Welcome back to ABG Investor Days. Next up, we have, Stefan Wikstrand, CFO of G5 Entertainment. Without further ado, I will leave the floor to you, Stefan.
Thank you very much. Thank you very much, and as always, a pleasure to be here, and thanks for hosting. So as said, my name is Stefan Wikstrand. I'm the CFO of G5 Entertainment and have been that since 2015, so the years are slowly starting to rack up. G5, we are a developer and a publisher of mobile games. So making and selling mobile games is what we do, but we also publish other developers' games. So there we work as a book publisher or similar, but in mobile gaming. We work in a very large and growing market, which has grown quite rapidly, and we'll look at some market data in just a bit. Slowed down in the recent times, but now coming back to growth.
We are focused on a target audience of women over 35, which is where we've essentially focused since we went into mobile gaming, more than 10 years ago. We have a strong history of creating very successful mobile games and publishing them, which you can see on the longer revenue chart here, which kind of starts at 2009, when we went into mobile gaming. Today, we operate through 11 countries. We have over 900 employees.
So we're listed here, so this is our kind of technical headquarters, but we also have a very important office in Malta, we have an office in the U.S. for quite a time, but the majority of the people that work in the company is then employed in jurisdictions in Eastern Europe, where we've opened quite a few the last years to kind of spread out the workforce and minimize that risk of having two very focused countries as we had before, but now having it more spread out. So that is a bit of a change in the last 18 months compared to how it was before. So looking briefly at the kind of mobile gaming industry.
So we're coming out of 2022, and also the start of 2023, where we've seen the kind of first decline in mobile gaming revenue. And that is due to the kind of increased revenue that we got during the pandemic, so it's kind of a reversal to the underlying performance. You can actually see the trend. If you're gonna take out the 2020 and 2021 bars there, you can see that the... you can almost see the underlying trend. So we took some growth early as an industry, which we're paying for now in 2022 and 2023.
But now the market is kind of coming back to a healthy underlying growth, lower than it has been before because it is a more mature business, but still, probably a solid 3%-5% growth range in the coming years, which is very healthy. We also have very kind of underlying growth in the amount of players that play mobile games, which you see below the kind of revenue chart. So that is expected to continue to increase. But if we then move to the kind of bottom right on this slide, you will see how the global games market per region look overall, and you can see that Asia takes a very large part of that pie.
And there is where kind of the audience metrics are, the increases in audience metrics are coming from. And China, part of it, but now also in the kind of Southeast Asia, India part. So Asia is a big market for mobile gaming in general. For G5, it is a much smaller market, so we have 7% of our revenue coming from Asia. We have more of a kind of a standard footprint for being a Western developer, so North America being the biggest market, where U.S. specifically is the absolute major chunk of that. We have a good foothold in Europe with 26%, which has been increasing over the last years, and then a smaller chunk in kind of the rest of the world.
If we then move to our portfolio, as I said, we focus on a target audience of women over 35, we have been focused on that target audience essentially since going into mobile games with our first ported games from kind of web games and going into mobile. We saw that the type of games that we did attracted a female audience, and we kind of nurtured that and went for that. So that is where our focus is. And today, we have, you could say, three main categories of games. We have the hidden object games, which is the biggest, which skews very heavily female, also tend to have a bit of an older audience. So that is our biggest genre, where we've also had the biggest successes, obviously, then over time.
So Secret Society and Hidden City, that was mentioned on the first slide, both are hidden object games, and Sherlock, our most recent success, is also a hidden object game primarily, but it also has some elements of Match- 3 baked into it. Match -3 is the second biggest category for us. It's one of the biggest in the mobile games market. So we're here, we are definitely a smaller player in a very big pond, while in hidden object, which is more of a niche market, we're one of the main developers of hidden object games. But Match-3 has been very good for us as well the last years, specifically with the Jewels of series of games, where Jewels of Rome is the biggest one.
I would say that if we then look at when we come to the details of the kind of development over the portfolio, I would say that in general, you know, we tend to invest by size, so we invest most in hidden object or Match-3, which is our biggest kind of genres. We still continue to invest in mahjong games and release mahjong games, which is the kind of third genre that we have. But it kind of falls off. And then we have what we call here the new genres bucket, where we test new mechanics and try to innovate and kind of see if we can fit in newer kind of genres that pop up in the market.
There we tend to then invest the least, but still, we, you know, we release one or two games into soft launch each year in these new genres and try to kind of experiment with the mechanics, to see if we can find a foothold in new genres. In the bottom left, you see the icon of the G5 Friends network, which is our social network that is built into all the games. It helps the players to, well, they can save their progress, or if they change device, they can easily restore where they were in the game. But not least, they can also play on cross-device.
So you can play on your mobile phone and then switch to your PC or your tablet when you come home, or so it's more fluent, and that is also one part of the G5 Store, which I will come back to in just a few minutes. But yeah, that is built into all the games and kind of creates and connects the games together. So, as I said, on the development funnel, we did some changes last year, which also has some bearings on the numbers for this year. So we've highlighted the two first columns here, the game idea and the early development and soft launch, which is where we made changes in how we vet the games when they are in early stages.
So how we do soft launch, how we test game ideas to come up with the best, or release the best ideas that we have to the market. So before, we released all the games that we developed to a global market, more or less, and kind of tested them a bit more live in the market, while now we do slightly different types of iterations early on, and how we test games early on, but also how we do soft launch, which is now select market and a bit more closed to give us the feedback that we need to kind of continue developing the best, the best idea possible.
So we release fewer games. We disclosed this in the Q3 report of last year, and since we did this change, all games kind of went into the same type of funnel that we have, and we haven't released any games on the back of these changes that we made. First coming out in well, very shortly, so that will be exciting to see. The other parts of the kind of game development life cycle are more or less the same as it was before. You release a game, you scale the game with marketing. At some point, you will reach a peak revenue, which is natural. You get kind of a more mature. You start tweaking a bit on how you do marketing. You get a more mature audience.
You usually see a drop-off in revenue, which then flattens out, and you have an amazing long-tail revenue, which I always come back to in these presentations because I think even though we've said it for probably 10 years by now, I still think it's an underappreciated part of mobile gaming that is much more sticky than people expect. So the revenues continue to come in from the games, and also they tend to be a lot more profitable in that stage as well because you reduce the marketing, and thereby you get a better operating result from the game. So, as I said, we've done a lot of work on the portfolio over the years, and 17 and 18, we a lot of changes to the development teams.
We got a lot of games out of that, Sherlock, Jewels of Rome being two examples. That increased the share of own games that we see in the portfolio while to a very healthy, kind of 70%. And we said—I don't remember exactly where we were when we started that kind of transition, but we were probably at maybe 30. So over, you know, 2017-2021, we saw a big transformation in how the portfolio was constituted. So now we have a much more healthy balance, which was, which was what we set out to do when we started doing these changes to the development teams. And now, last year, as I said, we've done some additional changes in how the process to making games are made.
So hopefully we'll see the same result coming out of those changes when we get new games out to the market. One big positive thing that we've had the last few years is our G5 Store. The G5 Store is our direct-to-consumer offering. So instead of going through Apple and Google or Microsoft in our case, which all of us do in this industry, we have a path of reaching the consumers directly. So that is the G5 Store. It is primarily today, the biggest part of it is on Windows, but it's also available for Mac and to a certain extent, Android, as well. So if we look at Apple and Google, for example, they charge 30%, for their hard work of publishing our games and supporting kind of servers and infrastructure, et cetera.
Microsoft is at 12%, so significantly lower. But with the G5 Store, you know, we take on board a bit more responsibility when it comes to compliance, et cetera, that costs us some. We have to pay for the payment provider, but we're still in single-digit percent in how much it costs us, so it's a significantly better deal for us, and we also get a direct channel to the consumer, which of course, is important as well. So today, G5 Store is over 12% of our revenue. It was 4%-5% last year in the same period in Q3, and you can, well, you can see the growth. It's very, very solid, and it's been growing like this more or less since we launched it in 2021. So growing bigger and bigger.
As I said, 12% today of our, of our revenue, of our net revenue, and we don't see why it couldn't continue to grow. We see peers that have double the share of revenue coming from direct-to-consumer platforms, and it is a very big market out there. So we don't see why we can't continue to grow the G5 Store, which also has a positive impact then on the gross margin, for obvious reasons. You can actually see that in the last report, where year-over-year, the gross margin increased from 67.6%-68.1%, so 0.5%. Up, while we also had a reduction in, or we had a larger share of revenue coming from licensed games, so that usually has a negative impact on the gross margin.
So, it really helps us in the long run, and also a new channel that we can promote the next game that is coming out with much lower fees. So we're very proud and quite excited about how well the G5 Store is performing, and let's see how the mobile ecosystem, if it by law or by push to the stores, that ecosystem will open up even more, well, then we have the infrastructure and the tools ready to take advantage of that in full. So certainly a very positive thing that we're very excited about. So, looking briefly at the financials. So as I said, 71% of revenue coming from own games.
You can see that we have a decline in revenue on the top, top chart there. We have a bit of a maturing portfolio of games, and Sherlock was released in 2020, so it's almost exactly three years today, I think. I think it was released in this time of the year. Whilst we were waiting for the new games coming out of the new pipeline, but still very healthy performance, and once again, I think the long tail revenue of the mobile games is underappreciated. So we have a lot of games that perform very solidly in this, and even though it is a maturing portfolio, it is a very kind of a gradual decline.
If we then move to the gross margin, as I said, the gross margin, on the other hand, is going in the other direction, thanks to the improving mix in own versus licensed game over time. This is a longer chart, so this starts at 2017, and as I said, we did a lot of work there, and we then started releasing games on the back of those changes. And then you can see the improvement in gross margin. We have a jump in 2021 when Microsoft lowered their fees, but then we've improved further from there, thanks to the G5 Store and also the mix between own and licensed games. One thing that I should mention that I forgot on revenue is, of course, as well, the average spend that we have per user.
That has been very stable over the last quarters, so we have an average spend on the paying audience. In mobile games, the majority of people don't pay. Even over their lifetime, the absolute majority, they never pay in the games. Roughly 10%-11% of the players pay at some point during their journey with our games. Every month, roughly 3% pay, but the ones that pay, they pay on average $63 in Q3, but it's been around $62-$64 the last year, which is a very strong number.
So for the paying audience, well, obviously, or we hope that they appreciate our games, and that's why they want to spend in them, but we have a very, very high spend in the games, and our games are very much focused as well on the in-app purchase part of the mobile gaming industry. So we have fairly low revenue coming from ads, so it's only 1%, while we have peers, or you have the broad range, you have games that have the complete reverse situation. They have 99% ads and 1% in-app purchase. But if we look at kind of the bigger peers, they're probably in the 20% to at least 20%+ range, while we only have 1%.
But we've always been very focused on providing a very strong gaming experience in our games, so ads can interrupt that. So we've always focused on the in-app purchase part, and that's why we also have very strong metrics there. Jumping back to while gross margin is strong, I think the EBIT margin, or EBIT, especially year-over-year, this year is a bit lower, especially if we exclude some one-off items. But one thing to remember when looking at the operating margin is that with the change that we did in the development funnel last year, we also stopped capitalizing on games that are not released yet. So we have a bit of an accounting effect that impacts EBIT negatively year-over-year. So good to bear in mind.
That does not, though, impact the cash flow. We continue to have a very strong free cash flow. Cash flow before financing activities was 25% in this quarter, despite it was impacted negatively by operating capital of negative SEK 15 million, if I remember correctly. Financing activities, we do quite a bit of buybacks, and have done over the last years. In Q2, if you look at the cash chart there in the lower right corner, cash is also impacted in Q2 specifically by the dividends that we pay. We both do dividends and buybacks, and have done that for years as well. Very kind of healthy underlying performance of the company in the kind of wait for the development funnel starting to produce new titles that we can bring to the market.
Then I will end on a kind of a brief outlook. As we've stated, you know, we expect to release one to two games globally per year under this new development funnel that we use. So we bring probably five to seven games into soft launch, which is not then visible for external parties, but we do one to two games globally per year. That is the goal, so we have this year's game coming out quite shortly. And we work actively then with a kind of a very broad pipeline of game ideas in various stages.
So you can see here, we have seven games in soft launch, but we also have 36 new game ideas that go into kind of the top end of the funnel, and it's being tested and figuring out which are best, and then they go into pre-production and then continue from there. The G5 Store continue to be a very positive part of the story currently. We expect that to continue to increase if it can grow with the same percentages sequentially. Let's see about that, but it is a very strong performance, and we expect that to be able to be a lot higher a year from now. We have kind of guide of a user acquisition or marketing games is a very big cost item in the P&L.
So we've tried to kind of guide for that in the last years, just to not give any negative surprises, and we expect to continue to have the user acquisition spend in the kind of range that we've guided last year, so 17%-22%. So if you don't hear anything, we will likely, or we will stay in that range. And we continue to have a super strong balance sheet. We have no debt, we have a very good free cash flow. We do the buybacks and dividends and remain that kind of, kind of remaining a very healthy company in that sense. So yeah, with that, I think I'll wrap it up.
Great. Thank you, Stefan. Right on time. We have time for a few questions. So let's start with the new games. Both the full release, but also the soft launches. What genres are you focusing on primarily, or is it very spread out between the three different main categories?
It is in all or all four, you could say, with the new genres, but I would say, you know, it kind of follows the waterfall that I talked about, primarily hidden object and Match-3, mahjong a bit, and then new genres experiment as well. So that's kind of. Yeah, the amount of games. If we have seven games in soft launch, the majority of them should be hidden object or Match-3, and then mahjong and new genres, maybe one or two. So that's kinda how it looks. And then what comes out of that and what's going into global launch is then, of course, the best ideas that we can create. And then if that is likely not a Mahjong game, but if it would be, you know, that will be released, and so that we'll see.
But I think that if I was a betting man, I think hidden object or Match-3 is probably a good place to start looking.
That makes sense. You touched on the different profitability profile on old versus new titles. So maybe could you just give maybe a few examples of what kind of profitability differences are we talking about in terms of EBIT margin on some old versus new games?
Yeah, but I can give a... You know, if we—if a game makes a $1 million or $2 million or $4 million, that doesn't necessarily require a differently sized team. So you have kind of a fixed cost part going into any game, but the big variable part is the user acquisition. So a game that is growing, you know, you can easily put in 40%-50% of revenue going back into marketing as long as you see it scale. But, you know, when you get into that kind of maturing phase and you have the long tail, you know, you're probably down to 15%-25%, or maybe even lower. So then, of course, if you have a title that makes... Well, you know, it's kinda simple math from there.
You know, if you have 10%, 15%, 20% difference in terms of how much revenue goes into user acquisition, well, that's what falls down to the, to the bottom line on the game as well. So, and then if it then makes four or two, you know, it, it is a huge, it is a huge difference, no matter the size, I would say. So, you know, that's the kind of easy way to look at it. Then you can, of course, make everything more complex and go back to your kind of finance studies in school and do very kind of, break it down even further. But I think that is the core of it.
Marketing is the big variable when it comes to a growing game, and, you know, when you get into the kind of mature phase and long, long tail, if you reduce that 30% or from 50% to 20%, then it has a huge impact on the profitability. So, you know, you might have less revenue, but you certainly have more profitability after peak than you have in the scale-up phase.
That makes sense. You're making good progress on the G5 Store sales, now 12% of revenue. Next year, we have the EU's Digital Markets Act entering force, so to say. Do you think you can see any? What kind of impact do you think you could see on your direct-to-consumer sales from this initiative?
No, but there are certainly, there's certainly parts of that legislation that requires us to do some extra work, that I actually had a call about that just before or when I was at the airport coming here. So we certainly, certainly need to look at that. I don't think, as far as I can tell, we're not, we're not Twitter that kinda rely on, on free speech and thereby have to exit the market just because it, it gets too tough to moderate. You know, we are in a entertainment genre, and our forums are hopefully a bit more friendly than what you can find on social media.
So I think, you know, there's some work to be done, but I don't see any kind of risks to it, operational risks that you kind of allude to, at this point.
Maybe on the other side, in terms of opportunities, could it mean that it becomes easier for you to convert players from iOS or Android to instead go into, like, your G5 Store, on the browser or in apps?
Well, that is certainly the hope. It is not. We primarily see new users coming in, or rather, given that it's sometimes hard to kind of follow the exact path from iOS or Google users or Android users, how they come to the store, the kind of direct transfers that we have in the games where people can move directly to G5 Store, that is not the main source of traffic. So, it might be easier. You could, we can hope, but that is not the main source of traffic, as I say. So, let's see what that means. I wouldn't kind of bank on that giving any kind of super boost, but if I'm proven wrong, you know, I would be happy to be wrong on that topic.
All right, so maybe not a game changer.
I don't think so at this point, but yeah, let's see.
All right. I think that's all we have time for. Thank you, Stefan, and thank you to the audience for tuning in.
Thank you. Thank you.