Earnings Call: Q2 2021

Aug 11, 2021

Welcome everyone to G5's Second Quarter 2021 Results Call. My name is Vlatsuglobov. I'm CEO of G5 Entertainment. And on this call, we have also Stefan Wixtrand, our CFO. And we're going to take about 15 minutes to run through the presentation of the 2nd quarter results, sorry, and then we will open the line for Q and A. So I'd like to summarize the quarter by saying that we continue to deliver on our strategy and that it is clearly paying off. Our main growth driver is our new generation of games. Revenue grew 3% in USD terms compared to the Q2 last year, which was, as you know, boosted by lockdowns at the time. So for our own games, growth was 23% year over year. And if we look specifically at the new generation of games that was released within the last 2 years, the growth year over year was 74%. These numbers are all in USD terms. As you may know, our sales are mostly happening in U. S. Dollars and euro and some other currencies, not the Swedish krona that we report then. So And there were big fluctuations in the exchange rate. That's why we are referring to the USD terms quite often because they show the true underlying dynamic of the business. So our new games now stands for 47% of our revenue. This is up from 43% in the Q1, and this percentage continues to grow, and we're very happy about it. So normally, Q2 is seasonally weak, and it's been for years seasonally weak because this is when the weather heats up and a lot of players head out on vacation. So last year, obviously, the Q2 was an outlier because nobody went on vacation, everybody stayed at home and played a lot of games. So this season this seasonal effect that we have observed before has returned and that's what we are seeing this year. But it's also kind of lower than before the lockdowns And we believe this is probably due to the fact that there have been structural changes to how people spend their time. Like we're all spending less time commuting, and so there's more time to dedicate to games and other kinds of entertainment. And in addition to that, we got pushed forward along our growth trajectory. And so we are just seeing better engagement and better participation from the players even in what looks like a seasonally weaker quarter. So among our games, Sharelook continues to be a growth driver, growing 45% sequentially and from the previous quarter and now representing over 7% of revenue in the Q2. We are very happy about that. Another highlight is that monthly average gross revenue per paying user grew 15% year over year. And in our view, it reflects the increasing popularity of our games, the willingness of players to spend more money while playing and the constantly improving production values of our games. It also reflects the changing structure of our audience where Match 3 games are possible for more and more revenue. And Match 3 games are the games where people tend to spend more money on a per user basis. And as we derive as we have more and more players playing Match 3 games, the overall monetization KPIs growing for our audience. We saw continued strong profitability in the quarter despite seasonal effects on sales. Our user acquisition level was 23% of revenue, about at the same level as last year and on the higher side of the range that we have previously communicated. As we wanted some to have some extra momentum as we go into the quarter with tough comparables. And we also wanted to spend a little bit more on Windows advertising ahead of the change of the store fee in Microsoft store that happened in the 1st August. So EBIT was SEK43.2 million. That was down 4 percent year over year. And the EBIT margin was 12.8%, which was lower than in the Q1. But all in all, earnings per share reached SEK4.67, which is an increase of 5% compared to last year. So all in all, we had a quarter where the top line But the comparables are difficult, but the top line grew 3% year over year and we reached growth in earnings per share 5% year over year. So not a bad result, to put it mildly, in a rather difficult quarter in terms of comparables. So let's take a closer look at the 2nd quarter revenue. So revenue of SEK337 1,000,000, That is 3% growth if we look at USD terms compared to the lockdown bump quarter last year. In sec terms, the revenue decreased compared to the same period last year. But again, you have to remember that the exchange rate has changed dramatically. We have a chart of the exchange rate of Swedish kroner and U. S. Dollar in the second quarter that we have just released. And you can see that there was a dramatic change from the Q2 last year to Q2 this year. And so it's important to look at the underlying figures in USD terms. Growth of our new generation of games drove expansion of our games revenue share to over 64% of total revenue that is up from 53% of total revenue in 2020. And the new generation of games grew 74 year over year and even more interestingly, 13% quarter to quarter from the Q1, both in USD terms And now new generation games account for 47% of our revenue. And this sequential development is very stable. And you can see looking at the charts, it looks very stable even as we go into seasonally weaker second quarter from a seasonally stronger Q1. To me, it means that we still have a lot of growth momentum in the new generation of games, and that is certainly a good thing. So This dynamic that you see in these charts, it will certainly continue. We expect it to continue that new games will continue to gain their share of the total revenue and then licensed games will gradually shrink. And we just hope that they will be doing it very gradually as they've been doing it for the last few quarters. So we continue to see Longer trend of improved monetization, we certainly expect that as more players are engaged by our newer games with better monetization, we'll continue to see the monetization metrics going up. And As I said, we've reached 15% growth in this metric compared to last year, and that is a very good sign. So let's talk about earnings now. So for the first half of this year, our EBIT was a record high, SEK103 1,000,000. And our net profit for the first half of this year grew 29% year over year and earnings per share grew 34% year over year. So a record first half of the year in terms of earnings. In the quarter, EBIT was SEK43.2 million, margin was 12.8%, kind of on the lower side, mostly because of the user acquisition spend that was on the higher side of the range that we communicated earlier. The gross margin was strong 59%, and that is a continuation of our long term trend of expanding margins as a larger share of revenue is coming from our own games. Yes, as I said, we spent on user acquisition at about 20 3% of revenue, which was more of a on a higher side, but also about the same level as last year. And since we've spent kind of on a low in the Q1. And on a higher side, in the second quarter, if you look at the first half of the year, you have record EBIT with UA stands somewhere in the middle of the range that we have indicated. So I think that's a very healthy result given that we have delivered very good performance year over year, both in terms of revenue and earnings, especially if you look at the first half of the year together as the Q2 last year was such a big outlier. So now let's talk about the cash flow and move on to the next slide. So we had a strong operating cash flow and a strong cash conversion during the quarter. Capitalized development expenses impacted cash flow by a negative SEK39 million, reflecting a higher capitalization ratio. We keep developing new games. That's a good thing. And we paid a dividend of SEK54.1 million. That's corresponding to SEK6.25 per share. So all in all, total cash flow in the quarter was a negative SEK45 1,000,000 as is very typical for our 2nd quarter when we pay dividend, taxes are due and so on and so forth. And total cash at the end of the period was almost SEK170 1,000,000, and I believe it was the highest we have ever had at the end of the second quarter. So let's look at the our thoughts on the rest of the year. So we expect our new generation of games to continue accelerating or rather increasing, hopefully accelerating and to continue to be the catalyst of growth of the company. Our new generation of games by now is the biggest segment of our portfolio. And as it continues to expand, it will help improve our gross margin and, in turn, our operating margin. Our optimized user acquisition attracts an improved quality of the audience by continued optimization of our Mars user with SVIT, we expect to continue to drive top line growth and operational efficiency. We have a roadmap for continuous improvements in our user acquisition tools for continued growth and efficiency. And the team keeps working on making these tools better. Another important aspect of our the margin expansion that we see in front of us is the continued growth of G5 store. And this project was launched just a few months ago, but it keeps growing at double digit growth phase month to month and continues to deliver the strong sequential growth for many months now and continue to do so during the Q2, and we expect it to continue to do so until the end of the year and by which Each time, it should contribute to the gradual expansion of the gross margin and earnings margin. And then you have reduced Microsoft Store fees, which have already happened on the 1st August, As we have communicated before, as Microsoft has said, their store fees are going down from 30% went down from 30% to 12%. That's another big driver for our gross margin expansion that you will see happen in the second half of this year. And so you have all these effects, the expansion of the new generation of games and owned games as a percentage of portfolio, which is driving margin expansion. You have reduced Microsoft Store fees, which are driving margin expansion. You have increased G5 store revenue, which again is driving our margin expansion. And then underneath it all, we have an improved efficiency of UA spend, which is also helping us to reduce the spend on marketing and leave more money for earnings, so driving EBIT margin expansion, not the gross margin, but EBIT margin expansion. So there are many factors which say continue to say that this is going to be a record year. As we have said, we expect this year to be at the beginning of the year. So that's quite exciting. And I believe that our margins for the Q3 this year are going to be more like what we had in the Q1 rather than the Q2. So we released 2 games this year, and we are on track to release 4 more for a total of 6, as we have communicated earlier about what we want to do this year in terms of the total number of caves. And so this is the idea, this is the concept of this business is that we released new games. We are trying to create new high quality entries into our portfolio. And then these games in the portfolio, the new ones are the successful ones are growing and those that are many years old, like you can see, like the Secret Society, we can see now they are sort of gradually declining, but they are providing us with a lot of resources, financial resources to invest in new games and create new growth drivers. So this is never ending cycle of creating new games, finding new ways to entertain our audience and gain more users. That's what it's all about. So our portfolio is well balanced and more diversified than it has ever been. Even if you look at a by platform like the platform situation, there's really no single dominant platform that we are relying on. We are very diversified across platforms, we are ready to provide our games on whatever platform our players are willing to play it. And this platform agnostic way of thinking about our business, I think, really helped us achieve success. And it's a good thing to have going forward. And that's why I think we'll just stick with the strategy. I think it's a very smart strategy to think about G5 as a platform agnostic company, which has most of its revenue from mobile for now, but we are ready to work with whatever future that will be. So at this moment, over 64% of our revenue is coming from our own titles. And if you follow us, you remember was a very different number just a year or 2 years ago. So to me, this is a clear proof of a successful strategy that we've chosen a few years ago and makes me very proud and makes me very proud of our great team, both in development and marketing. These guys are doing a tremendous job. So to summarize, we expect the strong trends that we've seen in the last few quarters to continue, and we are aiming for a record breaking 2021, as communicated before. And again, I'm very proud of the And you can ask a question by raising your hand and then Stefan can operate. I think I can. Or you can type a question in the Q and A box as far as indicated. Okay. Let's start with Sreedharik. Now you should be able to talk. Hi, guys. Can you hear me? Yes, we can hear you, Frederic. Hi. So hi, Teck with Zoom. I really like it. So Vlad, you're saying that you're expecting substantially better margins in Q3 based on window store fees. I got 2, 3, maybe 4 questions on this, if I may. But firstly, how should we think about Yue in the next quarter. It is a bit seasonally slower. Will the dynamics of the lower distribution fee come into play here in some way, I. E, Will UA in the next quarter look normal? Or will we see you put the pedal down, so to speak, based on this Windows Store fee cut? Yes. Well, let me answer that straight away. So we still think of it as a range that we have communicated to you from 17% to 22%, And so we aim to stay within that range. We also want to retain that flexibility to move within that range. So maybe you'll see a quarter on a higher side, a quarter on the lower side. But over time, as you can see in the first half of the year, it will be or somewhere between these two numbers. In my mind, it's not connected to the store fees at all because that's expressed as a percentage of the gross revenue, which does not change because of the store fees. No, that's a good answer. But maybe I can ask this then. I mean, would you be able to disclose your current exposure to Windows? And then thirdly, I mean, is it then fair to assume that you will be driving your UA towards the platform to seize better EBIT margins per user then? Well, I would get into very technical details if I to answer that. Let me give a general answer that the situation in the market is very unique when it comes to specific channel. On some channels, we wish we could spend more just technically, like we're already buying everything we can, for example. And so There, in such a channel, we would not be able to put more money to actual efficient use. On some other channels, the situation may be different. So it's a really complex situation. If we talk about the trends overall, Windows has been growing very strongly for us over the years. And so we've been investing as much as we can in the platform. And so because the store fees go down, we will keep trying to deploy even more allows us to find other channels to advertise. So there are it's just too complex to really try to answer in detail. That's why I'm saying we don't try to think of it in terms of the store fees and gross margins. For us, it's we have this range, 17% to 22% of the gross revenue. And so to simplify we will be within that range. How do we distribute between platforms? It's our internal kitchen. We don't break it down by platform. And so over the years, some platforms grew for us more than others. Some actually reduced in size. So they and so we don't see the point. We are serving our customers wherever they are through whatever device they're using, through whatever device they have. And our user acquisition budget is 17% to 22% in any given quarter from the gross revenue. So store fees go down. That's great for our earnings. And so you will see those store fees in our earnings. There's just no way around that. And the user acquisition will stay within that 17% to 22%. So maybe you will not notice because if it gives us a few percentage points more earnings, but in the same time we decide to spend a few percentage points more, right? You may not see it immediately, but it's going to be there if you just add these 2 numbers. Yes. That makes a lot of sense. Thank you. And on another note, I wanted to ask you on the advertising side of things, if I may. It's progressing, but at a slower pace, which you said. I mean, Budd, you talk a lot about synergies when discussing M and A. Is this one of the areas you could be referring to? I mean, we saw a casual player be acquired the other week with 75% advertising revenue growing at a massive pace. I guess my question boils down to what's your vision in terms of advertising and if M and A is included in your step plan here? So we are in terms of the range of possible monetization models, we are farther away from advertising. So we are much better at monetizing our audience within app purchases. But strategically saying, Yes, I guess a synergy can be something strategic that we don't know how to do, right? And so I could see some strategic moments in acquiring a company that is very good at advertising, monetization, although it's kind of flicking with what we have right now. So it's not very complementary maybe because you have to build sort of different games to be able to monetize them really well through advertising, like you have to build the game differently than what we have. So I think we will keep doing what we're doing with advertising with or without M and A in the portfolio that we have. And The goal with advertising there for us is a long term goal of finding a way to monetize our games without necessarily showing ads for other games, although that may change. But we try to go first with the user experience and to improve the monetization, but it's not a huge priority to us. As you can see, we have very strong earnings expansion coming from other areas and advertising is just another component, not as big as others, like I think G5 story can be much bigger contributor to gross margin by the end of the year than advertising. But again, this may change. We have a team that is working on our advertising monetization. And so They keep trying and coming up with new ideas, and we see progress is just not very, very fast. All right. Thank you very much for that, and thank you for taking my questions. Thank you, Frederic. And congrats on record H1. Thank you. Thank you. We had another hand, I think. I think we had. Let's see. But I can see a question in the question box. Let me and sort of which players are playing through Windows Store and the new G5 store and why do you think they're playing there instead of Apple Store or some other platform? So, there are many people with personal computers in this world. If you look at the numbers, they are very large. And a lot of people are Whoever didn't work at home, not work at home from their computer and everyone I know has a computer. Yes, they have a mobile phone. They may have a tablet, they also have a computer usually. So for us, we were just testing a hypothesis G5 store would work and we saw that it does work, that people do want to play on their computers. One thing that we have noticed over the years is that the larger the screen of the device, the more pleasurable it is to play. Maybe it's really important for the audience that we are targeting people 35 plus, sometimes 55 plus, like we have people in a very respectable age playing our games. And so sometimes, quite often, their vision is not as great as vision of younger people. And so naturally, it makes sense that they prefer to play on a larger screen when you see things better. I myself prefer played on the larger screen, everything else being equal, there's a trade off between portability and the screen size, right? You can take your phone everywhere with you. Maybe it's a bit more difficult with the laptop, although these new Windows laptops, they're really nice. You can twist them 30 They're really nice. You can twist them 360 degrees and then have basically a tablet with you with a really large screen. So they are quite portable, but we have been observing over the years is that people tend to play our games at home. Really, we don't see a lot of game sessions happening on a cellular connection, for example, quite often people most of the time they play at home. We are in that sense, we're probably competing with reading a book in the evening or watching Netflix in the evening. I don't think our games a lot of people actually play our games when they're commuting on train or we're in the subway, especially not in the last year, right? So I think that's just just the reality that maybe there are some players who discover our games on smaller screens and then gradually as phones increase size and tablets increase in size and computers become more like tablets, they just realize, oh, I can actually play this game on any device I want. And That's the ability that we give to players. You can play an iPhone, then you can continue to play on your in your browser, then you can continue to play on your on the app that you download to your computer. If you want, you can continue to play on your iPad. It's all instant. Can move between devices. There's no delay. You can just take off from your computer and then continue to play on the go if you want. We see some players doing that. So we are thinking in terms of not necessarily a platform, but rather players that like our game and our games, and we just want to give them the opportunity to play anywhere they want. And basically, they make a choice. We just enable for them to use any device and we will be marketing our games on any device, but it's their choice where to play. And so that's these are the people who are playing our games. It's the same audience essentially. All right. Jesper wants to ask a question, I think. Stefan, could you please Press whatever button. Now we should be able to speak. Hi. Can you hear me, Lado? Yes. I just Yes. Hi. Good morning, Hannah. Hope you're well. I think Frederic kind of touched upon this a little bit earlier, but I thought that I'd ask a question here in terms of EUA. You obviously ramped up your spending here in Q2 versus Q1, which is interesting because we've seen some channels because of that kind of affecting the efficiency and so on? So there's a bit of an ordeal with IDFA, everyone knows that. So I think Q2 was the quarter when everyone started seeing things not work exactly as they did before. And so that made it more difficult to acquire on iOS as a result. We also moved some budget away from iOS towards other platforms. There are not very many other platforms, right? There's for us, that's Google Play, not only for Amazon, which is a smaller and there's windows. So we certainly reallocated some budget away from Ios. But that said, We don't I think it's a thing it's still something in the process. So a solution needs to be made, and I think everyone is interested in the ecosystem for apps and games to continue to grow on iOS. So I think that will be fixed. And in the meantime, we can spend money elsewhere. And it's not our choice, but it's just the reaction to certain actions by players, but we're not too worried because we can reach our players in other platforms as well. And that's a good thing for us to be cross platform and platform agnostic and also have the ability to reach them through their Mac Computers and through their personal computers running on Windows and through their Android devices and through their Amazon devices as well. And a lot of people, they combine ownership of different device different devices, right, on different platforms. So we'll reach them one way or another. So it's just for us, it's like reallocating budgets between games and between certain advertising channels depending on what kind of efficiency we see there, so part of that. I hope I answered your question. Yes. That was a good answer. Thank you. And I think I'll just have a follow-up question there. And it kind of seems like that the adoption rate Or the rollout of IDFA has been slower than expected by everyone, by people not updating their phones and so And do you have any take on when you could see the majority being updated? And is it or is the majority updated now? And when Would you expect or do you have any guess on when we'll see that happening? I would have to get back to you on that. I was to be honest, I was on vacation for last week and a half. So I don't have the latest numbers on where we are with that particular version of the iOS. All right. So we don't seem to have any more questions. So thank you, everyone, again for joining us Thank you for following G5. This concludes our presentation for today. Have a great rest of your day. See you soon. Bye.