Hello and a warm welcome to this Q2 presentation with EG7. My name is Ludvig Andersson, and I will be your moderator here today. Together with me to present are our Acting CEO, Ji Ham, and our Deputy CEO and CFO, Fredrik Rüdén. After the presentation, we will have a Q&A session, so feel free to email your questions to the IR email. Without any further ado, over to you, Ji.
Thanks, Ludwig. Good morning. Thank you for joining us this morning. Is there a presentation that you could share, please? Sorry about these slight technical issues here, but we'll get the presentation up shortly. All right, there you go. Okay. All right, we'll start with a quick summary of EG7. EG7 is a global gaming group. We currently have multiple capabilities across both gaming development and services. On the game development side, we have new game development, as well as live service with a portfolio of live service games that we operate across PC, console, and mobile platforms. On the service side, we have Fireshine, our publisher that does digital and physical publishing and distribution.
We have Petrol, one of the best-known marketing and branding agencies in the world of gaming, providing their marketing services to some of the biggest publishers in the world, such as Activision Blizzard and Bandai Namco. In terms of our portfolio of live games, we have some of the most iconic brands in gaming: EverQuest, one of the very first MMOs to come out in the marketplace, now in its 24th year; The Lord of the Rings Online, which just celebrated its 15th anniversary this spring; DC Universe Online, based on the number two comic book IP in the world; and Magic: The Gathering Online, which is based on Magic: The Gathering, the number one trading card game IP in the world.
In terms of our geographic presence, we have 693 employees across 16 offices in North America and Europe: eight gaming studios with 458 talented developers. Our net revenue comes 73% from North America, 21% from Europe, and 6% from the rest of the world. For the last twelve months ended the second quarter, net revenue came in at SEK 1.7 billion. That represents a healthy 93% growth over a comparable period. Adjusted EBITDA was SEK 354 million, representing 108% growth. Next slide, please. Highlights from the second quarter: We had a very nice quarter.
We had net revenues coming in at SEK 463 million, representing 49% year-over-year growth, and strong organic growth, which was very notable at 41%. Before I go any further, just a quick note here: all our numbers actually do exclude Innova, which was disclosed as an asset that we're selling. So, a lot of these numbers that we will be discussing today will be without Innova. Okay, adjusted EBITDA was SEK 84 million, and we generated solid cash flow for the quarter, with SEK 64 million of operating cash flows for the period. Some of the key takeaways are very strong results above expectations, and we are continuing to consistently deliver.
Our growth continues to show very strong results, despite the market uncertainties that the gaming industry and global economy are having to face, especially on the organic growth side. Next slide, please. Operational highlights for our service segment. Key figures here. Net revenues came in at SEK 192 million, representing 103% growth. All of that was organic. The adjusted EBITDA of SEK 26 million represents almost 300% growth. The service segment is operating at a 14% margin. Some of the highlights that helped to drive this great result: Fireshine is continuing its strong performance. Core Keeper, which was released at the end of the first quarter of this year, has now sold over 1 million units and helped boost second-quarter results.
Fireshine also released Sniper Elite 5, a physical release that topped the charts in the UK for the second quarter. Petrol is expanding its relationship with some of the biggest publishers, namely Activision Blizzard. They have been the lead agency responsible for branding and marketing for the Call of Duty franchise for the last 16 years. Along with that, this year they announced Call of Duty: Modern Warfare II, which was one of the biggest announcements for that particular franchise with this highly anticipated IP game. On the live service side, Call of Duty has a title called Warzone, which Petrol also supports on the branding and marketing side.
Then they're expanding the relationship beyond Call of Duty, with Petrol being tapped to help lead the global branding initiative for Diablo Immortal, which is one of the biggest industry hits this year and continuing to perform really well. Next slide, please. On the gaming segment, some of the highlights here, financially, net revenues came in at SEK 270 million, representing 25% growth, and 14% of that was organic. Adjusted EBITDA of SEK 72 million represented a healthy 27% margin.
Highlights and the drivers for the quarter included My Singing Monsters, with its daily active user base increasing by over 2,000%, which is phenomenal. That resulted in the best quarter in history for My Singing Monsters, and that momentum continues to carry on. We have Lord of the Rings Online, which celebrated its 15th-year anniversary, resulting in the highest player engagement since 2016, further validating our differentiation, which speaks to the sticky, highly stable, and recurring revenue stream with their passionate player base that continues to play our beloved games. Dungeons & Dragons Online's 7th expansion pack came out, and its 55th update, and Piranha continues to develop great content for MechWarrior 5 with the second DLC coming out in the quarter and performing really well. Next slide, please.
At the group level, some of the highlights and updates include an Innova sales update. We announced the sale in the second quarter, in April. We are still making progress toward that and expect to be able to close that transaction before the end of Q3. On the board side, we have a new, updated board. Jason Epstein, the second-largest shareholder of EG7, has taken on the role of chairman. He will be taking a much more active role going forward, helping to drive growth for the overall organization. We also welcome Mr. Shyam Singh, a leading advisor and investor, who has been focusing on the gaming sector for multiple decades.
Shyam brings a ton of knowledge and experience in the sector, and we expect to be able to leverage his knowledge and experience to help continue to drive great performance for the business. On the investment side, insider investment, this quarter, we had a significant investment from the leadership group: over 40 million SEK invested, including myself as well as Fredrik and a number of key board members, including Jason Epstein. This was meant to be a firm indication of the leadership's belief and conviction in our business and our ability to continue to perform. Next slide, please. Okay, Fredrik.
Thank you. So, as Ji mentioned, we came in with a revenue in the quarter of SEK 463 million, which is an increase from 311, the comparable figure last year. This is a growth in the quarter of 49%, and an organic growth, if we take out Magic, of 41%. FX neutral, the organic growth is 24%. Looking to the right here, the net revenue in the last twelve months shows a constant increase from one consecutive quarter to the other. By the end of Q2, the LTM net revenue amounted to SEK 1,716 million, which is an increase from the comparable figure of SEK 891 million last year, corresponding to this 93% growth against last year, mainly driven by organic growth and well-selected M&A activities.
We operate our business with profitability, and the adjusted EBITDA margin amounted to 18% this quarter, which is the same level we had in Q4, but lower than the 27% reported in Q1. The LTM adjusted EBITDA margin has, during the last year, been trading around 21%-22%. Given today's revenue mix and after divesting the high-margin Innova business, this indicates the new normal level for us going forward. Innova was trading at a 35%-38% EBITDA margin before the Russian-Ukraine aggression. Between Q1 and Q2, we have some explanation for the variances in the margin there. We have more revenues from the service segment, which is normally lower margin, also boosted by the Core Keeper success and Sniper Elite that they launched, which was a great success for Fireshine.
We have a periodic effect with regard to MMO revenues, where we have a spillover effect from one active quarter like Q4 into a less active quarter, which is Q1. We did not see that effect from Q1 to Q2, and we do not anticipate seeing that kind of effect between Q2 and Q3 either. We also have one larger low-margin strategic project that is carried out in Petrol, which lowers its margin. In conjunction with the discontinuation of the Marvel project, we did not capitalize the R&D costs in Q2, which we did in Q1. Next slide, please. This picture further highlights EG7's diversification as both segments grew from one consecutive quarter to the other in LTM net revenue, despite the challenging environment.
Over the last twelve months, net revenue in the game segment amounted to SEK 1 billion, an increase from SEK 462 million, corresponding to 118% growth, explained mainly by M&A, but also by organic growth. Our foundation for predictable and sustainable net revenue and cash flow is our live games portfolio. The revenue from these assets was SEK 251 million in the quarter, which corresponds to 54% of the total revenues. As you can see in the bottom right of this picture, this portion has been over 50% during the last year. Over the last twelve months, net revenue in the service segment amounted to SEK 708 million, a growth from SEK 421 million the previous year, corresponding to 65% growth.
This is mainly explained by strong performance. Again, we have talked about the strong performance in Fireshine and also in Petrol. This part of the business shows greater volatility and is associated with generally lower margins. Yes, please, next slide. Looking at the game segment, we see that it contributed SEK 203 million in net revenue and a 52% adjusted EBITDA, which corresponds to a 25% EBITDA margin. Big Blue Bubble was fueled by a very successful Easter campaign and generated SEK 43 million in net revenue and as much as SEK 23 million in EBITDA, which corresponds to a 53% EBITDA margin. We have Piranha, who has been trading profitably since Q4 and generated SEK 23 million in revenue and SEK 4 million in EBITDA.
We also include Toadman Studios and Antimatter Games in this segment. Next slide, please. In the service segment, as we have talked about, Fireshine Games generated SEK 142 million in net revenue. I think it was SEK 90 million the previous quarter, again fueled by Sniper Elite, the physical distributed game, and Core Keeper, in the digitally distributed game, which continued to contribute to Q2. That also generated an EBITDA of SEK 31 million. Petrol had a strong Q1 with SEK 54 million, and in Q2, that was followed up by SEK 50 million in net revenue. Due to this large project or large strategic project that they carried out, the profit, or actually, they generated a loss in the quarter of SEK 4 million.
That corresponds to -4% in EBITDA margin, and they had a 25% plus margin in Q1, which shows a little bit of the volatility in that company. Next slide, please. To manage expectations a bit, the first half of the year was strong, driven by a good balance between recurring revenue from the live game portfolio, successful physical and digital distribution of games in Fireshine, and continued strong performance and campaigns in Petrol. The second quarter delivered a net revenue of SEK 463 million, which again corresponds to growth of 49%, an organic growth of 41%, and adjusted for FX, 24%.
Growth-wise, the comparable figures in the service segment for the first half of the year are relatively easy to achieve due to the pandemic situation at the beginning of last year. We have stated that we will deliver SEK 1.6 billion-SEK 1.7 billion for the full year of 2022, which means that we do not anticipate continuing to trade at these way-above-market growth rates for the next coming quarters. Adjusted EBITDA margin amounted to 18%. This is the same margin, as I said, as we had in Q4, but lower than the previous quarter. We anticipate trading at the new normalized level, which seems to be around 21%-22% looking at the last 12 months LTM EBITDA average.
We will be trading around that, plus or minus, given today's mixture of revenue between games and the lower-margin service segment. The third quarter started with SEK 132 million in revenue in July. Next slide, please. EG7's net debt-to-EBITDA ratio and cash position remain solid with or without Innova. In this picture, Innova is included in the left picture up until Q1 and then excluded from Q2. The cash debt amounted to SEK 493 million, which is a decline from SEK 557 million in Q1. This is mainly explained by the fact that we have paid the remaining purchase consideration for the former owners of Big Blue Bubble, which was an amount of SEK 46.6 million.
The cash went from SEK 449 million, including Innova, to SEK 381 million, explained by the fact that Innova was included by SEK 72 million at that point in time, and payment to Big Blue Bubble's former owners of SEK 46.6 million. This means that the net debt to EBITDA ratio came out at 0.28, which is quite similar to what we had, including Innova, by the end of Q1. Looking at the cash flow, the operational cash flow amounted to SEK 64 million and contributed to a slightly increased cash balance of SEK 381 million without Innova. Investments amounted to SEK 114 million, and this is mainly explained by capitalized R&D and the earn-out to Big Blue Bubble's former owners. The remaining movements in cash are mainly explained by different FX effects.
We still have a strong balance sheet and an attractive net debt-to-EBITDA ratio going forward. Next slide, please.
Next slide. Rüdén. Great. All right, so we'll cover some of the looking forward, short-term, medium-term, and long-term here. In the short term, some of the value drivers that we have coming up are that Innova sales should be completed by the end of Q3, removing the Russia-related risk. On the product side for the second half of the year, we have My Singing Monsters celebrating its tenth anniversary, which should be significant growth for the title, especially given its Q2 performance this year with a large content update coming along with the anniversary.
We have Amazon's *The Rings of Power* TV series coming out in September, and we expect that to boost *The Lord of the Rings Online*'s performance, along with the expansion for the title coming out and the upcoming annual expansion packs for *EverQuest* and *EverQuest II*, large updates that perform well every year. We have Q4, which is our peak season, where we expect to generate significant revenue for the quarter. Additionally, we feel very well positioned to deal with the volatile marketplace now.
We have been bucking trends and delivering great results, operating with strong cash flows and strong organic growth. We believe that with our stable and solid base of recurring revenue-based games, we'll be able to generate continuing cash flows, which will be very important during these unpredictable times. In the medium term, we have a couple of areas that should be creating value for the organization. The first is the revamping of our existing live games, three of our biggest games: The Lord of the Rings Online, Dungeons & Dragons Online, DC Universe Online, and Magic: The Gathering Online. These games are being invested in for a medium-term update with the revamp to be able to drive meaningful revenue and profit growth in the medium term.
We also have a new area that we will be focusing on. We are ramping up the development consulting business line. There's a meaningful market opportunity that we have identified, along with the pandemic and the shift to work from home. There's been a significant dislocation in the marketplace where resources have been very short and very hard to come by. This is one of the areas where we have significant assets, currently over 240 developers across Toadman, Antimatter, and Piranha. The plan is to be able to leverage the talent that we have to establish a consulting business where we would be taking advantage of the supply and demand imbalance in the development resources for games.
The combination of our talent and the premium consulting rates currently, as well as our lower labor cost with the team, should provide nice revenue and profit potential going forward. We expect to see upside from this in the medium term. In the long term, we have new products that we are investing in. You know, we have some of the best IPs, both first-party and third-party. We want to be able to invest in these IPs in order to really drive significant upside in the long term. You know, we want to emphasize long-term growth over really seeking immediate gratification through some of the short-term bets that have been made in the past and some of what the market has been really focused on.
We want to shift that from short-term to the big picture where our primary vision is to establish EG7 as one of the leading games-as-a-service companies in the industry. To achieve that goal, we believe it's very important to make long-term investments in our own IP, as well as some of the third-party IP that we currently have access to. In terms of M&A, we will continue to evaluate them, but the M&A market today is very different from where it was 12-24 months ago.
There are opportunities out there, but more difficult to come by, based on sort of the market dynamics that all the companies in the industries are dealing with. We do believe that it's a strategy that we will not abandon, but nonetheless, not as attractive as it was, over the last couple of years. We will be looking at it opportunistically. We will be open to exploring, but our primary focus will be really organic growth, continuing to drive that, and making investments in our long-term growth. Next slide, please. In summary, these are some of the investment highlights for Enad Global 7. You know, as noted throughout this presentation, we continue to deliver consistent performance quarter after quarter.
We have outstanding organic growth, despite what the market is doing here, a number of companies, number of competitors showing slower, in some cases, negative growth, but we're producing very strong organic growth. We have a portfolio of assets which really separates our business from many others, where we have significant amount of stable recurring revenues, and that helps to produce that consistent operating cash flows. During these uncertain times, we believe that having that strong liquidity and credit profile with a stable and strong cash flow is very, very important. We have our portfolio of world-class IPs. You know, those IPs are what's really contributing to our existing performance, but those are the IPs that with investment will also help drive significant long-term product upside potential.
Lastly, we have the insiders, who are fully on board, fully aligned with the investors. A significant investment made this past quarter. We truly believe in the value and the upside that we could bring about with Enad Global 7, and we will be working very hard to continue to drive that significant growth going forward for all the shareholders' benefit. Next slide, please.
Thank you very much, Ji and Fredrik. Over to the Q&A session. We received a question here from Matthias at Kepler Cheuvreux. Could you give some additional details on how you expect phasing of revenue and EBITDA to trend in H2? Is July revenue an indicator for a full Q3, or how should we read into that?
We are reiterating our forecast for the full year, SEK 1.6 billion to SEK 1.7 billion for the year. One month in July should not be just annualized in order to forecast out the remainder of the year. SEK 1.6 billion, SEK 1.7 billion reiterating, but that does exclude Innova. I think I do wanna make sure that the investor community is looking at those numbers without Innova and not comparing it to last year's numbers.
Thank you. Another question here from Matthias. How does the game pipeline look for Q3 and Q4 in the game and service segment, respectively?
In terms of new game pipeline, as we have communicated in the past, we have Block N Load 2 and EvilV Evil that we continue to make great progress towards. Those are games that we are planning on providing additional information and bring to market in the second half, towards the end of this year. As for some of the live service games, we have our annual updates coming out, EverQuest 2, with their big expansion packs coming out. We have Lord of the Rings Online just announced at Gamescom that we would be releasing a expansion in the fall as well, and then My Singing Monsters with significant update for its tenth-year anniversary celebration coming up. Those are some of the highlights of content updates that are coming out.
Thank you. From Rasmus at Handelsbanken. Can you explain the cost development quarter-over-quarter in gaming and services separately?
Are you maybe clarifying the question. When you say cost development, what, are you talking about margin or that
Yeah, it's what the question says, literally. I think he's trying to compare the cost comparison from quarter to quarter, year-over-year.
Yeah. Well, I don't know if Fredrik you could pitch in here, but in terms of cost on the game development side of things, other than the investments that are being made, our headcount has not really shifted meaningfully, so our cost continues to stay fairly stable. Although, you know, annually, you know, every business has their cost of living adjustments that we have to make. Given the current market circumstances with inflation running very high, there are adjustments that we had to make this year that did increase, you know, compensation and some of the costs a little higher than we have historically done so.
We do believe that, you know, as a global economy and a lot of the monetary policies continuing to be utilized to fight inflation, that some of the changes that we had to make on labor costs, et cetera, would be temporary this year versus something that will persist going forward. As for service segment, similar, not a lot of changes in terms of costs other than I think depending on what kind of service, especially Petrol, for example, is engaged in big campaigns for games like Call of Duty. They do have to deal with third-party in order to produce some of that content, and some of that third-party content cost is also going up a little bit.
They're dealing with those type of changes, but overall, organizationally, not a significant increase in cost overall.
Great. Thank you very much. From Hjalmar at Redeye. How did you look at the low margin product for Petrol? Does this happen from time to time, or how should we look at that?
Yeah, I mean, sometimes it's the relationship. You know, that refers to one of the biggest product announcements that Petrol was engaged in with Call of Duty: Modern Warfare II. You know, it garnered significant attention, but it was one of the very few instances where it wasn't just digital, it was actually physical. I encourage people to look it up online, Call of Duty: Modern Warfare, Faces of War. Phenomenal, utilizing you know one of the docks in L.A. in order to create this amazing visual masterpiece of showcasing Call of Duty's new key art. That was an engagement where it wasn't all about the profit, but rather showcasing Petrol's capabilities, expanding the relationship with Activision Blizzard.
As we talked about in the presentation, they're no longer just doing Call of Duty. They're engaged with Diablo. They're engaged with the live service element of Call of Duty as well. Not that it's a loss leader, but nonetheless, it's really the all-encompassing relationship that Petrol is focused on when they're engaging in some of those contracts. Additionally, though, I think one thing that is not presented is there's also some mismatching of revenue and expenses that all of us, all the organization have to deal with in terms of revenue recognition. As Fredrik mentioned, our first quarter profit margin for Petrol was very high at 25% or more. Whereas second quarter came in at that negative number.
The part of the reason is because of that mismatch between revenue and expenses. Some of the expenses from first quarter is bleeding into the second quarter, and some of the revenue recognized in the first quarter could have been recognized in the second quarter. Those variances do create some volatility in margin. We do encourage that we look at the really 12-month average, because really that's the right way to look at it, especially given some of these deferred revenue and expenses that do run through a number of our businesses.
Great. Thank you. Another question here from Hjalmar at Redeye. Could you clarify what you mean with the margin going forward for 2022?
Yeah. I think this is definitely worth some time where we should really explain, and it's very simple math. Innova has been an important part of our organization. We acquired that business, closed on April first, 2021. For 2021, we had owned that business for 9 months. During that period, Innova contributed 15% of net revenues for the group, and then they generated for that 9-month period average margin of 36%. When you look at the weighted average contribution from Innova, it's literally just 15% times the 36, and then you get to 5%.
That 5% margin, where prior to Innova being excluded as an asset that we're going to divest and prior to Innova having to deal with Russia and Ukraine situation, where they were operating on a normalized basis, their weighted average contribution to our overall margin was 5%. Now that they're no longer going to be included, our margin will go from 25, 26, 27% down by 5%. Hence the reason why Fredrik guided to that 20%-22% as a go-forward margin. That 20%-22% margin is coming from two areas, right? We got game segment, we got service segment. Game segment operates at that 26, 27, 28% margin, which is healthy. Service segment, while it's growing and performing really well, performs at a lower margin.
We do wanna make sure that the investment committee understands our business. We have one side of the business with really healthy margin, another side of the business, which is very important too, but it's operating at that 12%-13% margin. When you combine the two and look at the blended average or weighted average, excluding 5% contribution from Innova, we're going to end up at that 20%-22% normalized level going forward.
Thank you. A question on AMG and the path of '83. Do you see any risk of a potential write-down on that game or the logic behind the path?
Yeah, the logic was pretty straightforward. You know, Antimatter Games is not a big studio. They have about 50 people, and under prior management team, they were trying to make progress on two games, IGI and '83 at the same time. They were doing a good job, but at the same time, not ideal. We made the strategic decision to sequence it so that we dedicate all the resources to completing one game versus making limited progress on both. They will sequence IGI as the first title to finish. Thereafter, they'll be rotating back to '83. Having said that, are we going to evaluate where '83 is further and decide whether we may wanna ultimately ship that game in 2024, 2025?
That evaluation will happen still, but nonetheless, the initial decision around us pausing development is based on our strategy of being able to complete one game versus making limited progress on two.
Thank you. A question here on Fireshine. How do you see Fireshine going forward for H2, following the success with Core Keeper?
Yeah. You know, they continue to perform well. Core Keeper came out as an early access title, you know, towards the beginning of March in the first quarter. The early access title means that it came out on Steam, it's not a completed game, it's really a beta release. Then there will be a final release when that product is finished. Once that product is finished, we'll be shipping it not just on PC, but also on consoles. We believe that there's meaningful upside.
Already sold 1 million+ units on Steam early access alone, and once we complete and are able to ship on multiple platforms, including console, which has a big market for a type of game like that, we expect meaningful upside, not in the second half, but that's likely in 2023. As for some of the other games that Fireshine's working on, they continue to build out their pipeline of digital releases. Most of them are indie titles, as well as some of the physical releases that continue to work with Frontier, Rebellion and et cetera, their long-term partners that provide premium products, and Fireshine handles their physical releases. So they're doing well. For the second half, you know, product release pipeline, it is volatile, right?
First half, Core Keeper did better than we expected, significant upside that we saw in Q1 continuing to perform well Q2. We expect that game will continue to do well for the remainder of the year. As for some of the new products that may be coming out in the second half, there are other interesting products, but we don't wanna, you know, sort of make promises in terms of how they're going to perform other than to say that, Fireshine continues to build out their pipeline, and they'll continue to execute well.
Fantastic. Thank you so much for the answers and for the presentation, Ji and Fredrik. I think this is all we had for today. For everyone who's tuned in, thank you very much and we wish you a great day. Thank you.
Great. Thank you, everyone.