Earnings Call: Q1 2019

May 3, 2019

Morning, everyone. Thank you for joining us on our Q1 earnings call today. My name is Vladza Glubov. I am the CEO of the company. And let's move on to the first slide of our presentation. As you can see, and it starts with the decline of revenue year over year of 18%. And that is mostly attributable actually, pretty much all of that is attributable to the game Hidden City, which is our still largest by revenue. You can see the on the chart in the right bottom corner of the slide that our revenue consists of the revenue from our own games that we own and that we have internally developed and the revenue from licensed games, which frankly, Hidden City is the largest part of. And you can see that the revenue from home games remain more or less flat and slightly declining since the Q2 2018, while Hidden City, since it has achieved its peak in the second quarter and then kind of plateaued for a couple of quarters. It has now went down a little bit again. But the I would say the core of our portfolio, which is our own internally developed games, remain pretty much in the same place. And that is the reason that the percentage of revenue generated by Gvive's games, which was going up actually gradually since 2017 jumped once again in the Q1 to a higher level. So if we look at the own gains, there are gains in different lifecycle points and it's quite a few games. So there are a few games that we have discontinued, as I mentioned in the report. It doesn't mean we pulled them from the stores. They're still available to players. But we have moved we have basically stopped updating them and stopped evolving them because we ran out of ideas and we don't know how to increase their revenue and we focused the resources we used on these games on the new games. And so there is a part of the own games, part of our portfolio that is declining, but on the other hand, it's being compensated by, for example, homicide squad, which is a growth point and that has been growing for many quarters now. And also the biggest game in our own portfolio is Mahjong Journey, which continues to do really well. So if we look at the revenue from own games right now and since the Q2 of 2018, then just the revenue from owned games is as big as the whole company's revenue was in the first half of twenty sixteen. I think it's we wish that and we worked towards having more revenue generated by own games. But if you think of it, the tremendous growth that we have over the last few years, I think it's pretty amazing that in just 3 years, we basically have the business consisting of own games only that is the size of the whole company just 3 years ago. Let's move on to the next slide and talk about the earnings. And we had an EBIT margin close to the record EBIT margin that we have ever had, 13%. And on declining revenue, you would think that the margin would be affected, but there are two factors at play here. 1st of all, because it was the licensed part of our portfolio that was shrinking the most or shrinking at all. The gross margin actually improved as a result of that, which obviously helped us with the earnings margin. And because Hidden City is in a life cycle where it's plateaued and continues to very gradually slide down for now, We even if we wanted, we couldn't really help it a lot with the substantial user acquisition spend. So we are trying to allocate our user acquisition spend in a wise way to get the most effect that is possible to get at this stage of the game. So as a result of that, we have reduced the user acquisition spend, especially if you look year over year. And I would also say that in the Q1 of last year, I would say we were kind of over investing in user acquisition in this game and now we went to more reasonable spend on user acquisition. There is a strong core number of users, the core audience of the game, which are repeat customers that come back every month to play new events and new content in the game. And I think we have their attention and we will have their attention for a very long period of time. We also we're not stopping work on human city. In fact, we are making the developer in G5. We're spending a lot of effort and time on making improvements to the game and evolving the game in order kind of rework it in a way that will make it even more interesting to the players and that will allow it to be even more competitive in a more competitive situation that we have now in the market. And these changes that we're making to the game, we are certainly seeing positive effects as well. And I would not say that going forward, we will keep user acquisition spend on this game. At a low level, I would say we will be trying different things and if we see improvement of the KPIs, we can go back to increasing user acquisition spend on the license part of the portfolio. So that said, I mean Hidden City remains very profitable and a large business. And there's a lot of money and a lot of profit to be made over the years on this game, and we have good experience maintaining games for very many years. So I think the big takeaway from this slide is that we have shown that even on the during the off peak cycle when the largest gain by revenue kind of declines and we don't know if it's going to continue to slide or we can stabilize it and maybe we can bring it back up a little. We can switch to the mode, which allows us to finance all of the games that we continue to develop and it allows us to continue to grow the percentage of the revenue generated by all games. And we continue to be a profitable and cash flow positive company that even pays dividends. And I personally think that's the way to manage a games development company because you manage your portfolio. And a portfolio, it's always a combination of games that are runaway hits like in this case, the Hit and Save and of things that basically fail miserably in the market and then you just pull them from the store and we've had a few of those. And you have this also, I would say, a set of reasonable successes, which forms a core of your portfolio, very stable that keeps generating profit over time. But it's not a big star, but it's not a failure and it's a profitable business also that you have. So I think when you manage a portfolio like that, you're happy when you have a star. You run as fast and as far as you can with it. But it may happen that it will be declining at some point or plateauing at some point. And the important thing is that you have to understand that any particular big success that you have may not last forever and you have to build your business in such a way that you can go through the periods where maybe your top line is not growing and you keep doing the same thing that you've been doing for many, many years and that's managing your portfolio, creating new games that are good shot to success and making sure that the company will continue to be cash flow positive and profitable, notwithstanding what specific kind of scenario for development of the revenue for your base hits you are going to have. And I think with G5 with that in mind, and it's really it is very stable and it's a very healthy position when it comes to this. And we're very optimal with spending our resources and managing the game's lifecycle. Let's move on to the next slide and talk about the cash flow. So you can see we have pretty much we have a record cash position that we've ever had in the company, which again speaks of strength, the financial strength of the situation. Last quarter, in the Q4 2018, Apple overpaid us one payment at the end of the year, which was kind of out of the ordinary. And so in this quarter, they kind of changed it back to the normal schedule of paying. So we didn't have one payment from Apple. That's why cash position in Q1 is exactly the same as in Q4. If they were paying as they usually pay, then we would have a slightly lower cash position at the end of Q4 and brought from Q4 to Q1. So obviously, the lower user acquisition spend has helped maintain cash position. If you compare this to the situation we had Q3 to Q4 to Q1 last year, we were heavily investing in user acquisitions like Hidden City. And although the top line went up substantially, you can see it wasn't a big effect on our cash position. So when we don't have to do that or we cannot even do that, let's put it this way, We focus on building up our cash position and focusing on continuing developing the new games for at least this year and evolving existing games in which we still do that. So let's move to the next slide and discuss the outlook a little bit. So again, we are fundamentally in a very good place financially, record cash position, cash flow positive, profitable, debt free, even paying a dividend. And Unseen remains a big and profitable business and it will make a lot of money going forward. Also games, how do I put it? So basically you spend a lot of money, I would say you are overspending money on marketing when you bring the game from 0 or close to 0 to the peak level. And after that, when you realize you cannot at least at the present moment take a higher, you were able to actually lower user acquisition spend and this is the period when the game generates most of its profits because this is when you have a reasonable advertising spend and the rest is the profit, in our case to be shared between G5 and the developer. So now it's more profitable than during its growth phase. And again, in that sense, I think most of the profits generated will be generated by the game are still ahead of us. And we have I think we have good dynamic in the own games. Semi side, what continues growing, has been growing for many quarters now and it looks like a stable thing that is happening. We have strong sales of Magellan Journey, which remains our number 2 gain by revenue And the percentage of overall revenue from home games continue to increase, which is going to impact our gross margins positively. We really have strengthened our development teams over the last couple of years. We did not release many games, but this year we aim to release 4 games and I think we are on track to do that. I'm pretty excited about the games we're going to release this year and some of them are coming rather soon. So follow the news, it should not be too long. We will announce something. And the genres for these games are the ones we know best and that is Hidden Object and Match 3. And I think that some of the games that we have in the pipeline for at least this year, they should be quite competitive in the market given their structure and emphasis on strong storyline and metamechanics that are now popular in the market within within the top titles in the market. This concludes my deck actually. So time for questions and answers, if you have any questions. The first question is from Pierre Melstrom from Handelsbank. Please go ahead. Your line is open. Hi, good morning. Can you hear me? Yes. Good morning. Vlad, thanks for taking my question. So I was just wondering, if I recall correctly, before you were talking about that Secret Society had sort of this stable revenue tail but on a lower level. So how far are you from Hidden Cities, sort of the stabilizing out, would you say? Well, how far from Hidden City? Well, the Secret Society's revenue is rather lower than The Hidden City, but also The Secret Society has never achieved the scale that we have achieved with Hidden City. So I we looking at the development of revenue for Hidden City, we obviously compare it to how the revenue developed for the secret society. But I think in the case of Hidden City, we have a developer that is very strongly motivated to do the right things for this game. And we can see that they're paying a lot of attention and you can see that they are releasing updates for this game every month. And these are very high quality updates. So, we are actually expecting we're trying and I think we have the reason to believe that we can have a better dynamic with the revenue, like a lifecycle revenue of Hidden City than with the Secret Society. I don't know. Does that answer your question? Yes. So I was just trying to get a feeling for when we can mean, I understand you keep working for it, I mean, on the game and if we could get a feeling to when it sort of like stabilizes because now obviously it's sort of burdening the group numbers, but you're talking about a solid development underlying. So speaking of that, pulling back on your UA cost this quarter, are you doing that for your own portfolio as well? Or is that mainly just for Hidden City? Well, we do use our acquisition on all of our games, and we'll look at them individually, what is the potential to grow, what was the dynamic in the last few months, how fast we'll recoup the investment if we'll make it. So yes, part actually a substantial part of user acquisition that we do, we do for our own games. So we do not really break it down the UA costs by the type of game that we spend it on. But it's the same I would say it's the same logic when we see the opportunity for growth, when you go forward, when we see that additional marketing spend has not been changed the situation that we may choose to actually make profit on a game in a given month. So it's an iterative process. Month to month, we are deciding how to best allocate resources and it depends on a number of things on how well, what kind of updates that we're making, where are the KPIs moving and how does the top line trend looks like and etcetera. When it comes to when exactly it's going to stabilize, it's we are managing a portfolio of gains, right? We don't know the future. We may try to come up with some ideas and some scenarios of how the revenue for 1 or another game is going to develop into the future. And basically, we make sure that the company can continue doing what it's doing, managing the portfolio and making new gains under any of these scenarios. That is how we do it and that's how we've been doing it for many years. So I don't have the exact date for you, but rest assured that we're doing everything we can to nobody here is motivated for lower sales of our games. We're doing everything we can to maintain these sales and expand them again. And there's a lot of thought going into that. Got it. That was all from me. Thank you very much. Thank you. Next question is from Matthias Thig from RBC Partners. So I'd like to talk a bit more about the own games. I completely understand the portfolio approach and the life cycle of games, but I'm a bit worried that the own games are declining at the moment. Maybe you can share some of the reasons that you see for that. And also put it in the context of declining users and payers. It would be great to see some of those metrics per game, I mean, especially the more important own games like March and Johnny and Homicide Squad. How do they develop by users and payers? Does that still fit with the expected life cycle and investments you make in marketing and development? Or is there anything going on in the environment, in competition with those games specifically that leads to a decline of own games at the moment? Right. Well, I wouldn't say they're declining. They're rather flat, a little bit up or down and really can be seasonal or just the length of the quarter can affect that. I think we have a stable situation with our own portfolio. The problem or the I mean, it's a portfolio, right? So we have older games like The Secret Society, we have newer games like Homicide Squad and different games in the own game portfolio have different obviously different revenues and they are responsible for different proportion of revenue. And so the resulting dynamic is a combination of the dynamics of different games. Now, we have stopped work on several games, 3 or 4 in the last quarter or 2 and those games when being moved to the harvest mode, for example, they don't really get an increase in the marketing budget, right? So we are kind of harvesting that. So we're trying to maximize the profit from these games And that is the strategy there. We know we can't really increase the revenue from these games, but we know we can make good profit on them for many years to come. So it is kind of normal for that part of the portfolio to gradually go down and while actually being very profitable. So it's a combination of that. And certainly, I mean, we do not have games in our own portfolio as of now and in the present state that should be as hidden city several years ago where we can really boost our top line through a massive user acquisition investment. But we are evolving, we have our growth points in the portfolio. We are evolving gains gradually. We make sure that all the gains that reach substantial revenue are also profitable. I think that's the way to manage it. And then we are working on new games. And 4 games this year is, it's quite a few, it's actually quite few games. So I think and my hope is and our ambition is, as I wrote in the Q4 report that, and I said that we don't expect any records that included revenue records in the first half of the year, but with the help of new releases, we would like to change that situation towards the second half of the year. So that's what I said in the Q4 report. And we because we don't really give guidance. That's all I can say at this point. Yes, I think I answered, but let me know if I didn't answer anything. I mean, can you share some detailed metrics on the 2, 3 most important own gains? I think that would really help to see that at least for homicide squads, the trend is still positive because if we only get the aggregated number and we know it's very skewed towards a few games, you get the impression that they are declining as well. Yes. Well, you can look it up on SensorDAO or Appenany. You can look at the top charts. That is really easy to see. Humidase Quad is doing well in Japan and China, actually better than in the United States. But you can look at the United States, China and Japan to get a feeling over the last 2 years how the game is developing. We do not break it down by game. We have just started breaking it down by licensed PSO in games. So we like to share more information, but do it gradually. We do not turn we have plans to break it down by specific games or disclose KPIs by specific game, unfortunately. Okay, thanks. And the next question is from Oscar Ericsson from Carnegie. Please go ahead. Your line is open. Thank you. Good morning, guys. Just a few questions from me. First of all, I mean, this was your Q1 with quite low user acquisition costs with strong margins. How should we interpret the user base development? I mean, it's natural with the high churn, of course, in a quarter like this. But what can you see going forward with quite a rapidly declining active user base? So I think one thing to remember is that the overall number of users is well good to have. About 90% of them never make any purchases. So for the top line and profitability development, that really doesn't matter. I think one of the trends that we're certainly seeing in user acquisition, what we are doing is focus on acquiring more high quality users. So that is one thing that certainly lead to the decrease in the overall monthly active users. The decrease in paying users, I mean, that's inevitable in a game which has matured substantially and people play the game and eventually get tired of the game and then they play less often or they just churn out that's part of what's going on in games. And the key here is to be able to bring them back and the key is to find the level of marketing which would bring back the sustainable number of users and acquire some new users as well and kind of stabilize the dynamic in the audience. And obviously, you see the decline in revenue and that is a function of the audience and the decline in the audience and those are connected. So if revenue drops, but we would have still the same audience and same user numbers and same paying user numbers. That would be really worrying because it would mean we have really broken something in our games. But in this case, this kind of goes hand in hand. Maybe it's more pronounced on the total audience, But I think that's the total audience can include players in Brazil, India, Poland, a lot of countries that produce a lot of users but do not really have a big meaning for us financially, at least at the current moment. So in terms of the dynamic, again, it is connected to revenue because the monetization per user, although growing, it's growing very gradually. You can expect that if our revenues to continue to go down, that will be because it is a function of our audience metrics and vice versa. So they are connected and they will probably be connected going forward. Okay. Thank you. I guess my question was more now that you have had lower user acquisition spending for 1 quarter, do you expect a more stable user base development when the most or the least loyal part of the user base is perhaps out? Do you understand what I mean? Yes. Again, it's the same situation. Yes, we would like to stabilize the user numbers and with the goal to stabilize revenue numbers. We are indeed trying to find a level of spend, which would allow us to not lose money on doing that, but also keep the number of users in the game that would help stabilize the revenue. Indeed, we are trying to achieve that, yes. Okay, great. And final question, Homicide Squad, which I think is, one, certainly a bright spot in the portfolio and trending quite strongly in Asia. What do you see for the game going forward? What's the potential of the game if you compare it to other hit titles that you have had? And also perhaps why it's more successful in Asia, if you could shed some light on that? Thank you. Well, I don't know why it's doing better in Asia. I it's always easy to explain in retrospect and I can say, well, looks like people in Japan and China really like games about New York and maybe they just like New York. Maybe it's because they watch TV series that are similar to the game and the moves and maybe that's why they like it. But it's really easy to say when it has already happened. So one way or another, these games do really well in Asia, this game, The Homicide Squad. So we try to obviously maintain that success. And this game has not has been growing rather gradually. The dynamic there is not as fast as other games that we've had. On the other hand, there's a really stable grower. So it's that was the positive thing about this game. And we there's a number of things in our roadmap to this game that we have not yet introduced to this game. So I think there's still a big potential for the improvement of the game and improvement of its key performance indicators. So that's what I think. And as long as it's growing, we're going to continue helping it growing to grow further. And we take it month by month basically because it's a balance or the situation how the LTV is connected to the cost of user acquisition that we can do on this game, by what other means we can support its growth, etcetera, etcetera. So, yes, I wish I knew I could tell you where it's going and how much money it's going to be making, but I don't know. I know where it is now and I know how it's been in the last few quarters and we hope it continues growing. Great. And actually one final question, if I may. Just trying to find a way to think about this. But I mean, now you've had user acquisition spending of below 20% for the first time in quite a lot of quarters. How low do you think you can go in terms of user acquisition spending, I mean, assuming that revenues continue perhaps to decline 1 or 2 more quarters, can you go even lower to maintain this strong earnings power that you showed in Q1? Or is this sort of a bottom level, do you think, for use acquisition spending? Well, again, this is something that we look at on a game by game basis. And we are basically, I really don't know. You're basically asking me how are we going to be spending on marketing until the end of the year and the answer is I don't know. The goal would be to support whatever growth we can see in our portfolio. So we will support Homicide Squad because it's growing, we'll support Hidden City if we see that there's potential for growth and the same applies for other games. And if we launch new games and we see good traction there, we will of course be spending on user acquisition there. I would just repeat the same thing we've been saying all along. When we see the opportunity for growth, we will focus on growth and we will pay less attention to profitability. If we will be in the absence of growth points or big enough growth points, then you can expect that we will not be spending too much pointlessly on marketing and instead we will try to be profitable. And that remains the same. It's the trade off or rather growth. And I would want in a situation where we don't have growth or don't have a lot of growth, I would want to show better profit margins. But if we see the opportunity to grow, we will certainly spend more to get that growth going. That's the logic. And then how it's going to play until the end of the year? That will depend on the updates that we're going to be making for the games on the market situation and on the new releases, of course. And there could be no further questions registered. Yes, so I hand the call back to you, Vlad. Please go ahead. All right. Thank you for the questions and thank you for dialing in today. That concludes our call. Thanks again and have a good day. Bye.