forward to Slide 11, where we see our income statement. So overall, we continued on our sequential improvements, not just in the development and publishing but also what comes to our financials. So our revenues increased compared to the previous quarter, that being the Q4 last year, and especially compared to the first quarter last year. And overall, we continued investing into our technology, the shooter technology, which shows in our manufacturing for enterprise's own use. The other operating income consists of some smaller income streams that we have as well as a first batch of the support funding that we got from Business Finland to compensate the slowdowns caused by the COVID-19 outbreak. The materials and services were EUR 239,000. And those consist of our third-party outsource services as well as investments done in the user acquisition and marketing.The personnel expenses remained on the new lower level. They were roughly EUR 0.5 million for the first quarter. And the depreciations according to plan are slightly smaller compared to the previous quarter. And this is a result of us now completing the depreciations for one of the older development projects in our bookkeeping as of end of last year. The other operating expenses are roughly EUR 300,000, consisting of our office costs, software costs, technology costs, all sorts of administrative services, bookkeeping and things like that. And overall then, the operating losses were EUR 323,000, and the total losses for the first quarter were EUR 335,000. And this is a notable improvement if we look at the numbers, how things looked like 1 year ago on the first quarter in 2019. And in terms of the supportive funding that we gained from Business Finland, that's a total of EUR 100,000 grant, which is to be used in the development of these new game concepts and new products that we can then utilize and take leverage of in the business development, where we are seeking new agreements with potential new partners. And overall, the reductions on the cost side compared to the last year are a direct result of us paying a lot of attention during the first half of last year into streamlining our costs and making sure that we have a scalable base to build on. Let's move forward to the next slide, please. And this is where we see the trend of 2 numbers, basically, the revenues and the EBITDA. And this shows the quarterly development of these both starting from this year. And while -- we can see here is we have systematically increased revenues quarter-by-quarter while, at the same time, we have worked hard to keep our costs at bay in order to be able to improve the EBITDA. Obviously, we're not yet satisfied by these numbers in no means. So we still have work to do, and we are determined to work hard and smart to continue improving on these numbers. But we're delighted that the direction is right, and we're going upwards and to the right as we should be, in the long run, especially. Next slide, please. Here's a couple of the significant events that happened both during the quarter and especially after the quarter. And overall, during the first quarter, our focus was pretty heavily in production when it comes to all of our products and preparing for starting to roll out new things one by one, step-by-step, in the form of updates to Heroes of Warland, soft launch for theHunter, the upcoming soft launch for Lootland and new titles in development. We were also very active in the business development front, which materialized in new deals together with Expansive Worlds, who are part of the Avalanche Studios Group. But that said, we are looking to continue being very active in business development and produce new projects and opportunities for Nitro.

[Antti Villanen, Co]

After the quarter, there are -- maybe the biggest changes is coming after the IPO, we announced that Nordisk Film Games invested SEK 45 million in the Nitro Games and become the-- biggest shareholder on the company. That's a really big thing for us, and it was pretty, pretty long and in terms of process and resulted very well and very good outcome for the company. The Nordisk Film Games, they are supporting our vision, our strategy. They're a long-term strategic owner. And I think one of the main thing is it's not like exclusive on the other operations that we have with other gaming companies. Coming from the new Board members, both Karl Magnus and Pim have lots of experience on a shooter category where we are focusing. Both of them have been building big successful companies in Sweden, Karl Magnus building the DICE, and Pim, now Avalanche, that's really valuable experience with our Board of Directors. Also, the synergies between all the portfolio companies of the Nordisk Film Games and also the Nordisk Films and Egmont itself, those are valuable assets for the Nitro Games going forward. On top of that, I think one key thing, with all this structure, that the gentlemen on those organizations seems to be really reasonable and good guys. And it's always nice to work with the big people.

[Jussi Tähtinen, Co]

Indeed, indeed. Overall, I think the whole deal with Nordisk Film Games and the resulting funding and the resulting network and the people that we get, I personally consider that to be a very logical and positive next step for Nitro that helps us to move forward, following our vision, executing our strategy, and we're looking forward to a long-term and successful cooperation with all the people involved. Let's move forward to the next slide, please. If we look at things on a high level, we started the execution of our ongoing strategy in the beginning of 2017 when we started building the self-publishing capabilities into Nitro Games. And also, in 2017, in June, we listed the company in NASDAQ First North growth market in Stockholm. And the main purpose of that listing and the resulting fundraise was to help us invest in the building of these capabilities, whether it's technology development, development of the team or development of the game portfolio. We did our first projects during 2017 to 2019. And now the focus point in this year, in 2020, is to have a scalable free-to-play game. So the whole Nitro team is now focusing on achieving one thing and one thing only, and that's a scalable free-to-play game. And for that, we have a strong lineup now for this year. We have Heroes of Warland, which we already talked about, and the existing agreements we have with Netmarble EMEA for the upcoming rollout of the game. Then we have Lootland, a whole new game that's currently in production, and the next step is going to be a soft launch for that one. And then obviously, theHunter: Mobile that we spoke a lot about during this call. In addition to the existing projects, as we mentioned earlier, we are continuing to be active on the business development front, where we are looking into the various different type of opportunities in the category of shooter games. Those branch all the way from different so-called Hollywood IPs, whether it's movies, TV series, big shooter game brand IPs. And then we're also looking into opportunities in the field of nonorganic growth. We've been scanning out a lot of studios who have the capabilities in this sector and category as well. And where we're going in the long run is what Antti explained in the beginning, which is all about making Nitro a household name in the shooter category on mobile. And how we get there is to -- we continue working on a portfolio of the shooter games on mobile. We seek to do things in a scalable way to achieve scalable growth. And by doing things this way, we believe that we are able to build shareholder value, and that's our long-term goal with all of these. And if we now look at Q1 2020, this year, so far. Overall, it's been really positive progress basically on all possible fronts. We're in a very good [Audio Gap] basically everything that we need. So things look very positive now. And moving forward, we expect this positive progress to continue as well. I think that...

[Antti Villanen, Co]

It's time to say thank you.

[Jussi Tähtinen, Co]

Yes. Time to say thank you. Time flies fast. Yes. We are very much looking forward to seeing you also in person as soon as or whenever this COVID-19 and the resulting travel restrictions are over. And meanwhile, please follow Nitro. And everybody, stay safe.

[Antti Villanen, Co]

Thank you. Stay safe.

[Jussi Tähtinen, Co]

Thank you.