Earnings Call: Q1 2021

May 25, 2021

Hello, everyone, and welcome to this Q1 presentation with EG7. With us today, we have CEO and Co Founder, Robin Fludin, who will go over that report. And I will come back afterwards for the Q and A session. So over to you, Robin. Thank you very much. And I also want to welcome all of the investors and also all of the gamers that I know is always watching. I know that you're always very excited about game announcements, I want to remind everyone who's a gamer that those who come through our gaming channels, but you're very welcome to sit in and listen to the strategy of the company. So let's get into it. This is the best quarter in EG7's history, and I'm extremely proud of the team's performance to be able to deliver this. We've had 100% increase in revenue from last year's quarter 1 and 500% increase in profit EBITDA level since quarter 1. We also closed a €1,100,000,000 transaction in Nova Games, which is really furthering our strategy. And we're also looking at growth throughout the year, both for Q2 and throughout the year. So I cannot say that I can't be more excited than I am right now. The vision that I created back in the day when we were just starting out is coming true, and we are really setting up ourselves for the future. ED7 as a company It's an ecosystem for video games companies. We have 3 major ways that we generate our revenue. These ways R through our world class IP portfolio of live and premium titles, where most of it is generated 80% from live titles. These are games that are constantly out there being updated and consumers are spending in them every day. This creates a really solid rock for our company to be able to grow in the future. It's a baseline and it's a growing baseline. With Enova, we also added our own platform, which we're going to talk more about, but it's a very exciting combination with all of the live games that we have. And then also, of course, our world class service platform. Something unique to us where we created a way where we really thought about what are the pieces needed for a video games company to be the most successful at Cannes. With all of the pieces sitting together as a M and A strategy, as a buy and build, How are we actually giving these companies coming into the group a bigger reason to be part of us, rather than just sitting and having a bunch of assets. These are about how these assets become stronger together. We are also very happy to see that on a rolling basis, on annual, It's €2,000,000,000 in revenue from the company and €600,000,000 in EBITDA. If we look back a little bit quickly, we can see in 2015, we were a small consultancy studio. And in 2017, we listed the company with a vision and idea. And from that day, an 11,000,000 in revenue, we've been growing massively. Over 3 years, we've had over 300% CAGR in the company, both through our very aggressive M and A agenda, but also through organic growth. And we've now created a really strong company in the video games industry that is set up for further growth with strong IPs, with a platform and with our world class services. And once again, I just want to stress, I cannot be more proud of the team that I have behind me and all the people that are working so hard to have made this possible. So if you look at the actual numbers, doubling the revenue since Q1 last year, 500% in profit increase from last year. And we are growing still. And you can also see that just as we've been telling investors, our margins are significantly increasing. And this is something that you can expect going into the future as well. Something that we've always said, and I think This is important, you know, things being consistent about your strategy and executing on that. It's always been that we want to control the value chain. We think that this is crucial to have our high margins, to be able to actually supply our IP and the way that IP is interacting with the gamers, That we control the full value chain. And Enova is really a testament to one piece in this continuously building puzzle How we are putting all of this together. And we think that now we've really established our way all the way through that we can sell through to the consumer and control it all the way there. And we think that you're going to see all of the upside from that as we go forward in time. Today, the company has an IP portfolio of live games of world class. Both some of the best licensed IT in the world, like Lord of the Rings. Or, as we can see, with our own games like EverQuest, Which has generated $1,000,000,000 in revenue and has an amazing amount of fans or H1C1, which everyone Always are so excited about what we're going to do with in the future. Today, 50% of our revenue On a pro form a basis, including Enova and Piranha is coming from these live games. Reoccurring revenue, stable and growing. Which is also coming from live games directly from consumers, diversified between 13 different games. We have 16% of our revenue coming from there. And then our world class service platform with 22% of the revenue. And here, I think a lot of investors usually ask me, Do you see that this segment will significantly grow? And I always said from the beginning, when this segment was quite a large part of our revenue, No, I think that the gaming segment will outperform in terms of growth. But it is very much because we have this segment that we can then outperform even more Than what could be normally expected. And I think that that's very key. But you should still expect that we could add more things into our service platform if we believe that this we'll further grow the company, but you're going to see the growth coming mostly from our platform and from our live games. ED7 is a global company, and this was a core mission from the beginning. Games are global, And they're becoming more and more global for every day. So also having a company that is truly global has always been our strategy. And we keep thinking this way. And you're going to see more acquisitions on a global scale, games that are launched globally, and fans all over the world. And already today that's true. And I'm super happy to say that even in Antarctica we have players live right now. Incentive structures is a key element of how to work together and achieve success. That's why I'm super happy to say that today in the company, Board and Management hold 51% of the company. We are very much aligned. So let's talk about the growth. So I've told you We have stable revenue, we have growing stable revenue. Something that you can be predictable, something that is a really strong base for investing in games and doing more things, IPs that we can do expansions and sequels to. But how are we growing? How are we significantly growing into the future? And here we see 4 different things. We are going to put our games on the 4 game platform. This will make sure that the gamers can come into one place. And this means that it will spread out. And we know that this creates revenue increase on the different games. We will expand geographically as there are several of our live titles right now and the platform that has not been utilized on this geographic location, and we see this as a low hanging fruit and a great short term expansion of revenue and profits. And then, of course, very importantly expanding the games and new titles. And then last but not least, we're going to continue our very successful M and A strategy. So if you look a little bit about 4 Games. So why do we think that this is really interesting approach? Well, with 4 Games, of course, we get better margins. We are on our own platform. And today we have many of our games on the own platform, but they're all spread out in different places. So gamers has to go to many different places to achieve this. What we see is that there's a revenue uplift in the 4 game platform for every new game launched around all the other games. Because consumers see new games and they want to go in and try them, and they have one way to interact. And this improved way for us to funnel and channel marketing and everything that we do into one place will increase the revenue and performance of all the games together. But then, of course, it's also where did this platform started. So for game, it has the licenses for this IP that it does In the European CIS territories. But what was the biggest reason? Why didn't it grow before? Well, it didn't have the IP rights to be global. But today we have some great IP, we can decide. So now there's nothing limiting us for growing the platform globally. And this is going to be also something very interesting. And then we will look at the games. So already today, we have several initiatives Stade that are expanding the current live games in different ways. It's new expansions, new content, updating to the modern standards, the new platforms and giving gamers something that they really want. And then of course it's also our new titles. And in the new title segment we also want to say we have a new MMO in the works. AAA MMO and one of the greatest brands in the world. And then of course, our M and A. We've done 8 different companies throughout the 3 year span. It's about 2 to 3 companies a year. And I think that this is very important when you look at our strategy. We are very fast running and aggressive when But we only select the things that fit in our strategy. We are very active with the companies. We integrate the companies. And this requires time and consolidation. But it also has a future proof upside where these companies actually fit together into this group. And this is part of our core philosophy, our strategy and the way we operate. You can expect us to see more M and A for sure. But these are going to be the companies that we've truly and chosen to be the right ones. And this is something that I full heartedly believe is going to be what leads EG7 to So why should you invest in EG7? Well, I want to say that, first of all, there's many people who have started trying to do similar things to us After we were first with coming up with our service platform combined with the video game space and the way that we do it, many others who also want to do an ecosystem for games. But we've already applied this strategy for several years now. And we are winning many engagements in terms of M and A with lower prices paid because people want to be part of EG7 and our strategy, because we're selective, Because we don't pick up every company that comes along that we could have acquired. So these are very important parts. But we are also based on high IP, some of the best IP in the world. Diversified, solid revenues, high margins, And we have upside option potential going into the future. I think that there are a few companies that have all of these characteristics that you can look at in the gaming industry. And we have been the best performing in terms of growth video game company Great. Thank you, Robin, and congratulations on a strong quarter. If you would like to pick just 1 or 2 highlights from the report, what would that be? I mean, there's many things that are very exciting. And I think it's truly starting to show all of the great things. But let's say, 100% profit growth, 500 percent profit growth and 100% revenue growth. I think it's just amazing and continuously seeing growth. I know many other companies might see that they're not growing. We are seeing growth throughout the year. So I think that that's extremely exciting. And And there's even more to come. So Okay. So we have received a lot of questions already. And you can keep them coming by e mail. You can send them to irenadglobal7.com, and we'll get through them as we go along with this session. So you closed 2 acquisitions during this quarter, Piranha Games and Inova. How do these companies change the group? I think both of these companies was very good to add to the group. I mean, soon we're launching Macquarie 5. Now with the combined work of Petrol and Sold Out, joining in to help out using our different channels to also support the marketing efforts towards all the gamers that we have, which they could have never done before. Being able to Towards all the gamers that we have, which they could have never done before, being able to add the kind of marketing value that they actually needed for the game to launch successfully. So this is just one example of how a game company like that, and we need strong game companies that can work on expanding our portfolio and expanding all of the great that we are having in our portfolio. So Piranha is a great addition to that. And then we have Enova, which really, you know, is, I would say, It's a perfect match for us. For us, we've already been looking at how do we consolidate to a platform in this way. And then, you know, here we have an established platform generating revenue with a great management team, very, very good at what they're doing, Which just matches perfectly with all of the games that we have and are about to launch. And this means that for every game that we launch, now, you know, Let's say we launch a title like Evil versus Evil, and we spend a bunch of marketing towards that into the platform. We're now getting even if it would be poor result on the game, We get extra results from all the other games, right? Because people might come in and say, I didn't like that game, but I like this game. So it is going to be, you know, generally, it's very much fits Into our approach and our thinking around how to really control the value chain. And I think, yes, I couldn't be more happy with The company, Norman, also the fact that they took 100% shares. I mean, that shows you that they truly believe in what we're doing. There's an upside there, yes. So you booked revenues for SEK346,500,000 during the quarter, but you also mentioned that on a pro form a basis, revenues were SEK 2,000,000,000. Can you explain that big difference? Yes, of course. And That's on a 12 month rolling basis. So I think that this is just there are some things that moved out of the quarter, Like, for example, sold out, have some big launches and so on that affected the revenue for the quarter that will be happening in the future. But I think that In general, we are performing really well. And like I said, it's also that you add in, of course, Innova and Piranha, which wasn't in this quarter, which is important, They will come in the next quarter, consolidated. Okay. So we have a question coming in here from Daniel. How is the rest of the year looking in terms of M and A. What does the pipeline look like? We have an extremely strong pipeline in M and A, and I would say it's really stronger than ever. And then people might ask, when is it coming? And I can't say, of course, but the truth is that We have a very selective approach. And we've also been very much working on integrating these businesses that we have now and looking at what is the next step, Which companies of all of these companies we're talking to is the right approach. So I would expect more, but I can't say what. I see. So we had another question that came in earlier. 80% of revenues were reoccurring. How significant is that? I think that is I mean, compare that to any other video games. Most companies are based on launches, right? And we have most of our revenue in very, very stable games that have been around. Some of them, EverQuest 1 has been around for 22 years. I think that that gives us a very solid base, both for investors is sort of a bottom line of the revenue, right? These games has that sort of staying power. It's not just a hit. It's just not something that came and went, right? And it's not, you know, so you could say, okay, maybe mobile games have Similar characteristics, but usually that's they still launch new games all the time. Very few mobile games have staying power, right? They go in and they go out and go in and go out. We have games that have generated these stable kind of revenues for a very long time. And now we're also seeing a lot of growth opportunities. So I think that that's I mean, that's few companies that have that benefit, and we're very happy about it. We also had another question on revenues, 63% of the group revenues originate from live titles. Do you want to comment on the significance of that, the live titles. Yeah, I think, I mean, we've always said that one of our key ways of thinking around the games that we want to have is we think about long term communities. And this fits perfectly in that because we can serve these gamers constantly on a rolling basis with new content They want the new things and the thing that they love. And it creates, you know, a stability that few other video game companies have. But it also means that we can do we can put in this expansion and new things and be quite sure that we're going to be able to make the money back and then have new bets coming up, right, both in the terms of the IP that is very strong, but also, of course, in new games as well. Yes. We just put this in a very strong position. So we had another question that came in on the COVID-nineteen effects on the marketing agency, Petrol, Troll and the Publishing division in terms of sold out. Do you care to elaborate a little bit on how the pandemic has affected the company during the quarter? Yeah. So there's been some things that have been pushed into the future because of, partners having issues Launching games, which we all know, right? But on general, we've been performing really, really well on average in the company. So I think That's just going to be exciting for us going forward as we're going to see a lot where we do see those things are still coming. They're just coming Looking forward in this year. Okay. We have a question coming in from Johan here too. How do you see the mix of income from your divisions, games Conservices going forward. So we truly like I also commented on the presentation, we think games is going to be the growing massively growing part of the business. While services still going to grow, it's going to be is not where we put our focus in growth. We put our focus in using the service division to help grow our games division. But I think that is it possible that we have more service companies and in that way that revenue grows significantly in that acquisition? Yeah, sure. That's possible, but it is not our major strategy. We're focusing on IP now and games. We have a strong service division. Might be some things that we can add in there. But in general, we're quite With Veritas is today. So if you want to point to a few key figures that are the most important one for shareholders to keep track of when it comes to the performance of the company. What would those key figures be? I mean, I want to say that they're quite good, all of them. But I want to point them out. I think it's a high margins that we're able to produce, especially if you also take out some of the one time costs that has happened in the quarter. And a lot of this is just through all of the things that are happening in IFRS. We're not doing that again. The transaction transition to IFRS, of course, took a lot Time and efforts, a lot of these sort of short term things as we're restructuring and fixing That's the accounting standards that you Exactly. And IFRS, of course, Massively increased SEK 600,000,000 to the result because we don't have to downrise or amortize the goodwill On a linear basis, though that, of course, affects the results positively and gives a much better understanding of what's actually going on, I think. So we need to address this question, though, because we do always get a lot of questions about it. What are the highlights in the game's pipeline coming forward? We're seeing a lot of questions from fans about H1, C1, for example. I mean, you saw the games that were up there on expansions. I think that that's where I have to leave it, that we are having several initiatives of what we're doing with the IPN games that we have. And it's definitely part of our strategy. Do you have any updates on major game releases such as MacWarrior 5 and Evil versus Evil or we do get questions about this that are expected to be released during the second half of the year. Any updates. Yes. So Macquarie 5 is coming in, I think it's 2 days now. Very exciting. And hype is starting to build. So Let's see how that goes. We're very keen to see. But then I think Evil versus Evil and Blokken02 is scheduled to come out in some way or form throughout the end of the year. So that's also looking very good. I think on the development side, we're very, very happy. But I think something that we also said, and I can repeat this for those investors who haven't heard it, is that we really see that these free to play types of games Don't really benefit from a big hype up. You're just wasting money, right? You want to spend when the consumer can't have a call to action and go in and play the game. You don't want to spend before the game comes out. This is more traditional. This is what we do for premium titles. It's all about spending up until launch, Getting people in the game rather than the sort of long term spending of getting people constantly coming back in a free to play game. So I think that That's also something that people should expect, but we're looking good for those games, absolutely. Okay. So we have a question coming in from Frederik. What are you currently missing in the System. Any specific type of companies you're looking for in your M and A hunt? Yeah, I think I mean, the good thing about all these pieces now is it's very scalable to add new games companies with IP, you know, into this platform, into our systems into the way that we start operating the Oslo business. So of course, we would like more IP and more game studios that fit in today's or game studios that can help with development. But then, I mean, are there small pieces in terms of platform? Absolutely. But I don't see at the moment that there are any specific ones that are the most key that I wanted to at least want to talk about and to not give our competitors an edge in looking for them. But I do think we have everything we need there. It's really just building out IP in games that is the most important for us. We have another question there from Frederic. Any changes to the game's pipeline strategy? Will you continue to develop your own IP or what does that look like? Absolutely, I think that that's but it's all about what is the size of that bet. And I think that what I really like about our strategy is that now and this was I If you go back and listen to me, you can see that I'm talking about this. One of our strategies with M and A was also producing an area, a way to create a company that is able to generate revenues on this sort of more predictable way so that you can invest in the game long term because new IP is very hard to predict How long it takes to develop. It's a lot of R and D. It's a lot of figuring out things. And then if you imagine that maybe a while ago, we had a huge bet on these new games. Now the bet is much smaller, but it still gives you that huge upside potential. If one of these games are very successful, It could double the revenue of the company, right? But if they don't, they don't hit us in any major way. There's now there's no big risk to it. And then we can keep having a certain percentage of the company's profits, betting on these really great potentials. Some of it is, of course, betting on the things we know. And then some of it are just generated revenue from day to day And I think that actually is a really strong gaming company. Right. So the revenues are more diversified that way. So can you talk a little bit about how you work with synergies within the group when it comes to development, marketing and distribution? Yes. We really worked a lot on how to integrate and work together with these companies. And I think that that's something that And if you compare, there are some consolidators out there that mostly just own assets. And then they put them in some different ways in the group, but they're really just owning assets, so you're just a holding company and managing that well. I'd call it the Berkshire Hathaway principle, which is a really good strategy. It's just managing through balance sheet. But we are managing in a sort of semi active. We're constantly engaging with our entrepreneurs. We're trying to we're a company, not just a consolidator. We are managing strategy from a group level, helping the companies together, work together. And it's from a group level, helping the companies together, work together. And it's bringing in Petrol to really for marketing strategies, talk about How can we prove it? And we've done some tests on this on the live games and already seen significant uptick in revenue from these synergies and the things we're bringing in. You have BigBluebubble bringing out the console version of My Singing Monsters, sold out is helping out, bringing it to stores and so on, which was never the plan before, and already creating extra revenue that wasn't there previously. So is that an advantage in your M and A strategy, Jen, to be able to offer more than just cash or equity? Absolutely. And we know that we won several of our acquisitions at lower cost to the acquisition. And because people believe that this strategy is the way to go in this business, Well, at least many people believe that in the video space, they seed all of the upside to this and then they want to take the share and be part of the upside. So we have another question coming in here. What can investors expect from EG7 going forward? Kind of a broad question, but if you want to pick something in particular to highlight. I mean, we are in a really great momentum at the moment. We have been Throughout last year and still, I mean, we are working extremely hard to forge all these pieces together. And I think what you're going to see from that is As these synergies start taking effects more and more, you're going to see more growth. You're going to see margins improving and you're going to see some new really cool investments into game and expansions that will further give multiples of upside into revenue potential. And not just, let's say, that organic growth is somewhere around, let's say 20% a year, but then this could create these things that we're building could create instead of 20% is 100%, 400%, 500% maybe revenue increase If they do well. And I think that that's going to be something that I think about a lot is how do we create this. It's not just how do we sustain, grow and have a margin, but also how do we become 5, 10 times bigger as a company through great content and through adding some amazing companies to the group. Well, that's about all the time we have today. So we have to wrap it up here. Thank you so much, Robin, for joining us today and thank all of you who tuned in and watched us live.