Acquisition

Sep 9, 2021

Very much, and good morning, listeners dialing in. So with me today, I have Andreas Zutman, CFO and Marina Andersson, Head of M and A. I will start to present some general facts about Joachter and the possibilities we see and the quality we see in this new member of the Zilprom family. Joe Walker is a leading highly profitable mobile gaming company in the Middle East, and they have built a very exciting App or Game that consists of actually more than 30 games in a classical board game genre. And that is a genre which is very attractive for us because it has a longevity, which we will comment on in a few minutes. It. But it also allows not only to play, it allows the users to connect with friends, join clubs and socialize. Socializing is one of the most important drivers behind gaming. What we think is very exciting is that they extract not only servers, this is non gamers. So we are broadening our footprint in the region with new type of new types of games and a new type of audience. What is also interesting when you have this one app approach is that Build A Ecosystem, and that is something which is highly strategically important for us and for other gaming companies to do the next coming years. And Joe Walker has been excelling in doing that, not only talking about it, but also making it happen. And that supports one of the benefits is obviously that it supports cross promotion and that you keep the users being able to enjoy many different games Hand, socialized within without shifting for gain. A very, very strong, obviously, in the region where they are located, but they also have a significant audience in the Arabic diaspora in Europe and North America. They are headquartered in Abu Dhabi in the UAE. They have some 3,800,000 unique users currently. Airway in July, and they are rapidly growing. Turning to next page. Some comments on the company. They have these assets on classical evergreen games with high retention exceptional retention, I would say, and premium profitability and very high growth. So and again, what we now get into our presence that we've had since 2016 in the MENA region is that we have this much, much wider audience. We have a leading position within Strategy Games. But now we get the leading position within the culture so important in the region, classical games of board games and card games. And what they have done exceptionally well besides this Well, besides this one app approach, the Walker is that they have been able through that, but also through the way that they have developed their games and the Social Features, is to achieve a very high retention. And high retention is a key for both being profitable, but also to be successful over a very, very long time. And also, they have been able to due to this cleverly designed run approach run app approach. More than 50% currently are playing more than 1 game and 25% are playing more than 2 games. So they get players to really step by step play more of the some 35 games or so that are currently in that. So it's really working with this ecosystem approach, which is strategically and obviously operational, successful and important. Further, they have developed a And we sell the network or physical reseller where they can sell the in game currency, which is established a very important or necessary way of getting users in several regions and countries and territories in the world, not Leased in the Middle East. We have the same with or similar with Moon Frog in the Indian subcontinent. And by having that, you get an opportunity for mass market consumers to buy your in game currency in the way that cash it's natural for a cash economy. And it's also healthy for margins because the gross margin are obviously supported by that. In this slide, you can see also the cohort charts and that they are describing the exception of strong retention and how the Spend. This is how spending comes from different cohorts of users coming in. Just look at the pre-fifteen cohorts. I mean, that is obviously, from 6 to 10 years ago, they are still growing and have been growing constantly. Day. And then you can see each layer of new users coming in, adding value. You can also note in this slide that they have approximately 100% growth from Q2 'twenty to Q2 'twenty one. It's very, very seldom you can see this quality of the cohorts. And that is not something that you're not just lucky with, that is a clear result of clever Build Business and Good Execution. Going to next slide, Slide 5. Research. Our rationale behind this is multiple. There are many, many reasons for us. As a headline, we would say that we see excellent synergy opportunities and gaining potential this company coming into the different group. And as we have already and since quite some time and an ambition and a strategy to get to more and more traffic generated within our own ecosystem. Jaw Walker has done that for from the beginning and really excelling in doing that. So I think that they should contribute to the group's development in achieving that, but also in other ways to cross promote. We have a significant scaling potential Indomina region and also by addressing the Arabic speaking population worldwide or for that sake, Arabic Origin People That Speak English For That State as Well. And For Doing That, You Need Also TO Have an Expertise in Investor Acquisition and Performance Marketing, which is one of the CIFO Group's absolute strength, I would say, and the market reach that we have developed through the years. And When John Walker have looked at also at Babyl Games, where we which we acquired in 2016, they can see we can conclude that we have been able to scale that company in a very good way together with, obviously, the team at Baavild, but so our center of excellence for marketing has been able to jointly by joint efforts to scale up that business. And we see similar great opportunities to do this for Johan Wacker as well. Also, there are collaboration potential with Movefrog regarding further develop the and how to work with new cellular networks since both these studios have Heavy Work Intensively Release and Networks. So these are some of the most important synergy opportunities and scaling opportunities, but there are more to it. So we are really happy to take us on take on this journey of creating synergies and scaling together Gluguides' half floor. And with that, I will hand over to Marina on the next slide, Slide 6. With transaction structure, we pay upfront consideration of USD 205,000,000 On a cash and debt free basis, whereof cash consideration is approximately €152,000,000 and share consideration Approximately $52,000,000 $53,000,000 Earn out consideration is for 2021, maximum $20,000,000 if your walker reaches a certain EBIT target for the year. And such consideration would be 0 for the midpoint of the communicated EBIT range. All of consideration for 2021 would be payable in cash. For 2022 to 2026, the amount is 1x EBIT for each respective year, And it will be payable 70% in cash and 30% in newly issued shares. SEK. And I will move over to the finance consideration. In total, in fact, the transaction is approximately SEK 1.8 SEK 1,000,000,000 of that SEK 1,300,000,000 is cash. And we as We have also published we did an accelerated book building yesterday. It was 16 months since we raised equity or cash equity the last time. So we are using that time to go to market as well, and we were backed by our main big main shareholders SEK. And we raised a total SEK 1,000,000,000. So this is sort of a part of our financing strategy to continue to have our Farajit in a good position and keep our leverage target around our communicated financial targets. And then looking to the next slide and that's Page 7, looking a bit what Jorg would have added for the First Half of twenty twenty would have been consolidated. Our net revenues would have increased by 5% With SEK 132,000,000. But especially, as Jurgen was alluding to as well, is a very strong profitability. It is a very profitable company, partially driven by the retail networks where we don't have the platform fees in the same extent. And also they haven't they are using you any, but not to the extent that We Think and Joakr thinks we can do in the future. So they have a very strong underlying margin business And we do think we can continue to keep a strong margin, But of course, focus on unit spend going forward as well. So underlying a strong profit generated business. We did also, as we are coming close to the year, turning to Page 8, provide where we see Junker for the full year would have been consolidated for 2021. And we expect them to Deliminar between SEK 270,000,000 SEK 310,000,000 on net revenues and an adjusted EBIT of SEK 180,000,000 to SEK 210,000,000 So that would using the mid range imply an upfront multiple of 8.9. And with that, I hand back to Jurgen. Thank you, Andreas, and thank you, Marina. So to conclude this, I would just like to emphasize that we are continuing our growth journey. Through this transaction, we had rapidly growing revenue with premium sustainable Profitability. And this is very important that they have this retention uniquely strong retention also underpinned the sustainability and the profitability, and that is very important. And bundling the players in one ecosystem is state of the art and will be very, very important and state of the art for any company that would like to be leading in the next coming years, we think. Also, this solidifies our position in the MENA region, and that is a very attractive region. And the Arab speaking or the Arab population in the world is almost 450,000,000 people. So it's a massive market, mainly on mobile. So we think it's very, very good that we're not only now our presence in strategy, but also in classical games. And this brings substantial, as mentioned, scaling opportunities has been part of different groups. So with this, we're not over and done with. We will continue with working with our pipeline for making more fine deals in the future and take further steps towards our Financial Targets 2023. That was all from us. So we open up for questions. Oliver. We have a question from the line of Nick Dempsey from Barclays. Please go ahead. Yes. Good morning, guys. I've got three questions. So first of all, did you say that revenues were 100% higher in Q2 2021 than Q2 2020? Or was that a different measure you were talking about? And baked into that, did they get a positive effect from the pandemic? So did they have very strong growth in 2Q 'twenty over 2Q 'nineteen? Second question, can you give an example of how Joakka monetizes its games? Is advertising part of the mix there? Or just kind of describe how that Us. And the final question, would you perhaps lower margin initially by spending more on UAC to drive good revenue growth over time? Or You think you can manage all of that without initially lowering the high margin? Yes. Thank you. So first of all, yes, I said that was what I meant and what you read. So approximately, as you can see on the cohort graph, obviously, on the y axis is revenue. So you can see that it's approximately not exactly about 100% increase from Q2 'twenty and Q2 'twenty one. And then it's much higher even if you look Q2 'nineteen to Q2 'twenty. So I mean, they have been on a very, very impressive growth trajectory the last 2 years. And it's as you also can see in that graph, they had a very little, but still some kind of COVID-nineteen effect in Q2 'twenty. You can see that it sets up there. But since I mean, this kind of games, just as it is for Steelfront in general, we don't have games that you play intensely for hours and spend more as you play or something or buy more games or downloads or whatever because they are not built for that purpose basically. So the way the Expert Steel from Plupad in general was that we could market our products in a completely different way. And but the engagement levels and the cohort behaviors are very similar. And that is also the case Roger Walker. You can see some effects in that, but it's very little. You can see that how they continue to grow because Their main means of achieving growth is through organic, almost viral effect amongst the users because, I mean, the Jaw Walker app, one should recall it, one of the largest classical App for classical games globally already. That's quite impressive. So and it generates a lot of traffic within the ecosystem. So it can continue to grow. But hence, they didn't get this I think they don't conduct so much U. A. They didn't get that fantastic boost in the U. A. Returns that we saw in the group otherwise. So but on the other hand, they have seen no slowdown either. So that's very, very solid development performance. And that ties into your next question. The market is very limited today through UK, And these guys are clever in many ways. Obviously, they have been a fantastic high quality company. They have a very clear vision of how they Have come to this point, but many years to come, how they should continue to build their position. So They also are clever in the way that they know and see what they are not mastering that well, and that is UA. And it's exceptionally difficult to build from a small students perspective the kind of market reach that we have built in the group for many, many years now. So they can tap into the formidable market reach that we have with channels more than 50 channels in more than almost 100 countries worldwide. So definitely and Maybe yes, both in the MENA region and the Gulf states and so on, but also in many of the other territories where there are their target audience does exist, but then you need to master your way. So that is definitely something we can add. And doing that, as you rightly are into, would mean that potentially margin goes down, but then it goes down for the very good reason that we further feel Higher Growth. So I think that to what extent we will work with you where it's, of course, a bit premature to say. But we hope we think and we are convinced that we can add that to the marketing plan and not only rely on the which works quite well then, the organic development of cross promotion within the app. I hope that answers your question. Can I just clarify one thing? I meant do they generate revenues Through advertising or is it all in game spend? That was one of my questions, sorry. Sorry. No, well, very limited, I should say, very limited ad revenues. Okay. That's great. Thank you. And the next question comes from the line of Oskar Ewertsen Air. I don't know if you mentioned that, but could you discuss what growth rate the JAVELICO grew in Q1 and Q2? And also, how much have you spent on U. A? I mean, is it 5%? Is it nothing? Or just Would be interesting to hear that. Thank you. Thank you, Oscar. Well, as you can see on the Slide 4 with the cohort graph, that is revenues on the y axis. So you can pick any month to end amount basically and see approximately the growth. So I think that you have the answers on the growth. And as I said, it's approximately 100% growth if you take April to April or May to May. So they have been growing by 100% that. And if you look to 2019 to 2020, it's more than 100%. So I think that's very impressive numbers. So when it comes to U. When it comes to U. S, it's below 10%, so it's around Page 2. Yes. Okay, great. And then a question for New Year again, and maybe Marina can Help as well. The structure of the deal With an upfront payment, obviously, and 2 different earnouts. The longer term earnouts with onetime EBIT in 2022, 2026. My take is sort of the you obviously expect the up Sold multiple to be significantly lower in 2022, 2023 given strong growth here. And you also paid the earnout in 30% shares the VVAP at the time. But how do you think about the structure of the deal, which is quite interesting? Thank you. Yes. There are always many factors that comes in when you figure out what kind of deal structure is suitable for a certain transaction. So In this case, we it's a balance between that we would like to have a very clear incentive over long time for the guys longer earn out than we usually have. At the same time, from our perspective, on the buying side perspective, Of course, if they double, triple, quadruple their profits over a certain time or a longer time period, 6 years from now, then of course, the value of that company at that point in time is much higher. And if you sum all the earn up we have paid and the upfront we have paid on the lower profitability. The actual total multiple that we will have paid, I think, will be very, very attractive. But it also will be good because the seller, rightly having paid a good price for a top quality company. And we so basically, we share the risk reward over a longer I think that is one of the key elements of the construct in this case. Excellent. And I mean, the country seems super interesting, not least the cohort behavior here. So I mean, what can you take from this and sort of incorporate and learn from for the rest of your group in a quite interesting time in mobile gaming here with low value and keeping users in your own ecosystem. If you could elaborate on that A little bit further would be really interesting. Yes. That is true. They are an exceptionally high quality company, for sure. You can obviously that and you have read that in the cohort saying that. I we have said for quite some time and we are all conducting a work internally in Fieldfront decided transaction on how to establish our own ecosystem, so to speak, so that we basically can we're not as we traditionally have done, we buy one user to one game, we buy another user to another game. That has been convenient, profitable and Straightforward in every way. So but at some point in time, you can and at some point, you must buy one user to one game and get that user to play not only that game, but several game in your portfolio. And to get to that point, you need to have a lot of things in place. It's not as easy as it might sound. And you have you need mechanisms, processes and a lot of supportive software to get this happening. And but I think it's very encouraging to see someone that start with that mindset could achieve that with 50 people over this soon, 10 years in a really, really perfect way for their kind of product. It. So I think that we will learn from we will see learnings from that, and they will be able to contribute with their experiences, obviously. So that is definitely the case. But I think also the way that they work with Retail and Network for other cash economies. They can share their learnings and they can learn from Lunefog and others. So that is an important thing. And cash economists will be around for many years, and they create tremendous moats for competition. So in mass market in such cash economy, you need to have a reseller network. And that is also something which is it. It's very tricky to do and takes some time, and it takes requires knowledge. So I think with this acquisition, we get a much wider footprint. We are strong on strategy. Now we are strong on classical games and more mass market, non gamer product, and then Yanivis. So I think there are several areas where we can learn mutually from the author and they can learn from other studios. And I mean just to add to that on UAA again. So UAA has been very limited historically. So what I mentioned below 10% It's like on the upper end. I would say it has been historically lower, 5% to 10%. And there, we see a lot of potential within the group where we can Yale and at our competence and our knowledge. Great. And then I mean, just one follow-up here. Just interested to hear your rollout plans ahead. You mentioned, I think, in the press release India as a region that likes these types of gains and dynamics, of course, with cash economies. What where is Johaker not today? And where do you plan to reach out ahead? I mean, they have 3,200,000 unique players today, which is a a significant number. But again, there are 4 between 413,460 Arabs globally. So they obviously, they have a fantastic market to go with. And the reason why I'm emphasizing that is this is culturally Intervolver, strong Intervolver Games. They are so specific For the Countries. And there is a culture of playing these kind of games, which is very, very strong. So I think they have a massive market still to go for. So they're definitely not the nearby having reached the potential growing there. But I think classical games and board games It's an area that we have set up as strategically very important for Steelfront since several years back. So now we have a top quality studio in a region where board games also is very important and strong. So I think that we should add other board games into Steelfront's portfolio as well. And in India and the Indian subcontinent is also important, but also in Western countries. So I think and hope that their Experience of how you optimize and how you fine tune and add social features and other features to apply that to these kind of games. It's really applicable for other Legions as well. But if you cannot take all of these games and market them to Western community because they are culture specific, which is yes, they are culture specific basically. But the generic knowledge, we can use. Understood. Thank you very much. We have another question from the line of Martin Arnell from DNB Markets. Please go ahead. Good morning, everyone. I want to ask you about the customer base and how much is Europe and U. S. So far. First of all, we look we're checking that. So Is it minor or is it Mike. Just a second. So first of all, the user base is there is no you're not allowed to pay if you're beneath 2018. So this is for for Statefront in general, we are addressing people that are typically 25% to 45%. So that goes for these games as well. And the revenue distribution for 2021, Marina will mention. So primarily In Europe and also U. S. And Turkey, it's Diaspora who is playing those games because they are cultural games, so cultural specific games. So for Turkey, U. K, Germany, U. S. And France, in total, we have approximately 30%, a bit more than 30% for 2021. Okay. Excellent. Thank you. And when you look at the ArpDAU in these classic board games, how does it compare to your other genres? Now we haven't gone out with the ARCTO, so that is not a public number yet. We can come back to that. But importantly, the more we have dug into the product related and game related KPIs, the happier we've been because it's really solid. And they have been able to step by step by step for 10 years improve those numbers, including Harp Tau. So but of course, these games are not strategy games where you have much higher numbers, but they are improving and they're working very systematically the Listing to its community, adding attractive content and thereby increasing the ARPU. But we will come back to that when we have consolidated Jawor Green Cloudbox. Excellent. Thank you. And then just on the margin and Growth Expectations here going forward. Given sort of how to calculate those forecasts, trying to get the full picture of what price this will be. How should we look at the higher margins seen this business. And now would it be growth above the average share going forward, do you think? We don't give forecast for several years ahead for 1 single studio. So but I mean, if you look at the cohort Graph on Slide 4. You can see how they have been able to grow and how they have been able to grow, not at least the last during Q2 this year. So I think that this is a high growth company that we can easily conclude. And they're not like if they would have had 80% of the target audience already, therefore, of course, have limited opportunities. But again, they have 3,200,000 mouths out of, in theory a couple of 100,000,000 that could be in their audience. So I think that they definitely have Even though they are the leading one by far and one of the largest classical game apps globally already, but still they have so much more to grow. So I think we will see a very strong growth for a very long time. And if we also can add to that U. A, they can more easily grasp the Even though, as Marina pointed out, they have actually over 30% in the diaspora, I mean, Arabs not being in the Arab Region. That could be more easily grasped that pocket or not on the pocket, but that area of growth with U. A. That they don't master today, but we can add from our Center of Excellence. So I think this without giving any forecast, we don't do that, but this is a high growth company for many, many years to come. And when it comes to margins, Just to clarify that if we don't add any way, they will grow at high numbers and as they have done for 10 years Just through the fact that they have this one half approach and get cross promote between that and a viral marketing Status. We, of course, very, very profit oriented since you don't pay any U. A. If we add U. We accelerate growth further, but of course, the margins percentage wise will go down. But in absolute numbers, the company will earn more money. So that is the dynamic as you probably already have understood. Excellent. Thank you, Jorgen, for that. And as there are no further questions, I'll hand back to the speakers for closing remarks. Thank you for dialing in, and we are thereby concluding this presentation. Thank you all.