• Net sales amounted to EUR2.9m (2.3), growing 22% y/y and above our estimates of EUR2.4m. In terms of revenue split, EUR2.4m came from the service business while EUR0.45m came from self-publishing.
• Total OPEX amounted to EUR-2.5m, lower than our estimates of EUR-3.0m.
• EBITDA amounted to EUR0.7m (-0.4). This was higher than our expectations of EUR-0.1m. The deviation is primarily due to higher sales.
• EBIT amounted to EUR0.35m (-0.6).
• Operating cash flow for the full year amounted to EUR-0.3m (-2.9) and investment in intangible/tangible assets was EUR-2.2m (-1.2).

Overall, Nitro Games concluded the year with a strong quarter, reporting a y/y growth of 22% with a positive net income. As expected, the robust sales figures are primarily due to the service business, which amounted to EUR2.4m, exceeding our estimate of EUR1.7m.

Looking at the self-publishing, the segment reached EUR0.4m in sales, lower than our expectations of EUR0.8m. We consider the lower-than-expected numbers in the self-publishing segment to be of minor importance, primarily due to reduced UA spending. On that note, we are encouraged by Nitro Games’ recent publishing agreement for Autogun Heroes, announced last week. This implies that more resources can be allocated to the game without adversely affecting Nitro Games’ cash flow. While sales surpassed expectations, we remain impressed by the company’s solid cost control during the quarter and coupled with the publishing agreement for Autogun Heroes and the new B2B project with Netflix, we believe the business risk has been significantly reduced compared to Q3.

After being globally launched on 1 June 2023 with promising results in terms of the payback window from user acquisition and retention rates, the game is set to enter the live-ops phase with Supersonic (a part of Unity) as a publisher. During the conference call, the management shared KPIs from the game’s launch phase, revealing approximately 1 million total installs and EUR~1.5m in accumulated revenues. The net ARPDAU has been EUR0.3 throughout the period, slightly lower than the ARPDAU figures shared from the Q2 and Q3 presentations. Retention numbers, such as D30 (the number of players continuing to play the game after 30 days of installation), have remained stable at 8%. (The company disclosed D28 retention of 8% in both Q2 and Q3). Overall, it is promising that the game’s KPIs have remained stable during the launch phase. It is also encouraging to note the game’s monetization with a healthy balance of ads and in-app purchases (IAP).

Given the challenging macro environment and privacy issues (IDFA changes from Apple) in the mobile gaming market, having strong retention numbers and a solid monetization strategy is crucial. This is particularly important as the acquisition of new players becomes increasingly expensive and challenging.

As mentioned above, last week, Nitro Games announced a publishing agreement with Supersonic (a part of Unity) for Autogun Heroes. The agreement means that Supersonic will have exclusive publishing rights to Autogun Heroes on iOS and Android globally (excluding China), thereby providing funding for the promotion and user acquisition of the game. Meanwhile, Nitro Games will remain the developer of the game and will continue to provide updates and live services.

We think the agreement is of great importance for Nitro Games, as we have argued that securing a third-party publisher would unlock the full potential of Autogun Heroes and provide the title with the opportunity it deserves based on its impressive KPIs. Furthermore, the agreement helps mitigate overall business risk, which, when combined with the recently announced development agreement with Netflix, significantly reduces the company’s business risk profile.

The publishing agreement follows an industry standard, typically involving a revenue share component in the range of 20-50% for the developer. Given Autogun Heroes’ impressive KPIs and the strong interest from third-party publishers previously communicated by the company, we believe a revenue share in the upper range is likely for Nitro Games. We are even more confident that Nitro Games has secured favorable terms after listening to the Q4 conference call. During the call, the management mentioned strong interest from third parties and emphasized their selective approach in negotiations.

Since nothing was disclosed regarding the IP, we also assume that Nitro retains ownership, allowing the company the potential to expand the title to other platforms in the future. We are also encouraged to see that Nitro continues attracting leading gaming industry players by collaborating with Unity. It is worth mentioning that Unity has its own advertising network, providing it with more data and tools for scaling games than other publishers typically have.

NERF: Superblast (NERF) was launched in September 2022. Nitro has a launch phase of six months where it measures different KPIs, experimenting with different strategies, balancing monetization rates, user acquisition, etc.

Data from Appmagic indicates over 50k downloads (up from 20k in Q3) of NERF: Superblast per month on Android and iOS, combined and that NERF is generating roughly USD5-10k per month across both platforms in line with the previous quarter. Moving forward, we anticipate that Nerf will continue to serve as a valuable showcase for Nitro’s capabilities of developing good games where it has over a million Android installs and consistently positive user reviews, earning an aggregated score of 4.6 out of 5 on Google Play and 4.8 out of 5 on iOS. Nevertheless, we expect the game’s financial impact on the company to remain limited.

Beyond self-publishing games, Nitro Games also operates a B2B segment where it provides development services to third parties. This strategic approach not only broadens the company's revenue streams but also serves as a risk-mitigation strategy.

On 11 November, Nitro Games disclosed a new development agreement with Netflix, amounting to approximately EUR9m, for an undisclosed game project on an undisclosed IP. The development agreement is expected to span until 2026, and the order value of EUR9m can be compared with the company's recent development deal with Digital Extremes, valued at EUR1.2m. Moreover, at the end of Q3, we estimated Nitro Games' ongoing project portfolio to be worth approximately EUR6.8m, underscoring the impact of the new agreement on the company's total order value for existing projects. Except for an impressive order value, the agreement with Netflix, also validates Nitro Games’ capabilities to develop complex games with prominent players.

We are further encouraged by Nitro Games' successful execution of its strategy to participate in larger and more complex projects (which should be the case here, given that it is a multiplatform game), as it should come with a better margin profile. In addition, the new agreement stipulates that Nitro Games will offer post-launch live services, which we anticipate will generate revenue beyond the development phase. Finally, securing projects of this magnitude with a projected duration of approximately three years is favorable as it enhances the company’s visibility and reduces the risk of additional capital injections.

We expect the project to be fully operational between 2024 and 2025, with an estimated completion in the early to mid-2026 period. The majority of sales recognition is expected in 2024-2025, and we estimate revenues of EUR4m in each of these years.

At the end of January, the company announced an expansion of the new Digital Extremes agreement worth EUR3.5m. The new order value can be compared with the initial order of EUR1.2m. The project involves providing game development services for a mobile version of the game Warframe. As we mentioned in conjunction with the announcement of the new project with Digital Extremes, given Nitro Games’ historical projects, we expected the initial order value to grow with new expansions. We also believe there are good chances for further expansions ahead. Nitro Games has started to work on the new project, scheduled for completion in 2024. We estimate a relatively linear revenue recognition from the project from Q2 to Q4, with a smaller contribution in Q1 as we anticipate revenues from the initial project, which was completed in Q1.

In total, we estimate that the ongoing B2B agreements, including Netflix, total EUR15m, where EUR12.8m is still to be recognized as revenues. In Q4, the service business generated EUR2.4m out of the total EUR2.9m. This means that the service business contributed the largest share of the revenue in the quarter. As we have mentioned in our earlier research updates, the work-for-hire structure provides stable cash flow at healthy margins, reducing the risk profile of the company while still providing optionality on the upside as Nitro has the right to a revenue share if some of the projects lead to a commercial launch.

After experiencing several quarters with weaker cash flow due to increased UA spending, Nitro Games had solid cash conversion in Q4, with cash flow from operations reaching EUR2.5m. This improvement was positively impacted by increased net income and lower working capital. The closing cash and equivalents amounted to EUR3.8m at the end of the quarter, and total equity stood at EUR1.7m, up from EUR1.3m at the end of Q3. With the new Netflix agreement and the publishing agreement for Autogun Heroes, we believe Nitro Games’ financial situation has significantly improved since Q3. However, until we gain a better understanding of how Autogun Heroes will be scaled with the new publishing agreement, we continue to adopt a cautious approach and estimate a capital injection of EUR2.5m in our base case and EUR4m in our bear case, even though we believe the risk has been reduced significantly since Q3.

Following the Q4 report, we have made limited revisions to our sales forecasts. Although we are more optimistic about sales from Autogun Heroes after the publishing deal, we maintain a conservative view until we observe the ramp-up of UA for the game. The most significant revisions are in COGS, where we have significantly reduced them, anticipating limited UA spending from Nitro Games following the publishing deal. Regarding other Opex, we have slightly increased our assumptions, primarily personnel expenses, which turned out to be somewhat higher than expected in the quarter. All in all, we have made limited changes on an EBIT level.

For Q4, we estimate sales of EUR2.6m, with approximately EUR0.25m stemming from self-publishing and EUR2.3m from the service business segment. We expect a q/q decline in the self-publishing business as we think limited UA spending from Supersonic (the publisher) in the quarter.

We have used a WACC of 14% in all scenarios, derived from Redeye’s Rating model, and a tax rate of 20.6%. The discount analysis extends to 2036, and the key financial assumptions for the scenarios are summarized below. We have also calculated with a capital injection of EUR2.5m in our Base case and EUR4m in our Bear case and associated dilution, impacting our valuation negatively. Our base case is SEK 9 (8).