GDEV Inc. (GDEV) Q3 2021 Earnings Report, Transcript and Summary

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. [Operator Instructions] Please be advised that this conference is being recorded Wednesday the 17th of November 2021. [Operator Instructions] I’d like to hand the conference over to first speaker of the day, Nexters’ Chief Corporate Development Officer Mr. Roman Safiyulin. Please go ahead, sir.

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. And 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.

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 details 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 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 word to Sasha, to discuss our financial performance during the last quarter. Please?

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 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 in more detail about the development of our cost structure during this quarter. As you know, in August 2021, we have 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 Kismat, which is 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 tend 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 the consumer acquisition. And then, after we came up with a forecast of net top-line number, because the top of rated [ph] 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.

Thank you, Sasha. Hello, everyone. As already mentioned by Andrey and Sasha, Q3 was a remarkable and exciting period for us. In Q3 2021, we continued to see our bookings grow, driven by the continued inflow of new payers. We managed to grow the number of payers to 371,000 paying users, that's up 30% year-over-year, and despite such a massive inflow of payers, the average check was relatively flat year-over-year, and up compared to Q2 at $128. Our unit economics remain healthy as well. We have not observed any decline in quality of the cohorts required in Q3 as compared to Q2. Contrary to the industry trends, we maintained elevated investments on iOS in Q3, which was approximately 50% higher year-over-year, as we saw an attractive window of opportunity to build a strong player base and strengthen our positions in such iOS dominated countries as Japan. Looking at the split of bookings by platform, we are pleased to have achieved remarkable growth in mobile despite all the turbulence caused by the IDFA regulation and higher competition for user acquisition as we have increased our UA spend. The desktop version of our games has demonstrated even higher growth rates, and now accounts for almost third of the bookings. We see a lot of opportunity in developing the desktop version of our games with the launch of Throne Rush on the web recently. Our proprietary platforms allow us to optimize the blended platform commissions and enjoy attractive unit economics. From a geographical perspective, we have continued seeing good traction across all our regions. But in Asia, the growth was especially strong. This year, we decided to make a special focus in terms of UA and game development in this region, and as a result doubled our bookings there. And last, but not least, the share of the formerly high marginal advertising revenue in our bookings has increased more than twice, and now accounts for approximately 6% of our bookings. And we believe the advertising revenue can grow even faster going forward. Turning to the conversion rates, despite much more aggressive marketing compared to last year, we have seen strong numbers in fair conversion, that's MPU to MAU and stickiness DAU to MAU, respectively. People continue to enjoy games and spend their time and money there, despite the easening of COVID restrictions in some countries. Finally, we would like to quickly update you on our new game development. As you already know, we officially released Chibi Island in July after a successful soft launch at the end of 2020. Since its soft launch, the game has accounted for around 1.4 million downloads on iOS and Android. Every month it engages on average 280,000 players and generates between 200,000 and 300,000 of bookings. We believe these are encouraging results for a brand new title, and we will continue working on this enhancement and scaling. In the mobile game market, the development of the game doesn't end at the moment of the official release. In fact, it never ends. We continue enhancing the core game mechanics as well as the monetization approach in order to find the right balance between lifetime value and the CPI, and identify the bridge -- and bridge the gaps that cause players to leave. Once the mechanism is set up properly, we’ll increase our marketing and intensify and scale the game. For Hero Wars, the process took close to 18-months, and we believe the experience we gained will allow us to avoid many mistakes and accelerate the ramp up period. In October we launched Throne Rush on our proprietary web platform. Throne Rush was our first game in genre offensive strategy. It was launched on social networks back in 2013, and was awarded with the title Game of The Year by Facebook in 2014. Like Hero Wars, the game enjoys the strong retention of users, long story selling and demonetization mechanics. Just a few words on why we believe web versions of our games are an important pillar of our growth strategy. First of all, the company originated from the social games, which provide users with bigger screen and wider gaming opportunities. Secondly, in the first half of 2021, the desktop version of Nexters' game showed considerable growth. The company's bookings on desktop, which includes social and web version of games have grown by 79% year-over-year since the beginning of 2021. And all the growth was driven by rapid expansion of our proprietary web platform. And last but not least, we expect the web version of our games to not only diversify our booking streams, but also to increase the economic efficiency by reducing the blended platform commission. According to our initial plan, we have two casual titles left for this year to launch. We plan to soft launch the first one in the following weeks. Its current working title is Puzzle Island, but quite soon it will be launched under a new name. You can already find it in Google Play and App Store. On a tech launch, we have seen very promising metrics on retention and monetization. The second title Riddle Island, which is a mix of mystery and adventures is in the final development stage. And we target to tech launch at around towards the end of the year in limited geographies and soft launches in 2022. So all the titles which were planned for this year, are in the exit pipeline and are set to be released within the anticipated timeline. All of them are casual games, which perfectly fits within our strategy of expanding onto the massive audience of casual players and where our game making playbook is comprehensive. With that, operator, please open up the call for questions.

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

Yes. Can I actually ask four things? Firstly, on the U.S. bookings, so the U.S. bookings were up only 5%. Can you please elaborate on the reasons for that it doesn't 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 efficiency of marketing in iOS post-IDFA? Thank you very much.

I can start probably. So, I have all the questions noted down. So about the U.S. bookings that were 5% only, I think I'll leave that one for Alexander. As for China, so at this point, we are in the final stage with the signing the contract with the local partner in China, to get our process started for receiving the ISBN and having our game published there. Next one would be the payback, I would also leave that to Alexander. And the fourth question was the -- sorry.

The marketing efficiency, I suppose.

Yeah. Sorry about that. So the marketing efficiency, we actually have -- so yeah, we've got a lot of first-party data that we analyze, and we are developing internal tools to analyze all the data that we receive. And actually, everything was in line with our expectations. So we did not see any drops in the efficiency for the iOS post-IDFA. On the contrary, we were enjoying the benefits of us investing more into attracting more iOS users. And the cohorts are very healthy.

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 Asia market. And the U.S. itself obviously have 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 basically, we developed kind of the instruments for the marketing tools that we deploy currently. And 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 are having for around 130 million of downloads globally. And we're far below any kind of potential limits certain other titles reached in terms of the download, so it can be more than a billion easily. So from this point of view, we really believe that it's still quite lot of room for the growth process. So on the payoff period, so again, we discussed that I think on couple of quarter web playoff periods are longer generally than the mobile version. And due to the fact the game itself it's somewhat more hardcore. So as I said, we're having higher CPIs, higher consumer attrition in there, but also higher lifespan expectancy, which is proven by our model. So from this point of view, when we look at this from a marketing point of view from a marketing department point of view, we have more room to invest into the long growth payoff period, simply because with believe and we anticipate based on the 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, I mean, 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.

Thank you very much.

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

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 and 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 the Chibi Island, the marketing. Basically, when do you expect the marketing to ramp up? When you expect this to become more aggressive in terms of the marketing of this title? That's another question. Maybe also, you could command 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? Yeah, that's it for now. Maybe I'll ask follow-up later. Thank you.

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 we – our policy from now on will be to publish the guidance for the coming year only and which 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. But 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, again, 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. So again, the guidance that we have just provided more or less, obviously 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 would 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. And I’ll pass on back to Anton for his remark on the Chibi Island marketing expense.

Yeah, thank you very much, Sasha. And thank you very much for the question about the about Chibi Island. So as said, we have a lot of active work around Chibi Island going on. So 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, and we managed to increase the average playing session by 40%. And we are reaching the levels for the main metrics that we've on the model. So 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 I just -- we 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. And another small remark I would like to add about that, we use the data from one game to make the other game better, and vice versa. So basically, this slow maybe like starting slow with Chibi Island would help the other two casual games starts faster. So this is something that we have experience with 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.

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.

Yeah, actually, I would say, yeah, what makes us successful. All right, so as said, 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 the relevant return rates. So basically, we know our game and we know the cohorts. So basically, we have a lot of data on our game on every, like on very granular level. And, this helps a lot to scale. We actually have very successfully introduced a new internal approach on how to value new players and how we determine the optimal ratio between the cost of new pair and the LTV. We also work on improving our forecasts capabilities, using ML solutions, and have very strong, so we invest in building strong analytical tools which enable us to use some early signs of performance trends. And so, I would say that basically if we compare us to other companies, we have a big team of professionals who do marketing for online games for quite -- do marketing for games for more than eight or nine years. And 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 come through a lot of big changes on ad networks of different kinds. So we have -- since day one, when we heard about the IDFA change was coming, we started preparing ourselves for that. And we knew that it would be a window, that there would be an opportunity window for us to benefit from it. And so basically, we are not losing it. I would say that these are the main reasons.

And I would like to add to Anton, I completely agree with him. And to simplify all of that, we are one of the best companies in not only user acquisition, but we know how to engage players and players for years. And we know how to make long-term deep monetization. So IDFA is the real problem if you have business connected to something like hypercasual. So IDFA is not problem for us because we do other.

Yeah. Sorry, another two sense on that. Yeah, let's just -- if we look at it from the other angle, we treat IDFA change -- so it is changing the ad market. It is it is changing the way basically you do UA campaigns and buy users. But for the most part it has -- so basically it does change the tools that we use to acquire users. But it doesn't change the picture in general. There is a growing market of players on mobile -- players with mobile devices, who actually see ads, tap on ads, tap on engaging ads, and play great games on their devices and stay there for years. So keeping this philosophy in mind, we basically try to adapt our strategy and adapt the tools that we use to capture attention of our players and get as many of them as we can into our games. And this summer that was a great opportunity window to do that better than our competitors.

Yeah, thank you very much. Very, very clear. Sorry, just the last one follow up on this topic of marketing on Chibi Island. And you said that knowing the Hero Wars title very well helps you to be better [indiscernible], so to speak and understand how to view this market and efficiently. But Chibi Island is a little different, do you think you will be as efficient with Chibi Island, as if you were. So it would take I don’t know a year or a couple of months to build the knowledge for the new title? Thank you.

Great question. With Chibi Island, we are not stepping on the new territory. So we are not creating like games where we have zero experience or like we have never operated such a game before. We had the game called Island Experiments on Facebook and mobile in the past, which we’ve launched I believe in 2014, and which was a great success on Facebook. And it had significant revenues and we have invested a lot into marketing. I mean not a lot compared to Hero Wars but there were some decent numbers. We had experienced with the game that contains adventure and farming altogether. And actually knowing how great those games are, we have created Chibi Island, Puzzle Island and Riddle Island as we believe that this genre is just hitting mobile. We see that competitors are rising there. So the cumulative number of downloads is still small compared to say mystery or other farming games. But this is going to be a huge genre. It's kind of mid core and casual altogether. So it's casual in its easiness to convert into playing the game and paying in the game, but it's mid core in terms of the mechanics of the game and how deep those games could be. And so, we actually know what's most important than those kinds of games. As we have operated such, again, actually, our company lived off the profits of Island experiments. So basically, Island experiments allowed us to build Hero Wars and thrive with this game. So we know how to operate such games. And we don't think this would be a huge problem. This is a low-risk move for us.

Thank you very much.

Thank you. [Operator Instructions] Gentlemen, no further question at this time, please continue.

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

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