Nazara Technologies Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Margin story outshines revenue: EBITDA grew 24% YoY to INR 37.7 crores while revenue was flat, as the mix shifted decisively toward higher-margin Gaming and away from low-margin Ad Tech and GST-hit Real Money Gaming.
• Kiddopia’s margin leap is the quarter’s proof point: EBITDA margin jumped to 28.2% from 11.7% a year ago, driven by disciplined user acquisition spend, even though lower marketing caused a temporary spike in net subscriber churn.
• GST absorption masks steady RMG demand: Classic Rummy’s reported revenue collapsed because Nazara issued loyalty bonuses to offset the new 28% tax, but gross player deposits held steady, confirming the underlying player base did not shrink.
• Nodwin’s IP engine is strengthening even as it sheds a drag: Revenue per partner nearly doubled to INR 2.71 crores, and the company relinquished control of the loss-making Brandscale unit, a move that should lift segment profitability from Q4.
• What to watch next quarter: Whether Kiddopia’s new ad networks can restart subscriber growth without sacrificing the hard-won margin, and whether Classic Rummy can narrow its EBITDA loss as bonus normalization begins.

Kiddopia: The Margin Pivot and Its Cost

• The trade-off this quarter: Management made a deliberate choice to cut user acquisition spend when cost-per-install was unattractive, which sent EBITDA margin soaring to 28.2% but also caused net subscriber churn to rise because lower marketing spend reduced reactivations.
• The fix is already in motion: A hard switch to new ad networks was executed in December 2023, and management believes these channels will prove more effective at acquiring users at an acceptable cost.
• ARPU is quietly improving: Average revenue per user rose approximately 3% quarter-on-quarter, providing a second lever for revenue growth even if subscriber counts take time to recover.
• IP licensing as a game changer: Management is actively pursuing licensing deals with major IP holders like Hasbro, Mattel, or Disney, aiming to unlock organic user acquisition and break through the paid UA logjam; execution is targeted within the next one to two quarters.

Nitish Mittersain: "I think it's a very simple challenge of being able to acquire users effectively at the cost that we are willing to pay."

Real Money Gaming: GST Masks Steady Underlying Demand

• The accounting distortion: The 28% GST on entry fees, effective October 1, 2023, was fully absorbed by Nazara through loyalty promotion bonuses. Because accounting standards require bonuses to be deducted from gross revenue, reported net revenue fell sharply even though player deposit activity remained steady.
• Classic Rummy swung to an EBITDA loss in Q3 as a direct result of absorbing the GST impact, but management expects the bonus burden to normalize over coming quarters as the market adjusts and competitor behavior evolves.
• Consolidation is now on the table: With GST policy clarified, Nazara is actively exploring M&A in the RMG sector, though lawyers are working through how to structure deals so that retrospective tax liabilities of target companies do not transfer to Nazara.
• Regulatory overhang persists: Both Openplay and Halaplay received GST summons; relevant information was supplied, and management is hopeful courts will take a favorable view on retrospective claims over the course of this year.

Nitish Mittersain: "The reason that revenues are lower is because we have issued bonus to the consumers to offset the GST cost and as per our accounting standards, we are now deducting the bonus from the revenues to display net revenues."

Nodwin: Strong Core IP, Shedding a Drag

• Core IP revenue is accelerating: Revenue per partner from media rights and brand sponsorship increased from INR 1.63 crores to INR 2.71 crores, and Nodwin secured independent media rights for individual properties at higher rates than previous years, even as large-scale media deals stalled due to consolidation in the TV and OTT industry.
• Brandscale deconsolidation removes a loss-maker: Nodwin chose to forego further investment in Brandscale Innovations (Wings brand) and relinquish control; the unit will be treated as an associate from February 3, 2024, which management expects to deliver a positive EBITDA impact in the 10-to-20 range starting Q4.
• Acquisitions broaden the geographic and format footprint: Recent deals include Publishme (Middle East), Freaks 4U Gaming (Western markets, PC gaming), and Comic Con India (pop-culture), each bringing properties that Nodwin can cross-leverage across geographies and branding partners.
• Large media deals are delayed, not lost: Industry churn involving Zee, Sony, and Star has made broadcasters reluctant to commit to large-scale across-the-board deals, but management expects larger transactions to return in the next few quarters.

Ad Tech: A Deliberate Reset, Not a Decline

• Revenue dropped by design: The strategic pivot from low-margin client work to higher-margin services and product businesses caused revenue to fall to INR 76.3 crores from INR 114.2 crores, but gross margin expanded from 19% to 27% as the low-margin revenue was exited.
• Product gross margin nearly doubled sequentially: Gross margin on the product business improved from 20% to 31% quarter-on-quarter, and early clients are showing high stickiness, though management cautions it is still early days for this business.
• Investment in sales pipeline is the bridge to growth: EBITDA fell to INR 6.6 crores from INR 10.8 crores because of heightened spending on marketing team overheads and commercial events, but that investment has already improved the conversion rate and established crucial partnerships that are expected to drive growth in the coming year.

Sudhir Kamath: "That switch takes time. It's the fundamental reset of the DNA of the company, the organization structure, etcetera."

Gaming IP and Publishing: Building the Next Leg

• Animal Jam delivered its best quarter under Nazara: The December quarter produced the highest revenue and EBITDA since acquisition, driven by a successful in-app 'Wishing well' event and improved user acquisition through deeper analytics and TikTok influencer campaigns.
• The playbook is being codified for replication: Management is now more confident that the Animal Jam model (acquire global gaming IP, apply focused UA and data-driven product innovation) can be scaled, and it is actively evaluating new game studio acquisitions to repeat the formula.
• Growth expectations are cautiously framed: Management believes 10% to 15% year-on-year growth should be deliverable in all quarters for Animal Jam, but wants to see at least one more quarter of performance in a non-seasonal period before giving firmer guidance.
• Nazara Publishing is about to go live: The newly launched publishing division, focused on supporting Indian developers under a Make-in-India banner, will see its inaugural set of games go live soon, with the ambition to build a large user network through the platform.
• WCC is being rebuilt for growth: The legacy WCC 2 and WCC 3 businesses have been range-bound, but a significant product reset is underway, a new game is slated for launch in Q1FY25, and management expects next year to be a significant growth year for the franchise.

Sudhir Kamath: "We do expect that therefore this, you said 10% to 15% growth, that kind of growth should be deliverable in all the quarters on a year-on-year basis. But we would like to wait for at least one more quarter to see how it performs in a non-season quarter as well."

Capital Deployment and M&A Pipeline

• The war chest is full: Nazara completed a INR 760 crore preferential placement to marquee investors including Nikil Kamath, SBI Mutual Fund, and ICICI Prudential Mutual Fund, exceeding the INR 750 crore target and leaving the company well-positioned to pursue acquisitions.
• The pipeline is active across all three segments: Management has been working on multiple opportunities in gaming and Ad Tech for the last year and hopes to bring some to a logical conclusion in the coming quarter, with a clear strategy to target businesses that offer both growth potential and clear cash flow.
• RMG consolidation is a specific focus: With GST policy now providing clarity, Nazara is talking to potential targets in the real money gaming space, though structuring deals to ring-fence retrospective tax liabilities remains the key legal workstream.

Nitish Mittersain: "I think one thing we need to look at is about the retrospective liabilities that these companies are carrying and in any consolidation move, how do we ensure that they not get carried over to our companies."

Guidance & Commitments

Key Metrics