GDEV Inc. (GDEVW) Q3 2024 Earnings Call Transcript

Good day and thank you for standing by. Welcome to the GDEV Third Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be the question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Roman Safiyulin. Please go ahead.

Good day, everyone, and warm greetings from Cyprus. We are delighted to have you join us today as we present GDEV’s third quarter 2024 earnings results. On today’s call, our presenters, first will be Andrey Fadeev, Founder and CEO; Alexander Karavaev, Chief Financial Officer; and me, Roman Safiyulin, Chief Corporate Development Officer. Before we get started, I would like to remind you that today’s discussion may contain forward-looking statements which may not develop as we currently expect. We have posted a supplementary presentation at gdev.inc, which contains information and precautionary warnings on forward-looking statements as well as our non-IFRS financial measures. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC. Now, let me hand it over to Andrey.

Yes, I am Andrey. Thank you, Roman. I greet everyone, and especially our dear and respected analysts. Thank you for your work. Looking back on the third quarter, we see revenue growth compared to the prior quarter, and exceeding analysts’ expectation for both revenue and adjusted EBITDA. As you all know, we take a long-term perspective on our key products, focusing on unlocking their potential, and fostering sustainable growth over quick wins. The gaming landscape continues to evolve rapidly, shaped by dynamic player preferences, shifting gameplay trends, and intensifying competition across the entertainment industry. And rather than concentrating on short-term enhancements with limited impact, our studios are moving toward implementing thoughtful, long-term product changes aimed at fostering sustained growth and deeper play engagement. These updates span various aspects of our games, including core gameplay mechanics, meta progression, live operations, monetization models, marketing strategies, and art direction. By aligning gameplay more closely with audience preferences and enhancing emotional engagement, we aim to steadily improve key metrics such as player retention, lifetime value, and cohort monetization, while also increasing the efficiency of our marketing efforts. To help our studios achieve these ambitious goals, I’m excited to share that we’ve bolstered our leadership team with the appointment of Olga Loskutova as our new Chief Operating Officer. With her extensive managerial expertise in various consumer industries and valuable contributions as GDEV’s Board Member, Olga is uniquely positioned to guide our studios towards achieving their strategic goals and fostering sustainable growth. Olga’s appointment will help us in our drive to achieve success in our product strategy to become a top-tier title in their genre. In summary, we truly believe that our strategy and ongoing efforts will unlock the true potential of our key titles, driving long-term success and creating value for all stakeholders. Thank you. Alexander?

Thank you, Andrey. Hello, everyone. Now, let me say a few words about our financial performance in the third quarter of 2024. Despite now being in a transformation phase, our results remain within our expectations and even surpassed analysts’ consensus as Andrey just mentioned. In Q3 2024, revenue amounted to $111 million, reflecting a 5% growth quarter-over-quarter, but a 9% decline year-over-year. This was nevertheless in line with our expectations, and was primarily due to the decline in bookings. Bookings declined by 8% year-over-year to $93 million. Because our team is focused on long-term product improvements, as just said by Andrey. As a part of this initiative, we reduced the number of in-game events and monetization in general as we want to ensure, in the first place, that the product changes positively impact player experience and retention. This initiative applies not only to our core title, Hero Wars, but also to Pixel Gun and Island Hoppers. Specifically in Pixel Gun and Island Hoppers, we are undertaking several experiments and searching for fewer opportunities that would enable us to grow these or similar titles in the future. In the meantime, we don’t want to spend too much on scaling and live ops, because we prefer to adhere to our disciplined approach regarding the investments. We’re still continuing to feel the under-investment in marketing back in 2022, which was 33% lower compared to 2023, which we consider to be a normalized year. This under-investment affected the dynamic of our bookings over the past few quarters, including Q3 2024. Moving on to our expenses, we generally continue to execute on our disciplined approach around costs and expenses. Platform commissions decreased by 13% year-over-year or $4 million, driven by low revenues from in-game purchases and a higher share of revenues from the PC platform, which is associated with lower commissions. Game operation costs remained stable at $13 million, while general and administrative expenses were tightly controlled and declined slightly to $7 million compared to $8 million in Q3 2023. I would also like to highlight that our marketing investments increased by $9 million year-over-year, reaching $52 million. It is in line with our strategic plan. This reflects our efforts to scale marketing activities across multiple channels and experiments around new channels and new instruments to find future growth opportunities. As a result of all these factors, the net profit in Q3 2024 amounted to $15 million, compared to $24 million in the same period last year. This decrease was primarily due to lower revenue and higher marketing spend. Adjusted EBITDA for the quarter was $16 million, down $13 million year-over-year. However, cash flows generated from operating activities increased to $12 million compared to $8 million in Q3 2023. This demonstrates our effective cash management during this period of transformation. Geographically, over the past few quarters, we focused on Europe. As a result, the bookings in Europe grew year-over-year, increasing the region’s share of total bookings from 26% to 30%. Specifically, Germany, France, the United Kingdom, and Poland delivered solid performance on the back of our various marketing initiatives. In summary, this quarter underscores our commitment to sustainable growth. We continue to explore different growth initiatives, both across product and marketing while at the same time achieving our financial goals. We remain confident in our strategic focus on product evolution and marketing investments.

Thank you, Alexander. Yes, I would just like to make a quick update on our progress of improving the stock profile. So, as we have previously stated, improving the corporate profile of our stock and providing more liquidity is a high priority for shareholders, the Board, and the management team as it can open for us more opportunities in inorganic growth. On August 21, we executed a one-for-ten reverse stock split, better aligning our stock with investors’ preferences and enhancing the market appeal and optics. This was followed by an announcement of the eighth at-the-market offering on September 12. The at-the-market offering enables us to place, from time to time, up to 1.8 million of our ordinary shares acquired through our sales channel offer in the beginning of 2024, which we currently hold as treasury shares into the market at the prevailing market price as long as the ATM program is effective. This move is intended to increase the public flow to bolstering trade and liquidity without diluting existing shareholders. Together, these measures are aimed at having a lasting positive impact on our stock performance. We already see first signs of liquidity improvements with the average daily trading volume growing more than 15 times after the reverse stock split was announced, compared to the same period before. With that, we conclude our third quarter 2024 earnings call for GDEV Inc. And we will now address any questions you might have during the conference call. Thank you.

Thank you. And now, we are going to take our first question. And it comes from the line of Pat McCann from Noble Capital Markets. Your line is open. Please ask your question.

Hey, thanks for taking my question. I was curious about Pixel Gun on Steam. How much success has that had so far? What might be the impact on user growth, if you could just give an update there?

Thank you, Pat. This is Roman. I will take this question. Yes, definitely the launch of the Pixel Gun on Steam was a huge success. But as it is typical for the Steam platform, after the launch and the initial spike, the interest went down, and that is fine. We have already stabilized on some levels of the average active users. So, we on average have around 2,500 to 3,000 concurrent users. And that number is growing month over month right now. We believe that the launch of this great franchise on Steam was the right decision, and we see interest on this platform for this product. Right now, we are also looking into product improvements, which can better address the platform and the audience of Steam.

Great. And then, I was also curious with regard to the ATM that you mentioned in the press release. Could you kind of give an update on how you see capital allocation and the sorts of how you would intend to spend money as far as growth is concerned? Or, any updates as far as capital allocation?

Yes, thanks a lot. This is Alexander. Look, we generally will launch the ATM not because we need the capital. We obviously have a quite substantial cash cushion on the balance sheet. Its primary goal is basically to bolster the liquidity. So, in general, we continue to look for different opportunities out there in the market, particularly in terms of M&A. But it’s obviously something that you cannot plan. You cannot build a pipeline. So, we just will hold the cash for any type of future developments that we may have. We do not for now have anything special on the table.

Great, thank you. And then, finally, you of course have multiple game development studios and the prospect for launching new games outside of your core games. I was curious if there is anything exciting in the pipeline that might be coming soon? Or, if you had any updates on what you expect as far as potentially new franchises?

Yes, I will take this one. You’re right, we have R&D teams in all of our studios. Some develop games in the area of their core genre. Some are making experiments. We always have lots of games in development, always prototyping and looking for new concepts. Currently, we have some games showing good metrics, and we are actively working on them. Some are even in the scaling mode. Hopefully, we’ll be able to share some details later.

Thank you. Now we’re going to take our next question. And the question comes from the line of Edward James from Cantor Fitzgerald. Your line is open. Please ask your question.

Thank you for taking my question. I’ve got three questions. So, if we just take them one by one. Firstly, just on the user acquisition markets, can you give us an update as to how things have developed there in terms of user acquisition efficiency? And if you have seen the market improve in terms of your ability to deploy user acquisition capital at a higher ROI? And related to that, how should we expect UA spend to trend into Q4?

Okay, thanks a lot. I’ll take this one. Actually, the market didn’t change a lot since Q2. So, we’re still investing with a fairly decent IRR and ROAS, return on advertising spend, but it’s not really improving a lot. We’re still at the same level. Again, we’re doing internal initiatives just to test new types of creatives, new types of channels to see where we can scale in the future. This is still kind of in the experimental mode. As for Q4, historically, year-end and the beginning of the next year have been the period of time when we spend quite a lot on marketing. This year, we will also plan certain initiatives, but not probably as massive. As we said, we first want to really make certain product changes so that we first of all address player experience. In general, I would expect more or less the same level of marketing in Q4 compared to Q3 with a decent level of IRR.

That’s interesting. And just a related question, but then thinking about profitability, clearly the EBITDA number has exceeded most people’s expectations for Q3 and the previous quarter. Judging by your comments on user acquisition, should we expect bookings to remain more or less where they are, but profitability to remain at relatively solid levels for the near term? I understand you don’t provide guidance, but I’m just trying to put those two pieces of the puzzle together.

Yes, look. Again, we don’t expect any substantial changes to the bookings, at least for Q4, given that Q3 was really strong. Even if we don’t push a lot for the marketing in Q4, we still believe it’s going to be within consensus. So, that’s why. We’re currently not focusing heavily on financial results; we need to improve the product to enable future growth. But generally, yes, you can expect we’re going to be more or less within the consensus regarding revenues and possibly a little higher in terms of bookings.

Understood. Lastly, there’s been a diverging performance between Hero Wars: Alliance, which has been very solid, and, in fact, over the last four quarters has seen an upward trend in bookings, generally speaking, and Hero Wars: Dominion Era, which has reduced in size slightly. Why is there a different trend between the two games? Is that down to different experiments and optimization processes going on between the two?

Thanks. That’s a very good question. Look, I would say to a certain extent, there is a different strategy. The web version is a very nice instrument for us to diversify. As we discussed many times, it’s a completely different game, though they share the same umbrella brand. It provides for a different gameplay and different user economics, which has a limited scalability. It’s difficult to scale that game significantly. We are more focused on the mobile game because the mobile market in general has not grown much over the past two years. We still believe the mobile version is where we can scale quite substantially going forward. There is a strategy difference to a certain extent, but again, we don’t really expect substantial changes in the portfolio.

Thank you. And now we're going to take our next question. And the question comes to the line of Martin Yang from Opco. Your line is open. Please ask your question.

Hi. Thank you for taking my question. I have a few. First, can you share with us your latest thinking on the synergy between your games? How do you see the potential for cross-promotion and, maybe, down the line, cross-progression between the games in your portfolio?

Okay, I will get this. Andrey, hi. Hi, Martin. I am Andrey, as you know. Yes, I have been here 17 years and firstly, here in the gaming industry. For some years, I thought that cross-gaming and cross-promotion could be something very interesting and useful. We tested it on some of our early games, and we found that it's not effective to move players from one game to another. What you need to think about is working with cohorts; you need to understand completely your audience. Sometimes it's hard to find the audience of Game 2 in Game 1. You need to focus on specific users. What we found is that sometimes in mobile gaming there are bright ideas or creative thoughts inside teams that can be used across different teams. By applying very simple concepts, you can improve performance across teams. However, this is a slow process, and we need time to develop things. But I see a lot of progress in sharing knowledge among teams and using artificial intelligence to enhance performance.

Got it. Thank you, Andrey. My next question is about geographic expansion. Can you talk about your latest thoughts on where the geographic expansion will be focused on and how important is it to your near-term and mid-term bookings growth?

So, I can take it if I may. Thanks, Martin. That's a very good question. We would like to be represented globally. Right now, we are focusing on expanding into different geographies. We have a substantial footprint in developed countries such as Europe and the United States, as well as in Asia, particularly in Japan and Taiwan. We are thinking about substantially expanding into other regions like Latin America and India. Each market has its own specifics and incumbent players, so we need to develop strategies tailored to each market. We believe that enhancing our product updates is critical in adapting to these new demographics. Younger players have different preferences, and we are looking to modernize our gameplay to appeal to them. However, these are long-term initiatives; we won’t see immediate results.

Thank you, Alexander. My final question is more of a model question. Is your diluted share count in the third quarter?

It's actually not changed since we published the Q2 report. You can find that information on the SEC website. A very tiny portion of options have been issued, but generally, the share count is exactly the same.

Thank you. And now we're going to take our last question for today. And it comes to the line of Michael Kupinski from Noble. Your line is open. Please ask your question.

Thank you, and thanks for taking my question. As you consider new territories and geographies, I’m curious if you feel your current content aligns with those markets' demographics. Do you believe that you might need to look at M&A to position yourself effectively to enter those markets with possibly different content? What are your general thoughts about the M&A environment as well?

Hi, Michael. Thanks a lot. That's a very good question. We're constantly considering M&A, it’s certainly something we are looking at, especially with the idea of acquiring studios in these evolving geographies. However, it's an opportunistic endeavor, and analyzing each opportunity is crucial. Our core franchises are established but need to adapt to be more modern for younger audiences. We are exploring several initiatives to make our products more appealing. M&A is also something that could be beneficial in those markets, but again, we need to be careful and thoughtful in our approach.

Thank you. Dear speakers, there are no further questions for today. I would now like to hand the conference over to the management team for any closing remarks.

Thank you, everyone, for joining the call. See you next time. Bye-Bye.

That does conclude our conference today. Thank you for participating. You may now disconnect. Have a nice day.