Earnings Call: Q1 2017

May 4, 2017

Everyone. Thank you for joining us today. And this is the earnings call for the Q1 of G5 Entertainment. We are quite pleased with the results. The top line went up about 132% year on year. We had 27% growth quarter to quarter compared to Q4 2016. The user base monthly average monthly active users went up 109% year over year. Monthly unique payers went up 117%. So nice growth both in terms of the top line and the underlying audience. The average revenue per paying user, as you can see in the report, also went up about 10% year on year. There was a slight decline compared to Q4 2016. Probably has to do with the seasonality and also the fact that there was a larger inflow of new users during the Q1. So anyway, good result. We're quite pleased with that. And the drivers behind the growth in the Q1 were our license team, Hidden City, once again occupying the number one spot in terms of total revenue contribution to the company's top line and the growth. And on the other hand, we had good progress with our own games, Mahjong Journey, Twin Moon Society and Supermarket Mania Journey during the Q1. And that contributed both to the growth of the revenue and to the expansion of the margin. And overall, I think the most important thing that the Q1 demonstrates is the inherent leverage of our business model. The larger the revenue, the higher the margins. It doesn't really matter whether it's licensed games that drive the growth or owned games. It's just that the effect on the margin is going to be different. But in any case, the higher the revenue, the higher margins we're going to see with G5. That's because most of our costs after user acquisition and store fees are taken into account, the rest of the costs are pretty much fixed. We don't need to scale our staff as the game scales its audience basically. Or at least we don't have to do it at the same rate as the growth of the audience. So, in Q1, another very good thing happened. If you look at the amount of user acquisition, the amount we spent on user acquisition in Q1, it's 25% to the gross revenue in the quarter. And that's the same as in Q4. But if you compare the earnings margin in Q4, which was about 4%, to earnings margin in Q1, which is about 9%, you can see that spending the same percentage of our top line revenue on user acquisition, while doing that, we were able to expand our margins almost twofold quarter to quarter. So that's quite remarkable. And again shows the leverage in the business model that we have. Now on to Slide number 2, the financial summary. I think we covered the growth of the top line and the drivers behind it. Then another interesting thing is that 22% of our revenue in Q1 came from Asia. That compared to only 10% last year in the same period. So Asia once again was fueling our growth during the quarter. Also higher percentage of revenue came from smaller screen devices. That means phones or tablets also as they're called, so not tablets. And the growth of the user acquisition spending year over year went up it went up by over 200% and 27% quarter over quarter, pretty much in line with the top line growth quarter to quarter. Then we had some increase in R and D costs. And the reason to that is that we amortized more. We capitalized a bit more as well, but I think we have larger amortization. And in the end, during the quarter, capitalization and amortization once again almost canceled out. So there's not a lot of effect in earnings from that. The cash flow was negative in the quarter. The reason for that was that we only received 2 payments from 1 of the big application stores compared to usual free. And that happens sometimes. So that basically postpones the moment when we receive the money, in this case, just by a few days, which pushed it out of the quarter. And the amount is reflow. This amount outstanding amount is reflected on the accounts receivable on the balance sheet. You can see that. So let's move on to the next slide. The next UA platform in Q1. You may have seen this illustration from our presentation for the previous quarter. It's basically the same illustration that shows that when we increase the amount of user acquisition spend, we expect the revenue to grow and we expect the percentage of user acquisition spend to revenue to go down as that happens. And in this case, we always have the opportunity to kind of fix the absolute amount of user acquisition expenses and just keep it there and allow the revenue to grow to the next platform and allow it to stay there and to show the maximum possible margins that we can achieve at this level. But in Q1, we actually decided to go farther and we decided to once again increase the amount of spending on these acquisitions. So we did this step up thing once again. And that's the reason why the percentage of UA to revenue in Q1 is basically the same as in Q4. So it reflects quite aggressive investment in unit acquisition. And that makes it even more remarkable again that the margin went up almost twofold from Q4 to Q1. And it means that we want to continue driving growth of our revenue as long as we see the opportunity. And as I mentioned in the report, we have seen the growth and the new level of revenue that we have achieved in Q1 continue into the 1st month of Q2. And that's the only month that we can now see in the rearview year. Everything else plays ahead and we'll see what happens. But we are really focused on trying to maintain the pace of growth that we have. So, if you look in the last 12 months, you can see that our UA spending was between 15% 30% of our gross revenue. So that gives you the range that you can think of where basically we're going to be in the next quarter. And our current level of 25% pretty much reflects that we're doing it quite aggressively, maybe not as aggressively as some we did before sometimes, but on a higher level of revenue that means quite substantial amounts that actually go into marketing. All right. Let's move on to the next slide, revenue. Once again, good growth in revenue, quite impressive chart here. If you look at free to play revenue only and disregard the unlockable game sales, the year on year growth is actually 151%, even more impressive. And we expect unlockable games to continue to shrink. And the dynamic of the top line to reflect the pace of growth that we have in free to play games more and more in the next quarters. With that, let's move on to the next slide, operational costs. As you can see, the biggest increase there is comes from the marketing spend, which is driven by user acquisition spend. We also had some increase in the new research and development costs driven by higher amortization as menu gains exited the soft launch window compared to last year to the same period 2016. At the same time, we are actually capitalizing smaller amount of money compared to last year, which shows that we keep our development capacity and our development effort at about the same level, which I think is a great, great news. I mean, again, it shows that we can grow our top line using our marketing spend and using all our marketing efforts and the mechanisms of keeping users and acquiring new users in our games without increasing the capitalizable development costs. With that, let's move on to Slide titled EBIT Margin. You can see we went up quite substantially compared to Q4. This is not the highest we have shown. The highest we have shown was in Q3 2016. But that quarter had considerably smaller amount of money spent in marketing. So again, this is actually very good that we were able to deliver this margin that we did 9% in Q1 this year. And although the margin was quite similar 1 year ago, 8.8%, you have to take into account that last year, quarter to quarter growth in Q1 was really small. So the company wasn't really growing much. Investment in user acquisition was rather low and that was the reason why we were able to show almost 9% profit margin. And the more impressive is the fact that this year we are showing the same margin while also spending 25% for revenue back into user acquisition and showing 27% growth of revenue quarter to quarter compared to Q4 2016. Next slide, net capitalization. The net capitalization went up a little bit compared to Q4. So it literally canceled out in Q4, almost literally. There's a little bit of contribution to the earnings from capitalization this quarter. But again, compared to the new level of earnings, this is actually rather small amount. So compared to historic numbers that we had in 2015, 2016, this is a small amount. We expect, as I mentioned before, we expect this balance to continue to the future. It will probably go up and down depending on the situation with our development and investment in development of new and existing games from quarter to quarter. But overall, no big changes here that we are expecting. If we look at the balance sheet and capitalized cost on the balance sheet, the amount went up somewhat compared to last year. Free to play games now represent 99% of total value. We can see that the capitalized amounts for unlockable games that are released is almost 0. There's a little bit associated with the unlockable games that are not released yet. And then also most of the value is associated with the free to play games that have already been released. And then the new games and the games that are not released yet, the amount associated with them is potentially smaller compared to last year. So this reflects 2 things. First of all is that we're definitely aiming to not release as many games as we did before. We're probably going to release just a few games a year, but really focus on their quality and success in the market. And the other thing is that we are trying to stick to what works and try to avoid long term very expensive games, some of these projects that we had in the past. So we want to do it quicker and kind of focus on things that we know work well and become more effective with that. So I think our balance sheet dynamic sort of reflects that. Let's move to the next slide, cash flow. So cash flow from operating activities, SEK 11.6 million. Once again, there's big impact from changes in working capital and that amount that was outstanding at the end of the quarter has led to the negative cash flow. If we receive that amount on time, then accounts receivable would be lower, but then we would have more cash on the account. And cash flow would be nicely positive. So, we are not concerned at all with the negative cash flow in the quarter. That's just the way we are paid. So sometimes it's we're missing 1 monthly payment and that changes the situation. But then we're going to catch up in other quarters. So this will come back with some surplus in the following quarters. So nothing really interesting here. Other than that everything is good. That's it. Next slide is basically Q and A. So, thank you for listening. And if you have any questions, we're here to answer. There appears to be no questions on the phone, so I will hand back to the speaker. All right. Thank you, everyone, for listening and for participating. And with that, we pronounce at the end of our earnings call for the Q1. Thank you. Goodbye.