• Net sales amounted to EUR2.7m (1.7), growing 54% y/y and in line with our estimates of EUR2.6m. In terms of revenue split, EUR2.4m came from the service business while EUR0.26m came from self-publishing.
• Total OPEX amounted to EUR-2.5m, lower than our estimates of EUR-2.7m.
• EBITDA amounted to EUR0.6m (-0.2). This was higher than our expectations of EUR0.3m. The deviation is primarily due to lower opex.
• EBIT amounted to EUR0.2m (-0.5).
• Operating cash flow amounted to EUR0.065m (-0.1) and investment in intangible/tangible assets was EUR-0.6m (-0.27).
• Cash and cash equivalents for the ending period were EUR3.3m.

All in all, we deem the report to be solid across the board, with the top line coming in roughly in line with expectations while margins came in better than expected. We are particularly impressed by the company's consistent cost control over several consecutive quarters. Additionally, this quarter provides a good demonstration of the company’s business model, whereby the B2B segment contributes stability in a quarter where the self-publishing segment experiences a calmer period (as expected). As we highlighted in our previous research update, Nitro Games has made significant progress in recent quarters, securing new B2B agreements and a publisher for Autogun Heroes. We anticipate sequential growth in the self-publishing business as Supersonic starts to scale Autogun Heroes, and with the ongoing project with Digital Extremes and Netflix, we think the company is poised for continued growth.

After listening to the company’s Q1 webcast, it becomes evident that management appears more optimistic about the overall gaming market for 2024 compared to 2023. They also intend to maintain cost-prudence while shifting their focus somewhat to monetize more titles in the self-publishing business. Hence, we would not be surprised if the company made any new announcements regarding Nerf: Superblast or other new titles in the coming quarters.

It is also evident that the company has intensified its communication regarding its specialization in shooter games and has positioned itself to capitalize on the current trend where more AAA games are expected to transition to mobile platforms (here, Nitro Games can provide support with its B2B service). As B2B projects become increasingly complex and rigorous, particularly with AAA titles, competition for these projects will likely decrease compared to less complex ones, thus supporting the company’s gross margin. We believe this shift is already becoming apparent in Nitro Games’ figures, as we perceive its current projects with Digital Extremes and Netflix to be more complex than previous ones.

In Q1, 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.

At the beginning of Q2, the game entered the live-ops phase, and Supersonic took over the publishing activities. However, we have not witnessed any notable changes in the game’s performance on SensorTower and Appmagic. Consequently, we maintain our view, anticipating a gradual scale-up of the game.

As we wrote in our previous research update, 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 as Supersonic stands for the UA investments, hence mitigating the negative cash flow impact.

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.

NERF: Superblast (NERF) was launched in September 2022, and data from Appmagic indicates over 20k downloads (down from 50k in Q4) 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. Although management mentioned the possibility of exploring new ways to monetize the game during the Q1 webcast, we still anticipate that the game’s financial impact on the company will remain limited until we receive further information.

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 its current largest B2B project 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 amounts to EUR9m. Except for an impressive order value, the agreement with Netflix, also validates Nitro Games’ capabilities to develop complex games with prominent players.

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.

In addition to the Netflix project, Nitro Games is working on a project with Digital Extremes, a long-standing partner with whom Nitro Games has collaborated on several projects historically. The current project began in August 2023 and was expanded in Q1 2024; the expanded order is worth cEUR3.5m and is expected to be completed in 2024. The project involves providing game development services for a mobile version of the game Warframe, which was launched on iOS in February 2024. According to data from Appmagic and SensorTower, the game appears to generate USD100-200k per month with 200-400k downloads in the last month. The game is expected to be launched on Android later in 2024.

In total, we estimate that the ongoing B2B agreements, total EUR12.5m, where EUR10.5m is still to be recognized as revenues. In Q1, the service business generated EUR2.4m out of the total revenues of 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 user acquisition spending, Nitro Games has achieved positive operating cash flow for two consecutive quarters. The closing cash and equivalents amounted to EUR3.3m at the end of the quarter, with total equity standing at EUR1.85m, up from EUR1.69m at the end of Q4. During the quarter, the company amended the terms of the convertible loan (EUR2m) with Nordisk Games, and it will now repay the loan with monthly payments, starting in Q2 2024 and ending in Q2 2025 with a 0% interest rate.

With the new Netflix agreement and the publishing agreement for Autogun Heroes, we believe Nitro Games’ financial situation has significantly improved in recent quarters. 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 Q1 report, we have made limited revisions to our estimates. For Q2, we estimate sales of EUR2.6m, with approximately EUR0.6m stemming from self-publishing and EUR2.0m from the service business segment. We anticipate a sequential growth in the self-publishing business, as we expect Supersonic to increase user acquisition spending during the quarter, although we have not yet observed any significant spending when examining data from Appmagic and SensorTower. We anticipate somewhat lower revenues in the B2B business compared to Q4 and Q1, as we now project EUR2m for Q2 compared to approximately EUR2.4m in the previous two quarters.

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 SEK9.