Nazara Technologies Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Gaming IPs drive growth, RMG hit by ban: Gaming segment revenue grew 24% YoY with 41% EBITDA growth, but the Tamil Nadu ban on rummy erased 20% of OpenPlay's revenue and active player base.
• Kiddopia margin spike is a one-off: EBITDA margin jumped to 28% from 18.4% due to a temporary marketing disruption; normalized spend resumed in June and full-year margin guidance is 20% to 23%.
• Nodwin loss is a timing shift, not a trend: Key IPs were deferred to Q2 to capitalize on BGMI's return, and management commits Nodwin will be profitable for the full FY24.
• RMG sector faces a regulatory reset: The upcoming GST Council decision on August 2 could reshape skill-based gaming economics; management sees consolidation opportunity but will exit if policy makes the business unviable.
• What to watch next quarter: Whether Nodwin's deferred revenue materializes in Q2, the GST Council's RMG ruling and its impact on OpenPlay, and whether Kiddopia subscriber growth breaks out of its plateau toward 400,000.

Gaming IP Portfolio: Growth Engines and One-Offs

• Kiddopia subscriber plateau persists: Subscriber count hit a plateau and declined due to Apple IDFA changes; price increases and improved LTV/CAC allowed spending growth in H2 FY23, but a Q1 technical interruption held growth, and management is still working on breaking out to 400,000 to 500,000 subscribers.
• Kiddopia ARPU growth is muted: ARPU growth has been slow because old users renew at earlier rates after the price hike, and a mix shift from monthly to annual subscriptions locks in slightly lower rates; only a small percentage of subscribers are on the new ARPU.
• Animal Jam turnaround working: Since the August 2022 acquisition, improved analytics, content cadence and cost optimization drove EBITDA margin from 11.6% in Q4FY23 to 22.5% in Q1FY24; Datawrkz is now optimizing user acquisition internally.
• WildWorks growth still in plumbing phase: Management is not buying businesses to run them steady; they have been doing foundational work before pressing the accelerator, and some products may be taken to emerging markets including India.
• WCC scaling ambition: A new CEO with over 20 years of game design experience joined, and management hopes to demonstrate scaling capability with WCC in coming quarters, which could open opportunities to push other games in the Indian market.

Nitish Mittersain: "We are not buying any of these businesses to just run them on a steady basis and increase profitability. I don't think that's our objective. We have to grow these businesses. We've just been doing a lot of plumbing work before we are able to press the accelerate there."

Nodwin Gaming: Deferred Revenue, Full-Year Profit Commitment

• Q1 loss driven by timing, not weakness: Key IPs including BGMS were accounted for in Q1FY23 but pushed into Q2FY24 to take advantage of BGMI coming back; increased marketing and brand spend in the Wings gaming accessories business ahead of the festive season also weighed on the quarter.
• BGMS is already profitable: The BGMI Master Series IP is profitable for Nazara and will also be profitable in Q2; season 2, starting August 4, is expected to see much better response than season 1.
• Established IPs back-loaded to H2: DreamHack and NH7 Weekender, Nodwin's established IPs, are planned for Q3 and Q4, while newer IPs remain in the investment phase.
• BGMI ban-lift impact starts in Q2: There was no positive impact from the BGMI ban-lift in Q1; results will start showing from Q2 onwards.
• Krafton reinvested in Nodwin: Krafton, the owner and developer of BGMI, has only recently reinvested in Nodwin, signaling aligned interest in the platform's growth.

Nitish Mittersain: "I can assure that our objective of running all our businesses in a profitable manner continues and Nodwin will be profitable for the entire FY24. So Q1 EBITDA loss is not representative of what will happen in the entire year."

Real-Money Gaming: Regulatory Overhang and Strategic Optionality

• Tamil Nadu ban hit OpenPlay hard: The state banned all rummy games including skill-based in April 2023; Tamil Nadu contributed 20% of OpenPlay's revenues and active player base in FY23, directly impacting Q1FY24 performance.
• GST Council decision on August 2 is pivotal: The Council meets to clarify points on the 28% GST on full face value; management will only be able to assess the impact on platform fees and business viability after full clarity emerges.
• Sector economics will reset: Management expects a reset in the economics of skill-based money gaming; in the short term revenue may be impacted, but over time the cost structure will adjust, and smaller players may be forced to consolidate, creating opportunity for Nazara.
• Exit is on the table if policy turns hostile: Management does not currently have a view to exit the RMG business, but if final clarity brings a policy that makes the business unviable, they will take a prudent call as required.
• Capital allocation favors RMG: At the Nazara level, one of two focus areas for capital allocation is doing a lot more in the RMG sector, suggesting conviction in the long-term opportunity despite near-term uncertainty.

Nitish Mittersain: "I think clearly, this is going to impact a lot of the small players or the smaller players, and they will therefore have to consolidate if they have a chance to survive. That could be one opportunity."

Sportskeeda and Adtech: Organic Growth, Seasonal Tailwinds

• Sportskeeda delivered 52% YoY revenue growth: Most of the growth was organic; it now ranks among the top 10 multi-sport destinations in the U.S. and #2 among sports websites in India, with U.S. ad revenue ECPMs, monthly active users and direct sales all growing significantly.
• Pro Football Network is entirely seasonal: PFN contributed about INR 2.5 crores of revenue and zero EBITDA in Q1, which is completely off-season for American football; the NFL season runs September to January, so PFN picks up mid-Q2 and peaks in Q3/Q4.
• Cricket World Cup adds a catalyst: The upcoming Cricket World Cup and the NFL season will both help Sportskeeda in FY24.
• Roll-up platform thesis in early stages: Management sees Sportskeeda as a platform to roll up many other properties like PFN; the integration and performance of PFN will open up more opportunities, though no specific numbers or timeline were shared.
• Adtech revenue declined on client loss, margin improved: Datawrkz revenue fell 16% YoY due to the loss of one large but low-margin client; the focus on higher-margin clients and diversification improved gross margin from 18.4% to 22.9%, and revenue and EBITDA growth are expected to pick up from Q3 onwards.
• Datawrkz now leveraged internally: The company has started using Datawrkz capabilities for internal user acquisition, seeing encouraging results especially in Animal Jam.

Margins: FY24 is an Investment Year, Not a Margin Year

• Gaming segment EBITDA margin reached 24.6%: Driven by owned IPs, with 41% YoY EBITDA growth on 24% revenue growth.
• Kiddopia's 28% margin is not the new normal: The spike came from a technical issue with attribution partners that temporarily disrupted marketing campaigns, leading to lower spend; as of early June, spend levels are back to normal, and full-year margin guidance is 20% to 22% to 23%.
• Animal Jam margin target is at least 22.5%: Management expects to at least maintain this level going forward when ramping up user acquisition and growing revenues.
• Employee costs jumped ~60% YoY: Driven by team additions including the entire Pro Football team and WildWorks team of about 35 to 40 people in the U.S.; organically, team cost is not expected to increase much.
• FY24 is explicitly not a margin expansion year: Strategic focus is on accelerator growth, creating moats and building the ecosystem; margin expansion is targeted for FY25 onwards, though blended margins are still expected to be higher than FY23.

Nitish Mittersain: "I think for an overall perspective, our objective in FY24 still is to get the accelerator or strategic growth, creating Moats, creating an ecosystem. So we are not running for very high margin expansion for FY24. I think FY25 onwards, we will be focusing on that."

Capital Allocation and Strategic Optionality

• Fund raise of up to INR 750 crores approved: The board passed an enabling resolution seeking shareholder approval; management intends to raise funds at an appropriate time, with no specific timing disclosed.
• Nodwin closed ~\$28 million in funding: From existing investors and Sony Corporation, strengthening its balance sheet for IP investments.
• M&A pipeline focused on gaming IPs and teams: Discussions are underway with various gaming studios to strengthen the portfolio, with a strong focus on adding gaming IPs and teams.
• Freemium monetization upside untapped: Management sees significant potential in high-quality gaming IPs like Kiddopia, Animal Jam and WCC to unlock monetization beyond in-app purchases, advertising and subscription over time.
• India strategy for global IPs in the works: The company is actively working on an India strategy for monetizing Kiddopia and Animal Jam; localization will focus on product pricing and monetization models rather than the product itself.

Guidance & Commitments

Key Metrics