Hello, everyone. Thanks for tuning in. This is Vlad Suglobov, the CEO of G5 Entertainment. Let's start with slide number three, the financial summary. We had record revenue in the second quarter, about 395 million SEK, which is 43% growth year-over-year and 6% sequential growth from the first quarter of 2018. We had the record monetization per paying user in the second quarter of $46.2. This is something that we see as the consequence of us focusing more on the high-revenue territories and focusing more on acquiring users of high quality. The own games of the company year-over-year actually grew faster than the licensed games, and that is a good trend that supported the growth in the revenue. Earnings were at 50.1 million SEK and earnings per share of 5.07 SEK. I think this is the highest we've ever had.
The EBIT margin expanded year-over-year to 12.7%, but was a little bit down compared to the first quarter, which was, I think, 13.3%. We did a lot of hires during the quarter. About 65 people were added to the company, and there were some extra development costs, which affected the profit margin, but we'll talk about it later on. The user acquisition costs were 24% of revenue, which is 2 percentage points lower than 26%, which we had a year ago. I think this just shows that the model is sustainable, that we're able to generate growth even with lower user acquisition expenses, and all good on this front. EBIT margin before UA costs was 37%, which was a little bit down from the first quarter. Again, there was some pressure on the profit margin, which we will discuss in the following slide.
Cash flow was 8 million SEK, and this is despite very big items like dividend and settling the stock option programs, actually two of those, in the second quarter. Yet we have had the highest cash on the account of SEK 107.6 million at the end of the quarter. Let's move on to slide number four. You can see we're moving forward in about the same pattern that we had last year, where Q1 and Q2 show nice earnings and good earnings margin.
Despite the EBIT margin before UA going down a little bit in the second quarter, if you compare the situation that we have now to that of the third quarter last year, getting a little bit ahead of us, we have more space for spending on marketing, and we believe we are ready for the seasonal rebound that we believe is going to happen in the fourth quarter. One thing that we have noticed in this year is that because we have added so many people to strengthen our development studios over the last year, obviously, this started to weigh down a little bit on our earnings margin. This is something that we have to do. We have to build teams that will continue making shots at creating new games that will be making more than $100 million over the lifetime. That's our goal.
That's where we are aiming with the new games that we are creating. Because of all the new games that we are making and the continuous development of all the games that we have on the stores, we have to strengthen our development teams. In addition to that, what we are doing is we're taking quite a bit of work internally. As you know, we have acquired The Secret Society, we have acquired Nightmares from the Deep in the second quarter. We have to build teams to maintain and develop these games. We were also taking in work that was done in the external development studios in order to better control the quality of the output.
When we are adding new projects, when we are creating internal teams, it's a trade-off between better margins in the future if the project is successful, but higher costs in the beginning of the development, because we have to take them internally. We don't have external developers, which we can kind of put these costs on if it's a licensed deal. When we replace outsourcing costs with the internal development, it's not a dramatic effect on the earnings or on our development costs because we were overspending on outsourcing. We're just taking these costs internally. They may be a bit more expensive or maybe a little bit more cheaper internally, but the difference is not that big.
Just to explain to you better what is going on internally, because this is something that is affecting our expenses, and this is something that we are doing for the long term. We don't expect all the strengthening of our development department to be immediately translatable to the revenue and earnings, but this is something that is critically important that we do now in order to be able to continue delivering growth and great games in the future. It's unavoidable that we have to do it. Another thing that affected earnings margin this quarter was the team up events.
It's called G5 Team Up, which it's an event that we create to bring people together from all the different offices that we have, where people can finally meet that work on the same games but are located in different offices and kind of synchronizes the understanding of what we are trying to do in the company. We believe this is extremely important to do all that, especially with our distributed teams. We do it in the second quarter and the fourth quarter, accordingly, these expenses affect the earnings margin a little bit in these quarters. Let's move on to slide number five and look a bit more at the revenue. It looks pretty good, right? We have continued sequential growth, healthy growth year-over-year.
The differences to previous periods, I would say that this trend continues that started in Q1, that we are gaining a bigger part of revenue increase through the increase in the paying user monetization rather than increase of the audience. In part, this happens because we have changed our user acquisition strategy a little bit, and we focus more on higher quality users and higher quality countries. That automatically kind of lowers the overall number of downloads, but it increases the revenue that we generate from one paying user. As you know, we have about 10% of users who pay in any given game over the lifetime of the game. Theoretically, we could do quite well, actually, we could have exactly the same financial results without 90% of our users.
That's what's happening here is that we are kind of shrinking that 90% of people who never pay in our games, and we just have a little bit less of them and a little bit more of the actual paying users. The statistics of monthly active and daily active users and the monetization per users are affected accordingly. Another trend that we are seeing this year is the seasonality. It's a little bit early to say, obviously, about the third quarter, but we do see that in the summer, the activity of users and the number of new users looking for new content is going down a bit. We are in that part of the year now where we can certainly see these signs, and I would say that this looks pretty close to what we had last year during the summer as well.
In addition to that, we had a little bumps with our larger games. There were some delays with the updates and events, both in Hidden City and The Secret Society. There were some experiments with the balance of Hidden City, which did not go exactly as we hoped. I can't say these were planned because those were experiments, essentially. We have to do these to better understand what is driving users and to try new things. You have to innovate even on the established game, and sometimes we do set up certain experiments, and sometimes, unfortunately, they don't really turn out as we plan. Our strategy during this off-season time is to focus on retaining users, keeping our revenue, and preparing for the strongest quarters of the year, which is the fourth quarter and the first quarter.
We hope that we're going to see the same rebound we have seen last year in users' interest and activity as it gets colder and people have more time to spend with their devices and games. I haven't seen anything different from last year in that sense this year. Hidden City remains our largest game by monthly revenue. Changed, but I have to say the revenue from our own games continues growing faster year-over-year than licensed games, which basically means faster than Hidden City, because now with the acquisition of Nightmares from the Deep from (Inaudible), we own all the games in our portfolio that are worth owning, except Hidden City. It's kind of an outlier now. In terms of the revenue breakdown, it's about the same picture as before.
It looks like we are for now set with this distribution, where North America is about half, Asia 28%, Europe 16%, and rest of the world 6%. No big changes there. With that, let's move on to slide number six. Again, you can see our costs were gradually going down as a percentage of revenue, as revenue was growing very quickly. There was a little bit of a rebound in the administration costs, and that is primarily because of the events that we had and some other one-time costs. The R&D spend went up as well, and that is the effect of extra expenses that we have in connection with all the people we have hired recently. A big amount of work that was performed on a number of games that we are getting ready for the release before the end of the year.
There's going to be two or three such games. Then there were some extra development costs as well, connected to increased monetization. Monetization, I'm sorry, not monetization, but amortization. Amortization is kind of catching up with the increase in the capitalization that started a few quarters before. That's going up as well. We were still able to spend 26% of our revenue on user acquisition and deliver 12.7% EBIT margin. I think it's a healthy situation where we have to invest in the future of the company by building this team within the company, or rather plural teams, and building the games that we believe are going to ensure that the company has a bright future going forward. We have to make enough of these bets. We have to start enough of these games, in addition to continuing working on the existing games.
This is a course that we have to take. I think it's still a healthy result as we have margin expansion year-over-year, even with the lower user acquisition costs. Let's move on to the slide number seven, which shows net capitalization. This is the amounts we capitalize every quarter in connection with the development of games, minus the amortization that we take in the quarter. You can see those were canceling out at the end of 2016. As I say, the effect of have started in 2017 as we gradually started adding people to the company and kind of taking our development capacity to the new level. Now we have obviously taken it to a much higher level. We have many more employees, many more, or rather stronger teams. I wouldn't say many more teams, but several more teams, and they're much stronger and more able.
Amortization is catching up. The net effect, as you can see, is actually gradually going down from the fourth quarter this year. The net value of games portfolio went up dramatically compared to last year. You have to take into account that a really big chunk of this is in connection with the acquisition of The Secret Society. It's not just because we ramped up our development costs so much. If we take out The Secret Society effect from there, it would be a very different picture. Let's move on to slide number eight, cash flow. As you can see, the cash on account is going up gradually every quarter. Well, almost every quarter. This is all happening as we are showing the sequential growth and the growth year-over-year, but also as we pay dividends for the second year now.
In the second quarter, this is what we did. We had a big outflow with SEK 22.2 million in dividend payment. Then in connection with the stock option program from 2014 and 2016, we also spent SEK 9.1 million on that. Even after that, we had a positive cash flow of SEK 8.0 million. I think it's a very strong. Obviously had a very strong underlying cash flow in the quarter that we were able to go through the dividend and settlement to stock option programs during the quarter and still have a positive cash flow. One thing that helped us was the tax refund from Japanese authorities for amounts that they withheld over, I believe, two or three years ago. This is a one-time thing. But it kind of helped us there.
Otherwise, I think we are doing really well in that sense, and this is despite the increase in the development staff that I told you about. All right. I think this is it for the presentation, and I am happy to take your questions now.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial 02 to cancel. So once again, that's 01 to ask a question or 02 if you need to cancel. Our first question comes from the line of Viktor Forsell of ABG. Please go ahead. Your line is open.
Good morning, and thank you for having my question. I have a question regarding this slowdown that you're seeing in hidden object markets. Could you give us a little bit more of a flavor there?
Sure. We do see a decrease in the pace of growth in the hidden object markets overall. I would say it's not unique to this market. From what I have seen, from what I'm able to see, kind of the same situation in the match-3 games as well. I'm trying to make sense of it as we go. It looks like the industry and G5 obviously had a very good high season this year, and then it was so good that it had to go down a little bit. I think the fact that we are during the summer where people spend more time outdoors probably with different activities rather than sitting at home playing games is affecting it as well. My theory that I have is that we are basically looking at that.
I'm not saying everything that happens to our games is explained by seasonality, obviously not, and we had some issues as well during the summer. This is a trend that I think we have, and I think it may get even more pronounced over time, because as you know, the shipments of new devices, they are no longer growing year-over-year in the developed markets. You have pretty much a set audience of people playing these games and using mobile devices, and there is obviously room for expansion of their interest and how many games they play and how much they pay. In terms of getting new users, I think we are reaching a certain plateau in terms of the foot traffic in the application stores, for example, looking for new games. Maybe I'm getting very theoretical at this point.
It's not something I have seen, but this is something that I expect should happen, is that before, we always had certain number of people who never used smartphones or tablets before finally get one and go into the market and try to find applications for it, and this is when they download a lot of stuff. Now, we're not going to have that many people doing that because everybody has a smartphone. What will happen is that a certain number of people will come of age in a certain year, and they will get their device for the first time or new devices, or they will finally get into the age group which is interested in games like we're making.
It's going to be a bit more gradual process, not fueled by new users finally getting into the smartphones in developed because at this point in the developed markets, it looks like everybody already has one or was exposed to it. If they don't have it, they probably don't need it. That's my thinking.
Okay. Thank you very much for your answer.
Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. As there are no further questions at this time, I'll hand the call back to our speakers for the closing comments.
Actually, I have some comments here that were sent over the Internet, so I will go through them. One question is, could you please elaborate on which countries you are actually targeting in accordance with the new modified UA strategy? How does the focus on high-quality users affect your UA efforts in growth? I think I pretty much covered it. The change is that we are getting less users, and we get more paying users among those, and on average, the monetization per paying users is going up. The high revenue per user countries are obviously U.S. and Japan, which are big countries for us, but also South Korea, and even China. In China, you can target, for example, iOS users, and they tend to be rather good quality and rather highly priced as well on the user acquisition market.
There are countries in West Europe. We're just targeting the countries where our sales are the biggest, basically. Another question, have your advertising revenues increased these revenues from in-game purchases? We do not have any advertising revenue. None. All of our revenue is coming from in-app purchases, so no changes there. It's zero at this point. Then there's another question, can you elaborate on the two, three new games that you plan to launch by year-end? Category, current state of development. Yeah, I wouldn't be saying that the probability we'll launch them before the end of the year if they weren't in final stages of development. They must be quite close at least to the initial release and the quality that is enough for us to do the initial release.
The games that I'm talking about are going to be in one of our main genres. We have these three games that are coming out earlier than all of the other games, and I hope that two or even three of these will release before the end of the year. There's basically going to be one game in each of our main categories. Our categories are hidden object, match three, and solitaire games. That's our plan. I don't have any more questions. Thank you very much for listening, and this concludes our earnings call.