Earnings Call: Q4 2020

Feb 11, 2021

Good morning, everyone. As you can see, we have changed the format of the earnings call and we are now hosting them ourselves. To start, I would like to remind you that you can ask questions in the Q and A function where you can all also contribute by voting the questions, so that we can answer the most requested ones. And I won't promise that we will have time to answer all of them, but we will certainly try. You can also use the raise your hand feature when we reach the Q and A slide, if you want to ask questions verbally to us. With that, welcome everyone to G5's Q4 2020 earnings call. My name is Vlad Sublov. I am the CEO of G5 Entertainment. And with me on this call, I have Stefan Wigstrand, our CFO. We will take around 15 minutes to run through the presentation of the Q4 results. And then we will open the line for Q and A. So Let's look at the highlights of the year. And I'd like to summarize the quarter sorry, of the quarter. And I'd like to summarize the quarter by saying we continue to deliver on our strategy of organic growth that is driven internally by internally developed games and strong profitability from our more efficient and improved user acquisition, both of which we will talk more in about a minute. We delivered record earnings and strong growth momentum, which is pointing to a record breaking 2021. Our organic growth in USD terms was 16% year over year, while at the same time reaching all time high earnings and margins. It is important to remember we have virtually no revenue in Swedish kronor and we had some headwind during the quarter in the exchange rates. But most of our sales are happening in the United States, EU and Japan. So USD Comparison shows better shows you the fundamentals. Gross margin increased to 59% compared to 56% a year ago, as a larger share of revenues coming from own games. Based on the strong development of our own games, we also achieved Record profitability in the quarter. EBIT for the period was strong $52,300,000 only beaten by the record high Q3 2020. And it was also an increase of 266% compared to the same quarter 2019. The EBIT margin during the quarter was strong 15.6%. So in terms of the revenue from our owned games, it was 61% of the total revenue, which is up from 40% a year ago. And revenue from our new generation of games, and that's how we call games that we have released starting with the middle of 2019. That revenue went from virtually 0 to the current level organically and in only about 1.5 years. And in the Q4, it grew about 2 50% year over year to generate SEK 133 SEK1000000000 of revenue in the quarter. Our new generation of games stood at 40% of our revenue in the quarter, which makes it the biggest category if we break our revenue down between own new, own old and licensed games. So we have 40% in the new generation of games, 21% of revenue generated by older owned games and 39% generated by the licensed games, respectively. So this is now the new generation of games is now the largest category of games by revenue. And 1.5 years ago, it was basically 0. So this is it's almost like this really big and successful business that we have developed organically from 0 in the last 18 months. I think it shows you the potential of what the company is capable of. So in late December, we've also released a new match 3 game called Mayor Match. It's a combination of city builder and match 3 game. It's been live only for a short time in Q4, but the KPIs look promising. With the release of May or March, The total size of our portfolio is now 30 games. In 2020, we have launched 8 new titles and the portfolio of Own new generation games now stands at 13% out of 30 titles. For 2021, we have 6 new games in the pipeline. And one of them actually is in the soft launch already. So this new Growing business of the new generation of owned games is based on the investments we have made in expanding our development teams over several years. We have also invested quite a bit over the last year in improved efficiency of our user acquisition through improving the tools, strengthening the teams. And a lot of that was done during 2020, contributed to the growth of the audience. And as we have seen in the Q4, monthly average users rose 27% year on year and monthly average gross revenue per paying user rose 15% year on year. So not only We are able to increase the audience of players. We also continue to increase the monetization. This reflects the continued growth of higher monetizing match 3 games as a percentage of our revenue and also the improvements that our teams are making to our games on a regular basis and the improved quality of the audience that we are attracting with our more optimal user acquisition. We remain financially healthy and strong. We are debt free, profitable, highly cash generative. During 2020, we distributed SEK88 1,000,000 to shareholders in the form of dividends and share repurchases. And we reduced the number of shares in the market by 4.2% while still achieving a record cash position at the end of the year. I like to think of our buybacks as, as a sort of M and A where we see a very promising company making substantial progress with a great potential and we choose to invest the extra cash that we have in the shares of this promising company, which happens to be G5. And thanks to our outstanding ability to generate Cash, we have already repurchased shares for SEK 27,000,000 in 2021, so just in in a short period in 2021. And based on 2020 results, The Board has also proposed a dividend of SEK6.25 per share for 2020 and that is that corresponds to about 55 percent 55,000,000 seconds, sorry. And that is an increase of 150% compared to last year. So good progress there. Now let's talk a little bit about our Q4 figures. Starting with sales. So revenue was SEK335 1,000,000 and in Swedish kronor terms had increased by 2% compared to 2019. But in USD terms, revenue in Q4 grew 15% year over year. And as I mentioned, you likely know that Sorry, you likely know that our sales are generated outside of Sweden. So that is the USD figure is more of the underlying dynamic with the audience and the monetization. So year over year our own games continue to grow, while the license portfolio share is gradually shrinking. But that said, in Q4, Hidden City actually bounced back sequentially. And that happened because of strong holiday content. And because the game continues to perform well and the developers are addressing some issues. So you know and the strong Performance of Hidden City actually continued after the Q4. So the growth of our new generation games drove the expansion of the owned games revenue share to 61% of total revenue, as I mentioned, which is a clear improvement from 40% last year. And as I said, this is the largest part of our revenue now. So if you look at the year over year revenue in this segment, the new generation of games. We are seeing that they grew to 150% year over year. And this strong pace of growth year over year continues, and that's quite exciting. As I mentioned, we saw the improved monetization with monthly average gross revenue per paying user up 15% compared to last year. And that has to do with a number of things, but improvements of games primarily also that more revenues generated by Match 3. And thanks to the improvements we have made in the user acquisition. Let's move on to EBIT page. So our operating profit was at SEK52.3 million and the EBIT margin was 15.6 percent, the 2nd best we have achieved. It was a little higher in the Q3 this year. User acquisition costs were year over year down to only 22 of revenue and that it was 29% of revenue in Q4 last year. Sequentially, UA was very stable. I think we spent 21% of revenue on UA in the 3rd quarter, 22% in the 4th quarter. And I expect us to stay in kind of a narrow range of user acquisition expenses as a percentage of revenue. Like I said last quarter, we want to be predictable in this regard and avoid surprises, especially negative ones. So as you know, about a year ago, we have changed the management in our marketing department. And since then, a lot of Work has been done to make our user acquisition much more optimal. We have invested in creating a whole new tool set to do user acquisition. It's called Mars suite internally, and we are already starting to reap the benefits of that work. But the work continues and we have a very long road map to continue improving this solution. It's almost like a never ending work that has to be done all the time as there are changes happening in the ecosystem And so you can expect further improvements. The EBIT margin was also helped by a weak ruble and hryvna as well as higher position ratio as we invest more money in creating new games that should power our growth going forward. The gross margin was 59%, continuing the long term trend of expanding margins as a larger share of revenue is coming from on games. For the full year 2020, we achieved a record EBIT and a record EBIT margin, the highest achieved by the company to date. And this happened on lower UA spend compared to previous year. So you can see the sustainability of that, Despite the lower U. S. Spend, we are actually achieving year over year growth. We are driving the most promising segments of our revenue up, and we are achieving outstanding and record earnings for the company. With that, let's move on to the slide, The next slide about the cash flow. So as I mentioned, we had a strong operating cash flow. We had strong cash conversion during the quarter, which made us reach a record cash position despite the buybacks we have done. Capitalized development Expenses were impacted. They impacted cash flow by about SEK33.4 million. We repurchased own our shares for SEK12.4 million in the 4th quarter, bringing the total for the year to SEK66.5 million spent on buybacks and buying back a total of 4.2% of the outstanding shares. All in all, total cash flow in the quarter was almost SEK31 1,000,000. And despite the repurchases made and dividends paid during the year, we end the year with a total cash of SEK188 1,000,000, which is a record amount for the company for this time of the year. So, let's move on to the next slide and look at the year and kind of try to make sense of what happened over the course of the year in retrospect. I have to say, I'm very proud of the strong accomplishments the whole G5T made during this year, which wasn't the simplest one and the easiest one. So I want to use the opportunity to thank them for their efforts. We, especially I myself really appreciate that. And in many aspects, this year has been very different than expected, probably for everyone, but for us as well. And but we felt strongly that at the beginning of the year already that we have a competitive portfolio and we're adding competitive titles to this portfolio and we are improving the effectiveness of our user acquisition. So for us, the outlook was quite good. And that's what we communicated in the beginning of 2020 that we don't expect to set new records in the first half of the year. And that's what happened in Q1 and Q2. We already saw improvements from UA efficiency that we have created, and we have seen solid profitability. And then we have achieved what we hope to achieve in the second half of the year, which is the record earnings. And that was possible due to the improvements in user acquisition and the increased portfolio of new generation of games that did really well. So these two quarters, the 2 most profitable quarters in the history of the company. They made the whole year 2020 a record year for the company as we hoped at the beginning of the year. In USD terms, revenue grew 16% year over year. So it's a nice solid advancement. And I still believe that we are in the beginning of the new growth journey. And the January performance, which we will in a moment shows that the growth is picking up. And despite the headwind from the strengthening Swedish kronor, Our EBIT for the full year 2020 increased 2 66%. So I think that's a very solid result. And again, this was possible due to the fundamental factors. The strategy we have chosen, the investment in our own internal development teams that we have made. We started making several years ago and now we started reaping the benefits, which is competitive and popular new generation titles that we have released over the last year and a half and improved user acquisition, which is more efficient, and, you know, and which will continue to improve from here. So we have during the year expanded our user acquisition teams and also we continue to expand Pretty much every department of our company. We have over 720 employees now. I've mentioned the Mars suite. Obviously, we had to get people to take care of that. And I think that was very smart investment. And what I really like about the situation is that we are so profitable and so cash generative. And but that doesn't mean that we are restricting ourselves from doing something, right? We are fully funding all the departments of the company. We are building out new teams. And so the bottlenecks for the company's development is not has nothing to do with the money now. It's more about, you know, the talent and the ideas that that we want to implement and how quickly we can implement these ideas. So it's a really good position for the company to be in. On the downloads, we have seen 31,000,000 downloads in 2020, which is up 41% compared to previous year. As I mentioned, both the audience and monetization grew steadily over the year. So there's fundamental improvement in the audience reach and the monetization that supports the revenue and earnings growth. And Our own games, especially the new generation of titles, they continue to spur growth, reflecting the leverage that our business model has in driving margin expansion. And you can see that with the EBIT margin growing quarter to quarter during the course of the year. The JUUL's family of games continues to grow in a healthy way and continues to generate margins. And at the same time, Hidden City's Performance is stable and very remains very profitable. And as 56% of our revenue for the full year came from our own games. I'm extra proud. And to me, this is a clear proof of a successful strategy that we laid out a few years ago. What else I didn't mention? I think our development teams are stronger than ever. Our portfolio is more diversified than ever. And our development teams will continue delivering new games and they will continue to add content to the existing games. We have a roadmap for continuous improvements in UA and I'm really confident about the company's future. I think It's really things are really pointing in the right way. Let's put it this way. The trends are there. They're pointing in the right direction. There's always a question about the execution. But I think You have seen that we can execute in 2020. I've mentioned the year ended with a record cash position despite repurchases. And yes, I think we discussed it already. So with that, let's look at the outlook for 2021. If we look ahead to 2021, we are entering the year with the strong top line momentum. And I'm pleased to see that we have achieved 24% growth year over year in USD terms, in January with an EBIT margin of around 20%. This is a very strong result and this points to the possibility of seeing increasing year over year growth in Q1 and an EBIT margin higher than what we have seen in Q4. February is a shorter month and etcetera. But I think there is it's a very strong indication. So we entered the year with a well balanced and more diversified portfolio of games than ever. As I mentioned in our 2020 review, the jewels of family continues to grow. It's been a bright spot and continues to expand. But we also see promise in the recently released games such Sherlock and others, major match. We have seen an expansion of the gross margin that we expect to continue. As own games, We expect we'll generate increasing share of the revenue. And through that, we also expect higher EBIT margins going forward due to the inherent leverage of the business. We are working on improvements in all areas of our business, from the admin side to the marketing and to the development and to creating new games. That is not visible from the outside, but there's a lot of work going on. As I mentioned, one of the most important parts is Obviously, the marketing and we aim to continue to improve the Mars UA suite and related processes, which we expect to have further positive impact on our results in 2021. More games are coming as well. And as you have seen, we have already released the first of the communicated 6 games in January, trying out the new mechanic to adding a new mechanic to our portfolio. So that's the outlook for now than the current year already. Time flies. With that, I conclude my presentation. And I would like once again to remind you of either using raise your hand in zoom to verbally ask your questions or to post them in the Q and A box. If you see a question you are specifically interested in, Please upvote them so that we can answer the most relevant questions first, while we have time. All right. Stefan, are there any questions? Stefan, can you hear us, the questions? All right. Jesper is on the line now. Yes. I would like to hear. Please go ahead. Sorry. I'm still trying to figure it out. Yes, me too. Congrats on the reports here. I have a couple of questions. First, just in terms of January here in 2021, you mentioned obviously you're seeing very strong growth of 24% in USD terms, But also really a lot higher EBIT margins than we're used to. And I was wondering just in terms of the EBIT margin, is it Mainly driven by growth in your internal games, which has higher gross margins or is it more a case of there being really good Climate for use acquisition here at the start of the year. Yeah, it's really driven by the expansion of the top line. There's a very strong leverage in this business. I think you're going to see it. And that is what's driving it. So it's the efficiency on marketing spend, which is one big reason. And then It's the expansion of the top line and plus 24% is quite significant. I mean, even sequentially to Q4, That is quite a significant growth. And it's not like we have substantially increased our expenses from Q4 to Q1, not really. So and there you have the expansion in the gross margin and then the EBIT margin. And that is what's driving it. So Technically, if we look at our business from purely theoretical perspective at scale, there is no technical reason Why would White should not be able to generate 30% EBIT, for example. So we are moving in that direction. Obviously, it's not necessarily a straight line, not necessarily very quick movement, but we are moving in the right direction right now. And Assuming the continued efficiency in marketing and the expansion of the top line, we will see the extension of this trend. Thank you. And just elaborating on the potential Climate Freeze acquisition throughout 2021, I mean, there's as everyone probably knows, there's upcoming changes to iOS 14 and so on. And I was just wondering, what do you see For 2021 in terms of marketing, I mean, do you foresee, for example, you guys lowering marketing Potentially Q2 when these changes are coming and focusing on Android instead or how what's your thoughts on the outlook here? So I'm in touch with my marketing team about this. They are obviously in touch with the companies we work with in this area. And, you know, it seems like we have a solution. It is going to be some kind of a change. But the most important thing is that it's going to be the same change for everyone, right? So advertisers and company is generating a lot of revenue through advertising. We'll probably be the ones kind of suffering more as a result of these changes. But we don't really generate any advertising revenue to speak of. It's less than 1% at this point, but it's growing. But you have to remember, it's a growing market. So I think even if it's setback. It's going to be a temporary setback, and we're doing everything that we can to prepare for this transition. And we are in the same boat in the same situation as every other developer out there. And most importantly, I mean, people will not stop playing, and we will find a way to acquire users profitably because everyone is going to be in that situation. And so there will be adjustment of algorithms and adjustment of prices. So at this point, that's my view. I don't expect it to be dramatic. Not to mention, we are quite diversified in terms of platform revenue. We don't break it down by platform, but we are very diversified. I mean, very It's a really good balance in terms of platform revenue for us. In terms of M and A and acquisitions, I mean, there will be I mean, it's a huge market, right? There are 100 of companies. There will be transactions. I don't think that we have to be especially active. I think we have laid such a great foundation for continued organic growth that we want to see that happen. We want to see the market truly value that. And we want also to make sure that we apply the right kind of criteria to potential M and A targets. If we can wait one and a half years and generate the business of SEK 133 1,000,000 per quarter, Just by doing what we are doing, it kind of makes it less reasonable to go out and buy a company that makes that revenue because the cost associated is dramatically different. And acquisitions, Despite what you may think, you actually pay real money for acquisitions, right? You will have to give that money back. There is a cost involved, and it's very substantial. So we'll be careful, but we will make sure that we will look at the opportunities, especially strategic ones that brings synergies, the identifiable synergies, and that open new pathways for growth for G5. So we are on the lookout for such opportunities. But that's I will leave it at that. I hope this helps. Thank you. That definitely helps. But if I just may on the M and A part, additional question here. Just we've seen, Old question here. Just we've seen increased even more increased M and A within gaming During H2 of last year. And just are you do you still feel that there's a lot of attractive targets out there for you in terms of private companies? Or I mean, are all the good ones being snatched up? Or what's your feeling there? That really depends on what are you looking for. Again, the ecosystem is huge. There are new studios and new successful products in the store pretty much every month, right? There are many new discoveries. I don't think, I mean, the ecosystem is so dynamic that and so creative. And this is entertainment, right? There will be new stars. There will be new ideas that suddenly start being popular. So there is This never ending flow of creativity and new products, and some of them will become successful. So it really depends on what are you trying to achieve. In our case, if we want to use M and A as a way to enter new markets, We will be looking for a specific profile that other companies may not be looking at. So it's a really big ecosystem. I don't think, you know, my personal opinion is that It will be very difficult to kind of really consolidate the whole thing into just a few companies. There's there will always be space for a lot of companies and a lot of creativity. So while we will be looking at it, I don't think there is like a rush and window of opportunity or something that we really have to jump into. I think it's just an ongoing development of the ecosystem. And M and A is one of the tools that we can use to advance our position in the market. Thank you. It's interesting to get your thoughts on it. That was all the questions I had. And thank you for taking your time to answer. Thank you, Jasper. And we have a few questions in the Q and A box as well. Yeah. Can you just read them? I mean, it's going to be tested. How do you see the development of ads within games? Well, I think for us, it's a new thing. We've started serving ads in our games. The revenue is growing pretty fast. It's still a small percentage of our revenue, but we are determined to continue developing this area. I think And my long term view is that it is a very promising source of income. I hope there are more bigger brand advertisers. I hope to see these kind of companies in this space. And I think this is where it is moving. I mean, if you think about all the screen time that we are generating, it is enormous. It is as good or even better than the television. And so in theory, at least, this whole thing is going to move towards airtime costing comparable money compared to the television when we calculate it towards the reach that you provide and the quality of the audience that you have. Obviously, with the privacy development and tracking developments, It's a little bit of a setback, but I have to say, for television advertising, for example, they never had such advanced tracking, and yet they were able to develop into this large industry with a lot of revenue and profits. So we will certainly move into that direction with these changes or without them. And even if there's going to be a temporary bump on revenue. I think you have to think about what the growth is going to be for the market in the next 10 years. And that is the most important thing. So I believe in that. Also, I have to say our games are more on the mid core hardcore side of things in the game speak. So our games, they're really good at retaining users and monetizing them. They are a little bit less suited for advertising monetization compared to some games that are generating a lot of revenue through advertising. So I don't think for us, it's going to be a substantial percentage of revenue. But as I said, I think last year, And we repeated it several times over different quarters that 2% to 3%, 3% should be achievable. And we aim to get there. And when we cross 1%, we will certainly tell you and then you'll be able to track it. That's my view. Then we have a question from the moniker M on how many games we're working on with release in 2022 after the 6 games And that we talked about for 2021. That is a good question. You know, we aim to release several games a year. And there is a little bit of a balance between supporting the existing games and developing new games. If we're supporting all the games that we have released, we have to create new teams and that can be a bottleneck because you have to hire people, make sure they work well together. So there is a balance to be found. We will continue adding people. You can see that we've been hiring more people pretty much every year, and we will continue to do that. And we will certainly phase out some of the older games. We will certainly give up on some of the games that are not performing as the best games, and that will create the resources to assign to the new games. Our development plans for 2022 are only starting to kind of, you know, starting to have shape. And so we did not announce how many games we aim to release in 2022, but there will be some games, certainly. And we've got a follow-up on the M and A from Fredrik. If we're looking for game companies that are creating Similar games, so increasing market share or looking to broaden the portfolio, so with different kinds of Games. Yeah. Thank you for the question. Now I call me old school, but I want to see synergies. I want to see some added value of combining 2 entities. I understand this is from the previous era where money actually costs something. But also, we laid out our strategy 3 years ago with a slightly different situation when it comes to fiscal policy. I want to see synergies. We have some ideas about where the synergies, the actual monetizable synergies can come from. And so that will be our strategy and maybe at least for the next 3 months. And maybe we can have this discussion once again in the next quarter and see if our position has changed. But so far, I'm convinced we have to look for synergies. We don't want to just combine things just because they are combinable. And then we got to follow-up on that, on what type of added value you're looking for in M and A? Well, You know, we don't want to tell you. It's our little secret, but we have some ideas. And I think We haven't given up yet on this idea. So I will leave it at that. And then Matthew is asking if the typical demographic profile Of a user in our new generation of games are different than the legacy games? And if so, how that influences UA strategy? Well, I don't you know, that's okay. Multilayered question. So I would think that our demographic kind of changes because of how user acquisition is working and where they find the pockets of growth. So it's a little bit the other way around. It really depends on the type of the game. I would say that in general, It's very close to what was dominant before. There's a difference between match 3 game demographic and the hidden object demographic. So Hidden Object tends to be a little bit older, a little bit skewed towards female players. And Match 3 tends to be slightly younger on average. And there's like larger male player presence in match 3 games. So because we have more revenue generated by match 3 games. We're kind of getting more male players recently. So we are becoming a little bit less Well, the audience becomes a little bit younger on average and a little bit more male. But I mean, Still at the core of these games are games that appeal to a certain game preference profile. I can see, theoretically, there can be more men playing these games. It really won't change our strategy. It's just a way to explain the type of the player really, but obviously, every player is different. Different men play different games, different women play different games. And so you can expect that we will continue to be in this kind of peaceful, family friendly, but still adult games, puzzle games, like exercise your brain type of games based in the setting that appeals to kind of a little bit older demographic. We don't really have any specific goals to go into the younger demographic. I think we're very happy with where we are. You may say 35 plus predominantly female, maybe 30, 70 breakdown, maybe 50, 50 breakdown for some genres like Match 3. But we want to keep saying 35 women, because that really differentiates us and differentiates the thinking that you're using when building games for a different demographic. Yeah. That was what we had in the Q and A box for now. If you want to ask a question, you can either raise your hand. That option is still open. I don't see anyone or type it up in a fairly short period of time. Okay. Nothing. All right. I'm glad we've answered all your questions. With this, we conclude our calls. Thank you for joining us today And thank you for following G5. Goodbye.