Okay. Hello again. Good day, good morning, everyone. Thanks for joining us today. I have today with me our CFO, Grzegorz Kania, and Jon Bellamy, our EVP Strategy & Investment, and we'll be going through our Q1 results. If I could get the next slide, please. Let's talk about Q1. Macro environment has been very challenging for most of the businesses and markets. When speaking of mobile games, Sensor Tower reported a drop of consumer spending on mobile games in Q1 by 7.1%. For the time being, there is a lot of turbulence going on in the markets.
During bear markets, we think that the companies need to adjust their playbooks, and the whole sector and industries have been shifting their focus more to business fundamentals and profitability. This is exactly what we have done and, when speaking of our core franchises, we've been driving more cash generation and profits, EBITDA. Let's start with that in Q1, we did deliver double-digit EBITDA growth. Secondly, the company is in extremely good position cash-wise. We have close to $200 million at the end of Q1. The company also started buying its own stock.
We announced the first edition of our SBB a bit earlier and now earlier on this week we announced extension of the SBB and we do see buying our own stock as a great use of our cash at this point. We will be covering the key KPIs in the following slides and with that let's move to the next slide. I'll hand over the mic to JB, please.
Thanks, Anton. Okay. As you heard from Anton, the entire mobile gaming sector is down approximately 7%, versus Q1 2021, and that truth has not escaped social casino either. In fact, the whole sector of social casino is facing slowing growth. Eight out of the top 15 operators in our space have also shown year-over-year revenue decline in Q1 2022. For us, that decline equals approximately 12% from core revenue. That came alongside a 12% increase in ARPDAU over the same period, average revenue per daily active user, and that is reflective of the strategy that we continue to pursue. We see daily active users falling across the category and monetization metrics compensating by rising in tandem.
That's the same as Huuuge has been pursuing as a strategy for the past couple of years, and it's left us at the top of the leaderboard when it comes to monetization KPIs. The chart I'd really like to draw your attention to is the right-most chart in gray. That is our user acquisition dollars spent as a percentage of our gross revenue for our core franchises, and that number is 20% relative to 30% in Q1 of 2021. This is the manifestation of our focus on profitability and the longevity of our core portfolio. For Huuuge Casino and Billionaire Casino, we're obsessed with delivering another 10 years of product life and another $1 billion of revenue and beyond. For us, that means from an action-taking perspective, we need more discipline than ever before on user acquisition spending.
that means we should be focusing on quality of users rather than quantity of users, and placing DAU-based second after revenue and financial performance alongside the stability of the product for quarters to come. We do know that our paying players, those who add real value to our P&L, tend to be more engaged, more sticky, and more likely to pay again in future than any other players in our portfolio. As such, all of our live operations, all of our time-limited events and feature releases are targeted at those players, and provided that we're retaining that core high-value user base, then we're doing a reasonable job at ensuring the life of the product for years to come. Next slide. On the chart on the left, I'd like to draw your attention to the gray line in the background.
This is our user acquisition as a percentage of revenue, the number that I quoted on a previous slide, but trended over time. You'll see that in Q1 2017, this number started at approximately 85% or 80% of our revenue, and as of today, we're down to approximately 20%, where the trend is one of stability. We're seeing approximately 20% for the past three or four quarters now, and we expect that stability in high margin generation to continue. This is an evergreen category. Social casino games have been played for hundreds of years already. We expect that to not change in the future, and we believe that Huuuge Casino and Billionaire Casino as a result, when combined with increasing profitability, will make an incredibly strong backbone for the business and great profit centers for years to come.
As always, this is really an optimization task for us, and the user acquisition spending for our flagship games will be under heavy scrutiny, as should always be the case for the quarters ahead. Next slide, please. For new franchises, all of the games outside of Huuuge Casino and Billionaire Casino within our portfolio currently constitute approximately 12% of our total bookings. This is the result of a push towards diversification of revenue streams over the past two years or so. The vast majority of this 12% of our bookings is accounted for by Traffic Puzzle, which is 86% of all new franchise revenue in Q1 2022. All new games on top of that remain kind of undiscussed until we have sufficient proof points and track record for those new developments to have faith in the longevity of those games.
We're always building new games internally. We're always publishing new games externally. We'll talk more about that in a moment. At least for now, Traffic Puzzle continues to be the backbone of our new franchise's expansion. Next slide, please. To zoom in a little bit more on TP, we're looking at 205,000 unique users and growing in Q1 2022. That's 240,000 at its peak in April. As of right now, the focus is less on scaling user acquisition and more on working on product features and delivering the game's roadmap.
Once we start to see the expected KPI improvements of releasing new features and developing the product quality, we'll start scaling marketing spend once again, but everything must be done in a disciplined fashion, maintaining obsession over payback or retention-redemption periods for our user acquisition dollars. That is the yardstick by which we must measure our spending. As we mentioned in the previous quarter's presentation, we're beginning to work on our ability to build multiple games within the Traffic Puzzle franchise. We see significant brand equity in Traffic Puzzle and believe that there is a lot of value to be extracted by creating a multi-game franchise. We had the same playbook when we created Billionaire Casino after Huuuge Casino, and we expect to replicate those successes, relatively speaking, with Traffic Puzzle 2, 3 and any other sequels that we envisage. Next slide, please.
Final, in this section, on publishing, just a moment here. Time Master is our most recently signed game. That game is now fully integrated with Huuuge's backend and analytics systems, so we're effectively ready to start scaling spend. In fact, we started testing the user acquisition scaling in mid-May, so just over a week ago. Both Diffy and College Love Game are games that we published previously in earlier quarters, and they have the highest UA redemption or payback periods, in the Huuuge portfolio, albeit at much, much lower scales than our comparable products. We made significant business model improvements over the past year. As you remember, Publishing 2.0 is designed to be a funnel to evaluate many new early-stage products.
We take the best-performing games based on third-party market research, pursue them, and then sign publishing deals with the most promising that are available to cooperation. We then start running internal user acquisition testing to see which of those games perform very well. The ones that perform very well go on to take partnership agreements with us, and if they continue to scale during that partnership period, we then reserve the right to acquire the game or the company from most successful candidates. As such, the primary driver of success of this business model is the breadth of the top of the funnel. In 2021, we ran UA tests on 19 games, and this year we're on track to double that at 40 games tested in 2022.
Previously it took us 10-12 weeks to integrate a game with our backend systems. As of today, it takes approximately 6-8 weeks, and by the end of Q4, we're looking to drive that integration time down to 2 weeks, which will enable us to broaden the funnel once again. Perhaps with that, I can hand the mic to Grzegorz to cover our financial section.
Thank you, JB, and hello, everyone. Good morning. I will cover the financial results section with I think key highlights that already have been explained by Anton and JB. On the next slide, the overview of what already has been said. Difficult quarter from the top-line perspective, not only for Huuuge, but for the entire mobile gaming and social casino sectors, if not for the whole economy globally. That's yet to be seen. In those difficult times, we've managed to keep our cost discipline, keep our focus on profitability. Remember that cash flow in difficult times, cash flow is the king, and cash flow statement is the only statement that's true for the difficult times for the companies.
Adjusted EBITDA as a result of that increased 39% from $10.4 million in Q1 2021 to Q1 2022, reaching the level of $14.4 million and the adjusted EBITDA margin of 17.1%, which is roughly on the same level as for the year 2021, despite a 12% drop in the revenue. User acquisition expenses lowered by a 1/3 versus Q1 2021. Already the approach already explained by JB.
I will only add to this, the fact that, as you certainly remember, our user acquisition budgets were accumulated in the first half of the year in 2021 with the highest user acquisition spend in the first and the second quarter of last year. The high base of $39 million, and 41% of revenue in Q1 2021 is also contributing to such a large decrease of 1/3 of user acquisition expenses in Q1 2022. Perhaps a bit deeper dive into our P&L. On the next slide, you'll see the more numbers, 12.2% revenue decline, particularly as a result of lower daily active users in our core franchises.
Again, that's a reflection of a broader social casino market trends, and of course, partially offset by the increase in Traffic Puzzle games. As it comes to the non-core franchises, you also need to remember that in Q1 2021, we had several titles, such as Huuuge Stars or Bingo, that were discontinued, or I would, I should say rather sunsetted during the course of 2021, which of course has also an impact on our year-on-year dynamics in the non-core revenue. Cost of sales, just a reminder, mainly platform fees that we pay to the distributors and the expenses of gaming service.
Of course, in the first quarter of 2022, we also have the depreciation and amortization expense of Traffic Puzzle game that was not on our balance sheet, not our property in Q1, 2021. When it comes to general sales and marketing expenses dynamics, it's decreased by 12.8% from $4.1 million - $3.6 million, mainly as a result of lower costs of employee stock option programs. The R&D expense increase from $7.8 million - $9.0 million, or 14.9% as a result of increased costs of salaries and employee-related expenses.
It’s got to do with the timing and phasing of performance bonus provision in Q1 2021 versus Q1 2022. Of course, the other contributing factor is the Traffic Puzzle studio ramp-up after the acquisition, plus the scaling up of the publishing portfolio. G&A expense decrease mainly due to lower employee expenses and employee stock option expenses, and of course, lower external services, which in Q1 2021 were exceptionally high due to our IPO that we made in February last year.
Worth mentioning on this slide and worth emphasizing on this slide is definitely a positive profit before taxes and positive net result for Q1 2022, as opposed to Q1 2021, where we had, as you all remember, we had the Series C revaluation charges that made our business red on the bottom line level. This year, we've got $8.9 million of net profit for the period. On the next slide, you'll see the reconciliation of reported EBITDA and net results to the adjusted EBITDA and net results. We can go to the next slide. Yes.
The reconciling item for the adjusted EBITDA is just the one item, which is the cost of employee stock option program, $1.1 million in Q1 2022, a decrease of 60.4% versus the first quarter of last year, making our adjusted EBITDA at the level of $14.4 million and the adjusted EBITDA margin of 17.1%. For the net results for the periods, I already mentioned that last year we got a hit from Series C shares revaluation, a one-off of $39 million, a one-off from the perspective of 2021 of $39 million. Nothing for that, of course, going forward as those Series C shares were converted into common stock.
The adjusted net result for Q1, 2022, more than doubled even when taking the Series C revaluation charge. We see that the adjusted net result more than doubled, and the adjusted net result margin is a double-digit 11.9%. Very quick look at our balance sheet. As you remember, our non-current assets are mainly the Traffic Puzzle investment into the IP, $39 million, initially $35 million at the current values at the end of March 2022. Current assets, mainly cash, 89% of our current assets is cash, as I said, almost $200 million. I have separate slides for that, so I'll come back to this later on.
The current liabilities decreased by almost $20 million, and this is due to the payment of the second tranche for the Traffic Puzzle acquisition of $25 million during the course of the first quarter of 2022. The last payment, just a reminder, for the Traffic Puzzle liability is due in Q1 2023, and it's going to amount to $4.4 million. Now we can expand a bit more on our cash position and cash flow generation. On the next slide, you will see the cash flow for Q1 as compared to the last year. Definitely our net operating cash flow of positive $20 million is showing our strong cash flow generating capabilities.
Of course, investing cash flow from investments is a negative $25.7 million due to the payment of $25 million for a Traffic Puzzle liability. Despite that payment, we've got almost $200 million on our balance sheet as of the end of first quarter 2022. A very luxurious position to be in when entering into more turbulent times, as we can see in overall capital markets, which especially in the U.S., have been declining for six consecutive weeks now. We look forward with confidence about our ability to face the difficult market conditions with our focus on profitability, with a very large proportion of our variable costs in the total OpEx for Huuuge.
We are confident that Huuuge, if the difficult times come, Huuuge will definitely be strong and will come out stronger out of those times, to prove the point, I can go to the next slide to see that this positive cash flow conversion, EBITDA to operating cash flow is not just an incident of Q1 2022. You can see this has been repeatedly delivered by Huuuge since at least the fourth quarter of 2019, as you can see on the chart.
The only exception being first quarter of 2021, which is a combination of one-off payment of Washington case settlement of $6.5 million, and the working capital movement, particularly resulting from the phasing of user acquisition investments, particularly high in the fourth quarter of 2020. Other than Q1 2021, we repeatedly deliver operating cash flow. Our EBITDA is constantly converted into fairly high operating cash flow when it comes to EBITDA to cash flow conversion. We look confident into the market conditions going forward. Maybe a quick look for the long-term perspective of revenue and profitability development of the next slide.
Just a reminder of our revenue trajectory, the new franchises and the new franchises as percentage of revenue and our efforts to develop new revenue streams are also visible on this slide. Despite the fact that we were ramping down certain new titles over the course of 2021, the share of new franchises in total revenue remains stable at 12%, so with our efforts both in the Traffic Puzzle area and in publishing area, we're confident we'll be able to increase that share even further going forward. Same goes for the improvements of profitability. You can see from 2017, negative EBITDA to 17% in 2020, 17% adjusted EBITDA margin in 2020 continued through 2021, and sustained in difficult market conditions in the first quarter of 2022.
It actually proves what Anton said at the very beginning, that the playbook of Huuuge now is to focus on profitability of our products, optimization of the outcomes and the return on investment, and thus also creating positive free cashflow, which will be our focus going forward as well. Maybe lastly, a quick look on the share buyback, where we are and where we're heading. So far, until the end of Monday, we acquired 2.3 million shares out of the originally approved 2.5 million shares for the buyback. It actually counted for 90% of the total share buyback before the last weekend's board decision to expand it.
The average price that we were able to acquire those shares at was PLN 17.7 per share. Arguably, a very attractive price when you compare to our all-time low of PLN 15 from February this year. I think that PLN 17.7 per share is a very attractive buyback price. Thus we've spent approximately 40% of the initially allocated PLN 100 million. Looking at all of this, we recommended to the board that the share buyback is continued up to the level of 6.5 million shares within the originally allocated PLN 100 million. We've looked at our needs for shares going forward, not only in the foreseeable future, but also in the mid and long term.
We figured out that you know, our ESOP obligations would easily accommodate 6.5 million shares for the next three years. Looking at the current market conditions at a very attractive share price for the buyback, we recommended extending the size of the buyback from 2.5 million shares to 6.5 million shares to the board. The board has made a unanimous decision to approve the buyback, the extension of the buyback last weekend, which we, of course, announced by means of a current filing. Other terms of the buyback remain unchanged. We are going to continue the buyback until an earlier of using the $100 million cash, buying the 6.5 million shares, or 31st March 2023.
With that summary, I will conclude my section. Of course, be happy to address any questions you may have. For now, I will hand back to Anton for some concluding remarks and highlights.
Thank you, Grzegorz. If I can get the next slide, please. We've talked today how the macro is for the time being highly challenging. When thinking of that, my recommendation to all shareholders is to take a step back and think of where the gaming is heading. When we think of the long-term prospects of gaming and what we are doing as a company and where we are heading, we have high conviction that gaming market is the place to be and that the best and most successful games are still to be created and published. Markets are cyclical and in times like these, as we've already spoken a bit today, we focus on driving profitability with our core social casino franchises.
With Traffic Puzzle, we are expanding it from a single product to a multi-franchise, multi-product business. What comes to buy-side of things, publishing and M&A, the valuations have come down quite a lot across the sector. We see that there's lot more interesting opportunities out there that we are actively exploring and the difficult and challenging market conditions certainly provide exciting expansion opportunities that you can rest assured we will be focusing on exploring actively. With that being said, thanks for joining and I now open for the Q&A, and all the questions you may have. Thank you.
Thank you. Okay, in order to ask a question, you can click on the Raise Hand button, so we can unmute you, or you can type a question in Q&A and I will read that. I can see that Matthew Walker from Credit Suisse is raising his hand. Matthew, you are now unmuted.
Can you hear me okay?
Yep.
Yeah.
Thanks a lot. Good morning. Just a couple of questions, please. The first is, you know, can you just outline the reasons why the social casino market and the wider games market is under pressure right now, and how long you think that's gonna continue? And then, the second question is, Taking into account the group, so both the new games and the core games, what's the right level of user acquisition spend relative to revenue for this year? And then finally, what impact do you think recession would have on the, you know, the big spenders within the core casino games? Thanks.
Huuuge. The first, if I tackle the first one, you were asking, kind of the reasons behind the challenging market conditions. I think there's several. Firstly, we have to point to macro conditions. I think that has an impact, the geopolitics and the issues we are solving on a macro side. Secondly, the IDFA that Apple enforced more than half a year ago, last summer, has had profound impacts on how companies are executing their user acquisition and how effective that is on iOS.
Yeah, thirdly, I would say that now in 2022, you are being compared against the COVID comps and it is clear that when the lockdowns were on, people had more time to enjoy and have fun playing games, playing mobile games. Jonathan, Gregos, maybe you wanna add something to that.
Yeah. Maybe to cover the second point first, which was about the correct UA spend as a proportion of revenue across the portfolio. We covered for Huuuge Casino and Billionaire Casino in Q1. We spent approximately 20% of revenue on user acquisition. This has been fairly stable for the last three quarters, and I wouldn't expect material change from that in the quarters ahead. We reserve the right to do so if the fundamental economics, the LTV to CAC changes, but right now our outlook is one of being highly cash generative for HCBC. That's our view. On Traffic Puzzle, we've held significant discipline on marketing spend in recent weeks.
In fact, spend right now has been capped at my instruction for Traffic Puzzle until we see some of the product roadmap deliveries, so we can better estimate how the LTV curve or lifetime value curve of that product will grow or change in response to those roadmap items. As such, I hope to be able to lift spending again as we approach mid and end of year on the back of those results, but we reserve the right to do so as and when we see the performance. Then lastly, for the brand-new products, so for example, newly published games, it's very hard to predict how well those games will respond to an inflow of user acquisition dollars. That's exactly why we publish games, to try and effectively test how resilient payback periods are to lifting user acquisition spend.
That is the unknowable part of the equation on scaling, and so this is why we test. If we find a game that is performing extremely well as we lift user acquisition, then of course we'll reserve the right to spend with discipline and scale as appropriate. At least for now, you see a general trend across the business of UA as a percentage of revenue declining year-over-year. I think there was also a third question unless, Grzegorz, you want to touch on UA spend as well?
Sorry, I thought that it was already.
Exactly. Just asking you if you had anything to add. That was all.
Yeah, exactly. No, nothing.
Okay. The last question I think was what do we expect of high spenders in a recession? Just to add a little more color on this, the last time we had a recession widespread across the Western world, almost exactly coincided with the release of the iPhone. We lost a lot of the signal from the noise. In that case, there was explosive growth in mobile gaming around that period, identifying actual signal there is a hard thing to do. We do know that our most engaged and high propensity spenders are extremely price insensitive. They're extremely engaged with our product, and therefore, we expect to not see a significant material change. Where there might be more volatility in spend is in the mid-level and low level of spenders.
However, anecdotally speaking, we see that in times of recession, the leisure activities that get cut are those that incur significant one-time costs, like visiting a cinema or a ball game or the theater. Actually, discretionary spend at the price of between $0.50 and $10 is, I guess, inferior, as an economic term, inferior good, and therefore, more resilient to economic downturn. That's the thesis we're running with, but the reason we're being so cash generative and disciplined on spend is because it gives us the ability to be flexible if those conditions change.
Okay. Thanks very much.
Sure.
Okay, next question goes from the line of Michał Wojciechowski from Ipopema.
Hello, guys. Do you hear me?
Yes.
Hi, Michał.
Hi. I have a couple of questions, maybe starting with Traffic Puzzle. You noted that DAU in Traffic Puzzle increased by nearly 50% year-over-year, but DPU increased only by 15% year-over-year. I want to ask you about this disproportion, and maybe there is some problem with accumulating players or high churn of players. Could you give me more insight about that?
Sorry, I didn't actually catch the first part of that question.
Yeah.
Would you mind repeating?
Difference between growth in DAU and DPU for Traffic Puzzle.
Okay. Sure. There's a simple answer to this. We spent on a burst campaign, which, at least in the industry, is when you spend a sum of money on less valuable traffic and the install rate increases significantly. This was an experiment or a test that we ran in marketing. This is a playbook that has worked for casual games in the past, and so we employed it here as well. The reason for the differential between DAU and DPU here and the relative decline is simply because there was an influx of tier two and tier three traffic as a result of that test.
Okay. Maybe one follow-up question still regarding Traffic Puzzle. You invested quite a lot in user acquisition for this game, I think for more than a year, and we still expect, I believe that this game is going to be unprofitable in 2022. Could you give us more insight about that, why is it this way? Is the payback period so long or still KPIs are hard to be met? What's the reason?
Yeah, exactly. Payback periods are still extremely comparable to our other portfolio games, especially HC and BC, although they're a little bit shorter, generally speaking. However, of course, HC and BC have five years of history, cohorts to build upon, right? They're less sensitive to what we call new money or new install revenue generation. For Traffic Puzzle, it's extremely sensitive to new money revenue generation simply because it does not have five years of highly profitable cohorts underpinning the fundamentals of the product. That said, while the redemption or the payback periods are comparable or slightly favorable, there's rationale to spend.
As I said earlier in the presentation, though, that scaling of user acquisition spend has been paused, and will remain in such a position until we have sufficient KPI improvement to lift the LTV side of the LTV to CAC equation, and then we can rebalance CAC or CPI as appropriate. In essence, that's the answer.
Okay, thanks. The last question from me regarding new games. You said that you have 40 games versus close to 20 games in the last year. Should we also expect some impact on cost side, like higher R&D costs, higher user acquisition costs this year due to this scaling?
Yeah. Just to be clear, that 19 number and the 40 number, they are in reference to the number of user acquisition tests we have run on new publishing product candidates. These are not games that we've signed or will sign. These are games that we're testing with our own comparable apples to apples user acquisition parameters. That gives us the ability to compare games against their category benchmarks as well as against the portfolio of games we've tested and draw a conclusion as to whether or not we think signing a deal makes sense based on KPI and UA redemption mechanics. The effective cost of one of these tests depends on the genre, but you can assume that the test somewhere between $1,000 and $5,000 is a reasonable expectation.
If we're testing 40 games in 2022, I'd expect to see between $100 ,000 and $150 ,000 at most attributed to those tests. Of course, those tests come with revenue generation. The traffic we buy doesn't just disappear, and so part of those revenue streams will offset some of that testing.
Okay. That's clear. That's all from me. Thank you.
Okay.
Thanks, Michał. Okay, the next question comes from Ken Rumsey from Jefferies. Hi, Ken.
Hi. Do you hear me okay?
Yes.
Yes.
Hello, everyone. Okay. Could I, in a way, returning to the point about the sort of trend in social casino gaming, is there anything in either cohorts or sort of spending behavior that indicates, you know, when we might see a kinda slowdown in some of the declines in metrics like DAU? Is there a kind of, sort of low-hanging fruit easily shaken out? I clearly, I mean the opposite of a good thing in a sense. But you know what I mean. Is there some kind of, okay, these people were kinda loose and they've dropped out, and we're getting now to a core level? You know what I mean. Is there some kind of way of analyzing that? That's one question.
The second was just to understand a little bit more about the roadmap for TP. You've said, you know, more games, and I obviously, I think of, okay, it's like Billionaire Casino versus Huuuge Casino. It's a kind of a similar game, but a new one. Kind of Traffic Puzzle becomes Traffic Problem or something, you know. What are the other kind of elements of a multi-product strategy that we could be thinking about? I'll do a third question and then maybe come back with a more general one. The third one is just about wage inflation, which obviously is a feature globally and in the games industry. Apologies if I missed it at the beginning from you. Anyway, just a question on where that's looking like for the company as a whole, probably for Grzegorz.
Thank you.
Yeah. Thanks, Ken. For the first question, of course, there's. When we look at the retention rates of a payer or non-payer, so the DAU versus DPU. The payers are, of course, playing more, they are playing longer, and they are much more engaged. If you ask, if, you know, what's happening on the DAU side and, how sticky are the payers on Social Casino, I'm not sure if there's some more detail that we could comment on that question. JB or Grzegorz?
Yeah. I guess you've seen for the past three quarters, user acquisition as a percentage of revenue has dropped to about 20%. If we're expecting that to be somewhat consistent, you can take, I guess, an implied assumption of the retention curve for our core Social Casino users and then extrapolate all new cohorts on top of a linear decline of all old cohorts and get to the stable state. The point at which the DAU, I guess, approaches the asymptote is gonna be sometime in the foreseeable future, probably in the short to medium term based on the rate at which retention drops off day-to-day. Those cumulative deltas should show flattening of a DAU at some point in the kind of short to medium term. It's very hard for me to give you a date on this.
I haven't actually run the exercise myself, but I suspect, Ken, either you or one of your team might know how to do that. Ultimately though, Anton's point about the stickiness of payers is really the key thing. We do require a DAU base for our Social Casino games because we need a critical mass of players to make a lot of our social functions work, clubs, tournaments, et cetera. Actually that critical mass point is significantly below where we are right now in terms of DAU base. There was one question actually from Tomasz asking about DAU in core franchises. Maybe that's something I can comment on now in the context of this question. I think the number that we had was 428,000 DAU in Q1 2022 for HC and BC.
That excludes Traffic Puzzle, and that represents a 21.5% decline year-over-year versus Q1 2021 in DAU for HCBC. Across the entire Social Casino segment, as I'm sure you've already seen, we've seen double-digit declines in DAU over the same period. We're loosely in line with where the market's heading.
Yeah. On the second Traffic Puzzle question, how to turn Traffic Puzzle now into a multi-product franchise. One way how to do it is release a sequel, that you would have a Traffic Puzzle Two or, you know, Traffic Puzzle, this and that, extension. Another thing is to utilize the product platform and introduce a new theme. Exactly what we did to some extent with Huuuge Casino and Billionaire Casino back in the day. We are exploring both options. We see the potential of expanding Traffic Puzzle with potential sequels, as well as we see that there's opportunity to use the product platform and introduce new themes that would expand our presence on the market.
Okay.
You had a third question about wages and inflation. Grzegorz, I don't know if you
Yeah.
You'd take that.
Yeah. I'm glad to do that. I can. Yeah, definitely the wage inflation or, you know, the wage pressure is not anything new to us. Definitely we are observing that and monitoring the market rates. What I can say is that this year we expect the salary costs or wages to increase by. I'll just give you a range, but it's, you know, between 8% and 11% year-over-year. It's not just the wage, but the overall salary expense increase.
What plays for our benefit now and, you know, difficult to say how long, I wish I knew for how long, but what plays for our benefit at this moment is particularly strong. Some of the analysts say that even too strong dollar. While we paid our wages in złoty, predominantly in złoty, we of course enjoy favorable exchange rates or translation rates on our costs. Definitely majority of our revenues is generated in U.S. dollars. Some portion of it is generated in euro, but again, against złoty, that's also favorable. Yes, there is wage inflation out there.
We've got good cost arbitrage or good currency arbitrage of generating revenues in strong currencies and paying out wages in not so strong currencies to put it softly.
Okay. Thanks everyone for those answers. A final question, if I may, a more general one, I guess, for Anton is could you say a bit more about the decision to split the CEO role and bring in Rod? To what extent it reflects his connection to Raine as a shareholder or simply him? And kind of how you see the role dividing in terms of who focuses on what. You've kind of implied a bit about that already, but anyway, you get the idea. Why was the decision made now? Why Rod? And how do you divide things? Apologies for kind of a triple question again at the end.
Yeah. Good. First of all, it's a bit unfortunate that Rod couldn't join us today as both me and Rod we are traveling. I'm doing this very early from New York myself. Yeah, Rod has been helping company already for several years, first as an advisory capacity and then later on as a board member and now taking the next step and taking the co-CEO role. Rod has + 40 years of wisdom and market experience. He's the person who has been working the longest in gaming business out of my friends and from my network.
During times like this where we've seen big sentiment change and big changes on the market as well as inside the company, I feel that Rod is exactly the right person to help me to move things forward. His expertise is a lot on helping organizations to be more efficient. He has a lot of experience from optimizing OpEx, CapEx, and that sort of things, giving me a bit more focus and time on the new things, thinking of the Web3 expansion, new products, and what we do on the buy side. We do believe that there's more we can accomplish together.
Maybe that gives you already some more kind of a better understanding how we are thinking about it and the next time we have our Q2 call. I'm sure Rod will speak more about his focus and role with you.
Perfect. Thanks very much, everyone.
Thanks, Ken.
Thanks, Ken. Okay, so we have some additional questions on the chat. I will ask them one by one. First one is from Alexei Gogolev from J.P. Morgan. My question is M&A. Retrospectively, the management made the right choice not to purchase any assets last year at very high valuation. How is the management team looking at acquisitions in current environment? And does it make sense to become more acquisitive given that valuations look more attractive, or management would prefer to wait a bit more and possibly find an equivalent of Traffic Puzzle via publishing platform? JB, it's for you.
Thanks. Those are very, very good words to hear, I must admit. I think we spent the last year or so after telling the market and investors during our IPO process that we would not be making any deals that we felt were mispriced. In the last year of deal-making activity at the all-time peak of games M&A, there was more than one occasion where we were tempted to look at deals that were close to that financial discipline line. Felt enormous pressure, of course, coming from shareholders and internal stakeholders alike. In hindsight, no regrets for the position that we hold because today, as we start to look down the barrel of a bear market, we're in a very strong cash position with valuations falling across the board.
To your question, that same discipline that prevented us from spending dollars in a dilutive sense over the past 12 months cannot disappear. That discipline must stay. While there is more opportunity, and I'm certainly being approached with more inbound opportunity from bankers and direct corporates alike today more than any other time at Huuuge, to say that we'll go on a buying frenzy, I think would be an overstatement. I'm excited. Team is extremely positive. For the first time, I think, in the past 12 to 14 months, M&A is looking increasingly viable on a standalone basis, and it will of course still be complemented by what we're doing in publishing. Yes, more positive today than at any point in the past year, I'd say.
Thank you. Next question also to J.B. Can you please comment on DAU in core franchise?
I think we covered this one already, Gabi.
Okay
428,000, 21.5% year-on-year decline versus Q1 in 2021 for HCBC DAU.
Okay, next question, I think for Grzegorz. Interest rates in U.S. dollars are going up. You have $200 million of cash. Should we expect any financial income on that?
Yes. Yeah. Thank you. Maybe before coming to the question, just a supplement to what JB said about M&As and, you know, market conditions. You know, I'm a relatively old guy in the team and, you know, I do remember those old classic rules of, you know, selling when everybody's buying and when everybody is selling. You know, being greedy when everybody or being fearful when everybody is greedy, and being greedy when everybody is fearful. I think that when we look back
Those good old rules apply, you know, valid for the new economy as well. When everybody was greedy last year, I was quite fearful of really overpaying. I think it's paid back. You know, my gray hair contributed here, and so now when everybody's fearful, I think it's time to look for opportunities to make sure that we come out of this situation even stronger. When it comes to the dollar, the dollar is strong. We've got a lot of cash on our balance sheet. When it comes to the interest rates growing, it depends how you look at it.
Of course it's a good opportunity to invest in the instruments which are held to maturity because then you're not suffer from the fluctuation in interest rates, and we've seen those fluctuations in interest rates quite recently. You know, the Fed is increasing the interest, the reference interest rates every conference they held. In the times of increasing interest rates, if you don't hold your instruments to maturity, you're exposed to losses. We are not prepared to invest in the instruments which we would held to maturity for one, two, or three years, or even beyond that. That would be definitely too long for us to commit with our cash.
We're looking for opportunities to invest cash into short-term instruments, and as of now, bank deposits, you know, they don't offer any meaningful interest rates. They just, you know, below 1% per annum, but they seem to be, you know, the right balance between accessibility of cash and making sure that there is some marginal interest on it. If you look at the valuation of the bonds or the bond funds over the recent three months, you will see that, unless you keep the instrument to maturity, in those times you can only lose.
Thank you. Next question, regarding M&As versus buyback discussion, it is either M&A or buyback or we can expect both? That question for Dig.
JB, I think that was. Grzegorz as well, I suspect, but my answer is both. Grzegorz can flesh out more discussion on the share buyback, but he's already covered this in depth I think today. M&A, as I said, without being too specific, we're extremely optimistic, more so than ever before at Huuuge I'd say, I think you should expect both.
Okay, thanks. One more question to you. Could you please comment on marketing spend, especially how user acquisition per player looks like? Is there any decline in cost of acquisition per player recently? Is it all about relation between UA cost and LTV of player? Historically, UA cost was rising, so I am wondering how it looks like right now.
Yeah. Okay, a couple of fundamentals here. Cost per install generally increases as you spend more. Cost per install generally has increased for the past three or four years, many hundreds of percent, in fact. The two combined have put a lot of pressure on user acquisition performance, and they've elongated payback timelines. The risk appetite of the company really dictates how much you're willing to spend because that's the only lever you can really control to manage CPIs. But, to undo just about everything I just said, CPI doesn't really matter. The only thing that matters is CPI relative to LTV or how much are our users generating and how much do they cost, just incremental dollars.
If we can buy a user for $1,000 and get $1,200 back, that's better than spending $1 and getting $1 and $0.10. That's the way that our marketing team, and actually most performance marketing teams, look at UA spend in this category as of today. Our view is the same. Generally speaking, CPIs have started to show signs of flattening, so the growth has been particularly aggressive in CPIs since Apple's ATT announcement. A lot of the market has now started to settle out in finding homes for their UA dollars via new networks that previously were not very well used. We're starting to see CPIs starting to flatten, but really to only look at CPIs would miss half of the picture, so I think it's best to look at those payback performances.
For us, the reason we're managing our spend in the way that we are is because we're effectively shortening payback periods for HC and BC as we become more cash generative and holding payback periods steady for Traffic Puzzle until we see KPI improvements in the product that allow us to spend more aggressively while maintaining consistent payback periods.
Okay, thank you. The next question from Piotr Łopaciuk, PKO. What will be the rules of new ESOP? Will this require business growth? What will be the strike price, ambitious or just get shares for free? Grzegorz, I think it's for you.
Yeah, I mean, first of all, there is no new ESOP. I mean, there is only one ESOP post IPO, and that's been widely discussed and disclosed in the prospectus. There is no new ESOP on top of that. We continue the program that was fully disclosed during the IPO, and I mean, throughout the history of Huuuge, as I remember, the shares were never given for free. They were always given at a fair market value of the company at the time. Those who were with the company in 2012, 2016 or 2017, of course they received the shares with a relatively low strike price, but that's how startups work.
I mean, Anton has been making quite a lengthy explanation how he ramped up Huuuge, how he made Huuuge a success, and he said that one of the key success factors of having skin in the game was using ESOP for motivating people. You know, at that time I was enjoying very good, comfortable corporate functions in large corporations and that was a choice of mine. I mean, I never received ESOP at a such a lower strike price at when the company was simply a startup that could turn either direction.
We have always been granting ESOP at a fair market value, maybe with some minor and negligible exceptions, but the rule for the ESOP is that the strike price is the fair market value of the share at the time of grant. Would there be an ESOP grant today? It would have a strike price of PLN 18, and it's not, you know, even remotely close to being for free, in my opinion.
Okay, thank you. Next three questions from Mariam Tskvitaria from Wood & Company, I think go to JB. First one, do you see any major changes in the market trends in second quarter 2022 after challenging first quarter 2022? When do you expect to be ready to start scaling up of Traffic Puzzle? And is it fair to assume that the quarter-over-quarter stabilization in DPU delivered in first quarter, especially in core franchises, may be sustainable in the coming quarters?
First question, do we expect any major changes in market trends in 2Q 2022 versus a challenging 1Q 2022? I think our behavior represents our belief here. We're focusing on being margin generative, highly more profitable, and focused on longevity and sustainability for years to come. That's because we believe it's the correct course of action in the face of a relatively prolonged bear market. In essence, I don't expect a significant improvement in market conditions in free-to-play gaming inside of the next quarter. I suspect it may be significantly longer than that, and we'll be in a good position if we have a defensive cash balance and flexibility with a low-cost base. That's the best way I think we can prime ourselves for success, exactly as Grzegorz and Anton have both now mentioned.
I think the second question was, when do we expect to be ready to start scaling up Traffic Puzzle? Again, this is very much contingent on the performance of the product. We need to see roadmap changes. We need to see product improvements. The two big ones I'd like to call out so I'm not being so ambiguous, the first is integration with our segmentation tool. So Huuuge has some internal tools that allow us to segment our player base and identify clusters of players with particular behavior types. That ability to segment gives us a superpower in how we serve product dynamic offers, dynamic pricing structures to individual players based on their behaviors. That's the reason, part of the reason, why Huuuge Casino is market-leading from monetization perspective. We plan to integrate the same set of technologies into Traffic Puzzle.
There's plenty of upside in the product yet, but the point is we want to see that upside start to manifest before we scale the user acquisition dollars any further, so the cart cannot lead the horse. Lastly, I think the third question was, is it fair to assume a quarter-on-quarter stabilization in daily paying users delivered in 1Q 2022 in core franchises? Is it gonna be sustainable? We know that our daily paying users is a much, much more resilient metric than daily active users, and so you should expect to see a disproportionate level of stability in those paying users versus active users.
Of course, how stable it is is really a relative question or subjective question, but yes, the reason why we're operating Huuuge Casino the way that we are is to ensure that that DPU number does not drop, and more importantly, the revenue number stays at least fairly consistent.
Thank you. Next, question from Krzysztof Skoczylas from BDM. What is the reason for the big drop in revenue from other games? How much was your WAU in these games in first quarter 2022 versus 2021?
I think I explained the drop in the revenue of other games, saying that there were titles in Q1 2021 that were sunset over the course of 2021, and the two major one was the Huuuge Stars and Bingo. That's basically contributing to the large part of the drop. Of course, there were other also titles from the Coffee Break Games, but those all were sunset. We don't give detailed information on the user acquisition expenses by title, so I will withhold from answering that question. You know, there was no massive user acquisition investments in those games.
On the contrary, we figured out that in case of Huuuge Stars or Bingo, just to give those examples, the products were having very good potential of being a successful title, but it would require a massive investment into user acquisition at a much higher risk of return versus the Traffic Puzzle opportunity. Once we made the acquisition of Traffic Puzzle, we decided that our priority would be placed on the Traffic Puzzle at a lower risk and a higher return from the user acquisition investments. Thus, the decisions to sunset those two other titles.
Okay, the next question from Krzysztof is the company satisfied with the performance of Huuuge Casino, Billionaire Casino, and Traffic Puzzle in May?
In May. Well, we are not here today talking about May results yet, so isn't that a bit early? You know, we always are seeking more success, so we rarely satisfied with what we've done in the past, and we are hungry for more success. We are not today talking of the May results yet, so that will have to wait.
Okay, I have one more question for Anton from Tomasz Pełchar. Do you consider any strategic update about new directions, NFT, blockchain, et cetera, you are going to pursue?
Yes. We've already communicated earlier that we are active on the Web3 space, and we are actively building what we call Huuuge Live. I think we told a bit about that in the last quarterly results announcement we had. We don't yet have more to tell today, but stay tuned. We'll be coming out and telling more about our plans in that space.
Okay, thank you. Another question from Krzysztof from BDM. Could you comment please the performance of the new game, Time Master? Since when it is available on the market, how long have you been working on it? What are your expectations for this game? JB, I'll kick it for you.
Okay. Time Master was published incredibly recently. We started spending our first user acquisition dollars on it eight days ago. Needless to say, we need time for those UA dollars to be optimized and the algorithm to learn, and our ability to judge whether we can scale this game will then become clear. This process probably takes between a month and two usually. It's too early for us to comment on Time Master. That said, when we looked at the game from a publishing deal perspective, it had pretty extraordinary day 30 retention, long-term retention, far above the gaming average, but more in line with the category in which it sits. Yes, excited about it. We've only just started working on it. More to come probably in the next two quarters.
Okay, thank you. The next question to Grzegorz. What are your plans for cash management without share buyback and potential acquisition?
I mean, we've accumulated cash, and we've made a specific use of funds to have the war chest for acquisitions. I explained a bit earlier that, you know, in the times of raising interest rates, investing money into the debt instruments that are not held to maturity is not a wise idea in my opinion. We are not prepared to invest in instruments that would have two, three, or even higher maturity. And of course, there would be good opportunities there. We're making sure that there is some interest rates on it with the bank deposits.
I'm also confident, and I'm speaking for the whole executive management, and I believe that also board would have a sentiment on really evaluating our possible uses of cash, and the way forward. Fairly soon, we said during the IPO that we would need about 18 months to deploy the funds collected during the IPO. We are approaching that period in about 3 months. It's not that we would be keeping that cash on the balance sheet doing nothing for the next 12, 24 or 36 months. We'll definitely evaluate what has been achieved and what will be possible to be achieved going forward, and then we'll come back with a plan.
Okay, thank you. The next question is from Emil Popławski from PKO BP. Do you expect that after lower expenditure on marketing this year, you will have to significantly increase the UA in 2023 to prevent DAU/DPU decline?
Yeah, that very much depends on market conditions. If they're favorable and we have the ability to spend with good redemption periods, we'll spend more aggressively. If not, we won't. We just need to be disciplined.
Okay, thank you. Next question . Where is the free-to-play market heading? Do you believe in the new initiatives like Netflix in mobile gaming?
Yeah, free-to-play gaming is evolving. We believe there will be more players who play free-to-play games or free games. I think what's going on the blockchain side, give it enough time and it will have an impact how we perceive what is a free-to-play game. We believe in the future of mobile free-to-play games, and we believe that the market will continue to grow, even 2022 would be a challenging year for the market. Call us believers. Do you believe in the new initiatives like Netflix in mobile gaming? I don't think Netflix, their investments in games would have yet had a bigger impact on the global gaming market.
It's good to see big players like Netflix coming in and seeing the potential in games. If anything, that further encourages us that we are working on the right market and hopefully there will be more significant platforms to play games. Who knows? Maybe the Netflix offering will be evolving into something more meaningful, thinking free-to-play and mobile gaming.
Okay, thank you. We have next three questions. I think they are all to Anton. First one is, does Anton still has no cash component in his CEO contract as announced after first half 2021, only having options with a PLN 50 strike price?
We haven't communicated any new plan in my case. Yes, at the moment, that's the last year contract the company signed with me, and we currently don't have an update with that matter.
Okay. Do you see any interest in your company from strategic players as consolidation in global gaming is taking place?
Yeah. There continues to be a lot of consolidation we've seen in the beginning of the year, Zynga, Activision deals, and Huuuge is a significant player on the market. That's the only thing I would comment at this point. Nothing more concrete.
Okay. The last one, but I think it might be already answered. Can you tell us something more about the way of Web3 implementation in your games?
Yeah. The one thing I say that we are not looking to replicate the Axie Infinity NFT paywall or paywall gate. In Axie Infinity, one of the popular Web3 games, you have to buy NFTs in order to play the game. We think that it is better to offer the game for free, and then for those players who opt in and wanna go deeper and really choose to do so, then for these players, let them potentially buy NFTs and tokens and go all the way. That's how we are approaching the Web3 gaming opportunity, so not the way Axie Infinity has done it. There will be time to speak more about this, but that's not today.
Okay. Thank you. I don't see any further questions in the chat. I will now ask Anton for closing remarks.
I know, I'm cautious. We are already over time, so thank you all for joining. Please remember to download our games. We appreciate your engagement, reviews, and in-app purchases of course. Stay tuned for more Huuuge action and thanks again.
Thanks everyone.
Thank you.