Ladies and gentlemen, thank you for standing by, and I would like to Welcome you to the Q3 2024 Earnings Call of Huuuge. The speakers today are Wojciech Wronowski, the CEO, and Marek Chwałek, EVP Finance. The call will start with a presentation from the company, followed by a Q&A. For the Q&A session, we'll be joined by Erik Duindam, the COO, and Maciej Hebda, SVP, Strategy and Planning. The presentation will be available for download on our website after the call. You're also welcome to type in the questions in the chat box while the presenters are speaking. So with that, I'll pass the line over to Wojciech to start the presentation. Please go ahead, sir.
Hello everyone, and thank you for joining us. This is Wojciech Wronowski, the CEO of Huuuge. Today, alongside Marek Chwałek, our Treasurer and EVP Finance, we'll provide a summary of our operational and financial results for the Q3 of 2024. Following that, we'll share our outlook for the remainder of the year. As always, we'll conclude with a Q&A session. Before we dive into the details of the quarter, I would like to highlight the key priorities and achievements that shaped our Q3 results and our strategic focus going forward. First and foremost, maintaining profitability remains a core priority for Huuuge. Our strict cost discipline has allowed us to deliver strong Adjusted EBITDA of $21 million, representing a 7.4% sequential increase and an impressive Adjusted EBITDA margin of 36%, up by 48 percentage points compared to the previous quarter.
Our key focus remains to maintain and improve our profit margins. Q3 revenue totaled $59 million, reflecting a 17.5% year-over-year decline and 7.3% quarter-over-quarter decline. This performance was primarily impacted by the delay of key initiatives in our product roadmap to later in the year. However, the delayed roadmap initiatives are now progressing as planned, with significant milestones anticipated to drive positive impact starting in late Q4 2024. Direct-to-consumer channels continue to show strong momentum, with D2C accounting for 15% of sales in October 2024. This growth highlights the strategic importance of this channel in driving improved margins and creating long-term sustainability. Lastly, we remain focused on transformative growth through M&A. Our priority is targeting game-changing acquisitions that will expand our portfolio and leverage our expertise in monetization and operating games as a service.
With a robust cash position, we are well prepared to seize the right opportunities to accelerate growth. Now, let me turn to our core franchises and the development of new games. Core franchises' revenue declined year-over-year. We have decreased our user acquisition spend by 28% quarter-over-quarter, and our product KPIs have generally declined as a result of not refreshing our game offering and postponing our roadmap as shared on the previous earnings call. We have aligned our marketing strategy to match the product performance following our strict payback discipline. On top of that, we have changed our payback targets to be slightly more conservative and maximize midterm profit margins taking into account the current product metrics.
We anticipate that the upcoming November update, featuring the largest economic change we have implemented to date and the introduction of the new Huuuge Battle Pass feature, will significantly impact our revenue and engagement metrics, while also establishing greater stability in revenue for the months ahead. Depending on the magnitude of the impact of the product releases, we will adjust our marketing spend accordingly, with the goal of constantly improving our profit margins and maximizing cash generation in the long term. Huuuge continues to make significant progress in its direct-to-consumer strategy. In the Q3, D2C channels accounted for approximately 12% of revenue, rising to 15% in October. In the previous quarters, we adjusted our guidance from low to mid-teens for D2C revenue share for the full year. We now anticipate reaching a mid-to-high-teens revenue share in Q4.
With only a small portion of our player base currently engaging with this offering, we see substantial growth potential ahead. The company plans to expand its D2C offering to a wider audience later in Q4. Our approach emphasizes mindful expansion, focusing on enhancing the player experience while driving incremental growth and carefully managing the risk of cannibalization. Let's talk about new games. We have several teams working on new games, each focused on mastering a specific genre. Currently, we have a few games in various stages of development. This is a complex process, and we continue testing several prototypes. While many have been discontinued, others have advanced to the next stages. As soon as we achieve notable success, we'll share detailed updates and insights about these games. Now, let's turn to our financial performance. Marek, over to you.
Thank you, Wojciech. Hello everyone, good afternoon. I'll cover the financial section of this presentation. Next slide, please. In the Q3 of this year, we saw a 17.5% year-over-year and 7.3% quarter-over-quarter revenue decline, driven mostly by our core franchises. These results reflect a shift in the product roadmap, which is now scheduled to deliver impact in the late Q4 this year. At the gross profit level, we observe year-over-year and quarter-over-quarter improvement in the margin, primarily due to the continuous expansion of our D2C channel. We aligned our marketing strategy to better match performance trends and the new timing of our product feature roadmap. As a result, user acquisition expenses in the Q3 this year decreased by 21.5% year-over-year and 28.4% sequentially. This adjustment continued throughout the Q3.
Year-over-year changes in general sales and marketing, R&D, and G&A costs had a smaller impact due to last year's restructuring, which was already fully reflected in the Q3 last year's results. Additionally, the 5.8% year-over-year strengthening of the Polish złoty against the U.S. dollar in the Q3 of this year increased pressure on our costs. We remain committed to strict cost discipline. In the Q3 of this year, our Adjusted EBITDA amounted to $20.9 million. The year-over-year decline of 17.5% followed the revenue trend. The sequential improvement of 7.4% compared to the Q2 2024 reflects a reduced cost base, primarily in sales and marketing expenses. Now, let's move on to the balance sheet. Next slide, please.
During the first three quarters of this year, the structure of the balance sheet changed, primarily due to the $17 million share buyback settled in April, partially offset by a highly positive net operating cash flow of over $47 million. As a result, total assets amounted to $187 million, a decrease of $30.5 million compared to the end of the prior year. At the end of September, current assets consisted of 80% cash and cash equivalents, totaling nearly $125 million. Our non-current assets amounting to $31 million included $4 million long-term investment in Banana Studios and Empire Games, both completed within the first nine months of this year. Total equity decreased by $21 million due to the share buyback, partially offset by $47 million in current year's earnings. The decrease in current liabilities is primarily related to the payment of corporate income tax liabilities from the previous fiscal year.
Turning to the next slide, we can expand a bit on our cash position and cash flow generation. In the first nine months of this year, our pre-tax profit amounted to $56.5 million, a decrease of $18.9 million year-over-year, primarily due to lower revenue and increased UA spending. Thanks to better profit-to-operating cash flow conversion, this resulted in only a $10.3 million decrease in net operating cash flow compared to the first nine months of last year. The net operating cash flow in the previous period was impacted by a substantial increase in net working capital of $11 million. The negative investing cash flow for the first nine months of this year, amounting to $1.5 million, was primarily driven by a long-term investment of $4 million and ongoing purchases of tangible and intangible assets.
This was largely offset by interest received from short-term bank deposits and money market mutual funds, totaling $4.3 million. The negative net financing cash flow is mainly related to the share buyback. Turning to the next slide, I'd like to sum up our financial update. In the first three quarters of this year, we delivered an Adjusted EBITDA of $62.3 million and a net operating cash flow of $47.3 million. Our net operating cash flow to Adjusted EBITDA conversion rate for the 12 months ended Q3 this year amounted to 82%, showing a slight increase compared to the previous financial year. We are a highly profit-oriented and cash-generative business. Even after returning almost $220 million to our shareholders within the last two years, we maintain a strong balance of almost $125 million, allowing us to pursue inorganic growth options. Now, I will discuss our guidance for this financial year.
In light of the observed negative impact of the macroeconomic environment on player behavior and the product roadmap being pushed to the Q4, we expect a year-over-year revenue decrease in the full year 2024. Our future roadmap for the end of this year is exciting, laying a strong foundation for the coming year. Looking at the entire 2024, we expect marketing spend to grow year-over-year. However, in the Q3 this year, it was already reduced by 30% quarter-over-quarter, and further cuts are expected also in the Q4 to align investment marketing spend with product performance. Maintaining strict payback discipline remains our main priority. We will continually be seeking operating cost-effectiveness across the company and expect to realize further savings in the Q4 this year. We are confident that these measures will lead to solid Adjusted EBITDA and high profitability, even with lower-than-expected revenue.
With that, I'm turning to Wojciech for his closing remarks.
Thanks to everyone for tuning in and for your continued support. If there is anything we want you to remember, it's these key takeaways. We continue to deliver strong Adjusted EBITDA through a disciplined cost policy, ensuring sustained profitability. Our key focus remains to maintain and improve our profit margins. We are excited about the upcoming release of the Huuuge Battle Pass and the biggest economic changes we have executed to date. We anticipate they will drive a positive impact on the product metrics. Our D2C channel continues to expand, contributing 15% of the total sales in October 2024 and is expected to reach mid-to-high-teens in Q4 2024. We maintain M&A focus. We are targeting transformative, game-changing acquisitions to drive long-term growth. Let's start the Q&A.
Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. If you have any questions and are dialed in via the telephone, please press star two on your keypad. star two for any voice questions. You may also ask a voice or a text question if you are dialed in via the web. We will start with the text questions first. First question is from Mr. Max Stenberg, private investor. What specific measures are you taking to drive players to DTC? Do you have any longer goal for 2025 and beyond for the level of revenue from DTC?
I'll take this question. So our strategy with DTC involves our direct-to-consumer web shop and also alternative distribution channel. And these contain many different elements of making players go to these channels, including direct contact and other things online to market our DTC platforms. Right now, it's only available to our VIP players, and we'll be broadening this audience significantly, and we'll keep improving our user experience for this as well. So it will be ongoing development. In general, we are guiding for mid-to-high-teens for Q4 in 2024 in terms of DTC revenue. And for 2025, we will provide guidance on the annual earnings call. But we see a lot of upside potential here and are still planning to grow this further.
Okay, thank you. A follow-up question from Mr. Stenberg. What is the reason for Huuuge Casino being taken off Google Play Store in Poland?
Yeah, I can take this one. It requires a bit of context. Like a few weeks ago, we received a sudden suspension notice for Huuuge Casino with the reason cited being an alleged violation of local gambling laws. And as far as we know, Huuuge Casino is the only social casino from the whole industry impacted by this. We filed an appeal and provided a detailed explanation that the game has been on the market for nine years without any changes to the structure of the game, and there have been no changes in the regulations. And we requested to the platform to reinstate the game promptly. So the response we received only two days, so like three weeks after, has not brought yet any conclusions on this matter.
Because of the updates coming in and to continue serving the game, we had to kill a Polish version in order to proceed with rolling out those major updates we have, which include both the biggest economic change and Huuuge Battle Pass, our biggest release so far. In the meantime, we have taken all the measures and mitigated the impact on the revenue successfully. We transitioned a portion of our players to alternative platforms, and we recovered part of the potentially lost revenue. The impact on the revenue is not material.
Okay, thank you very much. Next question comes from Mr. Jimmy Johnson, Fold Equity. I believe the first part of your question was just answered. We'll move to the second part. You spent around 14.5% in UA compared to the revenues. What would you say is the steady state for Q4 and the start of 2025?
For Q4, we're expecting low double digits, and for 2025, we'll give guidance on the next earnings call.
Okay, thank you. A follow-up question from Mr. Jimmy Johnson. There is a big bundled ongoing lawsuit against Apple and Google. It's free to participate, but lawyers will claim 27.5% if they win. Rumors suggest there are several big mobile companies who are joining. Is this something you are looking into?
I appreciate the question. Generally, we will not comment on the rumors and anything regarding litigation is disclosed in our quarterly report.
Thank you. A follow-up question. Further cost savings are in progress for Q4. Could you please give us some more color in what areas?
Sure. Maybe I'll take this one. So there are various sections in different areas of the company for UA spend. We are tightening payback targets for all cost categories. We are monitoring and scrutinizing all expenditures to eliminate unnecessary or excessive spending. We are limiting new positions in the organization, but also discretionary costs such as travel or non-essential projects. We are also setting strict budgets for the department and generally trying to negotiate better terms with our suppliers or switching to cost-effective vendors.
Okay, thank you. A follow-up question. Huuuge is one of the cheapest public companies around mobile gaming in the world, but it is fair to assume you would rather do M&A than buybacks at this point. If yes, what is the rationale for this?
Our key and only priority is ultimately creating value for our shareholders. We think that smart and meaningful M&A focused on our strengths and potential synergies is a logical thing to do for us. We definitely don't rule out other avenues of creating or returning value to our shareholders. We will do M&A when we have high confidence in an opportunity and not automatically above anything else.
Thank you. A follow-up question. Hypothetically speaking, are you allowed to do buybacks even if you're looking into doing a larger acquisition?
We follow all relevant regulations of Poland and of the United States in our internal discussions and planning, ranging from regulations such as market abuse regulations or any more specific U.S. tax and securities regulations.
Okay, thank you very much. Our next question comes from Mr. Michał Wojciechowski from IPOPEMA Securities. Artifex Mundi's CEO recently noticed higher competition on the mobile market, resulting in volatility in CPIs. Have you noticed similar trends, excluding standard seasonal effects?
We have been adjusting, as you know, our UA spend or lowering it over the past months. And this ultimately impacts our CPIs quite a lot in a positive way because of lower scale, which also means it's harder to do any apples-to-apples comparison from our perspective. So we don't necessarily see a significant change in the trends in the past quarter compared to the quarter before. And generally, there may be differences within mobile game genres also.
Okay, thank you very much. Next question comes from Mr. Krzysztof Pałucki from Predin Invest. What do you believe to be the main reason for higher UA costs in the mobile gaming market? What would need to happen for this trend to change?
This is a tough question. It's ultimately a combination of many things, such as the competition within mobile gaming, but also competition with other types of apps or websites that are marketing or competing. There's still this effect from a few years ago when the privacy rules and targeting rules kind of sharpened from Apple's point of view. So all of these things are a factor here. To say what will need to happen for this trend to change, that's a really tough question. I'll leave to the analysts.
Okay, thank you. A follow-up question from Mr. Jimmy Johnson, Fold Equity, regarding the future roadmap and the potential bump in revenues. How long do you estimate this tail will sustain?
I can take that. So the short answer is that we expect a positive impact on Q4 revenue and early Q1, but expanding on it, the economic changes have usually a positive impact on both revenue engagement, and everything depends on the scope of the change if the economy change is done alone or supported by other releases. This November, in a week from now, we are going to do the biggest economic change so far, and we are going to release additional meta layer to the game. So we hope that this positive impact will last longer.
Okay, thank you very much. A follow-up question from Mr. Michał Wojciechowski from IPOPEMA Securities. How does the cooperation with third-party solution providers affect DTC fees and profitability?
Ultimately, working with a third-party provider offers much more than just payment processing. There's a lot of things on the monetization side and also distribution side that these partners can offer and that we greatly benefit from in terms of our profitability and DTC in general. The cost of doing this with external partners versus handling payments ourselves and developing everything ourselves is not significantly higher, while it does yield all of these benefits.
Okay, thank you very much. A follow-up question from Mr. Wojciechowski. Could you give us more color on Banana's current pipeline and results outlook?
In terms of Banana Studios, we signed a deal in March, and we have still a lot of time to decide on the next tranche. So we are monitoring. In the meantime, there are no further updates for now.
Okay, thank you very much. Next question is from Mr. Piotr Poniatowski from mBank. In what size range are you looking at M&As? Rather Empire-like, small single digit, Banana's-like, low double digit, or Traffic Puzzle-like, high double digit?
We are ultimately focused on maximizing our shareholder value, and so we will look at each opportunity individually, and depending on the market and opportunities, we'll make a decision.
Next question comes from Mr. Krzysztof Tkocz from BDM. Are you also considering entities from the Polish market as part of your M&A activities? Have you noticed any interesting opportunities?
The Polish market is obviously on our radar, and we know the market very well. So it's on our radar. In general, we can't comment on opportunities until it becomes something we can confidently talk about.
Next question is a follow-up question from Krzysztof Tkocz from BDM. How many people does the company currently employ, including Empire Games? And how does this compare quarter- on- quarter? Should we expect further employment optimization in 2025?
Empire Games is not a part of Huuuge. We are minority investors. In terms of headcount, we are below 450 people, and the headcount has been more or less stable over the last quarters. In terms of future optimizations, we as a management regularly review priorities in the structure to maximize efficiency and strong profit margins. We are not ruling out potential optimizations in the business in the future.
Okay, thank you very much. A follow-up question from Krzysztof. What is the reason for the increase in ARBDAU of other games in the Q3 of 2024 to $0.17? That's up 325% quarter- on- quarter.
So maybe I'll take this one. Just a reminder that the other games category is very small and has a material impact on our revenue. We are talking about less than 2,000 daily active users. You might see quarterly fluctuations on KPIs. It's a portfolio of small games with no UA support and no development support. We just might see that happening from quarter to quarter with virtually no impact on our numbers on our financial.
Okay, thank you very much. Next question is from Mr. Michał Stopka, private investor. What of your costs are denominated in U.S. dollar, euro, and Polish złoty? You hire most of your staff in Poland. Do you pay them Polish złoty or U.S. dollar?
Maybe I'll take this one. So there are two main currencies impacting our OpEx, our operation. That's USD and Polish złoty. USD is mostly relevant for our user acquisition spend, whereas PLN, Polish złoty for most of our operation. A majority of our operation is located in Poland, and we obviously pay our Polish employees in Polish złoty.
Okay, thank you very much. Next question is from Mr. Piotr Poniatowski from mBank. Are you looking at M&As with games targeting the fashion sector?
Not particularly. If there will be any opportunity related to fashion games that somehow has strong synergies with our business or products, then we wouldn't rule them out. We're not particularly looking at this.
Okay, thank you. A follow-up question from Mr. Piotr Poniatowski from mBank. What is the floor for minimum level of UA to revenue? Is the ratio we have seen in the first half of 2023 possible once again?
We've been setting more strict targets in terms of our payback periods to maximize profit margins in the midterm. This also led us to be cutting spend recently. We expect low double digits in Q4, as I said before, and we'll generally follow the performance as we've always done, and so we will present more detailed guidance in our annual earnings call for 2025.
Okay, thank you very much. Next question is a follow-up question from Mr. Max Stenberg, private investor. Regarding the closing of Huuuge Casino in Poland, do you see this as a further risk in other areas?
No. We don't see a further risk in other areas.
Okay, thank you very much. A follow-up question from Mr. Piotr Poniatowski mBank. Is any game from Huuuge Pods' portfolio standing out?
Currently, we are working on a few games, and many of those are in the very early product life cycle. So at the very moment, it's difficult to discuss if any game is standing out. If there would be any material success, we are going definitely to comment on this on the earnings calls.
Okay, thank you very much. Yes, perhaps just looking at the questions, we have no further questions at this point. We'll perhaps look at any other voice questions. Once again, start two if you have any voice questions. Okay, I see no further questions at this point. I'll be passing the line back to the Huuuge management team for their concluding remarks.
Thank you again for your continuous support, for good questions, and see you soon on the next earnings call. Have a great day, everyone.
Thank you very much.
Thank you, everyone.
Thank you.
Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you. Goodbye.