Nitro Games Oyj

STO:NITRO

Earnings Call Transcript 2019-Q4

[Jussi Tähtinen, Co]

Hello, everybody. [Foreign Language] It's your boss, Jussi Tähtinen, here delivering you the year-end report 2019.

[Antti Villanen, Co]

Good morning. We had a little bit trouble with the launch, but we did the hot fix and now everything should be up and running.

[Jussi Tähtinen, Co]

Yes. Yes. Sorry about the little bit of delay due to technical difficulties. But now we're live and now we're good to go. So my name is Jussi Tähtinen. I'm the CEO and Co-Founder of Nitro Games.

[Antti Villanen, Co]

I'm Antti, Co-Founder, CSO. Together, we've been running the company since 2007.

[Jussi Tähtinen, Co]

Yes. And it's been quite a while. Let's begin the presentation. So next slide, please. So here in Nitro Games, we do mobile games. We have 35 people here in Finland in 2 studios focusing on mid-core, free-to-play mobile games. And what we're all about building this experience on mobile and our task and challenge at the moment which we're focusing on for this year is to have a scalable play game. And we will talk more about that later on in the presentation.

[Antti Villanen, Co]

Few words about market in general. The global games market is estimated to be roughly USD 165 billion during this year 2020. And out of that, the mobile games market that we are operating is close to half of it. So roughly $77 billion market.

[Jussi Tähtinen, Co]

Yes.

[Antti Villanen, Co]

And so-called free-to-play business model is dominating the -- dominated the mobile games market, and that's exactly where we are focusing on and where our games are and where our take on the market is.

[Jussi Tähtinen, Co]

Yes. And what we're seeing from the latest numbers from the market is that the games market and especially mobile games market continues growing. We're seeing more than 9% year-on-year growth in terms of annual revenues from the market. So it's a good market to be in and compete in.

[Antti Villanen, Co]

Exactly.

[Jussi Tähtinen, Co]

Yes. Next slide, please. One of our major focus points last year, on 2019, was our team. And during the first half of the year, we focused on streamlining the team and the cost base and making sure that we're on a sustainable basis. But now during the second half of the year, we shifted our focus in strengthening the team with a couple of selected key hires, and we did a couple of arrangements inside the studios. And now it's safe to say that we're stronger than we've ever been when it comes to our team. The expertise in Nitro Games at the moment is super senior. We're covering all there from game development to self-publishing to live operations, which is crucial with free-to-play games since they are so data driven. And also on top of that, we're stronger in business development as well.

[Antti Villanen, Co]

Exactly. If we look a little bit back from the history, we started the company 2007, so 12 years ago or close to 13 years ago, by me and Jussi. And first years, we focused on being a developer on a PC game sector, and now for past 7 years, I think, we've been in a mobile games and are already starting to be veterans on a mobiles games market with several releases and several partnerships. And we are still focusing in a kind of 2-leg strategy as we started the current strategy period by offering our services into the Tier 1 companies in the industry, and also heavy focus on our own games on Self-publishing.

[Jussi Tähtinen, Co]

Yes.

[Antti Villanen, Co]

The key USP that separates us and brings the benefit into the company is through our own proprietary technology, NG Platform, and MVP-process that leverages the -- leverages the tech and that's something that not that many companies has such...[Audio Gap]

[Jussi Tähtinen, Co]

Thought about that on slide, please. So indeed, the Nitro Games platform is the backbone to all the games we've done and all the games that we're working on at the moment. And the platform itself is built on top of Unity, the most popular game engine there when it comes to making mobile games, combined with the server-side back end, which runs on top of Amazon Web Services. And historically, Nitro Games Platform has been developed for, I think, more than 5 years now already.

[Antti Villanen, Co]

Yes.

[Jussi Tähtinen, Co]

And during that time, it's been validated and looked into by several partners. We work together with War Gaming, with Netmarble and now the latest together with Avalanche Studios. And all of those are utilizing the same technology there. During the second half of last year, we also did some cooperation with both Unity and Amazon by asking them to do sort of detailed audits of our technology, and I'm happy to say that we went through from both of those with flying colors and got good credit. So the technology layer is solid, and the foundation is good.

[Antti Villanen, Co]

During the years, we developed several games with the platform and utilizing the platform and also the MVP-process. And even though that many of those have never seen the light of the -- well, whole life and has seen the market, we are always evaluating the game concept very early on and killing the ones that doesn't fly. As Jussi mentioned, there's a whole lot of validation for the tech and the process from the industry players and also the kind of base tech companies. In a long term, the NG Platform and the process we are utilizing alongside with the tech is creating the value for the company. It accumulates the team expertise and experience and brings the competitive advantage to the Nitro Games.

[Jussi Tähtinen, Co]

Yes, indeed. Basically, in a simplified manner, since we continue reusing the same technology, the same team works with them. So eventually, both the technology and the team get better with every iteration, yes.

[Antti Villanen, Co]

Yes.

[Jussi Tähtinen, Co]

Next slide, please. Now let's talk a little bit about the higher-level stuff and long-term plans. So Nitro Games' vision is to become a household name in the shooter category. And what we mean by this is that when anybody thinks of a shooter game on mobile, they think about Nitro. And that's how we envision the end game for this company in the next coming years. If we look at last year, 2019 was the year when shoot games finally fully established themselves on mobile and all those doubts regarding can shooter games become big on mobile and can you play a shooter game with a mobile phone, they were like vanished basically because you have these big Tier 1 games success such as Fortnite, obviously, everybody has heard about that, but also new games being introduced like CALL OF DUTY MOBILE. And behind these big blockbuster titles, we have continued to monitor several little bit smaller titles but still titles generating tens of millions of dollars of monthly revenue which have managed to keep their market position in the background. And here at Nitro Games, we've now sharpened our focus in the shooters. So everything we do, both in our self-publish business and also in our Service business, we focus on the same category.

[Antti Villanen, Co]

What we have seen from the market is that pretty much the same trends and life cycles that in so-called traditional platforms like a PC and console, it tends to go into the -- and coming into the mobile, they're pretty much the same trends and life cycles. And now it seems to be the time for the mobile shooters coming into the market with -- possibly being the high revenue-driving genre in a mobile as it has been on other platforms. And that is something that creates the momentum for our tech, for our team and the processes that we utilize to take our share on that growing market. Also what we have learned lately is that there are still like momentum to go into that market, and that's best seen in the CPI levels. We've still been able to keep those really low. And as to tech, our tech is evolving as the devices are coming more and more powerful as the bandwidth for the players are getting better and better. The mobile shooter is going to be definitely one of the biggest revenue-generating genre on mobile in the short future. Also that shows in our business development activities that has been more active maybe than ever. And many of the traditional PC, console developers, IP holders are interested to come into the mobile shooter genre, but there are not that many of the companies with the tech and expertise that can bring those IPs or games into the market. And on that, we see that Nitro Games is really good position to take advantage the momentum that market now has.

[Jussi Tähtinen, Co]

Yes, indeed. It's much like several, several years ago when shooter games established themselves on PC first, and then came the first generations of console and then there was a lot of discussion about can you play a shooter game on a console and so on. And fast forward a couple of years and all the consoles are full of shooter game that's making a lot of money, yes. And what we're seeing now on mobile, it looks like it's pretty much a similar shift happening. And obviously, you can't just copy again from PC or console and bring it to mobile, but you need to mobilize the game and make it playable on touch screens. And that's where you need to have a solid team and expertise who understands both the category and the limitations on mobile as well.

[Antti Villanen, Co]

And also the tech and process to get those games, IPs into the market in a reasonable time and spread.

[Jussi Tähtinen, Co]

Yes. So that's our vision. We want to be a household name in the shooter category. Next slide, please. Let's talk about our strategy, how we intend to get there. So our strategy is to build a portfolio of these games. We're building a portfolio of shooter games on mobile. And as I mentioned earlier, we're now focusing into this specific category, both in our Self-publishing business, where we are seeking the hit game driving our business forward in a sustainable fashion; and also in our Service business, where we're selling our skills and expertise and the technology. The third part is by making games for them. And Nitro Games Platform is right now in a shape where during last year, we've been developing more and more components related to the shooter technology into the platform and it supports this expansion of our portfolio that we're now going through in 2020.

[Antti Villanen, Co]

In the longer term, the portfolio strategy and focusing on the shooters, it's creating the value for the company and also creating the value for the shareholders. And what we can see from the market is that the focus on our shooters and requests and interest that there are all the time growing and growing towards this genre, it's the momentum that we want to take advantage and be in a position that we are the one who is the household name when it comes into the mobile shooters.

[Jussi Tähtinen, Co]

Indeed. Next slide, please.

[Antti Villanen, Co]

In the first half of this year, we are expanding our portfolio with several trigger points with the great games. We have 3 games about to get the market -- validation from the market during the first half, and that's something that kept us busy late last year and keeping us busy during the first half of this year. And I think we have a stronger portfolio than ever to introduce to the market and then market validation will then show which one of them will fly and how far.

[Jussi Tähtinen, Co]

Indeed. Indeed. If we look at the product portfolio that we have for the first half of this year, going -- the market validation, as Antti put it, which in practice means finalizing road maps, getting games to soft launch and basically validate data flows, we are right now in a point where we managed to build several opportunities for this first half. And if we briefly discuss these opportunities, we have Heroes of Warland first here on the list. With Heroes of Warland, we're right now going through exciting last steps in the big road map of updates that we've been discussing earlier. So we basically started rolling out the first updates from the new version of Heroes of Warland during the third quarter last year. And since then, we've been pushing out an update after update, expanding the game, adding more features into the game. And now after the reporting period in January, we actually rolled out the biggest update so far, which completely -- which introduced a completely new meta game layer, the whole progression system in the game. And now what's left in the road map is that...[Audio Gap]Polishing the gameplay during the battles, finalizing the game modes in the battles and making sure that the game looks great and all these type of things as well as focusing on what we call first-time user experience. This is easiest references of tutor, basically guiding the players through the game and getting them hooked into the game. And we have a couple of updates left. Just actually as of today, we're all down -- rolled out a small update this morning, which introduces some changes to the battle gameplay, and that's how we continue to work our way towards the end of the road map, introducing these things step by step. And after that, the data will determine where we actually stand. And if we continue to make our sequential improvements all the way, then we are going forward towards the scale-up phase with that game. Then we have a new game called Lootland. This one we announced end of last year. And Lootland is also a shooter game right now in development. And this one's a really different base compared to what comes to Heroes of Warland. So whereas in Heroes of Warland you're playing your phone sideways and you play against other human players in real time online, 3 versus 3, with Lootland you can actually play it in a portrait mode just with your 1 finger. And Lootland is not about playing against other people, but it's about playing together with other people. And that way, we feel that we can introduce a new game into our portfolio which doesn't jeopardize what we're planning to do with Heroes of Warland, but those 2 can actually coexist hand-in-hand. Then we have our project together with Avalanche Studios, a Swedish company best known for their shooter catalog on PC and consoles, really the experts on that category on those platforms. And what we're doing together with them is still unannounced, so we can't talk about that too much. But basically, we are developing, again, for Avalanche Studios that's utilizing their IP. And again, that, we're looking to get into soft launch pretty soon. And what we've announced recently is that Avalanche Studios is cooperating together with Nitro also on the publishing side. So we have our publishing team looking after that soft launch process with them.

[Antti Villanen, Co]

And then on top of that, as we have our robust technology and MVP-process, that means that minimum viable product process. We are all the time experimenting and do something new for the market. We are looking for quicker and early results from the marketability tests and also looking for quick decision points to either to continue with the games or, in a worse case, kill the games. And we have something going on and proving on, on that area also...

[Jussi Tähtinen, Co]

Indeed.

[Antti Villanen, Co]

And what comes to shooters. So expect to hear something more regarding that.

[Jussi Tähtinen, Co]

Indeed, exciting times going on there with new stuff as well. Next slide, please. So next in line, we're going to talk about some numbers. So let's wrap up 2019 in terms of financials. So next slide, please. What we have here is our income statement both from the quarter 4 and the full year 2019 compared to, obviously, previous year numbers. And overall, what we're seeing in fourth quarter is that we've continued growing our revenues that we started to do during third quarter. Our revenues during the fourth quarter were actually slightly bigger than the fourth quarter previous year. In terms of annual revenues, we are behind 2018. This is largely due to the fact that we didn't generate practically any revenues during the first half of the year when we're focused on streamlining. And the lower cost base that we managed to build during both the first half of the year and also the second half of the year translates into the operating costs, personnel costs and the third-party materials and services as well. So despite us still making losses last year, we managed to like reduce the amount of losses that we're generating. And next slide, please. These pillars here describe the sort of development with revenues quarter-by-quarter during 2019. And from here, we can clearly see that we basically started generating revenues during the third quarter, and we continued that during the fourth quarter with an increase in revenues compared to the previous one. And at the same time as we were starting to generate revenues, the focus point of the second half of last year really was in building those games and the things really is now in 2020. And next slide, please. In here, we can see the development of the EBITDA. And this also reflects in practice, the effect that we have from the streamlining and managing the cost level here in Nitro Games. And we do have some one-off costs in the fourth quarter that are a little bit hurting the EBITDA related to the fundraises that we did during the fourth quarter. But long term, our mindset is that we want to keep Nitro Games somewhat small. We're not looking to expand the teams in a dramatic fashion. We have our senior team, our scalable technology that we expect to give us that expansion in our portfolio rather than increasing costs, and we are focusing heavily on making sure that the sort of one-off cost increases we have go into sort of nonfixed costs. So basically, outsourcing certain services that we need from time to time rather than building our fixed-cost layers too big. And let's move on to the next slide where we talk about these events.

[Antti Villanen, Co]

Yes. If we're looking for what happened in the fourth quarter, there was an announcement of the -- our new game flow that is about to get the market validation during the first half of this year, and it's looking good with the game. I know there are a couple of nice market already validated mechanics included with some innovation into the game. Also we signed a new agreement with Expansive Worlds. And on that time, it was about using our data stacks and data pipeline on a game to prepare for the soft launch.

[Jussi Tähtinen, Co]

Yes. And Expansive Worlds is basically a subsidiary of Avalanche Studios.

[Antti Villanen, Co]

Subsidiary of Avalanche Studios, yes.

[Jussi Tähtinen, Co]

The same folks.

[Antti Villanen, Co]

We did quite a lot on streamlining with our team in earlier 2019. But on the fourth quarter, we strengthened the team, especially on our Live Operations capabilities side of the business. And we were lucky to get several industry veterans to join the Nitro Games and strengthening our knowledge and our capabilities on that front.

[Jussi Tähtinen, Co]

Yes. And that's now super important for us because right now, first half of this year, we start to roll out so many titles, we are collecting so much data. So you want meet data people.

[Antti Villanen, Co]

Yes.

[Jussi Tähtinen, Co]

We're going to handle that data.

[Antti Villanen, Co]

Yes. Both as a resources point of view, but also -- and especially on an expertise point of view.

[Jussi Tähtinen, Co]

Yes. Yes.

[Antti Villanen, Co]

Then we did a directed issue of SEK 15 million on the fourth quarter to support our road map and the strategy. And also as earlier already discussed and presented, we have a project going on with a Finnish governmental support organization, Business Finland, and we received roughly EUR 0.5 million, exactly EUR 460,000, of funding for the projects on the fourth quarter. And that's also supporting our road map and getting us into the place that we are targeting to go.

[Jussi Tähtinen, Co]

Indeed. And the project with Business Finland still continues this year and moving forward. So we are looking to still raise some further funding from them.

[Antti Villanen, Co]

Yes.

[Jussi Tähtinen, Co]

Then if we look at what happened after the fourth quarter, we signed another agreement with Expansive Worlds, so Avalanche Studios. And this was about them utilizing our publishing services in connection with the upcoming soft launch for the unannounced title that we're working together with them. But what this means basically is that we now have Nitro Games' team that's developing the game. We have our Nitro Games data pipelines implemented to make sure that we can go through the soft launch in a smooth fashion. And now we have Nitro Games' publishing team both preparing the soft launch and moving forward also operating the soft launch. So we've been deepening the cooperation together. And me personally, I'm really happy about that because we're all here expecting like a long-term cooperation with those guys since so far, it has gone so smoothly.

[Antti Villanen, Co]

Yes.

[Jussi Tähtinen, Co]

And then we also expanded the soft launch with Heroes of Warland. This refers to the big expansion that we launched to the game now in January. The work was mostly done during the fourth quarter since it was the biggest update so far. And now we're going to expand the game step-by-step by doing the still remaining pieces in the road map, launching the remaining updates and then expanding to new markets. And we are looking forward to scaling up the...[Audio Gap] And overall, like when it comes to our road map, we announced now early this year that we're looking to have more and more games and expanding and focusing on the shooter category, which we've already spoken about during this call. So let's, again, shift things to a little bit bigger picture, and let's go to the next slide. Our strategy -- the ongoing strategy period is basically about transforming Nitro Games from a development studio into a mobile games developer and publisher with full capabilities and Self-publishing, Live Operations, business development, the whole thing. And we started with the strategy in the beginning of 2017. And during the first few years, the first activities were we obviously listed Nitro Games in the Nasdaq First North in Stockholm, and this basically gave us the tools that we needed to start developing our self-publishing capabilities. We also did our first product rollouts, first processing the Service business, which took us this far. And now as a result of that now in 2020...

[Antti Villanen, Co]

Now in 2020, our kind of key target is to create a scalable free-to-play game...

[Jussi Tähtinen, Co]

Indeed.

[Antti Villanen, Co]

Out of the opportunities that we have in our hands right now and what to come. We have 3 games in a market validation kind of phase, and that's something that we pretty soon will know how that goes. There are lots of actions and opportunities and interest on our business development side of the business that then leads into the Service business or something else. And also we are seeing lots of interest and activities in a nonorganic growth side. And those kind of 3 sectors are our own games, the opportunities in the business development and on an organic side. Those are the sources we are planning to create a scalable free-to-play game toward 2020.

[Jussi Tähtinen, Co]

Yes.

[Antti Villanen, Co]

In the business development side, I would say that there are bigger and better opportunities maybe than ever with the history of the Nitro Games, and that mainly due to the fact that we have a really clear focus on mobile shooters. Our tech has been evolving. The team expertise match for the market momentum and what -- our outlook from the market. And that creates a really interesting position for the company in 2020.

[Jussi Tähtinen, Co]

Indeed. Indeed since we've already built the team, built the technology. And now this year, as we get to roll out the new version of Heroes of Warland after the last updates, we have Lootland and so many other things going on, we also finally have the games in this sector, and they basically act as sort of calling cards, so to speak, also in the business development opportunities. So good times at the moment. If we look at -- forward to the -- a little bit to the horizon and the next couple of years until, let's say, 2025, our goal is that we will build Nitro Games to be a household name in the shooter category. And what that means is that we're focusing on further developing our portfolio, whether it's with our own self-published games or through third-party IP or through our Service business. And that's how we're building both the scalable revenues but also value to our shareholders. And at the same time, we're expecting this fantastic mobile games market to continue to grow roughly close to 10% year-on-year growth we're expecting. So during this year, it's safe to say that the mobile games market is likely going to go plus $100 billion, and we want to take our share of that with the strategy that we have now. So good times happening in Nitro Games now during the first half of this year and moving forward towards the long term also with a laser sharp focus.

[Antti Villanen, Co]

Exactly.

[Jussi Tähtinen, Co]

Yes. Next slide, please, which means that it's our time to say thank you.

[Antti Villanen, Co]

[Foreign Language]

[Jussi Tähtinen, Co]

And we'll see you again next time during the second quarter when we roll out our results for the first quarter this year. So if you have any questions...

[Antti Villanen, Co]

We are here.

[Jussi Tähtinen, Co]

We are here. Let me check in the inbox to see if we have anything in e-mail. Looks like there are no questions. Are there any questions online?

[Operator]

[Operator Instructions] And there seems to be no questions from the phone either.

[Jussi Tähtinen, Co]

Okay.

[Antti Villanen, Co]

Okay. Good.

[Jussi Tähtinen, Co]

In that case, thank you very much.

[Antti Villanen, Co]

Thank you.

[Jussi Tähtinen, Co]

And until the next time.

[Antti Villanen, Co]

Thank you. Bye.

[Jussi Tähtinen, Co]

Bye-bye.