Earnings Call: Q2 2020

Aug 27, 2020

Hello, everyone, and a warm welcome to this Q2 presentation with EG7. With us today, we have CEO and Co-founder Robin Flodin, we are very eager to hear about today's result and also a bit on the transaction today. With those words, I will hand it over to you. Thank you very much. For everyone who don't know EG7 at this time, EG7 is a video games company listed here in Swedish stock market, make marketing, developing, publishing, and distributing video games for console, for PC, and now also for mobile. This group also has one big feature to it, that is that we have a buy and build strategy, which we think is a very important part of the company. Our specific approach to this is that we also try to really create strong synergies between the different companies and add a platform to those companies. We have a service branch that are not that common in the game industry, combined with our game IP and development. This leads us to our latest acquisition that we did today, Big Blue Bubble. With that, our 12 months up until Q2 on a pro forma basis would have been SEK 681 million in revenue and SEK 95 million in EBITDA. That's something we're super happy about being able to announce today. Jumping into the Q2. We've had over 1,000% of net revenue growth from last year's quarter two. Super exciting. We've also spent this time doing Q2 to consolidate Sold Out and Petrol and all of the new businesses that have joined the company and been ramping up our M&A strategy. We now have even more projects in the pipeline. We've signed new projects, and we've also released some big projects together with Sold Out, for example, No Straight Roads, which has already been profitable for the company. That's something we're also quite happy about. Petrol, who we were afraid would not perform as well as we expected due to some projects moving out with the COVID effect, has performed really well, and we're super proud of the team for working so hard on delivering that against expectations. We have also a stronger pipeline of M&A than we've ever had in the past. The pro forma numbers for Q2 is SEK 189 million in revenue and SEK 26.6 million in EBITDA. We also now have 270 employees, quite a big jump. More developers. Really exciting for the future of what we can do as a developer. Let's jump into the transaction and the company that we announced this morning, Big Blue Bubble. Big Blue Bubble is a mainstay in the Canadian games industry. They have offices in London, in Canada, not in our other London office, and then also in San Francisco. This company has been around since 2004 and been starting out very much like Toadman, a consultancy studios that has eventually been able to grow their own IP, but worked on over 100 plus titles, some really major titles, and work with Disney, Activision, DreamWorks, and many other companies that you might have heard of before. This company is really good at free-to-play, but have their heart and soul also in console development. This is one of the things that we really liked about this company. They have own IP that is generating profits, 2 million active users every month, and good revenue and reoccurring revenue and profits that are growing. Today, the company on a trailing 12 months would be CAD 12 million on a revenue basis and CAD 3.5 million on an EBITDA level. For us, this was really a company that could have several really good fits for us. One was that we got IP that are generating profit, something we have promised to look for as an acquisition strategy since we acquired or raised capital, SEK 119 million. This also improves and secures our other titles through experience. Free-to-play experience is something we really wanted to get into the company for titles like EVIL, but also makes Big Blue Bubble's launch where they don't really have a publishing unit or marketing unit in the way we do, and they have Foregone this coming out as a premium title. We hope that these things really push together, creates a super strong synergy situation, especially as we have this very experienced team that we can help make sure that our games are better, but also get this window now into mobile where we could probably move other IPs into mobile. That's something people have asked us for, and we always said that the only way we would do that is if we have something like this, where we have a company that could give us that experience, not trying to build that up from scratch, but have something that already works. The transaction in itself, CAD 16 million up front, which represents 4.6x multiple on EBITDA, which we think is a very good price, and also, of course, an earn-out that if they get it, we are very happy, and I think all shareholders should be. Even though it is quite big, it also means they have delivered amazing results. As you know, this is also active reoccurring revenue, so that will be very good for the company. We think that it's also very important to see that adding these 2 million active users also gives us an ability to cross-market and do many other things that will help the rest of the business. The experience of those 100 titles, we think also will secure even more with looking at things like Antimatter. Here we have another studio that has many times delivered very high critically acclaimed games to make sure that our titles internally are the best they can be. Let's jump back into EG7. One big thing that happened in the second quarter was that we divided the company into two divisions. Traditionally, we would have three. Why did we do this? Well, one was structurally, we wanted internally to be very clear about the different parts of the company, who is working for what, but also to make it more clear for investors, looking at the company, what is part of what. You can see something like games, for example, where maybe we have heavy investment into games, then that lands in the games revenue segment, then also profits from those games will land in the game segment, while services represents our services in the companies, for example, our consultancy or our marketing, which is quite a different form of business. That's why we thought it was very important for people to see this is how we have seen it for a while internally. Now we've chosen to start talking about it in these terms, both internally and for investors. This has been part of our consolidation efforts. In this case, Big Blue Bubble ends up in the game segment, while some companies, like Toadman or Sold Out, exist within both segments, depending on what part of the company we're talking about. Something else that I think is super important to understand with something like Big Blue Bubble, why would they be super interested in joining parts with us? It's not only because they have a charming personality, I'm sure. I think that it's very important to look at our platform that we've been talking about. They saw the value in this. This is our long-term goal is that we want to be the biggest smallest company in the world. This is about taking efficient companies and letting them take the scale of a bigger business- remaining agile. That has always been the goal of the company. It's something that many of these businesses love. We keep the culture, we let them run the business the way they are very successful at doing. We add this scale that something like an Activision or a big company could give to them. This is something we're scaling up to be even better at. It's not only to them, a view that, of course, they're transacting, they're getting shares, they're being part of the company. They also have this feeling that they, together with us, will be very successful in the future. That's also very important to understand when we do this acquisition. We talk to them, if this is not what you're interested in, this is not a company to work with. They were super excited about it. This is also in future transactions seem more and more as something that is unique if we compare us to some other parties that also do buy and build. If you jump into M&A, our company is really formed on the holding company level. The EG7 is really about this. We support the businesses, we work really hard with that, integrating between them, finding ways that their knowledge can scale each other. We are running faster than ever on new M&A targets. We've added M&A team in the Q2. It's become more efficient. Now we have more opportunities than we've ever seen before. It's a very exciting time for us. We feel that as things are becoming more and more clear, I think investors will see that our platform is very efficient, both in excitement over adding these new companies, IP that we can generate profit from, but also increasing those profits with the help of our service platform. We jump down to the next slide, we're going to see what is the result of this. This is, of course, a massive revenue increase just in this quarter. Like I said, 1,000% from last year, second quarter, the first quarter, 1,000% in revenue increase. We're hoping to keep this trend of being able to really push. We've also added 30% EBITDA through this acquisition, which we're also very happy about, which I think should be mentioned. Jumping into global view, I think it's very important in a business that is global, where people play globally to understand a global business in a global way. That's how we also feel about it. We don't care so much where a company is, but that it fits with us. We do like expanding into new territories because it teaches us a lot about the gaming space and opens up new doors into those spaces where there might be new interesting companies that gets the eye up for us as a business as well, and also understanding that local market in a better way. This time it's Canada, of course, opening a new office in the U.S. as well, in San Francisco, and also getting two really great names, Damir and Claudette, who's the founders of the company, on board to help us become even more successful in the future. In this also, we can see, have now an even bigger track record than ever before, adding 100 titles on a track record plus our 50 that we had before, 150 titles. This should be telling a story, I'm hoping, to investors that we are getting more and more experienced, and we're using as much of that experience to be more successful in the future. It's not only about what happened in the past. We also see that it's super exciting that we are getting more and more titles because this is an industry where even a talented team can have hardships, but portfolio play means that it's getting greater and greater option value for a big success. Before this call, we were talking about something like Fall Guys, that's a great example. That can happen, all of a sudden, let's say one of these games that we have in this pipeline of 25 projects can multiply our revenues by more than we have today. If you jump into 2020 so far, six months of the year, we've done some really good releases which has resulted in this revenue. Also very recently, we released No Straight Roads, and it's been received quite well. Both on a sales basis and also, of course, we've been profitable already, which we are very happy about. Like I said before, not only the past, but 2020 as it's ending, 2021 and 2022. In our view, 2021 and 2022, when Toadman and Antimatter are getting out with most of their games, we find even more exciting. That's going to be very big for us. We are getting more and more products signed out for Sold Out as well. Now also Big Blue Bubble, who's adding something like Foregone, which is a console title at the end of the year. If we look at EG7 as an investment, I think one thing that's really great right now is that we feel we have a great market position. We are not too big to be slow in the way we move ourselves, but big enough to really start getting that benefit of scale and getting more and more interest. We see that we have better-than-ever potential for M&A. There are a lot of IPs that we're looking at, also, of course, we see a lot of opportunity for further digital investment through Sold Out, like No Straight Roads, both acquiring titles or investing internal in titles. Another part of investment into this company is that we, at least me, as the biggest shareholder to date, I find it very important that this isn't a story about a management team that takes huge bonuses and walks away. This is a story about a team that really care about creating shareholder value. That's everywhere from me to all of the management team and all of these companies that we have acquired. They have a strong vested interest in us being successful into the future. 65% is held by management, these people, and the board. That's a very big part of the company today. Investing in this company, taking part of the gaming industry, growing trend, we have a lot to go. There's a lot of growth potential for us as a business. I think that's super interesting. We have an M&A team that's shown over and over again that we're able to do deals like this and attract more and more talent into the company. I think that this is going to prove over time to be some of the strongest reasons to invest in this company. We have a bunch of questions here to ask you, both from us at Carnegie, but also from our previous conference call. I guess we'll just get right into it. Yeah, jump in. You just stop me if you ever get tired. Starting with, I think on the M&A side, I guess that's most interesting newsflash of today, the acquisition of Big Blue Bubble. If we start with the considerable earn-out tied to this deal, and it's all, of course, conditional based if they succeed. Can you talk a bit on what kind of milestones do they have here? What kind of timeline are we looking at? I would say, when we talked to the company, they really saw a massive increase in their ability to generate profits in the future with some of the stuff they're working on. We said, "Okay, let's put that to paper then." If they do as well as they think they will, I think all shareholders will be very happy with paying them that money. It will be a really good deal for all of us. If they don't, if they keep doing what they do today and grow at the rate they have been, we won't be paying that amount of money out, but we are still happy. We've really tried to make sure that this is a deal where they feel really motivated to succeed as big as they think they will. I don't think any shareholder should fear that this will be negatively impact the company. In the other way, this is a motivation for them to perform better than ever. Mm-hmm. Yeah, of course. Can we talk a little about this asset specifically, split revenue per game? What does the concentration look like in terms of their title base? Their mobile titles is most of their revenue today, but that's also because console. Maybe they have 15%-20% on console, then the rest is on mobile. The biggest title is "My Singing Monsters," of course, and some other auxiliary titles. Across that, they have 2 million active users. But of course, one of the reason is they've done mostly mobile for a few years now, while their history is in console, and now they're coming back into console as a strategic move that they've been self sort of feeling this, that there's an intersection there. That's something we talked about the team too, and we feel the same way, that it is starting to become more of an intersection between these two areas. I think that we should also see what happens when these console titles come out in terms of revenue will, of course, be affected by that. Talking a little bit about their historic performance, what kind of growth rates have we seen in this company prior to joining you today? Maybe at 20%-30% a year in growth in both EBITDA and revenue, which stay quite static over the last three, four years in terms of margins and so on. Do you want to say anything about how much you think you can scale this now joining your own platform? I'm, of course, hoping that they will get all the earn-out. Let's just say that, then we can say, what would that mean in a good multiple. for all of us. Let's continue on M&A, more on a general note. First maybe on Big Blue Bubble, how did you come sourcing this deal? Also maybe background on how you typically source a transaction you find Yeah. Usually we source the network. This time, we brought in a new team of M&A, and they have been growing our pipeline by connecting both through their own networks. We have Chris Bergstrasser, who is the COO of the company in the EG7 Group, who has a strong track record of M&A in the past. From Konami to Sega, president of Sega Europe MTG here in Stockholm, how we got connected with him. He's used his network in some ways to find target, Also through our team. There are several people there now that this is what they do. They go talk to these companies and try to get more companies in, Of course my network and so on keeps using that. Also the network effect of these companies. These companies gives us their network and saying, "Hey, these guys are great to work with. Do you want to come aboard?" So that's also increased our pipeline quite significantly. The hardest part is just finding, it's about timing, it is about working up these relationships Of course, we look through a lot of companies, and they might not be the right fit. As the pipeline has been increasing, we see now that we're feeling very positive about the future of M&A. Even more than before. Of course, we've been positive before as well, but I think this has increased. The more we see, the more we will land in some really great deals. How many deals do you think you could, based on the current company structure you have today, carry out every year? What is the limit that you see? I would say that limit is increasing as we are able to scale. At the end of the day, we don't want the M&A team to be most of the revenue of the company. It's a little bit limited on people at the moment. We can't look at enough deals, to be honest, and we have more things coming in that we are able to negotiate internally. It's really now a matter of the M&A team to make sure we have all the people in place that we need for all of the stuff coming in, to be able to do it in a better pace. Of course, we don't want to move in a place where we're not able to integrate and do the things internally as well. Because of the structure we have, we think we could do, I don't know, several more this year possibly, but we're not going to do it if we don't feel that it's a great acquisition and that we agree on the deal terms that we think is favorable. How do you divide your time? You're arguably one of the most important people in this company in terms of looking at new deals versus deploying capital into the projects. Yeah. I wish I was the most important. I think it's important to see also that we are a team. Right? I think this is my most important role is to managing the team's directions, and I sometimes feel more like I'm the internal connector. I'm the person that talks to everyone, talks to different co-managers that run the different businesses and sort of make everyone agree on the vision and the structure and where we're going, and then sourcing their knowledge. That's something always been important to me. These are people that have been in the industry much longer than me, and understanding I'm not the expert at everything, right? What I know is how to manage people and have them go in the same direction and believe in this sort of future that we want to achieve, and I find that super important. Actually, one part that has happened is that I have left my studio job that I used to do back in, maybe a year ago, I will be very active in some of the studio management. Now I only work on the group level. I don't take part in that. I only focus on M&A or where we can improve the businesses in a significant way, while the teams have to work on their own. That's worked really well. I'm very happy. It's hard to leave your baby. I think anyone who built a company could realize that that was a very tough decision to step out and say, "Hey, I'm not going to be the CEO of the games side anymore because I have full time of just dealing with what happens on top of the company, dealing everything from board to different managers, and making sure that we're on the right path. That's also been super exciting. When we look at, you've done a couple of deals now. Where do you want to improve or strengthen your position? Is it in a specific genre you're looking at, in geography, a platform that you're currently not addressing? What would you say is missing in the company today? We're always looking at different things, there's some clear things we're always looking for. We're looking for IP. I think our platform has enough room to scale more content within there, we're also looking at the service branch to be able to deliver even better there. Then on top of that, I think one thing that is sort of a way to think of the kind of titles that we're looking for is always long-term communities. Users that will be coming back for the games. That doesn't really matter for us if it's My Singing Monsters in this case, or if it's an '83. We're not very interested in maybe having the big hit that everyone leaves in a few months. We're very interested in having users that we can keep growing year-over-year, this is something we saw with Big Blue Bubble. That's exactly their philosophy, this is the kind of companies that you could expect us buying in the future if we see IP that they have been able to sustain and grow the communities- Have those very loyal fans. Mm-hmm. On Big Blue Bubble again, how much of the revenue is in-app purchases versus ads, for example? It's about 60/40, 70/30. I don't want to be too exact, but they're somewhere in between there. This was a step in the free-to-play direction. Is this also something you're looking to strengthening to move forward? We were very much looking for it, at least. We announced that we were doing Evil vs. Evil as a free-to-play game. It would be our first internally produced free-to-play game, so we felt that that was very important to secure. This is how we want to use this platform. We see that we're missing a knowledge. This is a risk for us. We don't understand it enough. You don't know what you don't know. What we could get through this was also the ability to know something we didn't know before. It doesn't mean that just everything is going to turn free-to-play. I think a game should be what it's best at. '83," is that a free-to-play game? No, I don't think that's what the consumers there want. We are very happy to do that game the way they want it. That's sort of the answer. The business model is not the most important to us. It is that it's profitable, and that consumers are happy. committed customers that come back. Mm-hmm. Again, on the M&A side, you're not alone to look to consolidate the market. There are other players doing it. At the same time, it's quite fragmented. Have you seen any changes in terms of pricing for the assets you're looking at? Or any changes in general in the last year? In some ways, I would say they've gone down with the multiples, which from a Swedish perspective might be very strange. The reason for that is really because the bigger players, so China and the U.S., haven't been as active in M&A. From our perspective, we think it's very active right now, but they haven't been as active, which means that the bidding wars have become sort of decreased, actually. Especially China is moving out of it quite heavily due to, I guess, regulations. I don't know why. They've in the past been quite high on multiples. Now we're seeing more normal multiples that we would expect these companies at. That makes us very happy. I think that there is quite a lot of companies out there, too, as we're seeing a lot of them. We know that. We think that it's a great market for us right now, and for the other, of course, here in Sweden. I think it's a good timing for a lot of these companies, including us, to be out there. Speaking a bit about your release schedule. You have some near-term releases now. "No Straight Roads" has been quite successful, it seems, based on critic reviews. Also what we see in terms of general activity on medias and stuff. Same with "Descenders." Could you talk a little bit about the performance now in the first couple of days here? Those are- Yeah very important for- On pure and I can't tell the future, right? Right. It might just drop off. In a very short time, we're very happy with the sales- that we've seen so far. We think that they are performing over expectations. from what we calculated. like I said, that's with a few days to know. Do you have a budget for it? Or you? Yeah think it could reach? Of course, we have expectations. Tell me, we don't want to go out with the because there's so big ranges usually. We know we are profitable, which is always good. You have a service division as well, parts of it is as a work for hire basis. Going forward, you're growing your project pipeline and base there. Do you see this going more into current projects and less towards external projects? How do you see this development in coming years? Of course. Owning internal games is always great, we have always loved our consultancy business, because it gives us not only connections to businesses that might be potential targets in the future, but also for the fact that we learn a lot. It's very easy to get stuck in your own ways when you have your own team just sitting at home doing their thing together. By jumping between projects and teams, you learn so much about what's happening in the development, what kind of new technologies are out there, and that to us has been very, very good. It is relatively to what we used to do is much smaller, and that's been, of course, intentional- as we invest heavily in there, but removing it, I don't think so. Not what I know today. For these type of businesses, one could talk about utilization rates, for example. To what extent is that division fully utilized, or at 50%, 70%, 80% to give a 120 an idea of 120 120. Maybe even more, to be honest. Yeah. They're so over They need vacation. Yes. We pushed their vacation, I think, for some of the teams, two months- because they just had to get stuff done. Yeah. Now they've had vacation. Yeah, it's actually we need to scale. We haven't yet. The demand is there. Yeah, for sure. I think it's more than ever. There's so many companies who want talent, including ourselves. Yeah. That's why. Of course, you can't just hire, and that's one of the reasons why consultants are so great. You can't just be 200 tomorrow and think that that's going to work. These are teams that are extremely good at what they do, and they're hard to find. That's also. Yeah. That's good right now for us. It's very valuable to have that inside the company. Yeah, for sure. That has helped. We've been able to utilize it internally already. On the cash flows, what is the reason for the weaker cash flow or the working capital buildup in the quarter? Yeah. That's because of Sold Out and Petrol outgoing stuff. For example, Sold Out, it's revenue payments going out. We have fluctuations in our cash flow, this is, of course, you have to think this is a snapshot. At the moment of the closing of Q2. That happens all the time. It goes up and down, depending on where we pay out and doesn't pay out. On the gaming sector in general and digital businesses, we've seen, of course, an acceleration due to this pandemic today. Can you say anything about your player base and how that has behaved now? Would you still see it's on higher than normal levels? What kind of activity do you expect for the general market and for yourselves going forward My view is that there are two sides to this. I think of course the market is going to lower down as people open up in the terms of, I would say, the people have now been playing way more than they usually do. On the other side, we've had a positive effect, which is that a lot of new people are coming into this that didn't use to play before. I think that those players, because this is new to them and they're getting excited and they play the game for the first time, we can see that their retention rates are as high as other players' retention rates. I think a bigger role for the. One of those is an anecdote. My baby sister, she's 10 years younger than me, never loved games. She's a movie person. She doesn't like games. I play games since I was a kid. She's like, "Ugh, games." When COVID hit, she's like, "Oh, can I get a Switch? What's a Switch? That seems awesome. Can I get some games? What game should I play?" That to me is anecdotal, but we can also see it in the data that I think those markets you're going to see and sort of jump into the future for the entire sector. We've had the growth anyway year by year. Now I think we might have been growing, let's say 10% this year or 30% instead of 10 that we expected or 12 for the sector. Now you have quite a number of titles under your belt, so you have quite a sizable back catalog. Adding to, of course, the M&A you've carried out, do you have any sense of the growth rate in this catalog now? In the catalog of titles? How many? Maybe you could rephrase the question. Do you mean how many titles we think we're going to have in the future? No, in monetary terms, what we're trying to find is organic growth figures. Yeah growth figures on an all else equal basis now with the titles you have. Do you have any sense? Some could be in decay, some could be really booming, like your new titles. There's really different parts of the business where we see. On many parts of our business, we are growing on a year-over-year basis, maybe between 10% and 30%, depending on what title and game and where it's publishing or marketing. We have the titles that are being developed, there we sink a lot of money so that you can see that we are investing quite heavily into the titles internally, those are coming out 2021, 2022. We expect that to change to be very positive- depending on which one of those titles are the most successful. Another question from the audience. Could you please elaborate on the new segments and how Sold Out and Petrol fit into these segments? Yeah. The reason why we've divided it into these two segments is, like I said earlier, it's just a way for us to understand as well which parts are our games, so to speak. Which is fully published or is fully developed by us or owned by us in some way or form, where we have sequel rights and so on, and which part of it is just a service that we are giving to other people. How much of that revenue and how do we split that up and where there are costs and so on. That's also internally, so how we view it and have viewed it for the last few months, since we restructured and talked to all the teams. That's why you can see that some of the teams are split. Petrol is purely services. Sold Out sits with some stuff in services and a lot of in the games. Big Blue Bubble, completely their own thing. Antimatter, completely their own thing. Toadman Studios, both consultancies. Of course, also own developed. Comment on the releases of Sold Out during Q2. Did they exceed expectations? It depends on from what view you see it. I think that they did well. That's my view. Of course, we were hit by COVID. At the same time, we were doing better than we thought. Somewhere in between there, I would say that they hit sort of what we earlier expected. Why was Petrol so strong in the quarter, and how do you see Petrol in the future given the strong gaming activity due to the pandemic? I think it's very positive for the future, we were impressed with the team's delivery on the final sprint, especially as we had early signs of a lot of things moving out of the quarter because of COVID. They were good at getting more jobs, I guess, and delivered well and worked really hard. Yeah. On Evil vs Evil, what kind of launch window do you see here? Also maybe put in perspective to what kind of competing releases you may see. Will that affect the timing of this? Of course, it can. I've always said that for us it's very important that when we do a game, we do it right now. Of course, some games you might release them and say, "Okay, let's see what we can get back. This is not going to work." On the bigger scale of things, this is a title we are very excited about, and we're going to make sure it works. For that, we will see. We have not announced whether we're going to push it or not, and when we do, you'll know. If we do it, we'd probably be related to the fact that we can make it better. We believe that there's better market timing. Where do you see EG7 in a three to five-year perspective? Well, I'm hoping that we're going to be one of the biggest game companies around, or I wouldn't even say big. One of the more successful, I think, is more important. It's not only about scale, it's also about the titles that we produce. I'm really hoping that people are going to know the names of our studios for the titles that they do even more so than they used to, and that we are very profitable on the bottom line. Very good. Thank you very much for a good presentation. That concludes the questions. Thank you very much, and thank you, everyone. Thank you