Enad Global 7 AB (publ) (EG7.ST) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to EG7's Second Quarter Earnings Release. My name is Fredrik Ruden, Deputy CEO and CFO; and with me, I have the company's CEO, Ji Ham. We will start this session with a presentation and end it with a Q&A, and I hand it over to you, Ji.

Thanks, Fredrik. Thank you all. Good morning for joining us. We'll start with the key performance figures. Next slide, please. For the second quarter, our net revenues came in at SEK 379 million with adjusted EBITDA of SEK 38 million. Performance improved year-over-year. Net revenue grew by 7.4%. Currency movement has impacted our results pretty significantly this year without the FX effect net revenue grew by 17.2%, and organic growth came in at 6.7% when you exclude FX as well as the contribution from Palia. Adjusted EBITDA grew by 12% year-over-year and margin came in around 10%, a small increase from last year. Next slide, please. Palia release was the main highlight for the period. Successful release on PlayStation 5 and Xbox on May 13, contributed SEK 38 million of net revenue for the second quarter, and that represents around 200% increase quarter-to-quarter. All the major KPIs saw significant increases like-to-date downloads of over 8 million and 215,000 daily active users, representing more than 3x the level before release and 1.2 million peak monthly active users. And for July, average daily revenue came in at 3x the 30-day average before the update. The team has an exciting road map ahead with continuing build of the momentum for the game. We have Animal husbandry feature releasing shortly in September, multiplayer co-op housing feature targeted for the first half of 2026. Content update, we'll also see a more robust update going forward. Currently, monthly updates are going out. but we will be including larger quarterly content as well, which will reflect the seasonal changes. And just as we just released the Elderwood content update together with the console release, we intend to have big annual expansions during spring/summer time going forward. And with the right approach and execution, we are very excited that we have an opportunity here to be able to establish Palia as one of the leading cozy games globally. So far, Palia has attracted over 8 million users. And we have some big titles in the genre with Animal Crossing: New Horizons, a cozy game from Nintendo, which sold over 48 million units just on the Nintendo Switch. And you have Stardew Valley, a multi-platform indie title, that has sold over 41 million copies. And then the Sims 4 from EA, which had over 85 million players live-to-date as of last year, which is likely higher now. So based on the player base of these titles, this illustrates the overall market potential for the genre and combining Palia's quality game plan with the unique differentiation that Palia brings, which is the -- it's the only large-scale multiplayer online cozy name in the marketplace. And our aspiration is to be able to take Palia and then establish it as one of the biggest and the best in the genre going forward. Next slide, please. Additional updates for the period. We have Piranha, successfully releasing its first DLC for MechWarrior 5 plans. Performance was good, in line with expectations. Early trends are on target compared to prior DLCs for MechWarrior 5 Mercenaries. Next up is the DLC 7 for Mercenaries coming up in September and future plans for additional DLCs for both plans as well as Mercenaries will be announced thereafter. Cold Iron project. Project is making good progress, steady positive progress. It's in the final stages of development. And subject to progress, we're aiming to share official announcement around the timing of the release in the near future. On the strategic M&A front, we're continuing to see a flow of special situation opportunities in the marketplace. To date, we have evaluated several but passed on most of them Interesting opportunities, but we haven't like the balance of risk and reward profile for most. And current marketplace, when you look at the climate, it's a tale of haves and have nots. So at the very top of the market, when there's headlines relating to the biggest guys, they are showing good performance, and they're doing very well, benefiting from their established franchises. But when you look at the mid- to lower end of the market, the market remains quite challenging, still too much supply in volume. And currently, there's just not enough capital availability to fund a lot of these games to completion. As a result, we do expect additional rationalization in the marketplace especially in the mid- to lower end of the market over the near term. And EG7 as a group, we feel like we have a good position currently to be able to target opportunities as they come up, given our solid financial standing as the market continues to rationalize over the coming quarters. Next slide, please. Over to you, Frederic.

Thank you, Ji. Next slide, please. Net revenue in the quarter was SEK 379 million, up from SEK 353 million in the comparable figure last year representing 70% FX-neutral organic growth. Adjusted EBITDA was SEK 37 million, which gave a 10% adjusted EBITDA margin. LTM net revenue over the past year shows steady improvement and reached SEK 1.813 billion -- sorry, representing growth over the past 4 consecutive quarters. The LTM margins are stable at and the adjusted EBITDA margin was 19%, which is what we have had over the past 5 quarters on average. Next slide, please. We have a foundation of more predictable revenues and cash flows. More predictable revenues comes from the live service and back catalog titles. Net revenue from this portfolio was SEK 290 million corresponding to 77% of the net revenue for the group and over the last 12 months, net revenue amounted to SEK 1.813 billion, of which SEK 1.276 billion derived from this portfolio. The portion of revenue has been stable at 70% to 74% in the past 5 quarters. Next slide, please. Both Daybreak and Big Blue Bubble are negatively impacted by currency fluctuations. If adjusting for it, they would both show an increase from Q1. I will get back to this later in the presentation. So Daybreak is the largest contributor to the net revenue, generating SEK 190 million. The adjusted EBITDA came in at SEK 2 million, corresponding to a low 1% EBITDA margin. The lower margin was primarily driven by SEK 37 million additional cost after capitalization from acquired entity, of which SEK 10.5 million was marketing expenses in conjunction to the release of Elwood expansion. Singularity 6 capitalized a significant part of their cost up to the release date of Elderwood. We expect capitalization to increase in the preparation of next major upgrade for Palia. Second quarter included the full Eastern campaign for Big Blue Bubble, who generated SEK 61 million in net revenue and contributed SEK 25 million to the adjusted EBITDA corresponding to 41% adjusted EBITDA margin. Next slide, please. Piranha delivered a net revenue of SEK 23 million with an adjusted EBITDA at SEK 13 million, corresponding to 55% margin. The executed cost savings measures had a positive effect on margin. Meanwhile, net revenue was helped by the successful release of the first DLC for Clans, which came out May 8. The winding down of Toadman was completed according to plans in the beginning of the third quarter. Next slide, please. The strong release pipeline for Fireshine in the first quarter was followed by a fairly slow second quarter. Net revenue in Fireshine was SEK 74 million and adjusted EBITDA was SEK 3 million. Petrol has been profitable following the business optimization efforts executed in the beginning of the year. Petrol generated SEK 30 million in net revenue with a 3% adjusted EBITDA margin. Next slide, please. We have experienced some strong currency fluctuations in the second quarter. And they totally amounted to SEK 36.5 million mainly hitting Daybreak and Big Blue Bubble. And what I would like to highlight here is that we consolidate on accumulated figures, which means that we will see a revaluation effect on previous quarters to be recognized in the most recent quarter. So what we see in 2025 is that we have a positive FX effect in Q1 of [ SEK 6 million ] that will then be revalued in Q2 to SEK 36.5 million. So for the full period, the first 6 months, the effect is SEK 30 million negative, but the effect is stronger in Q2. That is what I'm trying to show here. Next slide, please. After issuing SEK 350 million unsecured bond in Q1, we started the quarter with a strong SEK 579 million opening cash balance. The working capital movement has so far for the year, and for several different reasons, be negative, we expect this to balance out over time. During 2024, our investment in what we call new growth initiatives, Clones and Palia, and Cold Iron peaked at SEK 238 million. And now we invested SEK 49 million in Palia and Cold Iron who are the 2 remaining projects here. And second quarter ended with a cash of SEK 455 million and a net cash position of SEK 102 million. And then I hand it over back to you, Ji.

Next slide, please. Okay. So in summary, a good quarter, stable one. Solid net revenue growth of 7% year-over-year. Adjusting for FX, once again, it would have been a nice growth of 17%. Palia released on PlayStation 5 and XBox was a nice success, and we have more to come on that front going forward, and we're excited for that. First DLC for MechWarrior 5 plan was also a nice outcome there. Our position is very good. So solid cash flow continues to be one of our strengths with our live service games. Our operations have been optimized to point of nice lean operations and a strong liquidity position, all of which provide us with a great position to execute against our strategy. And we are patiently seeking growth opportunities. There's good volume of potential M&A deals out there and we're being patient and disciplined. We do want to make sure that we find opportunities that fit and align well with what we're trying to accomplish strategically and provide compelling upside for the group going forward. So that concludes our second quarter earnings presentation, and now we will move to Q&A.

Thank you, Ji. So I'll try to coordinate this as I get some questions along the way here. I can start with one question from Carl [indiscernible] . Could you elaborate a bit on the types of targets you have evaluated recently?

Yes. I can't get into too much specifics, but in terms of the type of situations that we are encountering, we could talk about. So they're not that dissimilar from what we've done with Singularity 6. So there's been a significant amount of capital that's been invested into the middle to lower end of the market over the last number of years in quality games, great teams. But because of the dearth of capital in the marketplace given where the industry has been, there are certain studios that have great products that just do not have enough capital to get to the finish line, but they're almost there. So being able to evaluate opportunities where we can see, touch, feel, play and be able to underwrite the risk of these titles based on actually getting our hands on it, especially ones that are closer to the finish line has been highly valuable. But nonetheless, whether it's because it's an original IP where we may not like the genre that some of these games are in, even though their quality products and quality teams, we haven't found the right fit as to what to invest in yet. But we're seeing a number of these opportunities. And those are one pocket. Another pocket is there are also ones looking for liquidity, where they do have an existing title, existing business but they're looking for opportunity to exit. And then we're looking at this range of opportunities that fit with our strategy. and we are optimistic that there will be an opportunity for us to grow with M&A. But for now, over the last number of quarters, we haven't pulled the trigger yet.

Thank you, Ji. So I have some questions from Hjalmar at Redeye here. How has the revenue from Palia trended after the release? Is it growing or declining? Okay. Sorry.

So the second part was the trend after?

Yes.

Okay. Yes. So I mean it's not that dissimilar from what you would expect from any type of games release. So we saw each pipe initially when the game went out on PlayStation, Xbox, as well as reactivation of a lot of players on the existing platforms. And along with the significant content update, we saw a lot of players come back, reengaged, spend a lot of time playing, and we're also able to generate significant revenues from that. But because this is a live service game, you will see spikes and then the number will decline somewhat. And the idea is that we continue to provide content to keep players engaged and also to reactivate and attract new players. So trend will be a big spike, slow decline. And our goal is to be able to sequence wins content updates, compelling updates in terms of what the players may enjoy so that we continue to build. So these spikes, slight declines, spikes, slight decline, et cetera. so that over time, we continue to build that foundation of our user base to be able to sustain a long-term success here. And we do look at Palia as a type of game that we can establish that long-term success, live service game, similar to a number of our portfolio games that have sustained for a very long time.

There is a follow-up on that also, which I think you didn't cover also from Hjalmar. How is monetization on Palia now and what is the potential, what will drive revenue growth, more players or high monetization?

Yes, it's a combination of both. So the key driver is the player base, but alongside that continuing improvement on payer conversion, it's a free-to-play team, right? So in terms of all the players that are playing, one of the efforts that we are prioritizing is increasing the conversion rate for those that are enjoying the game. And alongside that, ultimately being able to increase average revenue per paying user, all of which would translate to increasing average revenue per user if we are successful with a number of the features that we're rolling out. So there's a pretty robust plan around that. So a combination of both user acquisition, retention and improving the conversion and average revenue per paying user. All of those metrics are what we're targeting.