Welcome, everyone, and let's begin our presentation. I'll start by giving you a brief overview of this morning's report, starting with revenue development. Revenue was $19.3 million . It is a decrease of 20% year-over-year and 4% sequentially. We unfortunately continue to see a decline across all three main pillars of revenue. Sherlock, Hidden City, and the Jewels family of games all have shown declines in the period. Hidden City declined 11% year-over-year and 6% sequentially. Sherlock declined 23% year-over-year and only 3% sequentially. The Jewels family of games, however, continues to be the weakest performer, declining 39% year-over-year and 12% sequentially. As we have announced last quarter, the Jewels games, together with The Secret Society, have now been put in harvest mode in September.
Our older games are now mostly complete in terms of functionality and content, so our focus going forward is on fine-tuning them for the best performance and operating them for the best return on investment in the long run. Our main games have a long tail of revenue that will generate cash flow for years to come. On the bright side, we have seen a very strong performance in the third-party distribution on the G5 Store during the quarter. Revenue from the distributed third-party games increased 41% sequentially. Interest from other developers is increasing as we deliver solid revenue share reports to the developers already on the G5 Store, and the pace of new game deals and releases is gradually increasing as well. As a consequence, we have also reached another all-time high gross margin of 74.1%, up from 71.2% last year.
The reasons are the continued growth of our direct-to-consumer channel, G5 Store, including third-party distribution, the growth of our advertising revenue, and the continued efforts to monetize players on mobile devices directly, including through the web shop. Monthly Average Gross Revenue Per Paying User came in at $75.2 , a 6% year-over-year increase, reflecting the high quality of our loyal audience. User acquisition was 18% of gross revenue, down from 21% a year ago, and user acquisition investment decreased 31% year-over-year to $3.4 million . Moving to profitability, EBIT was $1.9 million . As communicated before, we have carried out two waves of optimizations during the year, and this optimization is now substantially complete. Our severance costs in the third quarter were higher than we anticipated and guided for, but we have also achieved higher savings than we expected.
Our current assessment is that we have created annualized run rate savings of around $14 million , up from $11 million we communicated last quarter, and we expect the team to stabilize around 450 by the end of the year. We are now operating a much leaner organization, and as you can see, it shows in our profitability. At the end of the quarter, our cash position stood at a strong $24.3 million , including liquid short-term investments, and we remain debt-free, and we continue to have a strong balance sheet, which gives us strategic flexibility. Now, let's move over to the G5 Store and our direct-to-consumer strategy. The G5 Store is now established as the clear number one among our distribution channels.
The single-digit processing fees in the growing G5 Store continue to be a key driver of our margin performance, given that third-party mobile app stores typically charge between 12% and 30%. This cost efficiency directly contributes to our improved profitability and the expansion of our gross margin. G5 Store revenue continues to grow overall. As I said, revenue from third-party distribution in G5 Store grew 41% sequentially, while G5 Store revenue overall grew 7% sequentially and 16% year-over-year. G5 Store now accounts for 28.4% of total gross revenue of the group. The share of payments from the players on mobile devices processed directly continues to grow rapidly. After reaching 11% in the first quarter and 17% in the second quarter, it has now reached 21% of mobile gross revenue in the third quarter, further reducing platform fee exposure.
The expansion of the G5 Store as a distribution platform for third-party developers continues. As of the end of the third quarter, 19 games have been signed for distribution on the G5 Store, compared to 12 games at the end of the second quarter. Revenue from third-party games, as I mentioned, is growing steadily, and we continue to be on track to make this a significant fourth pillar of revenue for G5. Now, let's look a bit more in detail on the development during the quarter. As mentioned earlier, all three pillars of our revenue, Sherlock, Jewels family of games, and Hidden City, continue to decline in this quarter, which explains the overall negative dynamic. Our own games accounted for 65% of net revenue compared to 73% a year ago, as own games declined faster than licensed titles, and third-party games on the G5 Store added a growing share.
At the same time, the direct checkout combined with the G5 Store growth improved the gross margin. Let's now look at our operating profit for the quarter. Reported operating profit for the period came in at $1.9 million compared to $1.3 million last year. The reported margin was 9.8% versus 5.5% a year ago. EBIT was negatively impacted by severance payments of $0.8 million and positively by a one-off release of social security fees of $0.3 million, and also by currency exchange effects of $0.3 million. Adjusting for these, EBIT was $2.0 million compared to $1.4 million last year, corresponding to an EBIT margin of 10.6% compared to 5.7% adjusted EBIT margin last year.
In addition, the net capitalization impact on earnings was -$0.9 million compared to +$0.1 million last year, as capitalization decreased due to smaller game teams and games moving into the harvest mode. The underlying cash generation, or EBITDAC, of the operations was a strong $3.0 million. User acquisition, as I said, was 18% as percentage of revenue compared to 21% in the third quarter last year, or $3.4 million compared to $5.0 million last year. Now let's turn to the next page and talk about our cash position. G5 remains debt-free with a strong cash position of $24.3 million, including liquid short-term investments. Strong reserves combined with the return to profitability provide us with the flexibility to fund new game development and execute on our marketing strategy.
Operating cash flow was $0.7 million, $4.5 million last year, impacted by working capital movements of - $2.5 million, and we used $0.3 million for share repurchases compared to $0.9 million last year. Cash flow adjusting for interest-bearing investments was - $0.2 million, $1.1 million last year. Let's start to wrap it up with some final thoughts. As we move through 2026, we remain focused on key drivers. The workforce optimization is substantially complete with annualized run rate savings of around $14 million, and the team expected to stabilize at around 450 by the end of the year. We are committed to having compact teams that make impactful changes supported by the advancements and tools. We remain vigilant about the cost structure while maintaining product momentum across the game portfolio, the G5 Store, and other initiatives.
We will continue to sign and launch high-quality third-party games in G5 Store to solidify the store as our fourth revenue pillar. We will continue to grow advertising monetization, which increased 53% sequentially in the quarter, as another tool to stabilize the portfolio performance and further improve the gross margin. Finally, our new game continues in soft launch with the strongest short and medium-term metrics we have ever seen. Further iterations over the coming quarters will focus on its long-term metrics, which will indicate the game's scalability in the market for us. We remain committed to financial discipline and generating long-term shareholder returns through dividends and buybacks. With this, I'd like to thank the whole G5 team for their resilience in this time that is not very easy time, and I'd like to thank our shareholders for their trust.
This concludes our presentation, and we'd like to open the call for questions.
Yes, as I said at the beginning of the call, you can type your questions in the Q&A box, or you can also raise your hand to ask a question verbally. We have a few in the Q&A box. If we start with Hjalmar Ahlberg, "Do you have an indication of the UA level going forward?
Yes, we are looking at it as a function of a performance of a particular title. In the situation where we have just moved some of our bigger games into harvest mode, basically that is because we do not see the possibility to scale these games in the market. At the time, there is, so to speak, less rationale to spend high amounts on user acquisition. We want to make sure that when we spend on user acquisition, we can see clear path to recouping that money. When we move a game into a harvest, it basically means that we do not see that path on the game anymore. In the short run, user acquisition spend as a percentage of revenue is lower than it was before due to that fact.
On the other hand, we have ongoing needs of the new game and the soft launch, where we actively acquire users in numbers that will allow us to analyze the metrics of the game better. We are also investing in the marketing of G5 Store and in the marketing of the third-party games on the G5 Store. We have a situation where user acquisition spend is being reallocated from older games in our portfolio to these third-party distributed games, and also to the soft launch needs of our new game as we get more confident in its metrics and we try to spend a little bit more to get more data to understand the metrics better and have a better look at the medium and long-term metrics. The interplay of these factors will determine user acquisition levels.
I would say, as we said before, if user acquisition spend is going to stay within the brackets that we have outlined before, 18%-22%, we will not really try to guide for anything else. You can assume that we will try to stay within that range, which historically has been normal for us. If we are going to deviate away from this range, as we have made a commitment, we will try to guide for that. For now, I think we are staying within the previously communicated range. Yeah.
Very great. We have Simon Jönsson who raised his hand. There you go. I think you can speak now, Simon.
Hello, guys. Good morning.
Morning.
You hear me?
Hello, Simon. Yes, we can hear you.
Oh, perfect. Perfect. Thanks for that, and thanks for taking my questions. I missed the early part of the presentation, so maybe you already touched a bit on this, but I wonder how the third-party initiative is doing on G5 Store, if you are starting to see some real impacts of that yet, or how that is going, and if it is contributing positively or negatively to EBIT.
It's going well. We mentioned that sequential growth was 41% in third-party distribution revenue on G5 Store. It's quite a development, obviously, in terms of revenue. It has a positive contribution to our EBIT already, we can say with, I think, a good amount of certainty at this level. As we scale this part of our business, the contribution will increase over time. We think it's a great opportunity, really. You don't have a PC store for the players of this particular profile where they could play their favorite free-to-play games on a large screen. We believe there's an opportunity for us to find that audience and to bring extra revenue to the developers who are also in a difficult situation with the current situation with user acquisition and growth in mobile stores, where it's very expensive to acquire users and organic downloads are virtually zero.
I think there's a mutual interest between the developers to find that audience on personal computers, and we also see that the players are also very interested in such a marketplace. We have all the components in place, and it took us some years to develop these components. Everything from direct payment processing, supporting all payment methods, doing it very efficiently in terms of the commission, having user profiles, having a launcher, having analytics for the developers to look into and understand how users are going into the game and monetizing in their game. All of these components are there, and it's all based on the years of G5's investments for our own purposes, right? Because G5 Store started with our own games.
As we mentioned, we believe this can be a fourth revenue pillar for G5, and we see that the interest from developers continues to increase because the store is delivering on its promise of generating very significant incremental revenue for the developers. We are carefully reviewing the games that are interested in coming to the G5 Store. We want to keep the selection relatively limited. It will be a curated portfolio. It's not going to be a store with tens of thousands of applications, obviously. So far, the interest is very high and increasing, and we have games of different genres sort of adjacent to the genres that we focus on, appealing to the same target demographic, but still games of the genres that we didn't have in our portfolio. These kind of games are going into G5 Store as well soon.
It will be very exciting to see how this develops over the next quarters, the following quarters. I can see you also wanted to ask about the advertising, right? Yeah, we are experimenting with it. Because there are many games on mobile that monetize through advertising, and of course, it's interesting for us to see if G5 Store would work as a destination for these games as well. We are running some experiments, and I would say the results are encouraging so far. This can be another stream of revenue for games distributed through the G5 Store, and we'll provide all the needed tools and integration to the developers to easily switch between mobile ecosystem and personal computer ecosystem and make revenue.
What do you expect for kind of long-term margin potential for this business when you gain some scale?
In a way, this business is not as profitable as developing your own game, right? But on the other hand, it provides this diversification, and it provides an ability to form large portfolio, which in terms of the life cycle of games, is much more, again, diversified and much more stable overall, right? And it's not as capital intensive as developing your own games. Certainly less capital intensive. I think the potential here is great. It's not going to be as profitable as developing your own game and scoring a big hit, but it can be a lucrative business for us, certainly. We've had experience with publishing games from other developers before. We've worked at some point with 80 studios publishing their games on mobile, if we look back some years when we just started working on the iPhone and were increasing our publishing business.
We have certain reputation in the industry as a partner for developers. I would say good reputation, and certainly organizational experience with that. We are ready to scale this business to onboard more games, to license more games. It should be relatively smooth process for us. We're quite excited about the potential here.
Interesting. Thanks for that. One final question from me on capital allocation. What's your view on that, your overall view right now, balancing between investments, dividends, buybacks, et cetera?
Yeah. Well, obviously in a situation where we have this top line pressure, it helps to have reserves and just feel better in that sense, feel better that we can fund the initiatives that we need to get through this valley, so to speak, and hopefully come out on the other side with having turned around the top line dynamic. We are spending on doing buybacks because the valuation seems appropriate for that type of activity. I wouldn't exclude going back to paying higher dividends if we see that we're able to continue to maintain the profitability, which has been an issue for several quarters, which has now been addressed. Under the top line pressure, obviously the question is how sustainable that is. Depending on how things will go from here, we will probably do something relatively balanced. We want to continue doing buybacks.
We have the mandate from the board to keep doing that. We need to make sure that in case we see that we have a scalable product, we have enough money to scale it in this difficult user acquisition market. That's an important consideration as well. We are committed to providing returns to shareholders, as we mentioned, through buybacks, but also through dividends. With regard to dividends, we will act appropriately to the profitability that we are showing, and that's in the company's policy on dividends. That's stated as well. Nothing unusual in that sense, the continuation of what we did before.
I see. Thank you so much for that, Vlad. I'll get back into the queue.
Thank you, Simon.
Thank you, Simon. We have no other that has raised their hand currently, but we have a few questions in the Q&A box.
I feel like I answered one of these just now.
Yeah.
Yes.
Yes. The advertising.
Right. Yes. Anyway, it wasn't Simon's question. It was just staring me in the face, so I thought it's there. Yeah.
Now we have another question from Ole. "What's the status of new game? Any change versus three months ago regarding the potential or metrics?
The good thing that we're seeing is that the metrics are gradually improving, and so far, whatever depth in terms of the gameplay time we reach and analyze within the game, once we have enough players getting to that point. We see that these metrics are good, and then gradually they continue to increase as we work on the game. That's a good thing. Not so good thing is that setting up the game right for medium depth, so to speak, and long-term depth and medium depth of gameplay requires certain amount of players that actually get to that point, which in the current user acquisition market, first, is an expensive endeavor, and second, you have to wait as well. We are gradually progressing there. The iterations seem to be bringing results, so that's why we haven't canceled the game yet, unlike many other games.
But it is difficult to say with certainty that considering the break-even period for any user acquisition activity right now, we're not at the level of certainty where we can say, "Yeah, this game is certainly scalable in this market." We are sort of working towards that understanding. Unfortunately, I have to say, we have shut down games before, somewhere around the point where we are now in terms of developing that understanding. I really hope that we have positive results here, but we'll have to wait and see over the next few quarters. That's the situation, essentially, without going into technical details of what exactly works, what exactly needs improvement.
All right. I think next question is from Hjalmar. I think we touched upon this one slightly, but it is, "What do you see for the gross margin? Is there potential to improve the gross margin even if third-party games continues to grow?
Yeah. Well, there is potential, right? But we have two counter forces here. One is the obviously G5 Store, lower fees on average, doing direct payment processing, having more advertising monetization, which is a force to push our gross margins higher. On the other hand, obviously, since gross for us, net for us excludes store fees and royalties, if I'm not wrong, Stefan, right?
Yep.
Then the bigger G5 Store third-party distribution business becomes, the higher will be the share of revenue paid to third-party developers. So, the gross margin indicator that we are tracking, it's going to be the interplay between these two forces. If G5 Store becomes giant, that's a pressure on the gross margin, obviously. On the other hand, if we continue delivering great results when it comes to direct payment processing, when it comes to also advertising monetization, this will offset that effect. So that's the situation. It will depend on how the business develops going forward.
Okay. Can't see anyone else that has raised their hand, and we don't have any questions in the Q&A box currently. No, nothing new there. Okay then. Then I think it's not much for us to do than to wrap this up. So hand over to Vlad for final remarks.
Well, thank you so much for spending this part of the morning with us and for listening to us and asking questions, and I hope you have a great day. See you next time.
Thank you all.