Earnings Call Transcript - GDEV Q3 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to the Nexters Q3 2021 Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that this conference is being recorded Wednesday the 17th of November 2021. I’d like to hand the conference over to the first speaker of the day, Nexters’ Chief Corporate Development Officer Mr. Roman Safiyulin. Please go ahead, sir.

Roman Safiyulin, Chief Corporate Development Officer

Thank you. Hello, everyone, and welcome to the Nexters Inc. third quarter 2021 conference call. On the call today, we have Andrey Fadeev, our Chief Executive Officer, Alexander Karavaev, our Chief Financial Officer, and Anton Reinhold, our Chief Operating Officer. A press release and presentation containing our first quarter results was issued earlier today, and a copy may be obtained through our website at investor.nexters.com. Now I'll walk you quickly through our Safe Harbor statement. Today's discussion will contain forward-looking statements. Actual results may differ materially from the results predicted or implied by such statements. Forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise the statement. For a discussion of some of the risk factors that could cause actual results to differ, please see the Risk Factor section in our registration statement on Form-1 filed with the U.S. Securities and Exchange Commission. During this call, we will be referring to some non-IFRS financial measures. These non-IFRS financial measures are not prepared in accordance with IFRS. A reconciliation of the non-IFRS financial measures in the earning press release and the slide presentation to the more directly comparable IFRS measures is provided in the slide presentation we issued today, and will be available on our website at investor.nexters.com. Now, I'll turn the call over to Andrey, to make quick opening remarks. Please go ahead.

Andrey Fadeev, CEO

Thank you, Roman and thank you, everyone joining us today. We have recently had many exciting developments and made good progress in terms of building the basis for sustainable growth in 2022. We have improved our positions across the major areas of business, including new game releases, geographical diversification, platform diversification, and very importantly, merger and acquisition part. We will discuss all of these in more detail today. We have recently launched Nexters Boost. Nexters Boost is an accelerator for early-stage game development studios. We have reviewed dozens of projects since its launch, with a few deals being under consideration at the moment. We have launched Chibi Island in July, Throne Rush on the web platform in October. And very soon, we will soft launch another new game, so please stay tuned. We also continued to drive product improvements and constant content updates across our core franchise, Hero Wars, the mobile version of which has recently celebrated its fifth anniversary and passed the major milestone of $1 billion of lifetime bookings. We believe all of these achievements will provide us with a strong foundation for our future growth. With this, I would like to give the word to Sasha, to discuss our financial performance during the last quarter.

Alexander Karavaev, CFO

Thank you, Andrey, and thank you, everyone for joining us. So first of all, just a word, we’re very pleased with our results for the third quarter. We grew our revenue by an impressive 77% year-over-year to reach $115 million in this quarter. This growth was driven by purely organic factors, and we substantially exceeded the numbers that we have achieved since Q3 2020. We believe that it's a great achievement, given that Q3 numbers of the last year were an overly high base driven by the impact of COVID. And once again, we believe we were among the fastest-growing mobile game development companies globally. On the basis of this goal, our adjusted net income turned positive and totaled $8 million in the third quarter of this year compared to the $11 million loss in the comparative period of the prior year. Operational cash flow in this quarter grew 59% to reach $51 million, which once again demonstrated the strong cash generation of our business model. Now I'd like to go into more detail about the development of our cost structure during this quarter. As you know, in August 2021, we closed the business combination with Kismet Acquisition One Corp in order to list our share for NASDAQ. The accounting from the deal includes a special share listing expense. In accordance with international financial reporting standards, this listing expense is determined in the excess of the fair value of equity instruments, meaning shares and warrants issued by Nexters in the business combination, over the fair value of the net assets contributed by Kismet, which primarily consists of cash. So essentially, this share listing expense of the amount of $125 million, which is a non-cash and non-recurring expense is entirely unrelated to our ongoing operating activities. Our selling and marketing expenses grew 21% year-over-year in Q3 2021. Additionally, during the third quarter, people tended to spend more time offline, and we usually see a low engagement of our players during summer months. As a result, we've scaled back our investments and user acquisition for the normalized level, driving the total cost down 30% versus the peak levels which we recorded in the second quarter of this year. Growth of general and administrative expenses was largely associated with the growth of headcount by more than 60%, both organically and through traditional Russian subsidiaries, as well as due to other recurring and non-recurring costs linked to the listing of our shares on NASDAQ. Now, onto our guidance, we anticipate our bookings to reach a range between $560 million and $570 million this year, while the adjusted cost and expenses within the range of $455 million to $465 million. The decline in the bookings guidance compared with the previous guidance is in the very same amount of the declining our platform commission guidance. So, on a net top-line basis, our expectations remain exactly the same. This change in the guidance, which is nearly technical, is driven by the fact that internally we forecast our top-line on that base. In this context, that means bookings less platform commissions, excluding the effect of deferred platform commission. We use this parameter internally in order to measure the return on investment into consumer acquisition. And then, after we came up with a forecast of net top-line number, because the top of the rated bookings and platform commissions. In this respect, what really changed is grossing up our business to adjust for newer data via the indirect taxes and platform commission rate for all the platforms, while we kept the net top-line number the same. The second change for our guidance is a slightly higher selling and marketing expenses. This year we will have the higher share of acquisition budget allocated to the desktop version of hardcore pricing. While the platform commissions are lower, both the CPIs and consumer acquisition costs per paying user are higher and the anticipated average bookings per paying users are higher as well. This year, we've built the capability to invest more in the web platform. And on this basis, we plan to spend a bit more this year on consumer acquisition in total as compared to the previous guidance. So essentially, the key difference between the previous and the current guidance is slightly higher selling and marketing investments for this year are slightly more than $10 million, which we believe will help us benefit in the future. With that, I would like to give the word to Anton, to talk us through the operating performance of the business.

Anton Reinhold, COO

Thank you, Sasha. Hello, everyone. As noted by Andrey and Sasha, the third quarter was significant and exciting for us. In Q3 2021, we experienced continued growth in our bookings, primarily due to an influx of new payers. We increased our payer base to 371,000 paying users, a rise of 30% year-over-year. Even with this substantial growth in payers, the average transaction amount remained stable compared to the previous year, rising to $128 from Q2. Our unit economics also stayed strong, and we did not see any decline in the quality of our cohorts from Q2 to Q3. Unlike industry trends, we maintained elevated spending on iOS, investing about 50% more than the previous year, as we identified a key opportunity to build a robust player base in iOS-prevalent countries like Japan. When we analyze our bookings by platform, we are pleased to report remarkable mobile growth despite challenges from IDFA regulations and increased competition in user acquisition, partly due to our higher user acquisition spending. The desktop version of our games is growing even faster now, making up nearly a third of our total bookings. We see significant potential for our desktop games, especially following the recent launch of Throne Rush on the web. Our proprietary platforms enable us to optimize platform commission costs, which positively impacts our unit economics. Geographically, we continue to see strong traction across all regions, with particularly robust growth in Asia, where we've doubled our bookings due to a focused marketing and development strategy. Additionally, the share of advertising revenue in our bookings has more than doubled, now contributing approximately 6% of total bookings, and we anticipate even faster advertising revenue growth moving forward. In terms of conversion rates, despite significantly more aggressive marketing than last year, we are seeing solid metrics in fair conversion rates, including monthly active users to daily active users. Players continue to enjoy our games and spend time and money on them, even as COVID restrictions ease in various countries. I would also like to provide a brief update on our new game development. As you may know, we officially released Chibi Island in July following a successful soft launch at the end of 2020. Since its soft launch, the game has gained around 1.4 million downloads on iOS and Android, with an average of 280,000 active players each month generating between 200,000 and 300,000 in bookings. These results are promising for a new title, and we will keep enhancing and scaling the game. Game development in the mobile market is ongoing even post-launch, as we work on improving core gameplay mechanics and monetization strategies to better retain players and balance lifetime value against customer acquisition costs. Once we have the mechanics refined, we plan to increase our marketing efforts and scale the game. The development for Hero Wars took about 18 months, and we believe that experience will help us avoid past mistakes and speed up the ramp-up period. In October, we launched Throne Rush on our proprietary web platform. This was our first offensive strategy game, originally launched on social networks in 2013 and named Game of the Year by Facebook in 2014. Similar to Hero Wars, Throne Rush has shown strong user retention and effective monetization mechanics. The web versions of our games are key to our growth strategy for a couple of reasons. First, our company was founded on social games, which offer players larger screens and more opportunities. Second, in the first half of 2021, the desktop versions of Nexters' games saw significant growth, with desktop bookings rising by 79% year-over-year since the start of 2021, driven by the rapid expansion of our web platform. We expect the web versions to diversify our revenue streams and enhance economic efficiency by lowering platform commission costs. According to our plans, we have two casual titles remaining to launch this year. We intend to soft launch the first one soon, currently titled Puzzle Island, which will soon be rebranded. You can already find it on Google Play and the App Store. We've observed promising metrics related to retention and monetization. The second title, Riddle Island, combines mystery and adventure and is nearing completion. We plan to tech launch it in limited geographies towards the end of the year, followed by a soft launch in 2022. All titles planned for this year are progressing as expected and are casual games that align with our strategy to engage a broad casual player audience, supported by our comprehensive game-making approach. With that, operator, please open the call for questions.

Operator, Operator

Thank you. Our first question comes from the line of Ivan Kim from Xtellus Capital Partners. Please go ahead. The line is now open.

Ivan Kim, Analyst

Yes. Can I actually ask four things? Firstly, on the U.S. bookings, the U.S. bookings were up only 5%. Can you please elaborate on the reasons for that? Does it show the sorts of flattening out of the lifecycle of Hero Wars? Secondly, can you please update us on the China entry? Thirdly, can you please tell us what's the feedback in web compared to mobile? And lastly, can you please tell us whether there was any better clarity on the efficiency of marketing in iOS post-IDFA? Thank you very much.

Anton Reinhold, COO

I can start. I have noted all the questions. Regarding the U.S. bookings, which were only up 5%, I think I'll leave that to Alexander. As for China, we are currently in the final stage of signing a contract with a local partner to initiate the process for obtaining the ISBN and publishing our game there. I'll also leave the payback question to Alexander. And the fourth question was, sorry.

Ivan Kim, Analyst

The marketing efficiency, I suppose.

Anton Reinhold, COO

We have a lot of first-party data that we analyze, and we are developing internal tools to study all the data we collect. Everything was in line with our expectations, as we did not see any drops in efficiency following the iOS post-IDFA changes. In fact, we are reaping the benefits of investing more in attracting additional iOS users, and the cohorts are performing very well.

Andrey Fadeev, CEO

Thanks, Anton. Yeah, I’ll start on the U.S. So actually, other geographies, especially Asia, are outpacing in terms of booking growth the U.S. So the reason for that is basically the focus. So we launched last year, a couple of localizations for the Asian market, which we’re trying to attack, basically for a number of months. So for the past year, I'd say for the past several months, the core focus of the team was the Asia market. And the U.S. itself obviously has the highest base. So that's been actually the short market, the short mobile market that we attacked heavily, as soon as we launched a web version of Hero Wars, and developed the marketing tools that we deploy currently. It does not mean at all that we are close to separation in there. So I think we published that it should be a public number. So today, we have around 130 million downloads globally. And we're far below any kind of potential limits that certain other titles reached in terms of downloads, so it can exceed more than a billion easily. From this point of view, we really believe that there is still a lot of room for the growth process. So on the payoff period, we discussed that I think in a couple of quarters that web payoff periods are generally longer than the mobile version. Due to the fact the game itself is somewhat more hardcore, we have higher CPIs, higher consumer attrition in there, but also higher lifespan expectancy, which is proven by our model. From this point of view, when we look at this from a marketing department's perspective, we have more room to invest into the long growth payoff period, simply because we believe and anticipate based on mathematical regressions that the user cohorts will live longer in the web version. It's again, it's fairly user for many other games who should compare their mobile versions and the web version. No surprises there in general, part of the fact that it's a different game and the payoff periods are longer. So by that, I think we've covered all the questions.

Ivan Kim, Analyst

Thank you very much.

Operator, Operator

Thank you. The next question comes from the line of Dmitry Vlasov from WOOD & Company. Please go ahead. The line is now open.

Dmitry Vlasov, Analyst

Hi, yes. Thank you for the opportunity to ask the question. I have a couple of questions, please. The first one is on the 2022 and 2023 guidance, given the fact that you changed your methodology and guidance for the current year, how do we have to look at your 2022 and 2023 guidance? Basically, because the last time you've provided in your latest investor presentation, I guess the bookings should be lower now, while the costs and expenses also should be lower. Just curious about the potential change in the adjusted profitability basically. That's the first question. The second one is about Chibi Island, the marketing. Basically, when do you expect the marketing to ramp up? When do you expect this to become more aggressive in terms of the marketing of this title? That's another question. Maybe also, you could comment on the trends, which you see in the fourth quarter, especially in the bookings, and maybe also in the marketing, like how aggressive are you in the fourth quarter? That's it for now. Maybe I'll ask follow-up later. Thank you.

Alexander Karavaev, CFO

Okay. So thanks a lot. So I’ll start on the guidance. Look, we have just kind of better guidance for this year. So we are not yet in a position to provide the guidance for ‘22 and ‘23. So again, I think we can officially announce that our policy from now on will be to publish the guidance for the coming year only. We some time just to run through all the tests for us, just to update year 2022. So that likely will come whenever we issue our full year 2021 results. And again, the methodology would be pretty much the same. Given this change in the platform commissions, which are kind of decreasing, because we're kind of getting more and more share in terms of that proportion. But from a kind of core business point of view, nothing really changed. I’ll take the last question on Q4; so far, we're seeing more or less the trend that we’ve seen in Q3. But with the adjustment that, as you know, reports were fueled with the marketing, which is normal use of seasonality, and it should develop for the majority of the gaming companies. The guidance that we have provided more or less entails the result. What's also important is that usually in Q4, we have several specific events, like the birthday of the company, and like Black Friday, and a couple other things that usually ramp up substantially the bookings and the revenues, and the revenues kind of going forward, so we’ve deferred part of the revenues. Again, based on the data so far in Q4, it's more or less than within the plan, so no surprises in there. I’ll pass it back to Anton for his remark on the Chibi Island marketing expense.

Anton Reinhold, COO

Yeah, thank you very much, Sasha. And thank you very much for the question about Chibi Island. So as said, we have a lot of active work around Chibi Island going on. The games just don't start to skyrocket upon schedule. But we know our staff and we are actually actively working on the game right now. So at this time we work through optimizing cycles of Chibi Island, and we see traction there. We managed to increase the average playing session by 40%. We are reaching the levels for the main metrics that we've modeled. There is still room to grow, and we want the game to become as successful as it can be. So I won't give you any deadline for the marketing to skyrocket as we just want to be absolutely sure that everything works fine. We see very good traction with the game, and we see that it's changing, and it's getting better and better. We want it to be a huge success. Another small remark I would like to add about that is we use the data from one game to make the other game better, and vice versa. This slow maybe like starting slow with Chibi Island would help the other two casual games to start faster. We've experienced launching the games in the past. As said, Hero Wars took 18 months before we actually started scaling the game. We absolutely hope and we see that we are on a good track there to make it faster for Chibi Island and the rest of our new titles. Thank you.

Dmitry Vlasov, Analyst

Thank you very much. Maybe just a quick follow-up question on the marketing. Yeah, I've noticed that many other companies kind of complain about the IDFA and that the marketing becomes more difficult. But it seems like it works out quite well for you. I know you're investing a lot in IVS. Just wondering what's the difference between you and the competitors that makes you more effective on this front? Thank you.

Anton Reinhold, COO

Yeah, actually, I would say, yeah, what makes us successful. First, we have a large set of first-party data with strong market intel, and this helps us acquire payers on country and region levels with relevant return rates. Basically, we know our game and we know the cohorts. We have a lot of data on our game on very granular levels. This helps a lot to scale. We actually have very successfully introduced a new internal approach on how to value new players and determine the optimal ratio between the cost of a new pair and the LTV. We also work on improving our forecast capabilities using ML solutions and have very strong analytical tools which enable us to use early signs of performance trends. I would say that basically if we compare ourselves to other companies, we have a big team of professionals who do marketing for online games for quite a while, over eight or nine years. We've got a strong game that we know, and we have a lot of data on it. We stay focused, and throughout those eight or nine years, we have encountered significant changes in ad networks of all sorts. Since day one, when we heard about the IDFA change was coming, we started preparing ourselves for that. We knew it would create an opportunity window for us to benefit from it, and we are not losing that opportunity. These are the main reasons.

Andrey Fadeev, CEO

And I would like to add, I completely agree with Anton. To simplify all of that, we are one of the best companies not only in user acquisition but also in how to engage players for years. We know how to create long-term deep monetization strategies. IDFA is a real problem if you have a business connected to something like hyper-casual games. IDFA is not a problem for us because we operate differently.

Anton Reinhold, COO

Yeah, sorry, another two cents on that. If we look at it from another angle, we view the IDFA change as a shift in the ad market. It changes the tools we use for user acquisition campaigns and user buying. But for the most part, it does change the tools that we use to acquire users. But it doesn't alter the bigger picture. There is a growing market of players on mobile devices who actually see ads, tap on ads, engage with ads, and play great games on their devices and stay there for years. Keeping this philosophy in mind, we adapt our strategy and the tools that we use to capture the attention of our players and get as many of them as we can into our games. This summer provided a great window of opportunity to do that better than our competitors.

Dmitry Vlasov, Analyst

Yeah, thank you very much. Very, very clear. Sorry, just the last one follow up on this topic of marketing on Chibi Island. You said that knowing the Hero Wars title very well helps you to be better informed. But Chibi Island is a little different; do you think you will be as efficient with Chibi Island as if you were? So would it take, I don't know, a year or a couple of months to build the knowledge for the new title? Thank you.

Andrey Fadeev, CEO

Great question. With Chibi Island, we are not stepping into new territory. We are not creating games where we have zero experience or have never operated such a game before. We had a game called Island Experiments on Facebook and mobile in the past, which we launched in 2014 and was a great success on Facebook. It generated significant revenues, and we invested decent marketing into it. As we have operated games containing adventure and farming elements before, we created Chibi Island, Puzzle Island, and Riddle Island because we believe this genre is just breaking into mobile. We see competitors rising in this space. The cumulative number of downloads is still small compared to other mystery or farming games. But this is going to be a massive genre, right at the intersection of mid-core and casual gameplay. So, we know what matters most in these types of games, given our experience with Island Experiments. This low-risk move for us is rooted in our history and knowledge.

Operator, Operator

Thank you. Gentlemen, no further questions at this time, please continue.

Andrey Fadeev, CEO

Yeah. Thank you, everybody, for joining, and take care. Bye-bye.

Operator, Operator

Thank you. This concludes today’s conference. Thank you all for participating. Have a good day.