Nazara Technologies Limited (NAZARA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Nazara Technologies Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. Now I hand the conference over to Mr. Jayaram Shetty from ICICI Securities. Thank you, and over to you, Mr. Shetty.

Hi. Good morning, everyone, and welcome to Nazara Technologies conference call. On behalf of ICICI Securities, I would like to thank Nazara Technology for giving us the opportunity to host this call. From the company, we have with us Mr. Akshat Rathee, Co-Founder of Nodwin Gaming; Karandeep Singh, CFO of Nodwin Gaming; Anupriya Sinha Das, Head of Corporate Development. With that introduction, let me now hand over the call to Anupriya Sinha Das for opening remarks.

Good morning, everyone. Thank you for joining us today. In this call, we will discuss Nodwin Gaming's acquisition of Freaks 4U Gaming. We are pleased to have with us as Akshat Rathee, the Co-Founder of Nodwin Gaming and Karandeep Singh, the CFO of Nodwin Gaming, who will provide valuable insights into this acquisition strategy. Nodwin is a material subsidiary of Nazara. Please note that we are in the silent period, and we will not be addressing any questions on this quarter's guidance and beyond. I would now like to hand over the call to Karandeep to talk about the details of the deal. Over to you, Karan.

Thank you, Anupriya, and good morning, everyone, or good day wherever you calling in from. So on the 29th of Jan 2024, Nodwin acquired 13.5% stake in Freaks 4U Gaming by investing EUR 8 million and we've also got a Board seat to get a very closer view of their operations. For context, Freaks 4U is founded in 2011. It's a global full-service company, specializing in esports and gaming. It's domiciled in Germany with headquarters in Berlin, but it has offices across Europe, Asia and North America. Very recently, which was on the 28th of June, Nodwin Singapore, our international arm, signed agreements to acquire the balance 86.49% for EUR 30.3 million, which is circa INR 271 crores through share swap. So as we complete this transaction this week, Nodwin's share in Freaks 4U Gaming will immediately increase to 57%. Nodwin continues to hold exclusive rights to acquire the balance 43%, which is with the founders who continue to run the company Freaks 4U Gaming. Freaks 4U Gaming's strength in the PC gaming and publisher support services is very complementary to Nodwin's capability in mobile gaming. The integration of Freaks 4U Gaming capabilities along with its presence in developed markets will serve as a substantial revenue driver for Nodwin. This strategic alignment will complement Nodwin Gaming, strong execution capabilities in emerging markets, enabling the establishment of a margin accretive global delivery model, and that's a very pioneering achievement in the esports sector. For people who are interested, Freaks 4U generated revenues of EUR 26.9 million in the calendar year '23 at an EBITDA loss of EUR 8.8 million. These are unaudited numbers. But recently, based on connections that the Freaks 4U Gaming management team has taken to optimize their cost base and the potential synergies with Nodwin, we are confident of consolidating a profitable revenue company in FY '25. I would like now to invite Akshat, the Co-Founder and CEO of Nodwin to please share his views on the strategic fit of this acquisition for Nodwin.

Thanks, Karan. Thank, Anupriya. Hello, everyone. I've had the privilege of going and talking to some of you at different times of some of our events. Some of you who have not had the opportunity and we've not had the opportunity to meet you, please be in my first, be my guest to come to one of our large things that we do. Anupriya will coordinate. It's always nicer to see us in action of what we do. We do great things in India like Comic Con, we do great things in India like the BGMS, which is on Star sports, and we have very large IPs like NH7, et cetera. So please come to one of our large ones, and then we'll be able to always have a great chat with you. And that's a great segue to understand what we are trying to go ahead and build, right? So has not been expanse on something that I've often talked about, we just call it time share of mind share of people. That's a very important metric for us, as you know, Nodwin it's not a platform, right? It's not a destination. It's not a website. It's not an OTT platform. It's not a social media network. It's none of those. Nodwin is house of brands, where our IPs and our brands are looked forward for a lot -- by a lot of people, brands, publishers, communities and they engage with us across the network of what Nodwin builds, whether it is our influencer that they are watching on Instagram or there is -- our content that's being watched on Amazon Prime, like Playground or our chess tournaments that are on YouTube or BGMS that is on Star Sports or merchandise that's available or tickets that are available on Insider and BookMyShow. So we have a very diversified community strategy across the world. And as Nodwin keeps on expanding in other acquisitions that you're looking at, think of Nodwin's growth as 2 parts. It's always been a very important metric for us. Our Prime Minister called it the Global South. I think it's a good metric because that's where the growth of people is. So everything from Indonesia, Philippines, India, Bangladesh, Nepal, UAE, Nigeria, Kenya, South Africa, Mexico, Argentina, Brazil and parts of Central Asia are all the growth part of the world, which is there. But the revenue for us and for most of the world sits in Korea, Japan, China, Europe, America, and that's the diversified strategy, which we have. We would love to keep going and making acquisitions in the North that drive revenue, and acquisitions in the South that drive delivery in excellence and margin contributions. For Freaks as one of the best ones in the world, top companies in the world in gaming and esports with offices in Taiwan, in Germany, in the U.S., it helps us go ahead and drive the north revenue part and it also helps that we have announced acquisitions in Turkey, in the Middle East, which helps us in delivery centers for any revenue that comes in. And we'll keep on driving this. Mind share of -- time share of mind share, and this North, South investment and development strategy is very, very central to what we are going to be building. So everything that we do, we have done in the past and we'll do in the future, some of you will have more conversations with us. This kind of context is extremely important for us to go ahead on broad based our conversations on because that's the call it vision mission, you call it, whatever, but this is the way we want to go ahead and move our company forward with the blessings of all the investors in Nazara, Krafton, Sony et al spec. That's the overall vision of why we're doing this, specifically for -- on a conversation on Freaks, I think like every other gaming and esports company that is across the world, it's gone through its time of pain and suffering. I think and lot of those work builds out of valuations that were not sustainable, especially on the losses that were there. And to us, not losing money is an important part. So that's the reason we have taken a certain amount of time. And we'll keep on taking that time given that this [ started ] really well. Sometimes you want to get up and walk, sometimes you want to jump, sometimes you want to dance and sometimes you want to just fall and just look at things, which is there because we are looking at an inflection point on the world stage, which is there, and choosing partners, choosing different people who will join us this Nodwin village is important go ahead and both judge very, very carefully of what they will do, how they will contribute and how they will get continuity to us as we go forward. So just those overall guidance is in terms of why we are building, who we are choosing, how we are choosing, where we will be making those investments is an important conversation to have. In terms of going forward, I'd love to go ahead and take some questions because I think there are a lot of people out there. And I think -- Anupriya is that okay? Should we take some questions?

Yes, sure. Sure.

[Operator Instructions] The first question is from the line of Jinesh Joshi from Prabhudas Lilladher Private Limited.

Yes. Sir, my question is on the revenue profile of Freak. Now if I look at 2023, we reported revenues of about EUR 27 million. And in '22, we were at about EUR 38 million. So can you highlight the reason behind the decline in revenue in the 2023? And also, if you can just talk about what is the 1H revenue run rate so far? And how should we think of growth from here?

I'll answer the overall question and Karan can give be specific around it. So context is -- thank you for the question. The context is important here. So Freaks 4U was predominantly in 2022, it was a high time of the COVID pandemic. It was nearly at the end. There was at first the froth that was there because of what was happening in the world, gaming everything was very frothy. At that time, they were driving a lot of revenue that was being built out of their capacity that they had expanded in Germany and in other parts of the world and revenue was coming in. But that revenue was short-lived. And again that revenue, there was a huge amount of capacity in people that was build. That's why you see the loss that was there. In Europe, specifically France and Germany and other parts of the world and other parts of Europe, firing people with a very long-term exercise. So they carried a lot of fixed cost at that time. And even the fixed cost -- their revenue expectation at that time that they should be able to go ahead and do it was close to EUR 50 million. And they didn't do EUR 50 million, they did lesser. Because of that, they lost money and that created lock-off effects of stress that comes in '23, and then on to '24. And for us, the quality of revenue becomes really important, right? As a company, they hold, I think, like 99Damage, OneTV, Prime League, Valorant's, Challengers in the DACH League, they also hold few [ matches ], et cetera. So they have that capability of some great IPs, and they also work as a very strong agency for brands and publishers, who go ahead and run against Taiwan, in Germany, in France, in the U.S. That part of business was at least the one that had the Nodwin executive value. So pairing for us to go make that investment in the company. It was very important that we look at a road map of profitability at this. And if you've looked at some publicly facing announcements Freak has made, they've had a layoff people for, I think, two rounds of layoffs that they have done on and around the first time we've been heading that, but also very recently. Some of those are modalities of what we have been asking to go ahead and use the potential [indiscernible] a sustainable business before we make on that.

Sir, what is the 1H run rate and what kind of growth can we expect? If you can just highlight that bit as well?

I don't think I will be able to give a forward-looking guidance on the figures, but I'll leave, Karan.

Yes. Thank you, Akshat for giving all the context. So like Akshat said, I don't think we will give any guidance, but I can -- as I called out in my introduction, I think we're looking for a profitable revenue consolidation into Nodwin as we complete the transaction. I think more details can follow as we go through the year. But for now, we can give you that this is a healthy company, which is a profitable company that we need to consolidate.

One last question from my side. I think Freaks was incorporated in 2011. And if I heard you right, you mentioned that in 2023, the EBITDA loss was about EUR 8.8 million. I understand the reasons which Akshat sighted, but going ahead from here on, what can be the steady state EBITDA that one should look from Freak?

Yes. Like I said, I don't think I'm going to give any numbers, but there are potential synergies that may be exploiting between the 2 businesses, which should be margin accretive. We are now launching the global delivery platform, which is something that you guys are aware that India is a pioneer in that, but nobody has pioneered it in esports, that's something we're looking to do. All of those ideas -- between the skills they have, the capabilities we have, the skills and capabilities that Nodwin have, will be bound to bear in our numbers in the quarters to come. So no specific numbers, but definitely a huge amount of opportunities that will be exploiting as we work on those.

Sure, sir. Just one follow-up. I'll read the question a bit. Globally, I mean esports companies typically in the western world, what kind of EBITDA margin do they make, if you can share that?

I can go ahead and get that answer. And this is -- please take it partially as a pinch of salt, partially as a joke and partially true. In the Western world, in gaming and esports, every company loses money.

Okay.

That's being one of the problems with the industry itself. And we've seen this, right? One of the reasons I want to go ahead and build Nodwin in the way which is very different than everyone else and with Gods as well, we have been able to go ahead and do it is the Western world was predicated around building the gaming and esports world around losses. And that's why you've seen the SPACs in the U.S. have failed. We have seen companies that have been in Europe and America have failed. Europe and America unfortunately built a model around floppy, loss-making EBITDA and that's fine. There are time and place for everything. I think the Asian way, it has been to go ahead and do it much more sustainability. And that's been one of my driving factors in life. I want to go ahead and do it a little different, you want to go ahead and say that an Indian company can be one of the top companies in the world, and they can go ahead and build this sustainably profitably. There are ways to do this, right? And unfortunately, for the Western world, all of these companies lose money. And you can look at comparables that are there in the world, that Goldman Sachs everyone being putting out reports that they're making on these companies.

The next question is from the line of Deep Shah from B&K Securities.

Thanks for the initial vision that you laid out for the company. Sir, 2 questions. One, if you could help us better understand, does this acquisition help us bridge any capabilities they've or it is more of a way to expand our geographical presence? And second, in terms of your overall vision for Nodwin, where would you think that the last 5 years from when we started as a part of say the Nazara family we've reached today, right? What would you think -- what was your vision where you are today? And how do you see that whether you see that, today, the way BGMS could be on Star Sports, you see a lot more events becoming that large. So the last 5 years, how have they been? And what do you think the vision for the next 3 years is? And the earlier question on the capability versus geographical reach, if you help us with this, it would be very useful.

I appreciate the question. Very insightful question. I've done a couple of podcasts and I've done a couple of shows just on those 2 topics. But the short answer to that is -- and I'm happy to lead them, so that you have a much more detailed 1-hour answer, 1.5-hour answer on those. But the short answer to the first question, which is that, when you want to go build this, it's a mixture of everything. So there is not one binary answer that you want to go ahead and have. Do we get capabilities? Yes. What are the kind of capabilities we get? We get a great delivery location in -- we get a great technologically high-end AAA rated production facility for esports in Europe, right. Like there are studios, there are locations that are there. It's just like some of you that visited our location in Gurgaon, which is there. It's phenomenal. We have got some of these great locations that are there across the world. So we've got that. Why is that important? European publishers took people who have a lot of money for the European market, who want to go ahead and activities there. Where do they do them? They need a place which is there, right? The further logistically was, the more disconnected both from language and from players and from community you are, so the further you are the worse it is. So we've got that facility now in the heart of Europe, in Germany, in Berlin, good city, cool city to go ahead and do. So you get a great capacity, which is there. You also get capabilities that's coming, the capabilities become the people. And Nodwin makes investments when you saw we have invested into Ninja, we've invested in a couple of other companies like Comic Con. One of the big tenets for us that we try to do is to keep the founders with us. Now why are founders important? The founder mentality, it's just not playing with these companies, no, you played with them as earnout and then they go away. To me, an earnout is a bad word because you earn and then the person wants to go out. You want founder mentality in Nodwin because we like to go ahead and have founders, who wants something called missions, missions because we are all gaming company. Our activities, founders want to go ahead and do when their main mission is complete, you don't want them to leave, you want them to be excited about doing another mission. And as an example, right now, one of the Freaks 4U downstream founders [indiscernible] Samy. He was the founder of the Freaks office in France. The Freaks office in France is no longer operational for us. It is not something that is value accretive. But we didn't want to get rid of him. We gave him a mission that we have these spot missions that are there. And he said, I'd like to go ahead and set up the Central Asia. Central Asia for us, Uzbekistan, Kazakhstan, Kyrgyzstan, are all very strong growth markets that we're looking at. Like, all indicators around economy, people, youth government are great, which is there. And we've already started seeing some of the announcements coming in. They're very small, but they've started coming from us. And he has now become the Head of Central Asia. Our Turkey founders has gone and -- one of the Turkey founders has gone and taken over our Middle East division. So you want to be able to create missions out of this. Actually, we've got a great founder who's built a EUR 40 million company at one time and has the ability to go ahead and go on to these big mission. We will keep hitting in the future because the Nodwin journey is not right now, right? Nodwin is not here, say, hey, we will build an unicorn or whatever. Our long-term vision here is to build a billion-dollar revenue company, to be one of the largest youth media companies in the world. And for us, if we have to go ahead and do that, we'll need the ability to go ahead and inspire founders and build something called a founder circle in the company that allows us to do it and have that. So we get both capability and capacity out of this. And as far as your second question goes, which is where were we 5 years ago? To answer that, I think we've always like to put our head down and get some stuff done. We started an industry sector in India. I often joke about the fact at the first time we ever created, I think -- I got returnable mouse pads at sponsorship. And I also let that think in returnable mouse pads. I had a tournament for which a brand gave me mouse pads and said when the tournament is finished, please give the mouse pads back, and I had to pay salaries, I had to pay people, I had to go ahead and make the event happen. And that's where we are, and now we are kicking it, our revenue which is there. So it has taken us a long time to go ahead and build this. I think we are in phase 3 out of 6 of the road map we have built out. We've been blessed with great investors, which is there, and we'll continue. We will continue do that phase 6, which I talked about to try and build a billion-dollar revenue company for the largest multimedia company. So we'll see where we go.

Right. Thanks for that elaborate answer. It's quite an enterprising mission that you're out to. So I could just add a follow-up that when you say move on this phase 3 to 6 and that's quite a vision out there. How do we think about individual events or IPs? So is it that you get one successful somewhere and then you replicate that? Or is it more of you do many things, some of them work some of them don't work, and then what works you further double down on them. So is it very linear? Is it very spray and then you figure out whatever works, let's just take this ahead? How does that work when you evolve from, say, phase 3 to 4 and 5 towards your phases?

See, all -- there's a little bit of investor in all of us. I run my own family office. I've been an entrepreneur multiple times over. The short answer to it is nobody knows. But we still know what kind of -- I think the journey is very counter answer for me. And I know I'll try to answer that question, but it's a counter answer. I think my experience set is trying to understand what doesn't work. In our blue sky, in a blue ocean strategy, I don't know what works, but I started understanding what doesn't work, right? So what do we do? We use -- in our common language, I use a grassroot angel VC/PE kind of a strategy for IPs. At any given time right now, for example, we have our community management team trying out about 40 different games. We are trying -- our community is spread across 27 different languages, which we are trying out. We're also testing out about 30, 35 different communities in India. So the Northeast of India behaves very differently, then the south of India for the games they like, amount of time they spend, amount of length, in the language that they communicate with their communities. The tonality of the language, the kind of stars they like, the kind of jokes they make, the kind of [indiscernible] fan cover of gaming which they can. And you want to test everything. You want to test, "Hey, is MOBA doing well, is a fighting game going to do well, is shooting going to do well." Now you add the complexity of trying to do this across the world. So what do we do? We test out with every given time. Sometimes you hear us investing in growth kind of thing. What are we doing here? We are testing out IPs. We are testing out communities. We'll do a small tournament. We'll put a INR 5 lakh price for game, something in a college. If it's successful, we're seeing the right kind of traction, we'll go ahead and increase that to INR 50 lakh investment. And we'll test against that. If that works out, then we'll make a INR 2 crore investment against it, and we'll test out against that. I mean we have failure rates across the board, just like start-ups, right, we have failure rates of 60% to 70% to 80% at the earlier stages, reducing down to about 30% to 40% at the last stages, which is that. But you'll have cleared all across because nobody knows that the right answer. But we know that if we keep this as finger on the pulse to youth across the world, we will get the right answers. For example, this is not a forward-looking statement, but one of the cool things that we found out that gamers across the world like footwear and sneakers. So we will now look to do something in sneakers and footwear because it's an important thing to go ahead and look out for. Now whether it is a music event, whether it is an influencer, whether it is a sneaker lineup, whether it is a launch drop, which is there, maybe it's a festival. I don't know what the final answer is. We'll experiment against all of them. Whatever we'll go ahead and try and do, we need to go ahead and run it through this cycle that at least say, which is large. Some of them will go ahead and pop, like how BGMS has popped or NSL has popped, and that's great. And sometimes we will have to go ahead and acquire large behemoths because they already have those IPs because between a build and buy decision with each, the cheaper the better and we get people to go ahead and run it when we acquire a large enough IP. But most of the times, we are incubating most of these things out from our ecosystem. I know long answer to your short question.

No. It is very useful and all the best.

The next question is from the line of Rahul Jain from Dolat Capital.

Sir basically, I have a couple of questions. If you could share what is the dilution, we have done on the Singapore subsidiary in the share swap for this transaction?

Karan, do you want to take that one?

Yes. Rahul, do you want to finish your questions? We'll definitely answer, yes, I am noting it down.

Sorry?

I said you had a couple of questions. Do you want to finish your questions? I'm noting your questions. So that I can answer...

Yes, okay. That is question number one. Second thing is, why we are not taking the entire 86% right away as a part of the transaction and why 43% would come much later? And any reason for the valuation jump that has happened versus the December round? There's a significant jump. So does that reflect the traction that has come in, in the business in the last 6-month basis? Those are my questions.

Thank you, Rahul. Akshat, I may just pick it up and then you can please jump in. So first on the dilution, so we have a minimal dilution. We continue to hold a significant majority, up until 75% in Singapore, so just context around that. So it's a small dilution that we've done to kind of get the share swaps completed. Why 86% is not done right away? I think Akshat had answered this question. I think we want the founders to continue to be invested in running the operations, contributing to the larger cause of Nodwin, so which is why we've done a staggered approach to kind of take shares enough for us to kind of consolidate and run the company with an exit to their existing investors, but the founder shares at the right prudent time. We have the right to convert them and make them as Nodwin shareholders. So that has been done with some thoughts in mind, so that the founders can continue to operate the company that they built, and it sends a very strong message to everyone across the clients they have and the employees they have. The last part, I think this is -- I don't think there is any point of view in terms of the jump or drop in the valuation. I think this is just -- I think you should look at this as a joint up idea between what we invested initially and what we've got now. I think together, this leaves us with EUR 38.3 million, EUR 30.8 million went upfront. And it was just kind of -- we took about 6 months to get closer to the business, understand the business, and that's why we were able to put a fair market value to it. And it -- as you can see, it is about a very, very prudent split between cash and stock that we've done here. So there is no specific answer on the up and down on the valuation. I think it's a complicated deal that you should look at.

Yes. So just one clarification. Sir, this EUR 30 million, which is a consideration, this is towards 86% or towards incremental 43%?