Nitro Games Oyj (NITRO) Earnings Call Transcript & Summary

Good morning, [Foreign Language]. Greetings from Kotka, Finland. It's Jussi Tähtinen here, the CEO and Co-Founder of Nitro Games.

Good morning. It's also Antti, proud Co-Founder with Jussi, Chief Strategy Officer here.

And today, we're delivering you our status update from Nitro in the form of an interim report for the third quarter 2020. The vision of Nitro Games is to become a household name in the category of shooter games. And basically what this vision means for us is that Nitro seeks to focus heavily on shooter games on mobile. We're exploring different type of shooter games on mobile, and based on the latest progression we've seen on the market, we believe that this is definitely the right way to go for Nitro.

Our strategy is to build portfolio of shooter games into the market. And with the portfolio, we are both leveraging the -- our expertise and knowledge, minimizing the risk and looking for several opportunities at the same time.

Let's then have a look at the market opportunity that we have.

Yes. The market opportunity for Nitro is -- continues to grow as the shooters on mobile is evolving as a category, going from the early days from sniper games into the battle royale games. And now the category seems to be expanding. There are subcategories born and the whole category is getting bigger and bigger. The evolution of the category is supporting our vision very well. And also as the category grows, it creates lots of new opportunities in business development. There are new companies entering into the shooter category with traditional PC shooter IPs. There are entertainment companies and IPs coming into the mobile shooter category as the category in general is growing.

Indeed, indeed. And after the big burst into the category as a result of the battle royale genre, we've now lately, especially after this summer, seen a lot of movement both on the marketplace and in terms of what's cooking sort of under the radar but what we have seen. And like some of the biggest things that happened during this quarter was obviously the big sort of arm wrestling between Epic and Apple, which resulted in the market-leading game, Fortnite, no longer being available in the App Stores on mobile. And this, obviously, creates a lot of new room for new type of shooter games to enter the market. And both Nitro and also the analysts following the category are expecting that there will be some new subgenres emerging into the marketplace. And we're, of course, determined to take advantage of that momentum now.

It also seems that the category itself is polarizing, so meaning that there are very casual approaches to the shooters and then, on the other hand, very realistic, like a console PC-quality experiences on shooters.

Indeed, indeed. Let's then talk about the team. So obviously, the team we have in Nitro is the most important asset we can have. And right now, I'm happy to say that we have simply put the best team in the history of Nitro Games. We're really capable, really strong at the moment. And also at the same time, COVID-19, which impacts everyone, I think we've been really damn good at mitigating that and figuring out ways how to handle things in a remote fashion, which influences both our development but also the business development and seeking new opportunities. And during the third quarter, we did a total of 4 selected key recruitments. We mostly focused into strengthening our game design expertise to support our ambitions moving forward with new projects coming up. And we hired, for example, a new Creative Director, Giuliano Cremaschi, who is one of the industry veterans in the business of mobile gaming, and he has experience from companies like Crytek, who are famous for making Crysis, one of the best shooters all time, at Microsoft, then at Armada Interactive and so on.

Also on a business development and our service business side, we've been strengthening our team and the capabilities. Now that the COVID has pretty much shut down all the events, we've been really active on hybrid events, online events and also got some new guys onboard on business development and more about that a little bit later on the presentation.

Cool. So then let's look at the activities that we actually did during the third quarter. So we had a very high level of activity overall. We were super busy after the summer on several fronts. And to summarize these things together, what we actually did is that our -- well, firstly, the most important thing we're working on right now is our cornerstone game, Lootland, which is a casual arcade-ish co-op shooter, something that's somewhat completely new in this category on mobile. This game is currently in production. And also, while it's being produced towards the upcoming soft launch, we've been going through a lot of technical testing for the game. And based on the results we've seen there, we feel really confident about this title and have put some more resources working on it. Then we also have our new stuff. We have a total of 3 new games in preproduction stage. We have a total of 20 game concepts during the quarter in concepting stage. So we've been also really active with the early stage of the funnel. In our service business, we've completed our project with Expansive Worlds. We worked on theHunter: Mobile, which was taking their IP, theHunter franchise, to mobile. We first developed the game and then over the period of a couple of months during this summer and early fall, we went through the soft launch with them. And unfortunately, the results of the soft launch and the performance of the game did not support taking that game to a wider launch on mobile. So we, together with Expansive Worlds, decided not to continue forward with that one. However, we're seeking for potential ways of maybe working together with them moving forward in the future because the cooperation worked really well. Overall, we're really happy with that project. It has given us so much in terms of building team, building our knowledge on shooter category. And of course, it acts as another validation of our capabilities as a developer in this category. We also had a smaller service business project with a company called [indiscernible] and that project is basically supporting shooters and e-sports technology development moving forward. This project is also now completed as planned, and we are seeking ways to take advantage of the results of this project in the new games coming up in our pipeline. Then in terms of other stuff, we completed the third phase in the Business Finland project we have. This project is about developing capabilities in e-sports and competitive gaming on mobile, which goes nicely hand in hand with our vision of becoming a household name in the category of shooter games. And this means that we still have the sort of last 25-ish percentage left from the project. And despite the COVID-19, we've been able to find good ways of doing these things in a remote fashion instead of relying on these physical events. On the team side, we strengthened the team with 4 selected key hires, as we just spoke about. And then we've been really active in the business development where we now have a total of 30 active cases that we're exploring moving forward.

Even though most of these activities are materializing as a cost during the third quarter, we strongly believe that these activities will generate, in the future, exciting opportunities, interesting opportunities for Nitro in the coming months.

Indeed, indeed. If we look at the game pipeline that we have, what's cooking? We can see that our focus is right now very heavily on the earlier stages of the funnel where we have a total of 20 game concepts we've been working on. And basically, all the games in Nitro go through a funnel like this where we start with a concepting stage. And in the concepting stage, what we're doing, we're exploring opportunities on the market, seeking different type of customers, what are they looking for. We're building the game concept, game design, artwork examples. Typically, at this point, we also do simple prototyping so that we can do some super early-stage testing to build confidence that this is something worth moving forward. Concepting stage typically takes roughly 1-ish month per title, sometimes less, sometimes more, depending on the complexity. And out of these concepts, we then select the best ones to go into preproduction. And preproduction is a stage where we assign a team working on the title. We really polish the game design. We do some early-stage marketability testing. This is part of our MVP process where we test the game with live audience on selected markets. We also develop further the game prototype and the playbook. Sometimes it's more polished, sometimes less, whatever the game requires to get some data out of it. And then if we are seeing encouraging results in preproduction, then we take the title into production. And this is where, typically, you have the biggest team working on the title and the goal is to get the game soft launch-ready. And then in soft launch, once we go there, which is the next step, for Lootland for example, then it's all about measuring the game, finding the audience, proving that the game can work in scale. And these are phases where we are determined to be super selective and only taking forward those titles that we believe that will take us to our vision and end goal of having a scalable free-to-play game. Once we find that, then we go into live operations mode where we service the game. We do community management, we do continuous pushes on the marketing and that's when the game materializes into revenues.

It's good to note that even though it might look like there was 17 concept waste of time and money during the third quarter, those concepts that didn't go forward for the preproduction and after that products and those are basis for the new concept. It's constant iteration around those concept. It might be that somebody was too early for the market, or bundling or unbundling some new concept with some old concept might bring some new ideas on the table. So concept pool is something that we are constantly growing and evaluating and iterating around.

Indeed, indeed. It's our method for constant learning. So every time, we'll come up with something new and try it out. The team gets better and better. And since we also utilize our technology, Nitro Games Platform, it also means that whenever we develop new features for any game concept, we can just take the puzzle pieces that work and use those in upcoming new ideas. Then if we look at the business development side...

Yes. Here we have a bit of a new view on our -- on the business development funnel, and we've been -- as we've been more and more active during third quarter, we've been also -- streamlined our funnel thinking and how we visualize the progress on our business funnel. The increase compared to the second quarter was quite big and that's mainly coming from the COVID putting the hold on all the events. We activated our network around the world. Currently, the business development is run from Finland, U.S., Canada and Russia. And we're mostly focusing on our shooter category opportunities, but they're a little bit overlapping in the different categories also. If we look in -- look for the funnel itself, as we have identified some need from the potential partner, it goes into the first step on the funnel. And as you can see that late Q3, the need phase on the funnel was quite thin, and that's something -- what we've been now working during the fourth quarter.

Indeed.

Filling the early steps on the funnel. But then again, we did 18 pitches, 5 project plans. There was several terms and structure in discussions and 2 agreement made. And this is the way that we are now measuring the effectiveness of the business development and our capabilities to close the deals.

Indeed, indeed. And overall, what comes to the COVID-19, it's something that obviously affects everybody in this business and also in other businesses as well for that matter. But for Nitro, we are also seeing it as a big opportunity because so many companies are taking a negative impact from COVID, and so many companies out there are looking for new ways to -- how to build new projects and so on. So us being in a good shape right now and in a really strong stage, we are looking to take advantage of that.

If we then look a little bit deeper what kind of cases we have on those -- into the funnel. There is a leading companies service business cases that are work-for-hire kind of project with the big companies from the industry. Normally, more than EUR 1 million size of the projects. And those, we had 8 discussions and projects in our funnel. The licensed IP, it's again leading, or Tier 1 entertainment or gaming, IPs, brands or companies that we've been discussing with. And those include also sometimes funding in some form. Then the smaller cases are normally also the shooter category, but there might be something aside from the shooter also. Those are around EUR 1 million-ish the size of the project, normally, also work-for-hire with some sort of the back-end structure on those deals. And the publishing deals are either global or territorial publishing deals around our own IPs, with some sort of upfront payment and then some back-end component on the deals. And -- yes.

I think overall, what we have -- this different type of opportunities and business development is something that's a direct result of us putting in more resources into business development. So we've been able to expand the type of opportunities that we're having. And then again, it's also about Nitro being able to respond to that need that we're clearly seeing on the market right now when so many players are looking to find their way to the shooter category on mobile. And this all, of course, supports our vision and just gives us the feedback that we're definitely doing the right thing at the moment when we are hearing so much need about these things. And also worth mentioning that what comes to licensed IP or branded opportunities, whether they are game IPs or any other IPs like toys or whatever they could be, they are something that also gives us the sort of different type of risk management when we publish games with our own IP and licensed IP because the world of mobile marketing is constantly evolving and changing. And we are also looking for ways to do our games in a more viral fashion so that the games would have marketability built into them as a result of having an IP and a brand. Then let's move forward and check out the financials, what we actually got up in our books during the third quarter. So what we have here is our income statement. We're seeing the numbers from the third quarter compared to the previous year third quarter, and then the whole 9 months so far of this year compared to the previous year, and then again, the full year 2019. And what we're seeing now in the third quarter is a decrease in revenues. This is a direct result of us completing our service business project with Expansive Worlds, meaning theHunter: Mobile. And this is something that's pretty much the nature of our business. Once we complete previous project before we start a new one, we are going to see a decrease in our revenues coming from the service business. Overall, this, combined with our increased investment into materials and services, especially in the form of using some third parties developing some titles for us in preproduction, materializes in EBITDA being a little bit worse than during the previous quarters. However, if we look at these things in a bigger picture, we can see that quarter-by-quarter trend thus far for Nitro has been positive. Our focus has been on increasing our revenues while keeping our lower cost base and improving our EBITDA. But that type of volatility that's built into this is visible when we look at things from quarter-to-quarter. But when we changed the view looking at little bit longer periods of time, we can see that the same trend line still continues and this is the direction we're seeking to move moving forward as well. So this short-term volatility is something that we've been very used to over the past years as well when we change from one bigger project to another. Then if we move forward from financials and look at the road map for Nitro.

In a bigger picture, we are well on our way towards our vision. And as you can see, the steps on our slide, this year, the focus is to find a scalable free-to-play game and Lootland being our cornerstone product on that focus area.

Indeed.

Also, we've been exploring and examining the business development and external operations area a bit. And now we have had a couple of cases already now with some external studios, and we are looking at ways to expand our offering into the shooter category also with utilizing some external development studios and maybe someday organizing that with the -- inside of the company somehow.

Indeed, indeed. Thanks to the fund raise that we did just before the summer, where Nordisk Games, they just recently changed their name, became as our biggest owner in Nitro and we see raised some funding in connection with that. That has given us basically grounds to stand on and really focusing on doing the right thing with the long-term horizon in mind. So our vision, being a household name in the category of shooter games with the portfolio of titles that are succeeding on the market, means that we need to build ways to develop these games efficiently and that's where also the external development kicks in. Obviously, shorter term, moving forward, and the next big things for Nitro is to take Lootland to soft launch once we are happy with the results from the production stage. And then, of course, we're looking to move forward with some of those new games that we have in the early pipeline. So overall, the third quarter, we are pretty damn happy with how things have turned out and how things are moving forward on several fronts. It's been a quarter of high level of activity. And while, short term, a lot of these things materialize more as costs than revenues in our bookkeeping, we are confident that moving forward in the long run, we're definitely doing the right thing and are on our way towards our vision. So that said, it's time to conclude our update for the third quarter. We're very much looking forward to seeing you the next time -- early next year actually, yes, when we release the year-end report for Nitro. But before we do that, if there's any questions, we are happy to take those now.

We are here.

We are here.

[Operator Instructions]

While we wait for those, we can maybe take some questions that came through e-mail. So the first one being that when do we think that Lootland will reach market. Best guess requested. We don't specifically set a date for upcoming soft launches as we follow our process that we explained in the presentation. We go forward based on the data and based on when we feel that the game is ready for a soft launch. That said, Lootland already has been in technical testing and has been tested on live audiences since this summer. And every update that we do to the game, we are following the similar live testing and making sure that the KPIs, both on the game performance and marketability side, are progressing into the right direction. However, the soft launch and starting of that is something that we're very much preparing at the moment. So that game is not completed yet in production. Team is busy finalizing the gaming production and the next step is simply take it to soft launch. But we won't communicate an exact date for that because we want to go following our process. Then we have a question that -- what other projects, other than Lootland, are in the pipeline.

That's a good one because that's our project.

Yes. They're sure our projects. So we've had a total of 20 game concepts now during the quarter that we've been working on and 3 of those made it through the preproduction. All of these were different type of shooter games, and we have teams actively working on new stuff as we speak, continuing on the fourth quarter as well. And then, of course, we have tons of opportunities on the business development side, some of which are something completely new, some of which are related to our existing games that we've been building. And basically, our target right now is that when it comes to next projects starting up, we are seeking to make the best decisions for Nitro following our long-term vision because right now, we have the luxury of having that strength. So we are looking forward to communicating those things as soon as they have been settled down. Then there's a question about what is our plan to make our stock more interesting for potential shareholders. So we are all about building shareholder value. But instead of focusing too much on the short term, we are setting out to do the right things in the long run. And the third quarter this year has been somewhat of a silent month in terms of communications despite us being super active on several fronts. So we believe that moving forward, step by step, this will also materialize in shareholder value as we continue doing the right things and develop the business in the right direction, which, obviously, we expect to materialize into positive news moving forward as well. I think that's all the questions we have in -- via e-mail. If there's anything on the phone line?

There are no questions on the phone at this time.

Okay.

Okay.

That means that we are then done. So...

[Foreign Language]

Yes. Thank you all for joining and very much looking forward to seeing you the next time.

Bye.

Have a good one. Bye.