COMPANY ANALYSIS 23 November 2017

Summary

Nitro Games (NITRO)

The gateway to Asia List: Market Cap: 11 MEUR • Nitro Games has a long history of stable cash flows Industry: Gaming from developing contracts from bigger publishers CEO: Jussi Tähtinen Chairman: Antti Villanen which minimise risk in the business model.

• The stock market does not fully understand the potential in the game distribution agreement with OMXS 30 Nitro Games

Netmarble, one of Asia’s biggest 70 publishers. At this point a deepened partnership could 60 50 generate a significant revenue boost. 40 30 • The current project with Wargaming.net, the creator 20 10 of World of Tanks, one of the most successful PC- 0 16-Jun 14-Sep games of all time could secure income for the years to come.

• Our DCF indicates a fair value range of SEK 33-170

with a base case of SEK 56.

• Redeye Rating (0 – 10 points)

Management Ownership Profit outlook Profitability Financial strength

6.0 points 10.0 points 5.0 points 0.0 points 3.0 points

Key Financials

2015 2016 2017E 2018E 2019E Share information Revenue, MEUR 2 1 2 3 6 Share price (EUR) 47.8 Growth 0% -56% 109% 85% 75% Number of shares (m) 2.3 EBITDA 0 -1 -1 -1 1 Market Cap (MEUR) 11 EBITDA margin 10% -69% -83% -17% 10%

EBIT 0 -1 -2 -1 0 EBIT margin -21% -149% -124% -27% 8% Pre-tax earnings -1 -1 -2 -1 0 Net earnings -1 -1 -2 -1 0 Net margin -31% -179% -132% -27% 6%

2015 2016 2017E 2018E 2019E Analysts: Dividend/Share 0.00 0.00 0.00 0.00 0.00 Tomas Otterbeck

EPS adj. 2015 -0.39 2016 -0.74 2017E -0.98 2018E -0.37 2019E 0.15 [email protected] P/E adj. 0.0 0.0 -4.9 -12.8 32.6 EV/S 0.0 1.0 5.6 3.2 1.9 EV/EBITDA 0.0 -1.5 -6.7 -18.9 19.2 Kristoffer Lindström [email protected]

Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.

Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: [email protected] Nitro Games Redeye Rating: Background and definitions

The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.

Company Qualities

The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth.

We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 – Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.

Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points.

The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys.

Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 – Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.

Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.

Profit Outlook Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 – Competitiveness.

Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit margin or EBIT.

Financial Strength Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term. The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 – Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary events.

Company analysis 2 Nitro Games Table of contents Investment Thesis ...... 4 Company Profile ...... 6 Background ...... 6 Product and Services ...... 7 NG Platform ...... 7 Business model and sales ...... 9 Strategy ...... 10 Focus on the mid-core audience ...... 10 Strategy is the primary strategy ...... 11 One dominating game ...... 12 MVP-Process ...... 12 Quality evaluation ...... 13 Retention: Proof of Concept ...... 14 Market ...... 16 The gaming industry ...... 16 Segments ...... 17 Revenue models ...... 19 Value chain ...... 20 Business opportunities ...... 21 The gateway to Asia ...... 21 Wargaming bets big on mobile ...... 22 Financial projections ...... 24 Group forecast ...... 24 Self-developed and published games ...... 24 Medals of War ...... 25 Self-developing projections ...... 25 Third-party services ...... 26 Third-party services projections ...... 26 Valuation ...... 27 Base-case scenario ...... 27 Bear-case scenario ...... 27 Bull Case scenario ...... 28 Appendix ...... 29 Summary Redeye Rating ...... 31

Company analysis 3 Nitro Games Investment Thesis

Nitro Games has a long history of stable cash flows from developing contracts from bigger publishers which minimise risk in the business model. Currently a majority of Nitro Games 30 employees are working with a mobile game that will be published by Wargaming.net, the creators of “World of Tanks” the seventh highest grossing game on PC in 2016. The game has been one of the most successful free to play PC-games for several years.

The third- development services described above is expected to grow steadily the next coming years, this alone creates a high underlying value in the company which justifies about half the existing market cap.

Nitro Games second business area is developing and publishing mobile games. Nitro Games has adapted its business model closely after market conditions. One of the biggest values in Nitro Games is the self-developed NG Platform. The platform has been in development for over 4 years. With the NG Platform combined with a proven creative process Nitro Games can launch a mobile game in 5-10 months, typically this takes 6-18 months for most other mobile game companies. Therefore Nitro Games can minimise the amount of time and money spent in every single project minimising risk.

The NG Platform combined with Nitro Games creative-process, and the overall experienced personnel is the company’s biggest competitive advantage. Nitro Games two last games have both been selected by Apple as an editor’s pick which is unusual and a proof of quality in the products developed by the company.

Nitro Games and Netmarble EMEA have signed a Game Distribution and Servicing Agreement recently. We believe the stock market do not understand the potential long term value of this agreement. Netmarble is the highest grossing mobile games publisher in Korea. In China and Japan, the publisher’s games are top 5 amongst the highest grossing games.

Investment opportunity Catalyst 1: Nitro Games first released game “Medals of War” shows at this early stage promising KPI’s. The game has good loyalty-metrics (called retention) and is estimated to have healthy monetization, meaning average acquired users is profitable. Nitro Games is estimated to spend EUR 0.5-1 million on user acquisition the next 6-8 months which has a potential of a revenue of EUR 0.8 – 1.7 million.

Company analysis 4 Nitro Games Catalyst 2: Currently the agreement with Netmarble only applies to the game “Medals of War” for publishing in Turkey, Middle-East and Africa. The publishing deal generated an initial revenue of EUR 0.2 million for Nitro Games. However the most interesting thing announced in this partnership is the fact that Netmarble will have rights of first refusal for publishing in Asia, including China, Japan and Korea which is the biggest and fastest growing markets amongst mobile games.

So a big potential catalyst for the stock is of course if new publishing deals for those countries would be signed. At this point a deepened partnership of this kind is likely and have a potential initial revenue of EUR 0.8-1.2 million. We believe a deal of this kind is possible, which in this case means a profitability of 30-40 percent.

Catalyst 3: The partnership agreement between Nitro Games and Wargaming.net has an approximate communicated value of EUR 1.5 million. The two companies have since May 2017 been collaborating to co- develop a free-to-play mobile game that will be published by Wargaming. We believe Nitro Games will have an additional variable income connected to the generated revenue from this mobile game. If the game becomes successful the partnership agreement could generate stable income for Nitro Games the coming years with an approximate value of EUR 1 million or more.

Investment risks

According to a research made by Deloitte approximately 2.5 percent of the mobile game companies made over EUR 1 million in 2016. Most mobile game developers struggle with bad monetisation in their games.

The probability that it will take 2 years before Nitro Games will release a top grossing game is relatively high. We estimate the probability of this scenario is about 40-50 percent. We believe the stock will be volatile on investor’s hopes increasing risk in the stock.

It is also possible that the company never will succeed in the self-publishing mobile games industry. However, Nitro Games third-party development services are reducing the potential downside in the stock. This is our Bear- case scenario with a probability of 25 percent.

Company analysis 5 Nitro Games Company Profile

Nitro Games is a Finnish company, founded in 2007 as a spin-off from the digital marketing studio Nitro FX Oy. Nitro Games is a mobile game developer and as of recent a publisher with a decade of experience in developing games for the mid-core user segment. The company focuses on producing high revenue potential games for smartphones and tablets.

The company utilizes its own NG Platform -technology that allows it to develop and publish high-end mobile games with good graphics and modular design under a short period of time. This is, as well as the company’s MVP-process, are according to Nitro Games, unique strengths as they allow a cost-effective development of a games portfolio.

Background Nitro Games is an experienced team with 10 years in the industry and has many self-developed games in its backpack. Nitro Games also has co- developed games and performed consultancy assignments for big gaming studios like Fox Digital Entertainment, Linekong, Rovio and Remedy.

Nitro Games Oy was founded in 2007 as a subsidiary of Nitro FX Oy (a digital marketing studio).

In 2009 the founders of Nitro Games acquired the company from Nitro FX Oy. The same year Nitro Games released its first game, East India Company on PC. East India Company was developed by Nitro Games and published by Swedish Paradox Interactive.

Between 2010-2011 Nitro Games released five games on PC, four of them was published by Paradox Interactive.

In 2012 Nitro Games released its first mobile game ”Sink ’Em All!” on IOS and Android.

In 2013-2014 the development of the NG Platform began.

In 2015 Nitro Games developed the mobile game ”Raids of Glory” (Metascore 60)

Below is a selected list of PC-games self-developed by Nitro Games. Price per game is approximately EUR 10. East India Company is their biggest PC- success that have a loyal player base still today.

Game Released Genre Publisher Metascore *Sales East India Company 2009 Strategy Paradox Critics: 67 User: 57 90 000 Commander: Conquest of the Americas 2010 Strategy Paradox Critics: 68 User: 52 90 000 Woody Two Legs: Attack of the Zombie Pirates 2010 Shooter Paradox No reviews 40 000 East India Company Collection 2010 Strategy Paradox No reviews 30 000 Pirates of the Black Cove 2011 Strategy Paradox Critics: 56 User: 58 70 000 Wasteland Angel 2011 Shooter Meridian4 Critics: - User: 50 130 000 Raven's Cry (only a part of the development) 2014 Strategy TopWare Critics: 27 User: 35 5000 Source: Steamspy, VG Chartz * Estimated sales

Company analysis 6 Nitro Games Product and Services

Nitro Games has two business areas:

1. Self-publishing mobile games 2. Third-party game development services (“work for hire”)

While mobile game development has the potential in creating long-term values, great profit margins and scalability, it is also associated with great uncertainty for a relatively small mobile games developer/publisher like Nitro Games. Nitro Games, therefore, combine this highly uncertain revenues with more stable revenue streams from assignment jobs from other larger gaming companies also called “work for hire”.

NG Platform

One of the biggest values in Nitro Games is the self-developed NG Platform. The platform has been in development for over 4 years with 3-8 persons involved in a day to day basis during this time. The NG Platform combined with the MVP-process and the overall experienced personnel is the company’s biggest competitive advantage.

Like most other mobile games the game engine Unity 3D represent the foundation layer were the basic mechanics and graphics are built into the game. On top of this, the NG Platform layer is added were Nitro Games has built their own unique graphical tools and modules. This was primary optimised for strategy games but has during the years evolved to work in other genres as well.

The third layer is called “product layer” were the game specifics are created. Every game developed by Nitro Games will only have a different third layer, so the game specific part is only a small portion of the total technology built in the game optimising the efficiency in each project.

Technically the NG Platform is a cross-platform tool that works on different kinds of platforms including mobile devices, browser and Smart TV.

Company analysis 7 Nitro Games There is nothing revolutionary with self-developed platforms working as plugins on world-leading licensed game engines. Unity is the most used mobile game engine in the world. With the NG Platform, however, Nitro Games can produce playable prototypes in 1-4 weeks, reach so-called alpha (were the game seemingly works as a finished product) in 2-4 months. With this approach, the company can launch a mobile game in 5-10 months.

Therefore Nitro Games can minimise the amount of time and money spent on every single project minimising risk.

The NG Platform contains different kinds of components, which are a game engine, cloud backend, NG Player Account and Admin and Analytics tools.

Game client: The game engine is the mid-layer in the picture above were the games is built from the tools, and building blocks enabled in the NG platform software into the game client.

Game server: Today many games requires an internet connection to be played, which means a game server is needed. Nitro Games has tested the NG Platform’s game server with over 1 million users in total and all needed features required for match-making and analytics.

Tools have been created for optimising customer relationships, cross- promotion and profiling so that the company can work with user acquisition and loyalty programs in the best possible way.

Company analysis 8 Nitro Games Business model and sales

The main focus in the company is developing and publishing mobile games. The company generates its revenue from in-game purchases as well as in- game advertising. The business model of Nitro Games is illustrated below.

Nitro Games self-developed mobile games business can be divided into two publishing business areas:

Western markets: Nitro Games will distribute its games on Apple App Store, and Google Play. Approximately 90% of revenues from Europe, and the United States comes from this two marketplaces. Both Apple and Google charge 30% of the revenue from all in-app purchase made in the app stores. On this markets Nitro Games will obtain its highest potential profitability.

Eastern markets: Nitro Games will seek partnerships in the eastern markets, such as the newly announced agreement with Netmarble EMEA. Few mobile western mobile publishers has been successful on those markets without a partnership, due to many regional companies and mobile marketplaces is dominating in the East. To control risk Nitro Games has chosen to establish partnerships with Eastern publishers. The publisher will pay a minimum fee to get the game license and pay a royalty based on the revenue from the game.

The NG Platform is optimised for smartphones and tables. Nitro Games constantly analyse user behaviours and improve the exiting games thereafter, this is called “Live Ops” and has been a necessity for free-to-play game developers. Live Ops makes it possible to develop and update the game regularly, ensuring the return on investment in user acquisition is optimal. Live Ops are also a vital tool to improve KPIs such as user retention. Games are initially marketed through Facebook and similar social channels, where Nitro Games sees the best opportunity to maximise monetization.

The long-term value is expected to come from the company’s own games portfolio and self-publishing. Nitro Games, however, has a history of stable cash flows from developing contracts from bigger publishers which minimise risk in the business model. A potential business opportunity could be an additional variable source of income based on a “revenue share” business model.

Company analysis 9 Nitro Games Strategy

Focus on the mid-core audience

Nitro Games has a strong focus on the mid-core audience.

A midcore title is defined as being more challenging than the average casual game, requiring strategy and skill to level up your characters and rank among worldwide players. For this reason, this demographic is more invested in their gameplay progress than they would with a casual game, where the goal often is simply to solve puzzles. Players in the mid-core segment are looking for a more in-dept experience than in a casual game, yet one that is not as time-consuming as a core game.

The demographics between casual games and mid-core games differs a lot. Research firm Newzoo has compared the most popular game amongst mid- core player, ”Clash of Clans” with the most popular game among casual players ”Candy Crush Saga”.

Mid-core gamers are predominantly male (77% ) in contrast to casual gamers who are 60% female.

Over half of the mid-core players is between 21-35 years old, only 23% of the players are over 35 years old. In contrast, 40 % of casual gamers are above 40 years old.

According to Aaron Loeb, president of the successful mobile game developer Kabam, mid-core games is dominating the highest grossing charts in the biggest markets, China, US, Japan and South Korea. However, the mid-core market has been extremely fierce in recent years, probably in many ways equal competitive as the market for casual games.

However, there are some important differences between a successful casual game and mid-core game according to Juicebox Games CEO Michael Martinez. In casual games, you need to hit such a scale in the number of downloads. If you don't hit that scale the game won't be that successful as a business. Many times a great budget for user aquasitions or plain luck is the key reasons to a successful mobile casual game.

If a game developer wants to make a profitable mid-core game, you have to add another important ingredient, and that is quality. A mid-core game don't need nearly as many users to make a good business. The transaction size and the total lifetime per player are most of the times much higher.

In mid-core games, the average transaction size is USD 20. In the top- grossing game ”Game of War,” the most frequently purchased package is the USD 100 dollar package. In most other mid-core games the most frequent in-app purchases are however about USD 5.

Company analysis 10 Nitro Games If you are a relatively small game studio like Nitro Games with a limited budget to spend on user acquisitions you, therefore, have better chances of making a profitable game for mid-core audiences than casual audiences. Nitro Games also have 10 years of experience in developing more complex games which in this case is a necessity.

Market leading mobile games research firms App Annie and Newzoo is both confident that mid-core is one of the most interesting segment at the time, the market has a potential double-digit growth outlook. One important driver for mid-core games is that the quality of game experiences on mobile devices increases boosted by more powerful processing power and increased competition.

The market estimate for mid-core mobile games in US and EU according to Newzoo’s CEO, Peter Warman is USD 2 billion. This is the market nisch Nitro Games is focusing on.

Strategy is the primary strategy Nitro Games first self-published mobile game is a strategy game and is called Medals of War. Strategy games are the biggest contributor when it comes to worldwide revenues in mobile games. According to Barclays Research, the mobile games market is divided between genres like this:

23% 22%

18% 19%

18%

Strategy Puzzle RPG Action All Other

Source: Berclays Research

Users that play strategy games, however, is one of the most improbable groups to make an In-App Purchase (IAP).

Company analysis 11 Nitro Games One dominating game The most successful game in this mid-core segment was released in 2016, namely ”Clash Royale” by Supercell. The game had revenues around USD 1 billion worldwide during the year. And the game is still growing as it seems, in Q2 2017 Clash Royale was the second highest grossing mobile game in the world. The game is a spin-off to the worldwide success ”Clash of Clans” and has likely attracted the franchise's established fanbase.

Many mobile games developers are trying to do something similar but still different to the smashing success of “Clash Royal”. But are they successful? One of the biggest industry websites Pocketgamer.biz has been doing some research on the subject. Three games from three of the top mobile game publishers have been trying to ride the coattails of Clash Royale. But none of them has come close; it is not even certain that they were profitable at all, with ranks around top 1000 amongst the highest grossing games in the US.

With a good franchise you can as a game developer, make some grounds with clear Clash Royale inspirations. With the strength of the Star Wars license, Force Arena has been between top 500-1000 in the US Highest Grossing charts.

Nitro Games “Medals of War” has many similarities to Clash Royale, which according the facts above is a weakness and speaks against the game being a big blockbuster in the future. But the games high quality and good KPIs were players pay more than they cost acquiring, will likely give Nitro Games profits on a healthy scale. When the game was featured by Apple; meaning the game becomes extraordinarily visible in the App Store in 7 days for hundreads of millions of people, Medals of War peaked at around top 300 amongst the highest grossing games in the US for one day.

MVP-Process

With over 500 mobile games released on the App Store each day the competition is fierce. For this reason, Nitro Games has embraced a working process called “Minimum Viable Product”. The process can be explained as the minimum gameplay required to engage users. Developers typically deploy the game only with core game mechanics to a subset of possible customers. This strategy is cost-efficient and helps the developer to avoid building products that customers do not want.

The game development cost is increasing amongst mobile games alongside technical advancements in the mobile devices and hardened competition from a more demanding audience. Also marketing costs are increasing and it has become expensive with User Acquisition. The solution is, therefore, to release the game as early as possible on a test market. This is valuable solution when it ensures that the game is “working” and is “marketable”.

Company analysis 12 Nitro Games The two most crucial metrics in this area is retention and CPI (cost per install). Good quality games can often fail because users is too expensive to acquire.

Practically this is done through iterations, each taking about two weeks of time. During the first iteration, the game is playable on a mobile device after 1-2 weeks of development. This version is then published on a selected test market, with a “work in progress” title and a pseudonym of Nitro Games as an official publisher/developer. Based on the data from the first iteration the team change specific things in its second iteration and publishes a new version. This cycle continuous to a point where the results are satisfactory. If the game has not produced satisfactory results after 10- 15 iterations, then the company decides it most likely never will.

In Nitro Games own MVP-process it is vital to have several games launched during the same time in the same market to ensure that results between different games are comparable. Under the MVP-process when Nitro Games choose “Medal of War” a total of seven games were iterated at the same time with the MVP-process in many different genres.

All this different kind of games had some similarities; • Real-time competitive multiplayer • Played vertically, which makes it possible to play with one hand • Easy to learn but hard to master (like Othello…)

The game genres tested in the MVP-process was shooters, RPG, Hack n’ Slash, card battler and a runner game. Some of the best performing games are still being iterated, which makes it possible to make some assumptions on what type of game to expect in the future games portfolio.

Quality evaluation Nitro Game uses three key metrics to evaluate the quality of a game; • Game performance data • Focus group test data • Marketing test data Game performance: The focus is to measure retention, which is the best metric to describe the initial performance of the game.

Focus group test data: A target group of consumers test the game and fill out a survey. The gameplay is recorded on video while the users are verbally describing their experience. This helps to avoid the wrong conclusions of the game performance data.

Company analysis 13 Nitro Games Marketing test data: The company performs a test to evaluate the marketability of the game by acquiring users via mobile marketing campaigns. The data given in this process is “cost per install” (CPI) estimates so Nitro Games can estimate how likely the game will be profitable.

Retention: Proof of Concept

Medals of War is Nitro Games first released game as a self-publishing game developer. The game was also the first game created by Nitro Games own MVP-process.

The game first was in a so-called soft launch in a few countries during the summer; the game was later released on Apples App Store in 77 countries September 19.

What according to Nitro Games made “Medals of War” a winner compared with the other games during the MVP-process was the level of retention from users. This was the single most important reason why this game made it through the whole process.

During the MVP-process in December 2016 data shows 36% of the players returned the day after the install; this is called Day 1 retention. 16% of the players kept playing the game the second day after install.

Retention Curves Retention Best Good Average 1 Day 55% 50% 43% 7 Day 35% 25% 20% 30 Day 28% 18% 12%

Source: pocketphilosopher.net/all-about-retention/

If you compare with Supersell’s “Clash Royale” the second highest grossing strategy game on mobile, this game has a Day 1 retention of 30-33% and a Day 3 retention of 15-17%.

The reason to this below average retention rates in Clash Royale and Medals of War can be explained in what genre the game has and how it monetize on the users.

Strategy games have the lowest retention rates amongst all genres but have best possibilities to reach the highest “Average Revenue Per User” (ARPU). The biggest decline in retention will happen the first three days. The gap between Day 3 retention and Day 14 retention for Clash Royale is 17.6% to 5.9%. This means only 6 players of the total 100 players will play the game two weeks after install.

Company analysis 14 Nitro Games

Retention rates amongst genre look as following:

Retention rates amongst genres

Strategy 5.5%

Casual Games 7.0%

Arcade Games 6.3%

Adventure Games 6.0%

Action Games 7.0%

Top 100 Overall 18.9%

0.0% 5.0% 10.0% 15.0% 20.0%

Source: blog.apptopia.com/how-well-do-top-games-retain-users

The reason to the low retention rate amongst strategy games is that the games most often relies heavily on so-called in-app purchases (IAP). It gets harder and more time consuming to play a strategy game for two weeks without spending money in the game.

Looking at Medals of War and Clash Royale it is, however, most likely not very accurate to do a comparison at this state. Medal of War was still in a so-called soft launch with only minor marketing efforts so Nitro Games can tweak and test the game with a real-time audience on a daily basis. It is therefore quite impossible to say how well the game will perform on this initial retention numbers but it looks promising.

Ownership

The ownership in Nitro Games is perfect according to our Redeye Rating.

Jacob Ehrnrooth is the biggest shareholder with 32.2% of the capital and votes in the company. Jacob and his family is the owner of the second Savox Investments. Jacob is one of the members of the Board.

Swedbank Robur Ny Teknik has Ownership Nitro Games 9.7% of the shares, and is a large Owner Capital & Votes and institutional owner with Jacob Ehrnrooth 17.55% financial muscles and the right Savox Investments (Ehrnrooth) 14.68% knowledge. Swedbank Robur Ny Teknik 9.66% Antti Villanen 5.55% Management holds 16% of the Feat Invest (Biehl) 5.38% Ajoranta Group (Matti Nikkola) 5.03% capital and votes in the Avanza Pension 4.94% company. We have included the Luxus Micro Cap (Juhani Taskinen) 5.54% Chairman of the Board Annti Jussi Tähtinen 3.07% Villanen when he is active in the Carl Johan Biehl 3.91% company. Source: nitrogames.com

Company analysis 15 Nitro Games Market

The gaming industry The gaming industry is one of the largest digital entertainment markets globally. In 2016, total market size was USD 99.6 billion. Industry growth is projected to remain high at an average annual growth rate ("CAGR") of 7% in 2015-2019. As can be seen in the graph below, this will bring the total market to an estimated 119 billion USD in 2019.

Expected growth in the gaming industry

140 119 120 113 107 100 100 92

80

60

40

20

0 2015 2016 2017 2018 2019 Source: New zoo

North America and EMEA (Europe. Middle East and Africa) together account for around 49% of the global market. The total number of players during 2016 in North America and Europe was 535 million, of which 198 million are in North America and 337 million are in Europe. Asia-Pacific represents the largest geographic market with about 47% of the global gaming market and over 1 billion total number of players.

Gaming revenue per capita in North America and Europe are the highest globally and is estimated to be around 70 dollars in North America and 43 dollars in Europe in 2016. Gaming revenue per capita in Asia and the Pacific in 2016 is estimated to amount to 12 USD.

PC and console games have a strong position in the Western world where players increasingly are interested in so-called hardcore games. In the United States, PC and console games generated around $ 17 billion in revenues in 2015, representing over 71% of the total gaming industry revenues in the US. Console games accounted for just over $ 11 billion or 48% of total revenue. The market for mobile games is much stronger in Asia than in the West. Mobile games is expected to grow to around 47% in 2018 in Asia.

Company analysis 16 Nitro Games Segments The gaming market can be divided into three main segments; PC, game console and mobile games (mobile phone and tablet). As can be seen in the graph below, the traditional PC and Console segment together generated approximately USD 56 billion in revenues in 2016, representing 56% of the total gaming market. The PC segment is expected to grow on average 4% per year between 2015 and 2019, while the console segment is projected to grow by an average of 3% per year during the same period. This brings the PC and console market to around 62 billion USD in 2019, representing 51% of the total market.

Expected CAGR by segment

552015 53 50

45

40

35 32 30 30 30 28 26 25

20 Mobile Console PC 2015 2019 2015 2019 2015 2019 Mobile MobileConsolePC Console PC

Source: New zoo

The mobile segment accounted for 37% of the total gaming market in 2016 which amounted to approximately USD 37 billion. Compared to the PC and console games, the mobile market is relatively young and growing strongly. Between 2015 and 2019, the mobile games segment is projected to grow by an average of 15% per year. This brings the segment to about USD 53 billion in 2019, equivalent to as much as 45% of the total gaming market.

Global game revenues

Mobile 37% Digital PC/Console 47%

Physical PC/Console 16% Source: New zoo

Company analysis 17 Nitro Games The mobile segment consists to a large extent of casual games. This type of games can be developed in a much shorter time and with considerably scarcer resources than hardcore games in PC and console segment. The barriers to entry into this segment is, therefore, lower than in the PC and console segment. Mobile games are less advanced and not as engaging as PC and console games. In general the life cycles of mobile games are therefore often shorter and the number of mobile game developers who have managed to repeat their success is relatively limited in comparison.

Growth in mobile App Annie noted that China managed to generate nearly double the iOS App Store Games revenue it had just a year earlier in Q2 2015. The firm found that locally developed games in China dominated sales and were a large reason for the strong year-over-year growth.

IOS Games Revenue 200 180 160 140 120 100 80 60 40 20 0 Q2 2014 Q2 2015 Q2 2016

China US Japan

Source: App Annie

China will continue to present huge opportunities in mobile gaming. While foreign publishers have seen success in the country - as evidenced by Clash Royale ranking at number 10 by iOS revenue in Q2 2016 - local publishers dominate the top iOS revenue chart," App Annie said.

The importance of the Asian markets to the mobile world cannot be overstated. "Foreign publishers may see more success in the market by partnering with Chinese publishers to cater to local demand, secure distribution and generate awareness. Together, China, the US, and Japan are responsible for approximately 75% of gaming revenue on iOS," App Annie continued.

Company analysis 18 Nitro Games

Revenue models The following section describe the most common revenue models for the two respective segments; PC/console and mobile.

Full-priced games PC and console games are usually full-priced games which means that they are sold at a relatively high one-off price. High budget games are often priced at SEK 500-600 while low budget games can be priced as low as 150 SEK. The majority of the revenue from a new PC or console game is usually realized during the first 3-12 months after launch.

Add-ons/Extra content In addition to revenues from sales of the original game there are ways to generate revenue from extra content. The increasing degree of allows for sales of ("DLC") as well as technical and graphical upgrades of already launched games (a so-called "remaster"). The add-on sales contribute to longer life cycles of the revenue streams.

“The Spotify model” Subscription-based game sales and streaming of games is a model that has so far been relatively unexploited but is growing strongly. We think this will be the biggest trend in coming years.

Freemium In mobile games, the most common revenue model nowadays is "free-to- play" or "freemium" meaning that the game is free to download or can be downloaded to a very low payment. Revenues for mobile games is instead generated through advertisements within the game or "In-game purchases." This revenue model requires a recurring customer base of paying players to be successful. KPI’s such as MAUs (Monthly Active Users), DAU (Daily Active Users) and ARPU (Average Revenue Per User) is often used to measure how well the game is performing when it comes to revenues.

Company analysis 19 Nitro Games

Value chain

Developers Game developers create game content, design the game and write the software code. A game developer can be divided into four different categories: independent (“indie”), first-, second- or third-party developers. First and second party developers were more common a couple of years ago when the gaming industry was more focused on high budget games on PC and console.

A first-party developer is part of a platform owner, such as Sony and Microsoft, and develops games exclusively for this platform. Second-party developers are game developers that are connected to a platform owner in making exclusive content. Unlike a first party developer, they can be an independently owned studio.

Third-party developers are platform independent and are either a games publisher as well, or develop the games for one or several games publishers. EA and are two examples of third-party developers.

Indie game developers can both develop games for a large game publisher or publish their games themselves. When collaborating with a game publisher, the publisher often assumes the intellectual property (IP) to the game while compensating the independent game developer with a contracting fee during game development and royalties on each sold copy of the game. Both the risk and the upside when it comes to revenue potential for the independent game developer are reduced when collaborating with a publisher.

Publishers A game publisher publishes video games that they have either developed internally or have developed through a developer. Usually, the publisher provides financing for the development of the game while also being responsible for the market research, pricing of the game and all aspects of marketing and advertising. In addition, the publisher supervises the development process, tests and adjusts the game as it is being developed and manufactures the product in case of physical distribution. Since the publisher often provides the financing and thus bears the financial risk of the project, it also retains a significant part of the IP ownership in case of outsourced development.

Distributors Distributors are usually game vendors, supermarkets and internet providers. Distribution via digital channels is becoming more common as gamers prefer digitally distributed games. All the console manufacturers have their digital platforms.

Company analysis 20 Nitro Games Business opportunities

The gateway to Asia

The signed term sheet between Nitro Games and Netmarble EMEA was announced September 27. Netmarble EMEA is a subsidiary to Netmarble and EMEA stands for Europe, Middle East and Africa which are the regions included in the subsidiary’s publishing business.

The parent company Netmarble was established in Korea in 2000. Netmarble and is the fastest-growing mobile game company in Asia and the ninth largest mobile developer and publisher worldwide. With more than 3 500 employees, Netmarble has been developing and servicing some of the most successful mobile games. In Korea, Netmarble is the highest grossing mobile games publisher, and in China and Japan, the company’s games are top 5 amongst the highest grossing games. Netmarble has a market cap of USD 11 billion and recently had Korea’s largest IPO of all time. Netmarble is the largest shareholder to Jam City, a leading casual game developer, and parent company to Kabam, a top global game developer in massively multiplayer free-to-play games, Netmarble has strategic partnerships with Asia’s largest entertainment and internet companies. The agreement between Nitro Games and Netmarble EMEA only applies to the game “Medals of War” for publishing in Arabic and Turkish speaking countries. (The game will change graphically to work better culturally).

Some details about the terms of the first contract were specified in the press release and are as follows: Minimum Guarantee: EUR 200 000 35% of revenues will go to Nitro Games (Royalty) Territory: Turkey, Middle-East and Africa Target launch date: Q4 2017

However the most interesting thing announced in this partnership is the fact that Netmarble will have rights of first refusal for publishing in Asia including China, Japan and Korea which is the biggest and fastest growing markets in the world amongst mobile games. So a big potential catalyst for the stock is of course if new publishing deals for those countries would be signed. At this point a deepened partnership of this kind is likely. The advance payment and licence fees (royalty) will be negotiated separately for each territory. As market potential is significantly larger in Asia, one can assume that the advance payment will be considerable higher.

The deal between Netmarble and Nitro Games is a proof of the quality of the game “Medals of War”. Netmarble evaluates tons of games but only makes deals with a few game developers. CEO of Nitro Games also pointed out the importance of the MVP-process in this deal. The discussion started at an early stage before the game was soft-launched in May.

Company analysis 21 Nitro Games Nitro Games had already tested the game at his stage with real users and had, therefore, user data to show the different publishers they had meetings with.

If the collaboration and the game “Medals of War” become profitable this could be “the beginning of a beautiful friendship” and Nitro Games gateway to Asia.

Wargaming bets big on mobile

Wargaming.net (Wargaming) is a huge success and has been so for years. In 2016 the game “World of Tanks” was the seventh highest grossing game on PC with revenues around EUR 0.4 billion.

The partnership agreement between Nitro Games and Wargaming has an approximate value of EUR 1.5 million. The two companies have since May 2017 been collaborating to co-develop a free-to-play mobile game that will be published by Wargaming. According to the company approximately 10- 15 employees has been working on this game since May 2017. In October the development got more intense and currently 20 employees (65% of the entire workforce) works on the project.

World of Tanks has a “brother in arms” on mobile called “World of Tanks Blitz”. The mobile game has not been even close to as successful as the PC game but is still one highest grossing games for mobile and has been for years. The mobile game was released in 2014, and the PC game was released in 2011. Wargaming has in total three ongoing free to play games on PC, were the two others are “World of Warplanes” and “World of Warships”.

The two other games have revenues between 5-15% of the total revenues generated by World of Tanks. In July 2017 “World of Warships Blitz” was soft launched on mobile, so a mobile version on its third franchise called “World of Warplanes Blitz” would be logical. We also believe Wargaming will release a better version of their biggest franchise “World of Tanks” on mobile but this is likely to happen later in the future.

Just a few month earlier to the announced collaboration between Nitro Games and Wargaming, the World of Tanks developer acquired another Finnish studio called “Boomlagoon”. The studio is a small team with 13 employees and was founded in 2012. The studio is however experienced with former employees from Rovio (the Angry Birds studio) etc. The studio has changed its name to Wargaming Helsinki.

Wargaming has established a mobile game division this year both for development and publishing called Wargaming Mobile. The company will also offer a publishing solution program for smaller developers to reach instant market presence and consumer awareness. It is obvious the billion dollar company with its over 3000 employees will strengthen its position in the fast-growing mobile market.

Company analysis 22 Nitro Games The collaboration with Wargaming is beneficial for Nitro Games in many ways.

Cash: The most obvious way is, of course, the cash flow, a revenue of EUR 1.5 million in one year is close to the current yearly personnel cost.

More cash: If the game is released on mobile and Nitro Game has an important role in this release, Wargaming will most certainly buy more expertise in the following updates for the game. The amount of steady revenue the collaboration will generate is, of course, dependent on the popularity of the game. A potential business opportunity could be an additional variable source of income based on a “revenue share” business model. If the game becomes successful the partnership agreement could generate stable income for Nitro Games the coming years with an approximate value of EUR 1 million or more.

Further collaborations: A good relationship with a company of this size and position could mean a lot for a small company like Nitro Games. Further collaborations in upcoming project or games could mean more money or a potential acquisition of Nitro Games. Wargaming Mobile could also help Nitro Games with market presence and consumer awareness as a publisher or through cross sales.

Company analysis 23 Nitro Games Financial projections

Our forecast will be dived into two parts; Self-developed and published games and Third party service.

Group forecast

Our estimates for the years to come:

Nitro Games: Estimate (EURm) 2016 2017E 2018E 2019E 2020E Mobile games 0.03 0.33 1.30 3.10 4.70 Growth 0% 1000% 294% 238% 52% 3rd party service 0.80 1.40 1.90 2.50 2.40 Growth -56% 75% 36% 32% -4% Total revenue 0.83 1.73 3.20 5.60 7.10 CoS 0.06 0.58 0.63 1.38 2.01 Personel cost 0.90 1.14 1.37 1.68 1.74 Other Opex 0.46 1.57 1.34 1.50 1.70 Total cost 1.42 3.29 3.34 4.56 5.45 EBITDA -0.59 -1.56 -0.14 1.04 1.65 D&A 0.66 0.68 0.70 0.60 0.60 EBIT -1.25 -2.24 -0.84 0.44 1.05

Net sales growth -56% 108% 85% 75% 27% EBIT margin -151% -129% -26% 8% 15% Source: Redeye Research, Nitro Games

Self-developed and published games Our first section addresses Nitro Games prospects of being a self- developing mobile publisher. The market for mobile games is highly competitive. However, Nitro Game’s MVP process and long-term industry tenure create an advantage according to us.

According to a research made by Deloitte approximately 2.5 percent of the mobile game companies made over EUR 1 million in 2016. In the survey with 8 000 developers as respondents, Deloitte found that 17 percent generated no revenue; 18 percent made less than EUR 85 a month, and half made less than EUR 850 per month.

The average revenue per mobile game is EUR 40 000 per year. According to the same source, 80 percent of mobile games revenue comes from the top 1 000 highest grossing games earned by the top 20 publishers in each region. That leaves 20 percent of the remaining revenue to be shared among many tens of thousands of developers. The number one best grossing game could generate five times that of the number five game, and 10 times that of the number 10 game. The top five grossing mobile games generated 28 percent of total market revenue compared with 40 percent for 2015, however, indicating significant revenue distribution away from the top of the charts.

Company analysis 24 Nitro Games The perhaps most important milestone for Nitro Games mobile business according to us is the partnership with Netmarble. The Korean publisher has the resources to market games heavily which is essential for a small game developer to succeed. Netmarble also paid EUR 200 000 for exclusive rights to publish “Medals of War” in the Arabic speaking countries which should have covered a large part of the production cost for the game.

Another important milestone is the IPO and the approximately EUR 3.5 million in net cash that Nitro Games has funded in right issues. According to the company User Acquisition for the game is at a healthy level at the time which suggests that the game has potential for being ROAS (Return On Advertising Spend) positive once it’s being scaled up. This would mean users cost less than they generate in revenue. The user base, however, is at a low level, so we do not know yet how well these numbers hold if the company choose to scale up and spend more money on User Acquisition.

Nitro Games has a goal to develop and publish two games during a 12 months period. A long-term goal is to develop and publish a top 200 grossing mobile game in the US. According to Think Gaming a top 200 iPhone game has a revenue of EUR 10 000 each day meaning approximately EUR 3.65 million on a 12 months basis in the US alone.

Medals of War Earlier in the report, we wrote about three games from top mobile game publishers that have been trying to ride the coattails of Clash Royale without succeeding. However there is “Clash Royle-wannabes” that have succeeded, one is Stillfront Group’s Siege: Titan Wars, a game we wrote about as a potential blockbuster when the game was in soft launch. In total, the game has been installed by 1.8 million users and in Q3 2017 total gross revenue was about EUR 1 million. The game is still in its launch phase, so it's too early to make any elaborate conclusions based on the early income generations.

Self-developing projections We believe that Nitro Games will succeed in their self-publishing mobile games business which results in a high expected growth in 2018-2020. Next year the game Medals of War will generate approximately EUR 1 million. The publishing agreement with Netmarble will boost sales dramatically. For conservative reasons, we do not take to account a massive initial revenue in a potential publishing deal with Netmarble Asia.

Nitro Games has a goal of releasing two mobile games every 12 months which means two new game releases in 2018. However, these games will not generate significant revenue until 2019. The estimated revenue for the mobile games portfolio in 2019 is 262%. Approximately 40-50% of mobile game revenues will come from publishing deals in Asia.

The portfolio will likely be diversified with 4-5 games in different genres. In the MVP-process, Nitro Games has tested at least six different genres including strategy, shooters, RPG, Hack n’ Slash, card battler and a runner game.

Company analysis 25 Nitro Games After discussions with the company we think Nitro Games would prefer a mix with at least 2 strategy games, 1 shooter, 1 card battler and finally 1 Hack n’ Slash or 1 RPG in 2019. However, this is just a speculation on our side.

We believe a potential business opportunity could be licencing deals for the NG Platform with smaller mobile companies.

Third-party services Nitro Games has 10 years of experience in this business area.

Historically, Nitro Games developed games based on their own IP, wholly or partially self-funded. Often the company funded the early development, and then searched for a publisher who could fund the remaining part of the development and took care of publishing, marketing, distribution. This was a risky model as Nitro Games made their investment first and had no guarantees that publishers would be interested investing in the game.

When Nitro Games shifted exclusively to mobile in 2013 and did the game “Raids of Glory”, the company self-funded the game and then signed it with a publisher. This model proved to be very risky as free to play games, and this type of publisher deals very often don’t work.

For better financial control Nitro Games therefore now do self-funded development and self-publish (full risk but also more control) and balance this by doing ”zero risk” third-party service business.

Third-party services projections We estimate 65-70% of Nitro Games current workforce is full time involved in the project for Wargaming.net until May 2018. The assignment will for a 12 months period generate EUR 1.5 million a majority of Nitro Games total income under this period.

After the planned release of the mobile game published by Wargaming, approximately 20-30% of the current workforce is estimated to work on updates and other supporting services for the game in June 2018 and beyond. Our projections indicate a revenue growth during 2018 of 36% in Nitro Games third-party business area. This assumption is partly based on the company’s recruitment plans scheduled for the near future but also on the historic underlying growth rates in the business.

We expect Nitro Games will obtain a variable income (royalty) that is dependent on the revenue generated by the mobile game published by Wargaming. We also believe the game is developed on the NG Platform and it is therefore probable it will run on the NG Platform after launch.

In 2019 we believe that the self-published mobile games business will outgrow the third-party service business when it comes to revenue.

Company analysis 26 Nitro Games Valuation

Base-case scenario In our Base-case scenario, we assume that Nitro Games will succeed in their self-publishing mobile games business which results in a high growth in 2018-2020. We assume that during 2018 the game Medals of War will generate approximately EUR 1 million. We expect that the publishing agreement with Netmarble will boost sales dramatically, but for conservative reasons, we do not take to account a massive initial revenue in a potential publishing deal with Netmarble Asia and will treat this as a possible value-adding option.

The estimated revenue growth for the mobile games portfolio in 2019 is over 230%, which means EUR 3.1 million. Approximately 40-50% of mobile game revenues will come from publishing deals in Asia.

Our estimates indicate a revenue uptake during 2018 of 36% in Nitro Games third-party business area. This assumption is partly based on the company’s recruitment plans scheduled for the near future but also on the historic underlying growth rates in the business. In 2019 the self-published mobile games business will outgrow the third-party service business when it comes to revenue.

This assumptions results in a revenue growth 2018-2022 of 46% and an average EBIT-margin of 8.4%. This leads to a DCF-value of SEK 56 in our Base-case scenario.

Bear-case scenario In our Bear-case scenario, we assume Nitro Games will fail in their self- publishing mobile game business trying to reach profitability in over three years from now.

However Nitro Games third-party business will continue to show stable growth in the years to come. With a controlled risk management in the company EBITDA will only stay negative between 2018 and 2020. The company will survive with the current net cash during this period.

New sources of income will establish itself, the value mainly from the experienced personnel and the NG Platform will be used in a creative way.

This assumptions results in a revenue growth 2018-2022 of 32% and an average EBIT-margin of -5.8%. This leads to a DCF-value of SEK 33 in our Bear-case scenario.

Company analysis 27 Nitro Games

Bull Case scenario In our bull case scenario, the self-publishing mobile game business area will show explosive growth already in 2018. Medals of War will generate revenues of EUR 3 million and the entire games portfolio will generate EUR 4.5 million. A publishing agreement with Netmarble Asia will be signed with an initial fee of EUR 0.8 million. Over 50% of revenues from self- developed mobile games will come from Netmarble.

The high growth in the mobile games business will continue 2019 and beyond. In 2021-2023 Nitro Games will reach its long-term financial goal of having a top 200 highest grossing game in the US. Currently, this means EUR 35 million of revenue on a 12 months basis.

Due to the scalability of the business model and the success of the self- publishing, mobile game business Nitro Games will discontinue its third- party business area at the beginning of 2020 and focus on its own games portfolio.

This assumptions results in a revenue growth 2018-2022 of 63% and an average EBIT-margin of 14%. The WACC is 10.8% in this scenario. This leads to a DCF-value of SEK 170 in our Bull-case scenario.

Company analysis 28 Nitro Games Appendix

Management The core team of Nitro Games has worked together for almost a decade and has developed and released over 25 international game titles for top tier publishers globally.

CEO Jussi Tähtinen is the Managing Director of Nitro Games since September 2008. He started as a designer in Nitro FX Oy in 2004, and before becoming the Managing Director for the spin-off Nitro Games, he worked in various roles within design and production. During his time at Nitro Games Jussi has built up a close-knit team of gaming professionals, and been involved in over 25 different game launches. Shares: 3.07%

CFO Matti Nikkola has about 20 years of executive level experience in trade and logistics, video and mobile games, financials and marketing business. Before focusing on investing and business development advisory in smaller companies through his own company, Matti worked as Development Director at B&B TOOLS Finland Oy, Development Manager at Ruuska Group Oy and in various positions at for example Valmet Oyj, Sampo Oyj, Pohjola Oy, Shell Oy and Neste Oyj. Shares: 7.4%

CTO Samppa Rönkä started as an PHP Programmer at Nitro FX in 2005, and continued as an AI Programmer at Nitro Games in 2007 after it was spun- off. Samppa worked as a Lead Programmer from 2011 to 2014. During his 10 years in game development, Samppa has worked with a range of platforms (PC, iOS, Android, , 360, PS3 and ) as well as game engines (Unity3D, Havok Vision, Alan Wake engine, Marmalade SDK and Storm 3D).

CMO Mikko Kähärä has many years of experience in data-driven product portfolio management and business development support, mostly managing large scale product launches to international markets. Before Nitro Games, Mikko was the Head of ICT Growth Services at Cursor Oy from 2010 to 2015, where he focused on supporting companies with scalable business models in games, mobile and online. Before this, Mikko worked at for example Vodafone Roaming Services S.a.r.l., Orange Communications S.A and Telia Mobile AB.

Company analysis 29 Nitro Games Board of Directors

Chairman of the Board Antti Villanen is a digital media and game industry executive with over 15 years of board and C-level experience from a wide range of digital companies. Before founding Nitro Games, Antti co-founded the digital media studio Nitro FX Oy, where he worked as Executive Vice President and board member during 2002-2009 and CEO during 2000-2009. Shares: 5.55%

Jacob Ehrnrooth is Nitro Games biggest shareholder. Jacob has been investing in music, media and content producing companies and has over 20 years of experience of development and commercialisation of brands and IPR and is an experienced executive and board professional. He is the Chairman of Board of the radio station Oy Basso Media LTD and the founder and Chairman of the Board of the record label and music publisher Oy Exogenic Ab, where he held the position of CEO during 1996-2011. Shares: 32.23%

Juhani Taskinen is an investor through the company Luxus Micro Cap S.A., where he is the Chairman & CEO. Before this, Juhani was the Chairman & CEO of the public company Princeton Security Technologies and Chairman & CEO of Princeton Gamma Tech Instruments. Before this he acted as a Senior Adviser at Lehman Brothers, Governmental Entities. During 1983-1993 he was held various management positions at Nokia Oyj in Finland and USA. Shares: 3.97%

Petri Tolmunen is in the management of Cursor Oy, a company that offers a wide range of advisory services for companies in the Kotka-Hamina sub-region, where he is responsible for International Affairs and Digitalisation since 2015. Shares: 4.10%

Sverker Littorin has a long experience from building corporate value and board memberships in listed and unlisted companies, and is today a board professional and advisor. Earlier assignments include Executive Vice President of Pharmadule AB, Group Vice President of Elekta AB as well as Chairman of MedCap AB, Team Olivia AB, MedLearn AB and board member of Sectra AB.

Ilkka Lassila is an experience business executive specialised in mobile technologies, business digitalisation and sports. During 2014-2017, Ilkka was the CTO of Widespace AB, and during 2012-2014 the Head of Partnerships in Nordics. Before this, Ilkka founded and was the Chairman of Zonga Oy during 2009-2014.

Company analysis 30 Nitro Games Summary Redeye Rating

The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points.

Management 6.0p

The company has survived for 10 years in the competitive gaming- industry. The management is highly experienced and have a good cost control.

Ownership 10.0p The ownership in Nitro Games is very convincing. The management own 20% of the shares in the company. The largest shareholder and Board member Jacob Ehrnrooth controls the company with almost 37% of the shares. The Board of Directors owns 60% of the shares and votes. Swedbank Robur Ny Teknik own around 10% of the shares, an institutional owner with financial muscles and the right knowledge.

Profit outlook 5.0p

The company have a credible strategy to grow under its own power through organic growth and margin improvements. Nitro Games is expected to grow sales of more than 200% the next two years with a good potential long term scalability. The mobile market shows an explosive growth and is expected to do so the next-coming years.

Profitability 0.0p

Nitro Games does not demonstrating positive operating profit (EBIT) over a rolling 12-months period and has struggled doing so the last three years.

Financial strength 3.0p

The company strengthened the capital structure in 2017 with about EUR 3.5 million. The company’s business is diversified with no single paying customer and the business is not cyclical. However the competitive landscape is fierce.

Company analysis 31 Nitro Games

Income statement 2015 2016 2017E 2018E 2019E DCF valuation Cash flow, MEUR Net sales 2 1 2 3 6 WACC (%) 13.3 % NPV FCF (2017-2019) 2 Total operating costs -2 -1 -3 -4 -5 NPV FCF (2020-2026) 5 EBITDA 0 -1 -1 -1 1 NPV FCF (2027-) 7 Non-operating assets 0 Depreciation 0 0 0 0 0 Interest-bearing debt -1 Amortization -1 -1 -1 0 0 Fair value estimate MEUR 13 Impairment charges 0 0 0 0 0 Assumptions 2017-2023 (%) EBIT 0 -1 -2 -1 0 Average sales growth 38.0 % Fair value e. per share, SEK 56.0 EBIT margin -8.1 % Share price, SEK 47.8 Share in profits 0 0 0 0 0 Net financial items 0 0 0 0 0 Exchange rate dif. 0 0 0 0 0 Profitability 2015 2016 2017E 2018E 2019E Pre -tax profit -1 -1 -2 -1 0 ROE 0% -88% -117% -39% 17% ROCE -38% -58% -88% -39% 22% Tax 0 0 0 0 0 ROIC 0% -59% -101% -72% 45% Net earnings -1 -1 -2 -1 0 EBITDA margin 10% -69% -83% -17% 10% EBIT margin -21% -149% -124% -27% 8% Balance 2015 2016 2017E 2018E 2019E Net margin -31% -179% -132% -27% 6% Assets Current assets Data per share 2015 2016 2017E 2018E 2019E Cash in banks 0 0 1 1 1 EPS -0.39 -0.74 -0.98 -0.37 0.15 Receivables 0 0 1 1 2 EPS adj -0.39 -0.74 -0.98 -0.37 0.15 Inventories 0 1 0 0 1 Dividend 0.00 0.00 0.00 0.00 0.00 Other current assets 0 0 0 0 0 Net debt 0.00 0.43 -0.63 -0.37 -0.30 Current assets 0 1 2 2 4 Total shares 1.50 2.00 2.33 2.33 2.33 Fixed assets

Tangible assets 0 0 0 0 0 Valuation 2015 2016 2017E 2018E 2019E Associated comp. 0 0 0 0 0 EV 0.0 0.9 9.7 10.3 10.5 Investments 0 0 0 0 0 P/E 0.0 0.0 -4.9 -12.8 32.6 Goodwill 0 0 0 0 0 P/E diluted 0.0 0.0 -4.9 -12.8 32.6 Cap. exp. for dev. 0 0 0 0 0 P/Sales 0.0 0.0 6.5 3.5 2.0 O intangible rights 2 2 2 1 1 EV/Sales 0.0 1.0 5.6 3.2 1.9 O non-current assets 0 0 0 0 0 EV/EBITDA 0.0 -1.5 -6.7 -18.9 19.2 Total fixed assets 2 2 2 1 1 EV/EBIT 0.0 -0.7 -4.5 -11.9 23.8 Deferred tax assets 0 0 0 0 0 P/BV 0.0 0.0 4.2 6.2 5.2

Total (assets) 2 3 4 4 5 Share performance Growth/year 15/17e 1 month -16.1 % Net sales -3.9 % Liabilities 3 month 22.6 % Operating profit adj 132.0 % Current liabilities 12 month EPS, just 58.3 % Short -term debt 0 1 0 0 0 Since start of the year Equity 12.7 % Accounts payable 0 0 1 1 2 O current liabilities 0 0 0 0 0 Current liabilities 0 1 1 1 2 Shareholder structure % Capital Votes Long-term debt 0 0 0 0 0 Jacob Ehrnrooth 17.55% 17.55% O long-term liabilities 0 1 1 1 1 Savox Investments S.A. 14.68% 14.68% Convertibles 0 0 0 0 0 Swedbank Robur Fonder 9.66% 9.66% Total Liabilities 0 2 1 2 2 Antti Villanen 5.55% 5.55% Deferred tax liab 0 0 0 0 0 Feat Invest AB 5.38% 5.38% Provisions 0 0 0 0 0 Ajoranta Group AB 5.03% 5.03% Shareholders' equity 2 1 3 2 2 Avanza Pension 4.94% 4.94% Minority interest (BS) 0 0 0 0 0 Luxus Micro Cap S.A 3.92% 3.92% Minority & equity 2 1 3 2 2 Jussi Tähtinen 3.07% 3.07% Carl Johan Biehl 2.45% 2.45% Total liab & SE 2 3 4 4 5 Share information Free cash flow 2015 2016 2017E 2018E 2019E Reuters code Net sales 2 1 2 3 6 List Total operating costs -2 -1 -3 -4 -5 Share price 47.8 Depreciations total -1 -1 -1 0 0 Total shares, million 2.3 EBIT 0 -1 -2 -1 0 Market Cap, MEUR 11.2 Taxes on EBIT 0 0 0 0 0 NOPLAT 0 -1 -2 -1 0 Management & board Depreciation 1 1 1 0 0 CEO Jussi Tähtinen Gross cash flow 0 -1 -1 -1 1 CFO Matti Nikkola Change in WC 0 -1 0 0 0 IR Gross CAPEX -3 -1 0 0 0 Chairman Antti Villanen

Free cash flow -3 -2 -1 -1 0 Financial information

Capital structure 2015 2016 2017E 2018E 2019E Equity ratio 100% 42% 67% 51% 46% Debt/equity ratio 0% 73% 0% 0% 0% Net debt 0 1 -1 -1 -1 Analysts Redeye AB Capital employed 2 2 1 1 1 Tomas Otterbeck Mäster Samuelsgatan 42, 10tr Capital turnover rate 0.9 0.3 0.4 0.9 1.2 [email protected] 111 57 Stockholm

Growth 2015 2016 2017E 2018E 2019E Kristoffer Lindström Sales growth 0% -56% 109% 85% 75% [email protected] EPS growth (adj) 0% 89% 33% -62% -139%

Company analysis 32 Nitro Games

Revenue & Growth (%) EBIT (adjusted) & Margin (%)

6 140.0% 1 20.0% 120.0% 0.0% 5 0.5 100.0% -20.0% 80.0% 0 4 60.0% -40.0% 2014 2015 2016 2017E 2018E 2019E 40.0% -60.0% 3 -0.5 20.0% -80.0% -1 2 0.0% -100.0% -20.0% -1.5 -120.0% -40.0% 1 -140.0% -60.0% -2 0 -80.0% -160.0% 2014 2015 2016 2017E 2018E 2019E -2.5 -180.0%

Net sales Net sales growth EBIT adj EBIT margin

Earnings per share Equity & debt-equity ratio (%)

0.4 0.4 1.2 80.0% 70.0% 0.2 0.2 1 60.0% 0 0 0.8 50.0% 2014 2015 2016 2017E 2018E 2019E -0.2 -0.2 40.0% 0.6 -0.4 -0.4 30.0% -0.6 -0.6 0.4 20.0% 10.0% -0.8 -0.8 0.2 0.0% -1 -1 0 -10.0% -1.2 -1.2 2014 2015 2016 2017E 2018E 2019E

EPS, unadjusted EPS, adjusted Equity ratio Debt-equity ratio

Conflict of interests Company description Tomas Otterbeck owns shares in the company : Yes Kristoffer Lindström owns shares in the company : No

Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this.

Company analysis 33 Nitro Games

DISCLAIMER

Important information

Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority.

Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization).

Limitation of liability

This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis.

Potential conflict of interest

Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies:

• For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, effective from 30 days before its covered company comes with financial reports, such as quarterly reports, year-end reports, or the like, to the date Redeye publishes its analysis plus two trading days after this date.

• An analyst may not engage in corporate finance transactions without the express approval of management, and may not receive any remuneration directly linked to such transactions.

• Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.

Redeye’s research coverage

Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument.

Recommendation structure

Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision- making.

Redeye Rating (2017-11-23)

Rating Management Ownership Profit Profitability Financial outlook Strength 7,5p - 10,0p 42 41 18 10 22 3,5p - 7,0p 74 67 99 36 44 0,0p - 3,0p 16 24 15 86 66 Company N 132 132 132 132 132

Duplication and distribution

This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations.

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