NEXT GAMES Software/Finland, August 24, 2017 Company report

Transcription

1 Price/EUR Initiating coverage with BUY Rating 12 BUY We initiate coverage of Next Games with a BUY recommendation and a target price of EUR 9.2. We expect growth to accelerate in 2018 and strong growth also in 2019 mainly due to new games in development. We expect margins to be burdened by the rapid growth during but improvements to be made by Growth to accelerate due to new games Next Games currently has one launched game that generates all of the company s revenue. The company intends to launch one new game every year, starting from 2018, and the company currently has three new games in development. We expect Next Games flagship game The Walking Dead: NML to keep performing well in due to the popularity of the franchise. We expect sales to grow 2018 onward due to new game releases. Gross margins to be burdened by new launches Although Next Games margins have been slightly improving, they are still low and we expect the margins to be further burdened by increased user acquisition cost related to the releases of new games in We expect EBIT improvement in 2019 from operational leverage. Uncertainty from low visibility We base our estimates on the planned new games being launched and performing well, but note that the low visibility into the development pipeline makes Next Games a long term investment case. BUY with a target price of EUR 9.2 As a long term investment case we rely more on peer multiples for 2019 with adjustments for the sales uncertainty. Our target price is based on a 40/40/20 weighted approach of 12.2x EV/EBIT 2019E, 1.5x EV/Sales 2019E and our DCF model, respectively. KEY FIGURES 0 03/17 Next Games DJ STOXX 600 Share price, EUR (Last trading day s 7.14 closing price) Target price, EUR 9.2 Latest change in recommendation 24-Aug-17 Latest report on company 24-Aug-17 Research paid by issuer: YES No. of shares outstanding, 000 s 18,178 No. of shares fully diluted, 000 s 18,178 Market cap, EURm 130 Free float, % - Exchange rate Reuters code NXTGMS.HE Bloomberg code NXTGMS FH Average daily volume, EURm - Next interim report 03-Nov-17 Web site Analyst Jerker Salokivi jerker.salokivi@evli.com Telephone BUY HOLD SELL Sales EBIT EBIT Ptx profit EPS P/E EV/Sales P/CF EV/EBIT DPS EURm EURm % EURm EUR (x) (x) (x) (x) EUR % % E % , E % E % Market cap, EURm 130 BV per share 2017E, EUR 2.4 CAGR EPS , % 0.0 Net debt 2017E, EURm -33 Price/book 2017E 3.0 CAGR sales , % 48.1 Enterprise value, EURm 96 Dividend yield 2017E, % 0.0 ROE 2017E, % 1.3 Total assets 2017E, EURm 49 Tax rate 2017E, % 5.0 ROCE 2017E, % 2.2 Goodwill 2017E, EURm 0 Equity ratio 2017E, % 90.0 PEG, P/E 17/CAGR 1.1 All the important disclosures can be found on the last pages of this report. 1(32)

2 Investment Summary Developer and publisher of third party IP based mobile games Three new games in development Rapidly growing industry Flagship game has succeeded well in challenging industry Expected strong growth mainly from games in development Profitability expected to remain low during Main risks to investment case BUY with a target price of EUR 9.2 Next Games is a developer and publisher of third party IP based mobile games. The company has released two games: The Walking Dead: No Man s Land and Compass Point: West. The games are offered free-to-play and the main source of revenue is in-app purchases. By the end of the second quarter of 2017 the company had 93 employees. The company intends to build a portfolio of mobile games and as part of the strategy the company aims to publish one or more games each twelve months starting from Next Games currently has three new games in development. In June 2017 the company announced collaboration with Alcon Entertainment to create a mobile game for the upcoming Blade Runner movie. The overall gaming market globally is growing rapidly. Growth in mobile gaming is expected to be much stronger, with Newzoo estimating revenues from mobile games to grow from USD 38.6b in 2016 to USD 65b in 2020, implying a CAGR of roughly 14 % during the period 1. Success rates in the mobile gaming industry is skewed, as thousands of new mobile games are released to the app stores each month, but only a small percentage of the games are able to succeed. Next Games flagship game The Walking Dead: No Man s land has succeeded well in the challenging industry, having been among the top 100 highest grossing games on Google Play and Apple s App Store. With Next Games three new games in development and The Walking Dead: NML continuing to perform well, the company is set for growth at well above market growth rates. The Walking Dead: NML is based on the popular television series, and with season eight coming up by the end of year 2017 and new content being developed for the game based on events in the series, the popularity of the game is expected to continue. The new games in development are expected to be the main drivers for sales growth during the following years. We have estimated sales growth of 30.3 % in 2017E to pick up to 61.5 % in 2018E. Next Games was founded in 2013 and due to the strong growth phase the company has yet to achieve healthy levels of profitability. A large portion of costs are fixed to revenue in form of commissions and licenses. User acquisition costs also form a significant cost, especially when launching new games and we expect profitability to remain low during 2018 due to new launches. We expect profitability to improve by 2019 due to lower operating costs to revenue. We estimate EBIT of EUR 1.7m in 2018E and EUR 8.8m in 2019E. Due to the nature of the expected sales growth of Next Games, relying largely on the new games in the development pipeline with low visibility, we note certain significant risks to our investment case. The main risks are 1) new games in development not being launched or not succeeding well, 2) declining interest for the company s flagship game TWD: NML, and 3) failure to acquire users, resulting in lower profitability. Due to the estimated strong growth we rely to a larger extent on peer multiples in our valuation. Due to our long-term investment view we emphasize 2019 multiples, as we expect more stabilized business and healthier profitability to be reached by then. In our weighted valuation approach we value Next Games based on a peer EV/EBIT of 12.2x 2019E, and a below peer median EV/Sales of 1.5x 2019E, due to the expected strong growth, and our DCF model. The stronger weight on multiples together with our DCF model gives Next Games a target price of EUR 9.2 and a BUY recommendation. 1 Newzoo 2017 Global Mobile Market Report 2(32)

3 Scenario analysis 14 Next Games ,5 (+61,1%) ,2 (+28,9%) 8 7 7, (-16,0%) 5 4 3/17 7/17 11/17 2/18 5/18 8/18 Historical Stock Performance Current Price Base Case (Aug-18) Volume Base scenario EUR 9.2 Base case: EUR E EV/EBITDA 10.7x In our base case scenario we expect Next Games flagship game The Walking Dead: No Man s Land to continue to perform well and sales growth from launch of new games. Visibility in the development pipeline is low and monetary success of the new games is expected to be below TWD: NML. Margins are expected to start improving in 2019, as sales grow faster than costs E 2018E 2019E B ull Stronger topline growth Sales EURm 31,1 40,6 71,0 114,0 EUR 11,5 from new games success Sales growth 220,5% 30,3% 75,1% 60,6% +59,7% Margin improvements EBIT EURm -1,6 0,6 3,1 10,5 12,4x 2019E bull EBITDA EBIT-margin -5,1 % 1,4 % 4,4 % 9,2 % EBITDA EURm -1,2 1,7 6,0 13,4 B ase Strong topline growth from Sales EURm 31,1 40,6 65,5 101,0 EUR 9,2 new games and TWD: NML Sales growth 220,5% 30,3% 61,5% 54,2% +27,8% Margin improvements EBIT EURm -1,6 0,6 1,7 8,8 10,7x 2019E base EBITDA EBIT-margin -0,1 1,4 % 2,6 % 8,7 % EBITDA EURm -1,2 1,7 4,5 11,7 B ear Slower topline growth from Sales EURm 31,1 40,6 58,2 80,9 EUR 6 lower new game success Sales growth 220,5% 30,3% 43,5% 39,0% -16,7% Slower margin improvement EBIT EURm -1,6 0,6 1,2 4,6 9,5x 2019E bear EBITDA EBIT-margin -5,1% 1,4% 2,1% 5,7% Bull scenario EUR 11.5 EBITDA EURm -1,2 1,7 4,0 7,5 Bull case: EUR E EV/EBITDA 12.4x In our bull scenario we expect the new games in development to perform closer to the levels of TWD: NML. Proportional user acquisition costs are expected to stay at similar levels. Margins are expected to improve slightly due to additional scaling advantages. Bear scenario EUR 6 Bear case: EUR E EV/EBITDA 9.5x In our bear scenario a lower sales growth is expected, with the new games in development not succeeding as expected and TWD: NML reaching saturation faster. Margins are expected to decrease due to lower scaling advantages and increasing user acquisition costs. 3(32)

4 Company and business overview Developer and publisher of third party IP based mobile games Next Games is a developer and publisher of third party IP based mobile games. The company develops games based on licenses of mass entertainment products such as TV series and movies. The games are distributed via two main platforms: Apple s App Store and Google Play. The company has released two games, both during 2015: The Walking Dead: No Man s Land and Compass Point: West. The company s games have been downloaded over 19 million times and they have approximately 500k daily active users. Figure 1: Next Games revenue by geography and product, H1/17 12 % 11 % 26 % 62 % 89 % North America EU-countries Other Source: Next Games, Evli In-game virtual goods Ads Revenue based on in-app purchases and advertisement Offer mobile games as a continuous service Seeking growth through geographical expansion and releasing new games The company develops and releases free-to-play mobile games that create revenue through sales of virtual in-game goods. These micro transactions account for 90% of the company s revenue. The remaining 10% comes from in-game ads. The distribution platform providers take a transaction fee, which is typically around 30% of the sales price. Furthermore, the company pays license fees to the third party license owners. Next Games aims to offer mobile games as a continuous service (game-as-a service, GAAS ) by maintaining and updating its games, thereby forming a loyal player base. The company has a flagship game, The Walking Dead: No Man s Land, which it intends to improve by developing new content and improving marketing. The company intends to strengthen its competitive position in selected key markets and finding partners to improve the position in and to enter markets, especially in China and Japan. The company has also set a goal to release at least one game per year from 2018 onwards and currently they have three new games in the pipeline. Next Games SWOT-analysis Strengths Licensed IP focus In-house analytics platform Player acquisition and retention Weaknesses Dependency on one game Low predictability Variable costs Opportunities Expansion in Asia Strongly growing mobile gaming ind. New games in development pipeline Threats Choosing unsuccessful IPs Rapid industry changes Skewed industry success 4(32)

5 Operating model Games offered as freemium model with no pay to play requirement In-app purchases 90 % of revenue in 2016 Three new games in the pipeline Seeking improved advertisement revenue Three components for success with current operating model Next Games develops and publishes mobile games based on licenses from mass entertainment products such as TV series and movies. The games are released as free-toplay, which does not require a payment from the user. The freemium model has largely replaced the formerly been more dominant pay-to-play model among mobile games. The freemium -model lowers the barrier to start playing the game, after which players can improve the gaming experience through in-app purchases (IAP). Virtual products can be roughly divided into three subcategories: 1. Virtual currency that can be used to purchase in-game goods. 2. Non-durable virtual goods that accelerate progress in the game and 3. Durable virtual goods that improve gaming experience over a game s lifetime. Users are often offered larger bundle packs at a slight discount to increase the amount of purchases. In 2016 IAPs stood for 90 % of revenue. Next Games has developed two games, one (Compass point: West) based on own intellectual property (IP) and the other (The Walking Dead: No Man s Land) based on a license agreement with the IP owner (AMC). The company now focuses solely on licensed games and as of summer 2017, the company is developing three new games under different license agreements. One will be based on an upcoming sci-fi thriller Blade Runner 2049, with the movie scheduled for release on October 6, 2017, and the others are yet to be disclosed. The company started development of a third game in Q2/17. One of the three games in development utilizes location-based and augmented reality technology. The company s goal is to release at least one game per year from 2018 onwards. Management also sees opportunities in increasing advertising revenue. The company has developed proprietary technological solutions to enable better optimization of ads, and targeting the right audience with the right kind of ads. Furthermore, the company sees opportunities embedded in emerging brands into the games. The cloud-based technology makes the operating model extremely scalable, and growth is not limited by capital needs. Success with the current operating model is based on three competencies: first, good relationships with license owners are a necessity in order to get rights for new games. The company believes that a good track-record in producing popular license-based games will facilitate acquisition of new IP contracts. Secondly, developers must be able to create and continuously update high-class, engaging games. Thirdly, a good understanding of the gaming community is needed to be able to focus user acquisition spending to acquire new players as well as retain the existing players. Table 1: Key operating figures 4,00 3,50 3,00 2,50 2,00 1,50 1,00 0,50 0,00 Millions EUR 3,09 1,94 1,78 1,58 1,61 1,23 1,33 0,56 0,45 0,42 0,35 0,53 0,54 0,46 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 DAU MAU ARPDAU 0,3 0,25 0,2 0,15 0,1 0,05 0 Source: Next Games. The key operating metrics are described in detail on page 23 5(32)

6 Next Games has improved monetization to healthy levels North America currently main market Known brands facilitate customer acquisition Continuous developing key to customer retention Recognized entertainment brands and the freemium model offer good means to attract a large number of new players. As in-app purchases are often only a means of enabling more rapid development in-game, a challenge for mobile gaming companies is to create such content that players are willing to spend money on. The company must avoid mechanisms that lead players to stop playing, and develop new ways that encourage in-game spending. On , the 30-day conversion rate (=percentage of players that have made virtual purchases during the 30 days after download) was 4.2 per cent, approx. 1.4 percentage points higher than in , with stated estimates for mobile gaming averages at around 2 %. Another key metric is ARPDAU (=average revenue per daily active user), which was EUR 0.22 in H1 17. According to Soomla the average ARPDAU for strategy games was USD 0.05 in Q1/16 2. In 2016 North America accounted for 63% of sales, EU-countries for 26% and ROW for 11%. Out of the brand licenses the company s has currently released and informed of, especially The Walking Dead -brand is popular globally, and the company generated sales in over 160 countries. The Walking Dead -brand is widely recognized with an existing fan base, which helps to attract new players to the game. Known brands offer a significant advantage compared to game developers who only operate with in-house characters. In the mobile gaming industry sizable amounts of funds are used to attract new users, for instance through advertisements in apps. In 2016 Next Games organic downloads (downloads without targeted marketing efforts) were 3.8 times more than subsidized downloads. Cost per subsidized download CPI (=cost per install) was 4.8 times higher than average cost per download. Film and TV studios also see mobile games as natural extensions to the original experience that can help to retain franchise popularity between season breaks. The gaming market moves very rapidly and new game companies emerge while some developers do not succeed as planned. Next Games wants to build close connections to the gaming community, offer promotions, campaigns and other events that help to retain paying customers. Games have to co-evolve with the underlying brands in order to retain their attractiveness, and thereby customer bases. Next Games develops storylines of its games on a weekly level, based on the TV series latest episodes. The number of daily-active-users (DAU) was nearly 500k in H1/17. Figure 2: Next Games simplified operating model Source: Evli, Next Games 2 Soomla: Mobile Gaming Insights Report Q (32)

7 Licensed IP games developed in close cooperation with IPowners License agreement with AMC and new agreements Next Games aims to develop mobile games based on well-known entertainment franchises with a long-standing fan base. The company assesses possible new IP-rights based on game viability, the monetization profile and co-operation with the IP holders. Company management believes that close ties with the original franchise produce synergies and are necessary to create attractive content. On the other hand, IP-right owners are likely to look for game developers who understand the essence of the franchise, have a strong track-record and ability to monetize mobile games. The company pays license fees to the respective license owners, usually based on a fixed percentage of gross revenue from the game. The Initial Production License Agreement with AMC was confirmed on , after which contract conditions have been changed three times. AMC is a publicly listed company, which has given Next Games exclusive rights to develop mobile games based on The Walking Dead TV series throughout the world. Next Games has the right to determine the pricing policy of the game and it aims to position it as a premium product. The initial agreement is valid till February Further, Next Games has signed three other license agreements that give it right to develop and release mobile games globally. These games are now in different stages of development. In June 2017 the company revealed that it is partnering with Alcon Entertainment to create a mobile game based on a movie, Blade Runner Development and release Typically three phases in game development Within the current operating model, as both a games developer and publisher, the company takes part in the development, marketing, and continuous updating of the game. The typical game development process can be divided into three phases: conceptualization, pre-production and production. Figure 3: Next Games typical game development and release cycle In the conceptualization phase a small team work together with the IP-owners to create a concept for a game that works together with the original franchise. A significant amount of time is spent in the conceptualization phase with the license-owner, after which a deal is made for the licensing and development of the game. In the preproduction phase a plan and schedule for creating the game are developed to assure pre-requisites for creating the final product. In the production phase the game is developed and tested through prototyping to reach the desired target audience. The team in the production phase acts separately from the company s other teams. Source: Next Games 7(32)

8 Game improvement using analytics, based on the GAAS-concept Marketing expenditures increase vastly when releasing a game Games released to Apple App Store and Google Play After the development phase a game would typically first be released as a soft launch in selected test markets in order to gather data about the game. Based on the performance of a game in a soft launch phase the company could make modifications to the game before a full scope launch of the game. After the final release, data gathering continues and the company focuses on creating player commitment to the game, communicating with the gaming community and developing attractive gaming content. Continuous updating is based on the GAAS-concept and implemented in close coordination with IPright owners. Simultaneously with a release, the company would initiate marketing campaigns to improve player acquisition. A sizeable amount of revenues are invested in player acquisition and retaining in the early stage of a games release. Marketing is done through various channels, also in co-operation with the IP-right owners. The Walking Dead: No Man s Land game s marketing follows the TV-series cycle. Next Games states that its most important marketing impact metric is return on investment ROI, which is analysed on daily basis in order to optimize marketing efforts. Mobile games are released for ios- and Android operating systems through Apple App Store and Google Play. However, in Asia, third-party platforms, such as MyApp and Baidu have a large market share due to Google Play restrictions. Moreover, platforms provide the market infrastructure for micro transactions, such as in-game purchases. Typically platform operators take a cut of 30% of revenues. In H1/17 sales through the Apple App Store accounted for 54 % of Next Games revenues, with the rest coming from Google. Current Games The Walking Dead: No Man s Land The Walking Dead: NML highly rated and awardwinning Compass Point: West Next Games current flagship game, The Walking Dead: No Man s Land was released in October The game is based on the American TV series The Walking Dead, where zombie walkers have taken over the world. The game is a strategic role game, where players fight in dialogue-based combats, gather and develop characters and attend in a variety of challenges. The game has no end, but new content stream is constantly developed and the game follows the storylines of the original series on an episode level. In October 2016 the company started to integrate TV series events into the game. The next season of the TV series will commence at year-end In December % of players were male and years olds represent 57% of players. The game was ranked the 90 th highest grossing iphone game in June and has reached the top 10 rank in 38 countries. During 2016 the game enhanced operating figures, doubling 60-day retention rate. The game has been downloaded over 16 million times and holds a total of 4.3/5 rating on App Store (including all versions). The game accounted for 95% of Next Games gross sales in The game has also received several awards, for instance the International Licensing Award for best product in digital apps. Compass Point: West was released in March The game is not based on licensed franchise but the company s in-house developed gaming world. The Western-themed strategy game has been downloaded over 3 million times and accounted for 5% of Next Games revenues in The development and marketing of the game has been discontinued. 3 appannie.com, (32)

9 Revenue USD bn EVLI EQUITY RESEARCH The Walking Dead -franchise The Walking Dead is an American horror television series, shown on cable television channel AMC, and internationally distributed on Fox International Channels. The series premiered in the U.S. on October 31, 2010, after which seven seasons have been produced and the eight season will debut in October The series takes place in the world after zombie apocalypse, where zombies, so-called walkers approach humans and other living beings to eat them. The storyline is centred around sheriff s deputy Rick Grimes, who wakes up from a coma to realize apocalypse is happening. He becomes the leader of a group of people who attempt to survive in the post-apocalyptic world. The series has the highest total viewership in cable television history, and the seventh season averaged million viewers 4. The series has also been a critical success, getting nominated for several awards, such as the Writers Guild of America Award for New Series and the Golden Globe Award for Best Television Series Drama. Consequently, The Walking Dead has been developed into a well-known media franchise including comic book series, spin-off television series Fear the Walking Dead, video games, audio books, board games and other products. Market overview Strong growth expected to continue at slower pace in mobile games market The size of global games market is expected to total some $109bn in 2017, mobile being the most lucrative segment, with tablet and smartphone gaming claiming 42% of total revenues. In the overall games market a CAGR of around 6 % is expected for , but the mobile gaming market is expected to grow even faster, with a CAGR of around 13 % for By 2020, mobile gaming is expected to make up more than half of the total games market and reach $65 billion in revenues. 5 Figure 4: Forecasted per segment gaming revenue E 2018E 2019E 2020E 22 % 20 % 18 % 16 % 14 % 12 % 10 % 8 % 6 % Mobile revenue Other Mobile gaming growth Source: Newzoo, Newzoo Global Games Market Report (32)

10 Mobile is the preferred gaming platform According to Statista (2017), mobile is the preferred gaming platform based on the preferences of gaming companies customers, with consoles ranking in last place. The market share of smartphones is expected to grow strongly with tablets expected to stay at current levels in market share. Figure 5: Preferred gaming platforms, August % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % Mobile PC/MAC Social/Online Console Source: Statista, 2017 Figure 6: Gaming platform market share development 45 % 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5 % 0 % E 2018E 2019E 2020E Boxed/Downloaded PC Browser PC Console Tablet Smartphone Source: Newzoo, 2017 Asia has the largest market potential Asia-Pacific is clearly the largest market. China alone is expected to generate 25% of all mobile gaming revenues, approximately $15bn in Moreover, the fastest growing regions in the upcoming years will be South-East Asia and Latin America, where high population growth is accompanied with high economic growth and rising mobile penetration. 10(32)

11 Table 2: Geographic distribution of gaming revenue, 2016 Region Revenue YoY growth Population (M) Online population (M) Gamers (M) North America $7.2 Bn 9.2 % Western Europe $4.2 Bn 12.7 % Eastern Europe $1.0 Bn 16.6 % Middle East and Africa $1.6 Bn 56.5 % 1, Asia-Pacific $21.5 Bn 24.0 % 4,008 1,597 1,053 Latin America $1.4 Bn 56.3 % Source: Newzoo, 2017, 2016 People spend more time in mobile apps Games account for 82% of all application revenues In 2016, 2.3 billion people, or 31% of the total population used smartphones globally. By 2020 the number of users is expected to reach 3.6 billion with 4.2 billion devices 6. In June 2016 smartphone apps accounted for nearly 50% of digital media time with 73.8 hours per month 7. Gaming represents 11% of time spent, but the share has been declining, mainly due to increasing popularity of messaging & social apps 8. The free-to-play model has been proven as the winning model for mobile gaming as it lowers the threshold to start playing. In June 2017 all top 30 Apple App Store s highest grossing games were free-to-download, while in-game goods were the primary source of income. In the U.S. mobile phone gaming penetration in 2011 was just 25.9% vs. 55.7% in Penetration is expected to reach 63.7% in Furthermore, games are expected to account for 82% of all app store revenues in , as their monetization is ahead of all the other apps. Chinese market breakdown China by far the largest market There are over 700 million smartphone users in China, which is over 100% more than in the second largest market, India. China is also the largest mobile games market in terms of revenue and alone accounts for one-quarter of global mobile gaming revenues, $14.6bn in 2017, with estimated CAGR at 13.6 % 11. In 2017 there will be 565 million gamers in China, with 36 % spending money on games and 71% of the online population playing games Newzoo 2017 Global Mobile Market Report 7 ComScore 2016 U.S. Mobile App report 8 Flurry Analytics, State of Mobile report Statista, Mobile gaming penetration in the U.S Newzoo 2017 Global Mobile Market Report 11 Newzoo Global Games Market Update, April Newzoo Chinese Games Market 2016 Figure 7: China Oper. system market shares (April), top Android app stores (June) 2017 TOP 10 Android App Stores in China Rank App Store Coverage 1 MyApp 25 % 27,1 % Mobile Assistant 15 % 3 Xiaomi App Store 12 % 4 Baidu Mobile Assistant 12 % 72,9 % 5 Huawei HiApp 10 % 6 Oppo App Store 8 % 7 Wandouija 4 % 8 PP Mobile Assistant 4 % 9 Google Play 4 % Android ios 10 Sogou Mobile Assistant 4 % Source: Newzoo 2017, (32)

12 Android apps served through fragmented app store market in China Current presence in China limited to technical testing Different value chain affects profit making possibilities Billing systems less standardized Developers share of game revenue much smaller Intellectual property rights protection more difficult The Google Play store is not openly available in China, as the platform has been blocked by Chinese authorities. Google Play is not pre-installed on Android devices sold in China, but they will instead most likely come with other app stores, likely provided by a Chinese company. Google Play does hold a small share of the Chinese market as consumers can access the platform indirectly through circumvention methods (including VPN). In the absence of Google Play, independent Android stores serve the fragmented market with over 500 million android users. As a result, to reach 80% of the market, a game has to be released on at least five stores in China 13. With roughly a quarter of global mobile gaming revenue coming from China, it is apparent that the Chinese markets offer good revenue generation potential for companies in the industry. Next Games is currently not commercially present in China, with game availability currently being limited to technical testing. The company plans to expand the game offering to new countries as well as strengthening the presence in countries where the company s games are already being sold and China seems like the apparent choice for a larger focus of resources. In the mobile gaming industry the Chinese market differs substantially from Western countries and the market entry requires a lot of planning and preparations. The differing value chain affects profit making possibilities in the Chinese mobile gaming market, with a larger difference for Android-based games due to the blocking of Google Play. In China, non-chinese Android developers are required to publish content using a Chinese third party as a middleman, which is not required for ios. Another key difference in China is the role of teleoperators/carriers in billing. Whereas billing in Western countries are carried out through credit card payments in the app store, in China payment by SMS and through third party systems are more common. Some of the main actors in distribution of mobile games provide an array of services including billing systems, usually at the cost of a larger share of a games revenue. Typically in Western countries a games developer can publish a game directly to a distribution channel, possibly limiting the number of revenue sharing parties to one, and the developers share of revenue is typically around 70 % of gross revenue. In China the revenue cut taken by publishers, distributors, and payment solutions providers leaves the developer with a much smaller part of the revenue. Depending on if the app store is of open or closed type, the developer s share of revenue can be in the range of % 14. With the good scalability in the mobile games market the enormous revenue volumes in China still make the markets attractive, despite the lower share of revenue being accumulated. The more challenging environment for mobile game developers in China can also be seen in the protection of intellectual property rights. With the difficulties inherent in establishing a partnership with a local Chinese middleman to publish Android content, a developer could choose to only publish content on the ios App Store. If the game is successful it is highly likely that the game will be pirated to Android stores, which could tarnish the image of the IP and result in a loss in sales. As a relatively small company, Next Games may not have the resources to protect an IP in China. However, as the company produces games based on licensed franchise content, with the content owner usually being a large corporation, the owner will have much stronger possibilities as well as good incentives to act to protect the IP-rights. 13 Newzoo 2017 Global Mobile Market Report 14 Neogames Finland Assn. / Nordic Game Institute China Mobile Games Market (32)

13 Figure 8: China Revenues from gaming segments 40 USD Bn E 2018E 2019E 2020E Other Mobile Source: Newzoo 2017 M&A-market activity Acquisition activity in the mobile gaming market The rapid growth in mobile gaming has had games developers adjusting their business to add more mobile games to their portfolios. A quick way for games developers to adapt is by acquiring firms engaged in developing mobile games and in the past couple of years some larger M&A deals have been carried out. One of the most notable deals has been Tencent s acquisition of a majority stake in Supercell. Table 3: M&A deals with mobile games focused target companies Announce date Completed Target Acquirer EV $M EV/ Sales EV/ EBIT EV/ EBITDA Space Ape Games Ltd (62 % stake) Supercell Oy 90 1, Pending Changyou.com Ltd Management Group ,3 13,4 11, Social Point SL Take-Two Interactive Software, Inc ,0 13, Supercell Oy (72.2% Stake) Tencent Holdings Ltd ,3 17,3 10, Bigpoint GmbH YOUSU GmbH 90 1, Gameloft SE (69.99% Stake) Vivendi SA 740 2,6-692,7 39, King Digital Entertainment Limited Activision Blizzard, Inc ,3 6,8 6, Entermate Co. Korea No.2 Special Purpose Acquisition Co. 31 1,3 9, Supercell Oy (22.7% Stake) SoftBank Group Corp ,1 9,4 9, Playtika Ltd Giant Network Group Co., Ltd ,2 19, CrowdStar Inc. Glu Mobile Inc. 51 1,4-23,9-33, Kabam Vancouver Netmarble Games Corporation 691 1,4 Median 715 2,5 9,4 10,2 Source: FactSet, Mergermarket Potential acquisition object As a company with a narrow focus on licensed mobile games, with proven success and new games in the development pipeline, Next Games could possibly be an interesting and potential acquisition object for instance to a larger entertainment studio or a games developer, seeking to find a way into the mobile gaming market. Next Games license deal with AMC Networks Ventures could have a preventing effect on a possible acquisition, as under the license deal AMC has the right to revoke the license in the event of a change in majority ownership. 13(32)

14 Competitive landscape Most large competitors develop games on multiple platforms App stores flooded with mobile games The international gaming market is relatively fragmented with large game studios releasing games across all platforms (Activision Blizzard, Electronic Arts, Nintendo etc.) and a few developers who create games mainly or exclusively on mobile (Supercell, Zynga etc.). With the low barrier to entry in developing mobile games the market also contains a plenitude of small developers with only one or a limited amount of apps. In May 2017 there were a total of 2.2 million applications in the App Store and 2.8 million apps in Google Play 15. In December ,000 new applications were submitted to the App Store, of which 26,000 were mobile games 16. When comparing mobile games to games on PC and consoles the amount resources spent on developing a game are normally considerably lower. The competition in mobile games is as such much tougher and the barriers to entry are low. However, the licensed games market does exhibit some barrier to entry, as successful references in the area should provide a clear edge for established companies. According to Next Games management, Telltale Games is the only peer completely focused on IP licensed mobile games. Table 4: Top mobile companies and apps by revenue and downloads Top Companies By downloads By Revenue Rank Company Apps Rank Company Apps 1 Facebook 60 1 Tencent Google NetEase Tencent Activision Blizzard 94 4 Microsoft Netmarble Cheetah Mobile MZ 5 6 Alibaba Group Bandai Namco Outfit Mixi 49 8 Vivendi Sony 1,425 9 Electronic Arts Line Ubisoft Square Enix 333 Top Apps By downloads By Revenue Rank Company App Rank Company App 1 Facebook Whatsapp Messenger 1 Tencent Honour of Kings 2 Facebook Facebook Messenger 2 mixi Monster Strike 3 Facebook Facebook 3 Softworld Fate/Grand Order 4 Facebook Instagram 4 Tencent Clash Royale 5 Snap Snapchat 5 NetEase Fantasy Westward Journey 6 SHAREit SHAREit 6 Tencent Clash of Clans 7 Alibaba Group UC Browser 7 MZ Mobile Strike 8 Uber Technologies Uber 8 MZ Game of War - Fire Age 9 Kiloo idreamsky Subway Surfers 9 Activision Blizzard Candy Crush Saga 10 Google YouTube 10 Netmarble Lineage 2: Revolution (Mother entity as a publisher, e.g. Tencent as Clash Royale Company instead of Supercell) Source: AppAnnie (32)

15 Game success highly skewed While popularity among all apps is strongly skewed towards a few international favourites, so is financial success. Some 80 % of mobile game revenues in the top 1,000 titles are earned by the top 20 publishers 17. Gaming appears to be the best at monetizing among all application categories. While some 50 % of apps are games, approximately 80 % of mobile application revenues in 2017 will go to game companies. Moreover, some gaming companies have found persisting ways to remain among top grossing game companies, e.g. Electronic Arts has built success on licensed sports games. On the other hand, some free games have been difficult to monetize, but increasing tools for advertising on mobile channels and optimization of user acquisition should facilitate leveraging popularity. Table 5: Earnings potential by game category, July 2016, U.S. market Game statistics Monthly Revenue by Genre Average revenue per daily active user Rank Genre Revenue ($m) Rank Genre Revenue ($) 1 Strategy Role Playing Role Playing Strategy Adventure Adventure Action 98 4 Casino Puzzle 93 5 Racing Arcade 87 6 Card Card 78 7 Action Casino 78 8 Puzzle Simulation 72 9 Casual Casual Simulation 0.14 Source: SurveyMonkey Intelligence Table 6: Top grossing iphone games and distribution of revenues, June 2017 Top Grossing Iphone Games Rank Game Publisher Daily revenue ($) New installs 1 Clash Royale Supercell Clash of Clans Supercell Candy Crush Saga King Game of War - Fire Age Machine Zone Inc Pokemon Go Niantic Inc Mobile Strike Epic War Llc Candy Crush Soda Saga King MARVEL Contest of Champions Kabam Slotomania Slots Casino: Vegas Slot Playtika Ltd Machines Games 10 Lords Mobile Igg Com The Walking Dead: No Man's Land Next Games Source: ThinkGaming Licensing vs. in-house brand development Licensing IP rights of popular mass entertainment franchises seems to offer a shortcut to reaching wider audiences, but monetization is still largely dependent on game developer s ability to create attractive content and gaming experiences and spending on user acquisition is a necessity. While Next Games holds exclusive rights to develop mobile games based on The Walking Dead TV series, another gaming company Scopely, has released a game The Walking Dead: Road to Survival, which is based on the graphic novel 17 Deloitte 2016, Mobile games: leading but less lucrative 15(32)

16 version of the franchise. Thus, IP holders could race game developers against each other and split the franchise into a number of games. In June 2017 Scopely s version of the franchise was slightly more successful, ranking 71th on the top grossing iphone games list with $54k in daily revenue. Yet, it is hard to say whether the two games cannibalize each other or increase the franchise s popularity. Moreover, many IP holders have significant resources that can be used for game development. At least some IP holders are quite likely to choose to develop their own mobile games. Therefore, external developers must have an attractive offering for IP holders. Telltale Games, similar strategy to Next Games New platforms, new technologies Telltale Games is an American independent game developer, which has focused on graphic adventure game series based on licensed properties. Many of its games are released periodically and follow player-choice driven approach, were players choices affect future events in the game, thereby forming personalized storylines. Telltale Games has released games based on Game of Thrones, Minecraft, Marvel, The Walking Dead and Jurassic park, among others. The mobile games market changes all the time and game developers need to be able to adapt accordingly. In 2016 Niantic released the Pokemon Go game, which utilizes augmented reality technology, where the view of the real world environment is augmented by computer generated elements. Virtual reality (VR) devices are expected to have a significant impact on the gaming industry, and early adopters of the technology can shake the market. In January 2017 there were million Gear VR compatible devices active and the technology is constantly getting cheaper and more advanced 18. STRATEGY Plan to release at least one new game per 12 months from 2018 Improving sales by expanding geographically Increased advertisement revenue through analytics Next Games has stated four key components in their strategy. The company intends to continue the development and expansion of The Walking Dead: NML by bringing new content to the game and continuing marketing activities. The focus on improving the game is essential in the short and mid-term, as the game currently is the company s only active game. Next Games also seeks to create a portfolio of games by releasing new games, with the intention of releasing one or more games every 12 months, from 2018 onwards. With the three new games in the development pipeline, the target appears achievable. Next Games also intends to improve the geographical spread of its games. The company s games were available in 166 countries on the Thus, expansion to new countries is still possible and the company will also seek to increase presence in selected countries were the games are already sold, by increasing player acquisition and marketing activities. 63 % of the company s sales in 2016 originated from North America, but strong market growth in APAC and Latin America could open possibilities for more dispersed revenue generation. The company s strategy also focuses on the development of advertisement revenue. Roughly 10 % of the company s total revenue has been generated through ads. The company has developed own technologies to improve the targeting of advertisements. The share of mobile advertising of total display advertising is expected to grow strongly, driven by among other things increasing mobile-commerce and scaling demands. IHS has estimated the mobile advertising share of total display advertising at 44.6 % in 2015, expected to grow to 75.9 % in This is expected to increase revenue generation possibilities for companies such as Next Games. 18 Newzoo 2017 Global Mobile market Report 19 IHS Technology, March 2016: The future of mobile advertising is native 16(32)

17 FINANCIAL OUTLOOK AND ESTIMATES Solid development, quarterly figures can vary substantially Next Games history for financial figures is limited but development since the end of 2015 has been solid. Revenue growth has come at the costs of profitability, with the company barely reaching positive operating profit during certain quarters. When looking at the financial figures for Next Games one should not emphasize a single quarter too much, as the timing of events in the underlying IP s can have a large effect on sales, as can be seen in Q4/16, when new content for The Walking Dead: NML started to have an effect. Figure 9: Next Games revenue and profitability development Q4/15 Q1/16 Q2/16 Q3/16 Q4/16 Q1/17 Q2/17-4 Revenue EBIT Source: Next Games Strong revenue/employee ratio Next Games has previously performed exceptionally well when viewing the revenue per employee. In 2016 the company had similar ratios as the largest peers, which suggests potential for scalability. Figure 10: Next Games revenue per employee ratio (peers sorted by market cap.) Activision Blizzard Electronic Arts Take-Two Interactive Ubisoft Entertainment Zynga Starbreeze Glu Mobile G5 Entertainment Frontier Developments Next Games Stillfront Group Source: FactSet EUR ' (32)

18 Balance sheet Strong balance sheet due to listing proceeds Next Games balance sheet composition changed considerably after the stock exchange listing in Q1/17. The net proceeds from the listing amounted to around roughly EUR 27m, and as such the company currently enjoys a strong liquidity. On the assets side the company has nearly EUR 2.4m in deferred tax assets from the confirmed losses up until The intangible assets consist of activated listing expenses, intangibles from the Lume Games acquisition, and games licenses. The sources of intangibles will be amortized over a three year period, increasing depreciations until Next Games does not capitalize development costs of new games, which removes the risk of write-downs of intangibles if a game under development were to not be published. Figure 11: Next Games balance sheet 2016 and Q2/17 60,0 50,0 Cash and cash equiv. Receivables 70,0 60,0 50,0 5,6 Non-interest bearing current liab. 40,0 31,8 30,0 20,0 10,0 3,6 5,9 2,4 6,7 2,7 0,0 2,4 6, Q2/17 Source: Next Games Deferred tax assets Associated companies Tangible assets Intangible assets Cost structure 40,0 30,0 20,0 10,0 0,0-10,0 53,3 8,4 15,8-10,4-10, Q2/17 Long-term debt Share capital and other equity Retained earnings Costs largely variable Next Games three main cost categories are services and purchases, personnel costs, and other operating expenses. The largest costs have arisen from services and purchases, which are to a large extent variable costs fixed to a percentage of sales, and consist of the following: Commission fees to publishing platforms - Fixed at typically around 30 % or revenues License costs to IP owners - Mostly fixed to revenue, could include a base component. Values not disclosed Server costs - Fixed to server utilisation, largely variable but not fixed to sales Player acquisition costs - Non-fixed, seasonal. Spending optimized to acquisition efficiency. Costs higher for instance around Christmas and game launches. Personnel and marketing had a large effect on costs, R&D costs on the rise The other two cost categories, personnel costs and other operating expenses corresponded to 15.4 % and 19.6 % of revenue in 2016 respectively. Within the other operating expenses marketing expenses accounted for nearly half of the costs in The marketing expenses include other marketing activities than player acquisition costs and follow revenue development. Another larger part of costs are device and software related costs, which are dependent on the number of personnel and players. Also included in the other operating expenses are R&D-costs, which in 2016 were EUR 0.44m, while the company already in H1/17 reported EUR 1m in R&D-costs. 18(32)

19 Figure 12: Costs to revenue estimates Source: Evli estimates Licensed IP games increase variable costs, could lower user acquisition costs Lower user acquisition spending main way to improve gross margins Next Games focus on licensed IP games affects the potential for scalability in earnings. Competitors focusing on games based on in-house IP are not subject to the same costs relating to license payments to IP owners. The focus on licensed IP games does however give a certain advantage in player acquisition, as marketing activities by the IP owner increases brand recognition, which supports awareness of related products such as mobile games based on the brand. The most significant change in costs from 2016 has been the decrease in user acquisition costs. As license costs depend on specifics for each deal and server costs vary with server utilization rates the costs will see some fluctuation in the future but we do not expect these to vary significantly. We assume that user acquisition costs have been exceptionally high before 2017 due to the launch of The Walking Dead: NML and Next Games need to build up a user base. High costs for user acquisition is typical for the mobile gaming industry. The user acquisition spending appears to have dropped already during H1/17, but with an analytics-based and more efficient approach, there may be some room to improve gross margins. Figure 13: Next Games gross margin and EBIT-margin 60,0 % 40,0 % 20,0 % 0,0 % -20,0 % Q4/15 Q1/16 Q2/16 Q3/16 Q4/16 Q1/17 Q2/17-40,0 % -60,0 % -80,0 % Gross margin EBIT-margin Source: Next Games, Evli research 19(32)

20 Estimates Estimate three new games by 2019; not as successful as TWD: NML Near term gross margin to decrease slightly; EBIT improvement from scalability on long run The lacking visibility into the games that are in the development pipeline limit the predictability of the revenues generated by each game. Our estimates for the revenue of the new games in are conservative when comparing to The Walking Dead: NML. Due to the expanding games portfolio we still estimate 62 % and 54 % sales growth for 2018 and 2019 respectively. Next Games target is to release at least one new game per year from 2018 onwards and based on the current development pipeline we have estimated that Next Games will have three new games on the market by the end of For The Walking Dead: NML we still expect improving revenue, which we believe will cap in In our estimates we expect the gross to decrease during 2018 and We expect a continued need in spending on player acquisition with the launch of the new games, which will affect the gross margin. We also expect a small part of the revenue to be generated from sales in China, were the costs are less in favour of the games developer, thus affecting the gross margin negatively. We expect EBIT to improve as the company is able to scale the sales generation, with a larger proportion of employees working on games generating revenue as opposed to developing new games and on the long run also from gross margin improvements, when user acquisition spending stabilizes. Table 6: Operating model and estimates E 2017E 2017E 2018E 2019E FY Q1 Q2 Q3 Q4 FY FY FY Next Games Sales 31,1 10,9 8,5 8,0 13,1 40,6 65,5 101,0 NML 29,6 10,9 8,5 8,0 13,1 40,6 48,5 46,0 Compass point: West 1, Game 1 (Bladerunner) ,0 32,0 Game ,0 Game ,0 Sales growth 220 % 96 % 18 % 15 % 15 % 30 % 62 % 54 % Services and purchases -22,9-7,0-5,4-5,0-8,5-25,9-44,4-67,7 Gross margin 8,3 3,9 3,1 3,0 4,6 14,6 21,1 33,3 Gross margin 26,5 % 36,0 % 36,9 % 37,0 % 35,0 % 36,1 % 32,2 % 33,0 % Costs -9,4-3,4-3,0-3,0-3,5-12,9-16,6-21,6 Personnel costs -4,8-1,4* -1,6* -1,7-1,8-6,5-8,4-10,7 Other costs -6,1-2,0* -1,4* -1,3-1,7-6,4-8,1-10,9 EB ITDA -1,2 0,5 0,1-0,1 1,1 1,7 4,5 11,7 Depreciation and amort. -0,4-0,2-0,3-0,3-0,3-1,2-2,8-2,9 EB IT -1,6 0,4-0,2-0,4 0,8 0,6 1,7 8,8 EBIT-margin -5,1 % 3,4 % -2,6 % -5,0 % 6,1 % 1,4 % 2,6 % 8,7 % *Estimated from H1/17 reported numbers Other income added to EBITDA in 2016 Source: Evli estimates, Next Games No dividends expected We do not expect Next Games to pay dividends during The company will need the funds raised from the IPO to build up the games portfolio and with our estimates the profitability will be low during that period. Not many peers are expected to pay dividends, likely because the current market growth and the need to expand operations in mobile. 20(32)

21 Investment risks No visibility in development pipeline Company to be viewed on a longer horizon Possible that a game in development is not released Only a fraction of games succeed Different cost structure to in-house IP mobile games developers Next Games currently has one game in a continuous updating phase, The Walking Dead: NML, and the three announced games in development. In our view the main risks associated with the long-term performance are related to the success of games in development, where visibility is low. With currently only one game being actively updated and generating nearly all revenue, a declining interest could affect Next Games operations. With Next Games intentions to build a larger portfolio of games the company should be viewed on a longer horizon. With our estimates over half of revenue in 2019 will be generated from the new games to be launched. In our estimates we expect Next Games to be able to launch the three new games that have been announced. As the games have already entered the development pipeline the risk of a game not being launched is lower, but for various reasons the company could still decide not to launch a game. Even after having been released to soft launch, it is possible that a game does not appear to be successful enough to be released to all markets. The mobile gaming market is characterized by a highly skewed success rate. The low barrier to entry in developing a mobile game, compared to for instance a PC game, has seen the amount of mobile games in app stores increase vastly, with 26,000 new games submitted to the App store in December Only a fraction of these games reach high levels of success. Next Games focus on third party IP based games could offer increased possibility of success from user acquisition, but to retain players the key is to create a compelling game and offer attractive content in the long run. Due to the focus on third party IP based games a large part of Next Games costs are fixed to sales, as the company apart from the commissions to the app stores also pays royalty fees to the license owners. Furthermore, the company needs to spend resources on acquisition of new users, which can be a significant cost especially around launches of new games. If the company is not able to attract new users without spending a significant part of revenues on user acquisition, it will be challenging to reach higher levels of profitability. Figure 14: Split of estimated revenues 120,0 100,0 80,0 60,0 40,0 20,0 0,0 2016A 2017E 2018E 2019E New games Existing games Source: Evli estimates (32)

22 Valuation BUY with a target price of EUR 9.2 The estimated strong growth during E based on games in the development pipeline with low visibility imposes some challenges on the valuation. We expect the business to stabilize and profitability to reach healthier levels towards In our weighted valuation approach we value Next Games at peer EV/EBIT of 12.2x 2019E, and a below peer median EV/Sales of 1.5x 2019E, due to the expected above peer growth rate. The valuation approach with larger emphasis on peer multiples gives Next Games a target price of EUR 9.2 and a BUY recommendation. VALUATION Weight Implied value 20 % DCF 9,25 40 % Peer EV/EBIT '19E 8,1 40 % 1.5x EV/SALES '19E 10,6 Fair value 9,3 Target price (EUR) 9,2 Source: Evli Research Table 7: Next Games peer group MCAP EV/EBITDA EV/EBITDA EV/EBITDA EV/EBIT EV/EBIT EV/EBIT EV/Sales EV/Sales EV/Sales PEER GROUP MEUR Frontier Developments ,4x 14,3x 521,1x 21,0x 10,4x 5,2x G5 Entertainment ,1x 13,7x 8,7x 27,3x 19,1x 14,0x 3,2x 2,6x 2,1x Starbreeze ,0x Ubisoft Entertainment ,9x 6,1x 5,2x 22,8x 13,8x 11,5x 3,6x 2,9x 2,5x Glu Mobile 390 Activision B lizzard ,6x 16,3x 14,2x 21,4x 17,2x 15,0x 7,1x 6,4x 5,7x Electronic Arts ,5x 14,5x 12,5x 19,0x 15,3x 13,1x 6,1x 5,4x 4,9x Take-Two Interactive ,2x 13,7x 13,1x 27,6x 14,5x 12,8x 5,2x 3,6x 4,0x Zynga ,2x 13,7x 10,1x 23,5x 15,6x 10,8x 2,8x 2,4x 2,0x Stillfront Group 61 10,5x 4,8x 4,7x 17,6x 6,3x 6,3x 3,5x 1,9x 1,8x Digital B ros ,3x 10,4x 5,1x 20,7x 19,0x 6,5x 1,5x 1,5x 1,0x Peer Group Average ,4x 12,0x 9,2x 77,9x 15,8x 11,2x 5,3x 3,5x 3,0x Peer Group Median ,1x 13,7x 9,4x 22,8x 15,6x 12,2x 4,4x 2,9x 2,3x Next Games (Evli est.) ,3x 21,1x 7,6 x 175,1x 56,2x 10,1x 2,4x 1,5x 0,9 x Next Games prem./disc. to peer median 194 % 54 % -19 % 667 % 260 % -17 % -46 % -49 % -62 % Source FactSet, Evli Research P/E P/E P/E P/B P/B P/B Div. yield Div. yield Div. yield PEER GROUP Frontier Developments 345,2x 27,7x 6,8x 5,4x 0,0 % 0,0 % G5 Entertainment 33,5x 24,9x 19,4x 15,1x 10,4x 7,5x 0,3 % 0,5 % 0,6 % Starbreeze 3,5x 0,0 % Ubisoft Entertainment 33,7x 21,5x 20,3x 4,9x 4,1x 3,5x 0,0 % 0,0 % 0,0 % Glu Mobile 48,9x 15,5x 2,5x 2,4x 2,2x Activision B lizzard 30,5x 25,7x 24,1x 4,8x 4,2x 3,6x 0,5 % 0,2 % 0,2 % Electronic Arts 28,0x 23,7x 21,3x 7,9x 6,8x 5,3x 0,0 % 0,0 % 0,0 % Take-Two Interactive 43,9x 22,3x 20,4x 9,2x 6,7x 5,2x 0,0 % 0,0 % 0,0 % Zynga 36,2x 26,8x 22,6x 2,0x 1,9x 1,8x 0,0 % 0,0 % 0,0 % Stillfront Group 26,2x 9,6x 10,6x 2,9x 2,2x 1,8x 0,0 % 0,0 % 0,0 % Digital B ros 17,8x 28,6x 9,4x 3,7x 3,6x 3,0x 1,0 % 0,9 % 2,1 % Peer Group Average 66,1x 26,0x 18,2x 5,8x 4,8x 3,8x 0,2 % 0,2 % 0,4 % Peer Group Median 33,5x 25,3x 20,3x 4,8x 4,2x 3,5x 0,0 % 0,0 % 0,0 % Next Games (Evli est.) 152,7x 9 7,1x 18,5x 3,0x 2,9 x 2,5x 0,0 % 0,0 % 0,0 % Next Games prem./disc. to peer median 356 % 284 % -9 % -37 % -30 % -27 % Source FactSet, Evli Research 22(32)

23 GLOSSARY DAU (daily active users) MAU (monthly active users) ARPDAU (average revenue per daily active user) A measure for the number of users who signed in to the game at least one time during a 24-hour period. Average DAU over a period of time is measured by adding the total number of active users for each day and dividing by the number of days. DAU is useful for measuring player engagement. MAU is calculated in a similar way to DAU but is instead based on the number of users who signed in to the game at least once during a 30-day period. MAU is useful for measuring the overall size of the player network. ARPDAU is calculated by dividing daily gross bookings by the number of daily active users. ARPDAU is a useful measure for the monetization of a game, as it places sales in relation to player volume. 23(32)

24 VALUATION RESULTS BASE CASE DETAILS VALUATION ASSUMPTIONS ASSUMPTIONS FOR WACC Current share price 7.14 PV of Free Cash Flow 60 Long-term growth, % 2.5 Risk-free interest rate, % 2.25 DCF share value 9.25 PV of Horizon value 106 WACC, % 10.6 Market risk premium, % 5.8 Share price potential, % 29.6 Unconsolidated equity 0 Spread, % 0.5 Debt risk premium, % 2.8 Maximum value 10.0 Marketable securities 4 Minimum WACC, % 10.1 Equity beta coefficient 1.40 Minimum value 8.6 Debt - dividend -1 Maximum WACC, % 11.1 Target debt ratio, % 20 Horizon value, % 63.8 Value of stock 168 Nr of shares, Mn 18.2 Effective tax rate, % 20 DCF valuation, EURm E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Horizon Net sales Sales growth, % Operating income (EBIT) EBIT margin, % Depreciation+amort Income taxes Change in NWC NWC / Sales, % Change in other liabs Capital Expenditure Investments / Sales, % Other items = Unlevered Free CF (FCF) = Discounted FCF (DFCF) = DFCF min WACC = DFCF max WACC (32)

25 INTERIM FIGURES EVLI ESTIMATES, EURm 2016Q1 2016Q2 2016Q3 2016Q Q1 2017Q2 2017Q3E 2017Q4E 2017E 2018E 2019E Net sales EBITDA EBITDA margin (%) EBIT EBIT margin (%) Net financial items Pre-tax profit Tax Tax rate (%) Net profit EPS EPS adjusted (diluted no. of shares) Dividend per share SALES, EURm Division Total SALES GROWTH, Y/Y % Division Total EBIT, EURm Division Total EBIT margin, % Division Total (32)

26 INCOME STATEMENT, EURm E 2018E 2019E Sales Sales growth (%) , Costs Reported EBITDA Extraordinary items in EBITDA EBITDA margin (%) -98, Depreciation EBITA Goodwill amortization / writedown Reported EBIT EBIT margin (%) -98, Net financials Pre-tax profit Extraordinary items Taxes Minority shares Net profit BALANCE SHEET, EURm Assets Fixed assets % of sales 24, Goodwill % of sales Inventory % of sales Receivables % of sales Liquid funds % of sales 56, Total assets Liabilities Equity % of sales 59, Deferred taxes % of sales Interest bearing debt % of sales 3, Non-interest bearing current liabilities % of sales 18, Other interest free debt % of sales Total liabilities CASH FLOW, EURm + EBITDA Net financial items Taxes Increase in Net Working Capital /- Other = Cash flow from operations Capex Acquisitions Divestments = Net cash flow /- Change in interest-bearing debt /- New issues/buybacks Paid dividend /- Change in loan receivables Change in cash (32)

27 KEY FIGURES E 2018E 2019E M-cap Net debt Enterprise value Sales EBITDA EBIT Pre-tax Earnings Book value Valuation multiples EV/sales EV/EBITDA EV/EBITA EV/EBIT EV/operating cash flow EV/cash earnings P/E P/E excl. goodwill P/B P/sales P/CF , Target EV/EBIT Target P/E Target P/B Per share measures Number of shares 2,449 2,449 3,325 18,178 18,178 18,178 Number of shares (diluted) 2,449 2,449 3,325 18,178 18,178 18,178 EPS EPS excl. goodwill Cash EPS Operating cash flow per share Capital employed per share Book value per share Book value excl. goodwill Dividend per share Dividend payout ratio, % Dividend yield, % Efficiency measures ROE ROCE Financial ratios Capex/sales, % 4, Capex/depreciation excl. goodwill,% , Net debt/ebitda, book-weighted Debt/equity, market-weighted Equity ratio, book-weighted Gearing Number of employees, average Sales per employee, EUR EBIT per employee, EUR (32)

28 COMPANY DESCRIPTION: Next Games Oyj is a Finland-based developer and publisher of licensed mobile games. The Company develops games in cooperation with the license owners of the entertainment products, for instance a television series. Its current game portfolio includes The Walking Dead: No Man's Land and Compass Point: West. INVESTMENT CASE: OWNERSHIP STRUCTURE SHARES EURm % Ovaskainen Jari Juhani Rainer 3,039, % IDG Ventures USA III, L.P. 1,188, % Hiitola Kalle Johannes 942, % Achrén Joakim Tomas Johan 940, % Achrén Mikael Jan Kennet 935, % Jumisko Jaakko Ensio 935, % Ilmarinen Mutual Pension Insurance Company 482, % Varma Mutual Pension Insurance Company 380, % Nuard Ventures Oy 364, % Vaah Holdings Oy 266, % Ten largest 9,476, % Residual 8,701, % Total 18,178, % EARNINGS CALENDAR November 03, 2017 Q3 report OTHER EVENTS COMPANY MISCELLANEOUS CEO: Teemu Huuhtanen CFO: Annina Salvén IR: Kansakoulukatu 10, Helsinki Tel: 28(32)

29 DEFINITIONS P/E Price per share Earnings per share EPS Profitbeforeextraordinary items andtaxes income taxes minority interest Number of shares P/Sales Marketcap Sales DPS Dividend for the financial period per share P/BV Priceper share Shareholders' equity taxedprovisionsper share CEPS Gross cash flowfromoperations Number of shares P/CF Priceper share Operatingcash flowper share EV/Share Enterprise value Number of shares EV (Enterprise value) Marketcap net debt minority interest atmarket value share of associated companiesatmarket value Sales/Share Sales Number of shares Net debt Interest bearingdebt financialassets EBITDA/Share Earningsbeforeinterest, tax, depreciationandamortisation Number of shares EV/Sales Enterprise value Sales EBIT/Share Operatingprofit Number of shares EV/EBITDA Earnings before Enterprise value interest, tax, depreciation and amortisation EAFI/Share Pretax profit Number of shares EV/EBIT Enterprise value Operating profit Capital employed/share Totalassets non interest bearingdebt Number of shares Div yield, % Dividend per share Priceper share Total assets Balance sheet total Payout ratio, % Totaldividends Earningsbeforeextraordinary items andtaxes income taxes minority interest Interest coverage (x) Operatingprofit Financialitems Net cash/share Financial assets interest bearing debt Number of shares Asset turnover (x) Turnover Balancesheet total(average) ROA, % Operatingprofit Balancesheet total financial income extraordinary items interest free short termdebt longtermadvancesreceived andaccountspayable(average) ROCE, % Profitbeforeextraordinary items interest expenses other financialcosts Balancesheet total noninterest bearing debt (average) ROE, % Profit before extraordinary items and taxes income taxes Shareholders' equity minority interest taxedprovisions (average) Debt/Equity, % Interest bearing debt Shareholders' equity minority interest taxed provisions Equity ratio, % Shareholders' equity minority interest taxedprovisions Totalassets interest freeloans CAGR, % Cumulative annualgrowthrate Averagegrowthper year 29(32)

30 Important Disclosures Evli Research Partners Plc ( ERP ) uses 12-month target prices. Target prices are defined by utilizing analytical techniques based on financial theory including (but not limited to) discounted cash flow analysis and comparative valuation. The selection of valuation methods depends on different circumstances. Target prices may be altered on the basis of new information coming to light in the underlying company or changes in interest rates, changes in foreign exchange rates, other securities prices or market indices or outlook for the aforementioned factors or other factors that may change the conditions of financial markets. Recommendations and changes by analysts are available at Detailed information about the valuation or methodology and the underlying assumptions is accessible via ERP: Investment recommendations are defined as follows: Target price compared to share price Recommendation < -10 % SELL -10 (+10) % HOLD > 10 % BUY ERP s investment recommendation of the analyzed company is in general updated 2 4 per year. The graph above shows the distribution of ERP s recommendations of companies under coverage in 22nd of February If recommendation is not given, it is not mentioned here. Name(s) of the analyst(s): Salokivi This research report has been prepared by Evli Research Partners Plc ( ERP or Evli Research ). ERP is a subsidiary of Evli Bank Plc. Production of the investment recommendation has been concluded on [ , 8:00]. This report has been published on [ , 9:00]. None of the analysts contributing to this report, persons under their guardianship or corporations under their control have a position in the shares of the company or related securities. The date and time for any price of financial instruments mentioned in the recommendation refer to the previous trading day s closing price(s) unless otherwise stated in the report. Each analyst responsible for the content of this report assures that the expressed views accurately reflect the personal views of each analyst on the covered companies and securities. Each analyst assures that (s)he has not been, nor are or will be, receiving direct or indirect compensation related to the specific recommendations or views contained in this report. Companies in the Evli Group, affiliates or staff of companies in the Evli Group, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in the publication or report. Neither ERP nor any company within the Evli Group have managed or co-managed a public offering of the company s securities during the last 12 months prior to, received compensation for investment banking services from the company during the last 12 months prior to the publication of the research report. ERP may pursue an assignment from the issuer(s) of the financial instruments mentioned in the recommendation or this report. These assignments may have a limited economic or financial impact on ERP and/or Evli. Under such assignments ERP may perform services including, but not limited to, arranging investor meetings or events, investor relations communication advisory and production of research material. ERP has signed an agreement with the issuer of the financial instruments mentioned in the recommendation, which includes production of research reports. This assignment has a limited economic and financial impact on ERP and/or Evli. Under the assignment ERP performs services including, but not limited to, arranging investor meetings or events, investor relations communication advisory and production of research material. ERP or another company within the Evli Group does not have an agreement with the company to perform market making services. For the prevention and avoidance of conflicts of interests with respect to this report, there is an information barrier (Chinese wall) between Investment Research and Corporate Finance units concerning unpublished investment banking services to the company. The remuneration of the analyst(s) is not tied directly or indirectly to investment banking transactions performed by Evli Bank Plc or any company within Evli Group. This report has been disclosed to the company prior to its dissemination. The company has not made any amendments to its contents. Selected portions of the report were provided to the company for fact checking purposes only. 30(32)