The webinar for this morning for the earnings call. We repeat, as we usually do, that you will be in listen and view-only mode during the presentation, after which you can ask questions. You can either raise your hand, ask the questions verbally, or you can type them in the QA box as well, that you will find in the, in the Zoom window, and then we'll answer those, after the call as well. Yeah, I think we're ready to go, so I will hand over to our CEO, Vlad Suglobov.
Hello, everyone. Good morning. Thank you for joining the call, and thank you, Stefan, for the introduction. Stefan is, of course, our CFO. Let's begin and move on to slide number 1. The revenue in the second quarter this year was SEK 287 million, which was 13% lower than last year. That's in Swedish krona, and in USD terms, it was 14% lower. We saw a negative performance year-over-year in our actively managed portfolio, and that fell 13% year-over-year in USD terms. Audience monetization metrics and gross margin continued to improve as more revenue is derived through our own direct-to-consumer distribution channel called G5 Store.
So active portfolio is all of G5's games which receive regular updates, as opposed to the games in what we call harvest mode, on which we don't make any improvements, and this segment of games saw much stronger negative dynamics. Monthly average gross revenue per paying user was continuously strong at $63.7. G5 Store, the direct-to-consumer distribution channel, continued to show strong growth, and now it makes up 15.2% of total net revenue of the company, compared to 9.4% a year ago. So really good advancement there. As you know, G5 Store has lower processing fees than in the alternative stores. They are low single digits, compared to anywhere between 12%-30% that the third-party stores usually charge.
Growth for G5 Store was 42% year-over-year in Swedish krona and 40% in USD terms. So this is quite a significant pace of growth for an already substantial revenue stream. We are quite excited that G5 Store continues to grow strongly and not only year-over-year, but also sequentially. So growth compared to previous quarter was 9% in SEK and 6% in USD terms. Our user acquisition spend was 17% of revenue. That's compared to 19% last year. Gross margin remains strong at 67.8%, compared to 67.4% last year, and earnings per share was 3.02 SEK for the quarter, and that's compared to 4.96 SEK, same quarter last year.
So in this quarter, we paid our annual dividend of SEK 62.4 million, which is 80 krona per share. And despite this, our cash position at the end of the quarter stood at a strong SEK 193 million, up from SEK 173 million last year. We continue to have 0 debt and a solid cash flow, something we are very proud of. Let's move on to the next slide. I'd like to take a moment to talk about our development funnel, and the stages that games go through and how many games we have in each stage, so that you have a better understanding of our new games pipeline. As you know, we have evolved our development funnel, the new one, since the third quarter of 2022.
There are several stages that all new games are going through, and the way it works is that after the thorough process of testing and selecting new game ideas, they await the beginning of work in the shortlist for launch. So that happens before the first stage of this funnel. And once we have the resources available to start the work on a new idea, the idea with the most potential is selected from that shortlist, and the pre-production begins, the first stage that you see on the screen, during which major game design decisions are made. Once pre-production is complete, the development of the soft launch begins, the second stage, and then once it is ready, there are several stages until the engagement benchmarks for each stage are met.
We iterate in these stages, and these iterations can happen in the retention stage, as well as in the monetization stage as we work on achieving the benchmarks. The final soft launch stage is the scalability test. We only move to this stage when previous stages have shown the potential for the game to scale and the benchmarks were met. In this stage, we normally attempt to launch the game in a single country and scale the game's revenue with user acquisition in that particular country, and there may be iterations in this stage as well as we try to achieve scalability. In any of these stages, a game can be discarded if we fail to achieve the benchmarks we believe are necessary for scalability in the current market situation.
If the game proves its scalability, it is green-lighted for global launch, and the preparation for global launch begins. Starting in June this year, our focus has also been on improving the pace of iterations and on speeding up the movement of game ideas and the game development through this funnel so that we can cycle through new, interesting ideas faster, and so that we can filter through them faster to find the ones with the most potential, the ones that we believe can be scalable... in the market. This initiative that's going on in the company is focused on doing that faster and hopefully finding scalable ideas faster and just processing more ideas. This is the big change that the new funnel brought into the company.
Several years ago, we would just pursue, in a given year, maybe one or two new game ideas, and we would work really hard for a really long time on them, and sometimes we would find ourselves, you know, at a dead end, but we've spent years and millions of dollars pursuing that idea, and it will be difficult to abandon it. Now we aim to find red flags really quickly, and once they're found, to move on to another game idea. This way, in a given year, we move through much more, many more, new game ideas and, in search for the one that can lead to a successful game. As I said before, it takes quite a few attempts to find a hit game.
Even prior to kind of a more difficult market situation, we usually saw maybe one really successful game on the 10 games that we've made. So that's... These are the chances that we're working on. So it's important to move through new game ideas quickly enough to be able to find successful scalable ones. So during the course of the year, we normally expect to work on around 30 new game ideas, from 30 to 36. These ideas that we consider, that we try to test on the market, and we expect of these 30-something ideas to select five to six game ideas with the most potential that we see, to actually develop a build of the game, to test it on the live audience during the soft launch stages.
We expect that out of these 5-6 games, we aim out of these 5-6 games to proceed into global launch with one. But that's assuming that we are successful in actually getting a game with metrics that we believe are enough to find the scalability in the market, and that further shows that scalability in the scalability test. So it's a lot of technical details about what we do, but hopefully it gives you a better understanding of the work that the company is doing that is quite invisible from the outside in our financial figures at the moment. But this is the work that we're doing for the future.
So what you see in this slide is the slice of our development funnel as of the end of the second quarter, and from tens of game ideas that we evaluated over the last 12 months, we had 3 games that qualified and went into pre-production and early development stages, and we already had 4 games in various stages of soft launch testing. So during the course of the quarter, we usually make a lot of iterations in games of in different stages, and we may discard some games, and we may actually start pre-production or development of new game ideas that were not pursued last quarter. So there's a lot of work going on, and these games are continuing to progress through the funnel towards the global launch.
With that, let's move on to slide 4 and talk about our strong gross margin and stable performance of the second quarter. Our own games stood for a bit over 70% of net revenue during the quarter, basically on the same level as the second quarter last year. Our active games made up 63% of the quarter's revenue, in line with the 62% last year. Our gross margin came in at 67.8%, rising slightly from the 67.4% the year before, and mainly increasing thanks to the fast growth of G5 Store, which continues to be a welcome development for us. Monthly average gross revenue per paying user was strong, $63.7, compared to $62 a year ago. Let's continue to the next slide with talk about our operating margin.
Our operating profit or EBIT was SEK 21.8 million this year versus SEK 338.9 million a year before. This gave us an EBIT margin of 7.6% in Q2. And during the first quarter, EBIT got a boost from the revaluation related to FX, primarily from the Swedish krona versus USD. So in the second quarter, this trend was reversed, and we saw a negative impact from FX revaluations. When we adjust for that negative impact from other income and expenses as well, the EBIT margin would be 8.8%, versus 9.5% the year prior.
So at the same time, net capitalization impacted our earnings with SEK 8.1 million, compared to SEK 12.6 million in the same quarter last year, and we expect, this net capitalization, to continue to, go down- I mean, to be a less negative amount, going forward. Now, let's turn to talk about cash position. We pride ourselves on being financially strong, and this quarter was no exception. Cash flow before financing activities was SEK 6.5 million, compared to SEK 45.7 million last year. Total cash flow during the second quarter was negative SEK 56.3 million, compared to negative SEK 31.8 million last year. And both figures are after we paid a dividend of SEK 8 per share.
Both this year and last year, it happened in the second quarter, and it was a total of SEK 62.4 million this year and SEK 64.5 million, slightly higher, last year. Total cash at the end of the period stood at SEK 196 million, and that's up from SEK 173 million a year before. So as you can see, we can afford a large dividend and to continue to be profitable, and cash flow positive, and increase our cash position. So let's start to wrap it up here with some final thoughts on our further development. So we've seen stable revenue generation of the games in our actively managed portfolio and have continued to maintain a disciplined approach to costs.
By strategic initiatives and robust operational efficiency, we expect to continue to strengthen our operations for future growth prospects. New games are, of course, keys to success, and executing on the development funnel process will continue to strengthen our teams and build a promising pipeline of future games. During the year, we, as I said, expect to work on 30-36 new game ideas, soft launch 5-6 games, and we aim to release globally at least 1 game. We also expect the G5 Store to continue to grow and continue to boost our gross margin and profitability. We will continue to keep our UA spend at sustainable range of 17%-22%. And all in all, we expect robust cash generation, and a strong balance sheet, and remaining debt-free.
We continue to follow our strategy and see positive momentum in important parts of our business as we enter the second half of 2024. I'd like to end by thanking you for following G5, and also thanking the whole team at G5 for their outstanding efforts. This concludes my presentation, and we'd like to open the call for questions.
As I said before, you can either raise your hand to ask a question verbally or ask them through the Q&A box that you have available. We'll start here with Simon Jönsson from ABG.
Thank you.
Thanks you.
Yeah, can you hear me?
Yes.
Yes, Simon, we can hear you.
Yeah. Good morning, Stefan, and I'm assuming good evening for you, Vlad. So-
Evening, yes
... a few questions from me. First, could you maybe talk a bit about the current trajectory for the big games, Sherlock and Hidden City, please?
These are actually more stable than the other games. So the biggest games in our portfolio seem to be the most stable, which is welcome news, and we try to allocate substantial resources to evolving these games and making them better. There is a lot of work that's done, I know, on the developers' side, when it comes to Hidden City, and I know that we are trying to put our best resources on Sherlock and try to really think strategically how to evolve the game to extend its life cycle. And both games are obviously main drivers of our revenue and profitability as well.
All right, thank you. And, you mentioned four games in soft launch currently, and you also highlighted you want to release this one globally per year. Should we assume also that you still expect at least one global launch this year?
We do. This is what we aim for. But this is depending on the fact that we will be able to find a game that we believe is scalable, right? So we work through a lot of ideas, and we work through all these iterations in the soft launch to find the game that's scalable. And based on the statistics that we had, at least prior to 2022, we have calculated that we should be able to, you know, to find 5-6 valuable ideas out of 30 that would qualify, based on our testing in the market for the soft launch, and that seems to be happening. We are actually finding games that, we believe show the ideas, that show enough potential to go into the soft launch.
Where we've been having difficulties is actually building soft launch builds, which will show the scalability of the game that we've built, and it's obviously... That's the ultimate, the holy grail of it, right? So once we have the game that we believe is scalable with very strong metrics that we believe in the current market situation will lead to the scalability, that's the, that's the thing that we're looking for, and that's what everyone is looking for. So it will be a bit- it's a bit more difficult to achieve, and this is what we're really focused on. We'll see, you know, we'll see how it goes, but we have some ideas, some games in our pipeline that are showing promising results.
I hope that some of these ideas will qualify for global launch already this year, but we'll see what happens, of course.
Got it. And, do you think it's more likely that we see the potential global launch in Q4, or could it happen already in Q3?
I would say Q4 is more likely than Q3.
Yeah, makes sense. Maybe it's a bit too early to discuss this next question, but, I'm wondering if we assume you have a few successful new releases over the coming year or years, how would you assess that the share of G5 Store revenues could develop based on that? Should we assume that the new games have more third-party store revenues, or how should we think about that?
Well, I would say we see that the most successful games on mobile are also the ones that are most successful on G5 Store. Although, I would say on a higher level in terms of user engagement and user monetization. So if we were to find a scalable game, I would assume that it will lead to the increase in both of our mobile revenue, but also in the revenue of G5 Store. So I could, you know, say that theoretically I wouldn't be surprised if new game launches will not even change the trend of the percentage of the revenue that G5 Store generates.
Because if we have a very successful game, it will be successful on all of our channels, and it will be, you know, it will be the dynamic of the channel that we see in the revenue mix by channel. But this is highly theoretical, right? If we find a game that is very strongly scalable on mobile, mobile is arguably a deeper market with more users that we can reach in case we have a really strongly scalable game. And in that case, there may be more revenue coming from mobile platforms, and then G5 may be smaller as the revenue share of the overall portfolio. But again, this is so theoretical that I can imagine these two scenarios, basically. Wildly successful mobile game will reduce the share of G5 Store, probably.
Moderately successful game will likely not affect the trend that we're seeing, in terms of the percentage of the revenue that's generated by G5 Store.
All right. Got it. So basically, it sounds like you're pushing the new games on every platform.
Yes
From the beginning.
Yes, we ideally... You know, it's an interesting. Let me follow up on your question with a more interesting question. Like, going forward, is there a point in time when we start aiming for having games that are scalable on G5 Store, first and foremost? And maybe we aim for that specifically. I think that that is a valid question we actually are asking ourselves, like, when is the moment when we will say, "Well, why don't we evaluate if the game is scalable on G5 Store? Do we even care about whether it's scalable on mobile?" Well, this moment hasn't come yet.
So G5 Store overall revenue is pretty significant now, but if you look on a per game basis, I don't think it's enough for us at this moment to sustain, you know, a full development team. But I think we may be in a situation in a few quarters where we will say, "You know what? Even if we don't think this game is scalable on mobile, maybe it's possible to scale this game on G5 Store only." But this is purely theoretical. Right now, the way we look at it is that our best game, our best performing games on G5 Store are the ones that are most scalable on mobile, and the ones that are most successful on mobile. So we're aiming to...
I mean, we're still mobile first in that sense, but I can see that in some quarters or in a couple of years, this may change, depending on how the G5 Store trajectory develops.
So I'll follow up on G5 Store. So when you attract players or acquire users for the G5 Store, basically, is there a different competition for those eyeballs, you would say, compared to just going through the regular mobile platforms?
I think that once we acquire these users directly, they may be... I mean, what we see is that their metrics are much higher. We're trying to understand, is it because of something we're doing right, or is it because of just the pure selection process, where, you know, people are only willing to download games from G5 when they're directly, when they're very loyal to G5, they know our games well, and then it's kind of a selection of the best players, the most loyal players. So we're still trying to figure that out. But I think that we... Sorry, what was the question? I lost my train of thought.
Basically, if there is a difference in terms of what you're competing with for attracting-
Right
Eyeballs to G5 Store versus mobile platforms.
Yeah. We're certainly trying to make the experience in G5 Store much more about G5's games, right? If the players on mobile, they're probably exposed to many more games, and especially if they're frequent visitors to the application stores, they see a lot of other games as well. So the experience in G5 Store is different, obviously, and so we try at least to use the attention of the direct consumers that we have as much as possible, and to entertain them as much as possible, and to give them as many options as possible of you know, continuing to enjoy our portfolio of games... and you know, it seems to be working, although it's a bit of a chicken and egg question right now we're trying to explore.
But, we're doing everything possible to really focus our direct consumer on our existing and new games, and the live events, and everything that's happening within our portfolio. So and we have a number of initiatives to support that, and to have more reasons for the players to come back, to G5 Store and to G5 games. We definitely see that potential. We definitely see the potential of having a very direct relationship with the player, compared to acquiring them through a third-party store, where we have less control over their experience.
I see. And the potential you talk about, is that, like, in terms of cross-selling potential, or, what do you mean more specifically?
It's in terms of cross-promotional perspective, in terms of, just even informing players about live events and special deals and what's going on in our games. We just have a way more- we have more flexibility in the way that we bring this message to our players, through G5 Store compared to third-party stores. So it's, you know, it's, it's a big difference, really. So, we have a customized experience in G5 Store, which highlights you, you know, the best things that happen within G5 portfolio. And, you know, think of it as a, as a service. These games are services. It's almost like a TV channel, if you will, where certain things are happening.
There's a new event every time, or every couple of weeks there's a new event in Jewels of Rome. There's a new event in Sherlock. There's, like, a month-long event, and then there's a week-long event, and there may be some limited things that work only for a couple of days. So we do a lot of these, a lot of these things. But our ability to pull the user and inform the user about these interesting things that are happening in our games is limited on third-party stores, compared to what we can do if it's a very direct relationship. So we're trying to use that as much as possible to keep users engaged. I think we are succeeding, so we aim to further develop it.
Basically, we want to use this direct relationship as much as possible in every imaginable way, and to build user experience that is very G5-focused, and that will aim to, you know, give you enough entertainment to fill your whole day, and then you would not need other games, obviously. So that's the purpose.
That sounds good. So one last question from me. You didn't buy back any shares here in Q2, so how should we think about that?
Well, you know, as you can see, we have a very strong cash position. We remain cash flow positive and profitable, and we've been stacking up some cash, and we aim to deploy this cash as effectively as possible. So if there are opportunities to do more buybacks, we will do that, and I will leave it at that.
Got it. Thank you, guys. That's all from me.
Thank you, sir.
Thank you, Simon. And then we have Hjalmar Ahlberg from Redeye. I think we can hear you now.
Thank you. Yeah, maybe first a question on the information you provided here about the development funnel. I mean, let's say if you have a global launch, will you then have to allocate the resources to that game and then reduce the kind of resources you have to continue to develop new games, or how will that work? Or will you kind of add new resources when that happens?
So the way I look at it is that the only purpose that we have with this funnel is to find a scalable game, and we know it's a rare event. So when that event happens, when that happens, we will focus all of our resources on realizing that potential as much as possible. So, as much as that, we can put on hold other ideas, if needed. So I don't... My view of it is that we will worry about it when it happens, right? If we find a scalable game, we just run with it, and of course, this will affect our ability to work on other ideas, but then we can gradually increase the team there to continue working on new game ideas, as we can.
But once we've found the scalable game, it is not a priority anymore, at least for some months, while we're ramping up operations on a game that's scalable. So that's my plan. I think it makes sense. I don't think we need to have any extra capacity. We just need to have a sufficient capacity to pursue several game ideas, and we just need to feel that if we have a scalable game, that we can rather quickly assemble a complete team to run with this game as fast as possible.
Mm. Got it. And if you this new funnel you showed, how has this changed, I mean, the last year? Or is it kind of been the same number of games in pre-production soft launch, or has this increased recently? Can you give some sense of how that's developed?
That's a great question. So we, we introduced this, this chart, this graphic, to then show you some progress from one quarter to another. We'll find a way to communicate that, but usually over the course of the quarter, a number of iterations happens. Some games get discarded, and we did discard a number of games over the last year, and some new games go into the funnel from the top. And then some games move from different between different stages. So that all happened. We'll have...
We'll find a way to communicate exactly how much happened in that area from one quarter to another, but we had to establish some baseline, and so we do it this quarter, and there will be news in Q3 report, and we'll try to communicate it in a clear way, how much work was done over the quarter.
And also a question on the Twilight game. Have you seen any potential improvements in terms of monetization for that game?
We have seen improvements, but they're still iterating on it. But we haven't given up on it yet. It's an active iteration, so we're still doing it. Yeah.
Looking at UA, you spent kind of in the lower end of your range here. I mean, how are the returns on UA investments in general? Is there any change there, or is this just kind of on lower level because you don't have any new launches or what impacts that level?
Yeah, it's a little bit of both. The, the, you know, user acquisition is challenging with limited visibility. And also there is an ongoing sort of redistribution between mobile and G5 Store. And I would say the visibility in terms of user acquisition in G5 Store is also not ideal. I mean, this is just the new reality that everyone in the market has. And so I think when we decide on the budget, we go with what's possible, right? And the aim is to have good return on advertising spend, and that is what's driving the volume. And then the resulting spend that we have is kind of a function of the opportunities that we had to acquire users.
Got it. And looking into the second half of this year, I mean, there could be some potential upside if we launch a new game, although if it's in Q4, the revenue might come next year, I guess. But do you see any kind of support from maybe improving mobile or gaming market in general, or do you think it's still kind of a tough market out there?
Yeah, generally we see some improvement in the activity and monetization towards the end of the year, as you know, and around large holidays. There hasn't been a lot of that last year. Maybe there's a better situation this year. You know, I think, though, speaking on behalf of the whole industry, I think everyone would welcome lower interest rates to see if that will improve the situation, and we are. If that happens, I think that will be more positive rather than negative for the market. So that may be a positive development. But generally we will see. We're also very excited about the development of G5 Store, obviously. And, you know, sometimes it kind of slows down a bit, and then suddenly there's a stronger growth that we see there.
I mean, we've gotten to 15% of revenue, where it's really interesting to think about how big it can get in few quarters' time. And I think, you know, it's, it's a very exciting thing, to have this base of direct-to-consumer channels, and we have some interesting new ideas, that we'll be testing soon about going, more direct to consumer on other platforms as well, within the, within the, the, the guidelines, of third-party stores. So some positive development may, may happen from there, but you, you can consider this as a continuation of G5 Store or, or an expansion of G5 Store, offering.
Yeah. And maybe I have a final question. Just, I mean, a few years back, I think you provided some information on, on the platform mix, Microsoft, Apple, Google, et cetera. Is there any big change in that recently, or any indication that that's kind of stable where we saw this?
Yeah, well, obviously, G5 Store is growing, and now it's one of the largest platforms. In fact, I think in July, it overtook Google Play as a platform for us, right? So we derive more revenue from G5 Store now than from Google Play in terms of net revenue. And it continues advancing, so it's now our top three platform already. And I think... You know, I don't see why it cannot be our number 2 or number 1 platform, but it will take time to get there. But that's why it's also very exciting how far we can get with G5 Store.
Right. Thank you very much.
Thank you.
Thank you, Hjalmar. We don't have anyone else that has raised their hand, but we have a few questions in the Q&A box. First one is from Anonymous, and the question is: How is the changes in the marketing rules made by Google and Apple a few years ago affecting G5 today?
I don't think they're affecting us positively, but it's kind of an equal playing field for everyone in the industry, more or less. So I think the general impact on the games industry for these privacy initiatives was negative. I don't know if that improved anyone's privacy, but it certainly limited the ability to try to be granular in the marketing to go after a specific player profile. So that is now more probabilistic, I understand, rather than direct and hard tracking. And so that generally made user acquisition more of a, you know, guesswork than the exact science. But that happened for everyone in the industry, and advertisers and advertising platforms, they're adapting to it, and so do we.
And that's why also we go directly to consumers because it helps, at least in part, solve that, that challenge. But yeah, it was not a positive thing for the industry, for sure.
Got a follow-up on that. If we've changed the way we do user acquisition in recent years due to the changes made?
Well, the way, the way it works basically is that you have less certainty that the numbers that you're seeing represent the actual situation. And so, it probably did affect our... You know, we, we could have probably made better decisions and better optimizations in marketing if the situation was as it was seven years ago. However, it is what it is. And as I said, everyone is trying to adopt their different approaches that you use, but also advertising platforms such as Facebook, for example, and other channels, they're also aiming to find a way to make it work for advertisers because they want advertising revenue to go up.
And so I think, you know, the industry is trying to find a workable solution, and the companies are adapting to this new reality, but it is an ongoing channel challenge for everyone.
Then we have a final question here from Ole. "How many of your current games in pre-production, soft launch, are externally developed?
Yeah, of these games, three games are actually licensed, so developed by external developers. And then for our internal, we are aiming to improve the pace of evaluating new ideas and also testing new ideas on the market internally. So, I'd like to show you over the next few quarters how we are able to process more game ideas, kind of discard more, start work on more ideas, do more iteration, more iterations. So I'm working, we're working, the team is working towards that, with a goal, definitely going through more opportunities. But licensing and our publishing relationship with the developers that we work with is a great addition to that, because this way we can leverage our partnership with external developers for more, you know, independent thinking, right?
Because we think about things in G5 one way, and there are some external developers that they use their own approach. So this is good, and we can also test our filtering mechanism on their games, and this way just increase the chances of finding the game that's scalable. And I think if we find a game that is scalable, that comes from publishing, that's great, and that's amazing. If we find such game coming from internal development, that is great as well. We're also looking at expanding collaboration with external studios to maybe pursue more ideas that are internally developed by outsourcing work on the prototypes, and the soft launch builds to external studios.
So we're looking at different ways of organizing this, with the idea of creating this really nice profile and good, you know, finding a way to pursue a lot of game ideas, in a shorter period of time, and having both internal and external thinking applied for improving the chances of finding a successful scalable game.
All right. We have no one that wants to ask any questions by raising their hand. We have no questions either in the Q&A box, unless something pops up now, which it didn't. Okay then, I think that was it then. I will then hand back to Vlad for final remarks.
Well, thank you everyone for attending the call. Thank you for your questions and for the fact that you're following the company. Have a good rest of your day, and see you next time.