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

Good morning, and welcome to this year-end and Q4 presentation with EG7. My name is Ludvig Andersson, and I will be your moderator during this call. With me here to present, we have the company's acting CEO, Ji Ham; and Deputy CEO and CFO, Fredrik Ruden. After the presentation, we will have a short Q&A session. So feel free to e-mail your questions to the Investor Relations e-mail. But now over to you, Ji.

Thanks, Ludvig. Thank you all for joining us this morning for our earnings presentation. The group ended the year quite strong, and we're excited to share the results. Next slide. For Q4, net revenue came in at SEK 559 million, representing 12% growth year-on-year. Margins were very strong with adjusted EBITDA coming in at SEK 179 million, nearly doubling from the year before and achieving 32% margin. Solid operating cash flow for the quarter with SEK 140 million. For the full year, net revenue totaled SEK 1.87 billion. That's 27% growth year-on-year and 6.2% organic growth on an FX-neutral basis. Adjusted EBITDA came in at SEK 483 million, strong 26% margin and 49% growth year-on-year. Full year operating cash flow of SEK 375 million, which allowed the company to fully repay the debt and take our leverage to 0, which we're very happy about. Next slide, please. The major highlight for the Q4 was My Singing Monsters from Big Blue Bubble. Big Blue Bubble delivered a record performance. Q4 included My Signing Monsters' peak KPIs across the board. Net revenue for the quarter came in at SEK 193 million. That's growing by 607% year-on-year. Adjusted EBITDA came in at SEK 116 million, also growing exponentially by over 600%. For the full year, net revenue of SEK 310 million for Big Blue Bubble, a growth of 184%. Adjusted EBITDA of SEK 182 million, representing 234% growth. This record performance was driven by My Singing Monsters' transformational growth. In Q4, MSM became the highest grossing game in the music category and segment across both Apple and Android platforms, reached the #1 spot in the game category in the app store in more than 15 countries and top 10 in over 100 countries. Viral growth across social channels such as TikTok and YouTube provided the launchpad for this growth. And some of the KPI highlights from the year end on TikTok included 1.7 million followers, 21 million likes, 210 million video views, 2.5 billion hash tags. And as of the end of January, over 6.9 billion hash tags, illustrating the continuing sustaining performance of My Singing Monsters. Next slide, please. Some additional KPIs here that illustrate MSM's phenomenal growth in Q4, 11.1 million new users came in. That compares to 938,000 total new users in Q4 2021, that represents 1,086% growth year-on-year. Average daily active user for Q4 2022 reached 1.4 million compared to 172,000 in 2021, growth of 728%. I've said transformation a few times at this point. We do believe that this growth is not just a pop and drop. The initial exponential ramp was never going to sustain. However, we do believe that MSM will have a new baseline higher than prior historical levels, which allows the team to continue to build upon that going forward. The game and the brand reached a higher level of relevancy, and we are excited to see what our talented team at Big Blue Bubble can do going forward and continue this momentum along with this game. Next slide, please. Games segment delivered a strong quarter. Net revenue came in at SEK 423 million. That's 83% year-on-year growth, 47% organic growth on an FX-neutral basis. Strong profitability with adjusted EBITDA of SEK 168 million, representing 40% margin and 169% growth. As highlighted already, MSM was the key driver with Big Blue Bubble contributing 46% of net revenues and 69% of adjusted EBITDA for the segment. Daybreak is continuing its steady performance, delivering SEK 199 million of net revenues. Three successful expansion releases for EverQuest, EverQuest II, Lord of the Rings Online. Some of the titles did see declines as anticipated from the pandemic boosted levels in 2021. However, Magic Online's addition and also the favorable FX trends contributed to the growth resulting in net revenue growth of 15% year-on-year. Other business units within those segments are largely performing according to plan. Next slide, please. Service segment results came in, in line with expectations, SEK 136 million of net revenues, adjusted EBITDA of SEK 14 million. Q4 net revenues declined by 49% year-on-year. However, this is due to a mismatch in timing. In 2021, due to the pandemic, there were significant product delays impacting service segment revenues. As a result, 48% of total revenues in 2021 was recognized in Q4. This year-end weighted results in 2021 is causing this misleading year-on-year comparison. More appropriate way to look at it for 2021 and 2022 is really comparing the full year results. For full year, service segment delivered SEK 622 million of net revenues, representing 12% growth. And adjusted EBITDA for the year came in at SEK 90 million, growing a healthy 23% over 2021. Fireshine is performing as expected. Q4, the busiest quarter for Petrol on campaigns like Call of Duty and a number of other AAA products, once again, Petrol delivered its best-in-class effort. Next slide, please. Over the last few quarters, we have communicated our plans to ramp up the work-for-hire business. As we ended 2022, we have decided to fully pivot this way with nonlive game studios becoming work-for-hire centric. We believe that work-for-hire business provides a more compelling risk/reward balance. First-party titles that the studios have been developing, utilizing either new unproven IPs or subscale IPs with limited audience, we believe, are too unpredictable and no longer align with our strategy. The rationale for this change is our desire to continue transitioning our focus and business to a more predictable business model with heavy emphasis on risk management and also more predictable outcomes. We want to limit or avoid investing in unproven highly speculative opportunities going forward. As for the products that are work in progress, we are considering a few options there, exploring potential sale of the assets or the sale of the publishing rights to third parties. In case of games that are largely complete, Evil v Evil Game 1 and Block N Load The Other, we may end up releasing these games to early access to potentially recover some investment through publishing those games ultimately. The impact from this change will result in a write-down of SEK 309 million in capitalized R&D as of December 31. During this transition period while work-for-hire business is ramping up, noncontracted staff will remain on these work-in-progress titles to aid in potential sale or release. Capitalized R&D accrual for Q1 should be largely at a similar level to where Q4 was for these titles until the staff is transitioned to work-for-hire contracts, where the titles are ultimately divested. This decision to transition and clean up our balance sheet is consistent with the management team's ongoing actions over the last 18 months. We are proactively eliminating uncertainties. Our aim is to remove uncertain outcomes that are based on hope versus fundamental investment underwriting. And by eliminating these risks related to legacy and noncore assets, the aim is to improve our execution and predictability going forward. Next slide, please. Over to you, Fredrik.

All right. Thank you, Ji. Next slide, please. So as Ji stated, we're ending the year with a strong performance. Net revenue in the fourth quarter came in at SEK 559 million, which corresponds to a growth of 12%. Based on the high-margin revenue mix, fueled from My Singing Monsters, the EBITDA margin came in at 32%, which is really high. The net revenue and EBITDA over the last 12 months continued to show a constant increase from 1 consecutive quarter to the other. And by end of Q4, the LTM or, in this case, if you may, the full year net revenue amounted to SEK 1.866 billion, which is a growth of 27%, or organic FX adjusted growth of 6.2% in a declining market. This growth is driven by a combination of strong operational performance, FX and M&A activities. And the strong margin by end of the year also boosts the LTM full-year adjusted EBITDA margin, which came in at a historical high level of 25.9%. Next slide, please. Net revenue over the last 12 months from the Game segment exceeded SEK 1.2 billion, which corresponds to 36% increase. And in this segment, we have our live games portfolio, which is the fundamental part of the more predictable and sustainable net revenue and cash flow. Having said that, that's the definition that we have taken looking at games that have -- in relation to premium product, they have many years of being out there. So in that case, it's more predictable and reliable. The full year net revenue from these assets amounted to SEK 1.1 billion, which corresponds to 60% of the total net revenue for the year. And the comparable figure for that was 53% last year. so in this definition, we could say that starting 2023, we are more stable and predictable than ever before. The last 12 months in the Service segment, the net revenue came out at SEK 622 million, corresponding to a strong growth of 12%. Next slide, please. Looking at the Game segment isolated, we see a steady growth each quarter from Q4 '21. We've had growth both in Big Blue Bubble and Daybreak. And Daybreak has normally been the single largest contributor to the group and the largest contributor to our more predictable revenue base. Daybreak generated SEK 199 million in net revenue and SEK 42 million in adjusted EBITDA, which corresponds to a 21% margin. Big Blue Bubble, based on their strong performance, generated SEK 193 million in net revenue and SEK 160 million in adjusted EBITDA, corresponding to 60% margin. Piranha has been operating profitable since Q4 last year, and they generated a net revenue of SEK 25 million this quarter and adjusted EBITDA of SEK 15 million. And following the launch of DLC 4 for MechWarrior 5 by end of January '23, this momentum is continuing in this new year. We also include Toadman Studios and AntiMatter Games in this segment. Next slide, please. The Service segment is more volatile and to some extent hit driven. In Q4 last year, this segment had a strong momentum coming out from the pandemic delays and flavor with the hit, which was Jurassic Park Evolution that delivered SEK 100 million in net revenue in Q4 '21. The net revenue delta between quarters is rather a revenue recognition timing question than a momentum issue. Fireshine had a stable quarter, mainly attributable to the continued digital publishing success. The company generated SEK 77 million in net revenue and SEK 10 million in adjusted EBITDA, which corresponds to a 13% EBITDA margin. Petrol's momentum from the beginning of the year continued, and they generated SEK 59 million in net revenue and SEK 3.4 million in adjusted EBITDA. Next slide, please. Full year 2022 delivered a net revenue of SEK 1.9 billion. This corresponds to a 27% growth and an FX adjusted organic growth of 6.2%. And that is important to bear in mind that, that growth comes in a declining market. So the market is estimated to decline 4% to 5% in 2022. Meanwhile, the mobile market is declining even more than that. The fourth quarter delivered a net revenue of SEK 559 million, corresponding to an FX adjusted decline of 4.6%. Adjusted EBITDA margin was 32%. This strong margin also boosted the full year adjusted EBITDA margin, which came in at SEK 25.9 million. So the already guided for soft Q4 growth is rather explained by revenue recognition timing and momentum. And there are a few items to bear in mind, and one is -- and a few of them we have mentioned already, the challenging comparable figures in the Service segment coming out from the pandemic by end of Q3 last year and specifically in Q4 last year. And then we had this tied to Jurassic Park Evolution that delivered SEK 100 million in net sales in Q4 last year. We have had a few planned Q4 titles to be published for Fireshine that has moved into the future. And also that the live game portfolio in itself is trading at the new normalized post-pandemic level. The soft Q4 growth, FX adjusted then, was more than compensated for an EBITDA due to higher margin revenue mix. And looking at My Singing Monsters, which delivered a record performance with SEK 193 million in net sales and 60% EBITDA margin. And also that we see that January starting really strong, but it's a little bit too early to judge and to guide for Q1 and full year '23 based on that we need to look at the figures and the data for a longer perspective and then come back with some guidance around that. Next slide, please. Looking at the net debt and EBITDA ratio and cash. Fueled by the successful divestment of Innova and improved operational cash flow and lower investment than previous year, EG7 has had a net cash position since Q3. The net cash is SEK 304 million, excluding cash components to earn-outs and IFRS 16 leasing. If we include those, then the figure is SEK 220 million. The operating cash flow was improved in Q4 following the great success for My Singing Monsters. To further optimize the capital structure in the group, we repaid the SEK 300 million of external credit facilities in Q4 and the remaining SEK 100 million was paid in '23. We still have a frame of SEK 400 million credit frame to be utilized, which gives us great flexibility for the future. And this improved our net from financial items with approximately SEK 20 million on an annual basis. So starting the quarter, we had SEK 654 million in the cash box. From operations, we generated SEK 114 million. We invested SEK 47 million, and then the repayment in the financing group, which is SEK 300 million. Meaning that we are closing with a cash of SEK 408 million. So the balance sheet is becoming stronger and stronger. Over to you, Ji.

Thanks, Fredrik. Next slide, please. All right. So in summary, we're quite pleased with the group's performance last year. We encountered some unexpected challenges early last year, but were able to recover and deliver great results, growing our net revenue by 27% this year to SEK 1.9 billion. Strong profitability with adjusted EBITDA of SEK 483 million, which represented 26% margin. And My Singing Monsters delivered a headline worthy performance. It has clearly established itself as another superstar brand for the group, number one top grossing music game across both Apple and Android to end the year, and is sustaining that performance into 2023. It has become our biggest title and we believe that it's established a new elevated baseline for performance and growth going forward. Overall, the group is in its best position yet, solid balance sheet with 0 debt, SEK 304 million of net cash as of December 31, and continuing to generate solid cash flows. A clean balance sheet after writing down the intangible assets tied to unpredictable investments really eliminating that question mark and risk associated with it and solid start to 2023 with performance so far. And in conclusion, we want to emphasize our approach here. We remain focused on taking solid steps one at a time to create that value for the group. We are not chasing after quick wins for short-term gains or high. We'll continue to focus on investing in the building blocks for a sustainable and more predictable long-term growth. So that completes our earnings presentation. Thank you for listening. Now we will host a Q&A session. Back to you, Ludvig.

Thank you very much, Ji and Fredrik. First question from Hjalmar at Redeye. What is your view on Daybreak performance in Q4? Was it in line with your expectations? And are there any changes in player monetization due to the higher inflation?

Yes. So Daybreak performance for 2022 overall was generally in line with what the expectations were. We knew that coming into this past year and that the elevated levels in 2021 were not going to be sustainable. So similar to a lot of the other competitors that have published similar type of results with year-over-year declines for their live service game, we experienced the same. And as for impact from the inflation, it's difficult to really gauge as to how much that is impacting our numbers versus just general decline from the pandemic levels at this point.

Thank you. Another question here from Hjalmar from Redeye as well. You have a strong balance sheet. Can you elaborate on what you will use the overall cash for?

Yes. So it is something that we are continuing to evaluate. And with that said, I think there's a number of investments that we will be evaluating, including supporting the work-for-hire effort. We do believe that market has softened quite a bit from where it was 12 to 24 months ago. And based on that, we expect there may be additional opportunities that we may be able to target in the potential M&A space as well. So having that availability of extra cash on top of that additional leverage that's available with our revolving credit line gives us the flexibility not only being able to invest in number of reinvestment projects and gains that we want to invest in, but also potential M&A activity that we could reengage with.

Thank you. A question from [ Jan Soderstrom ]. Can you please elaborate more on the work-for-hire strategy and why you believe it's the future for EG7.

Yes. So work-for-hire strategy, I would say, it's a component of where we want to be driving our business to. We have a number of very talented groups of developers at Toadman and AntiMatter, Piranha, et cetera. They have been working on their own games. But as we noted in the presentation, some of the historical decisions around what type of games to invest in and what type of risk to take with investment in these types of games, that perspective and that strategy has changed along with my involvement and the new leadership team that have taken over the company over the last 18 months or so. So our desire is to invest in opportunities that are lower risk. Even within the gaming space, we believe there are compelling opportunities such as work-for-hire, where there's a nice supply and demand imbalance opportunistically. We do see that sustaining for the near future. We do see elements of that success already with Piranha ramping up on the work-for-hire side of things. We're looking for those type of similar opportunities that we could potentially bring for Toadman and other parts of the organization as well. So it's really a twofold approach, really stepping back from high-risk investments and also going into something that we could build on and that's a lot more predictable with great market dynamics currently in the work-for-hire space.

Thank you. A question from Rasmus at Handlesbanken. Can you give some light to your medium-term expectations for the Game business and the Service business as well. So I think he's referring to excluding My Singing Monsters and Big Blue Bubble here.

Yes. So Service business, I think it's a steady, quite stable business, as we've seen historically. It's not something that's going to grow at 30%. But at the same time, in terms of their ability to sustain and continue to grow at a nice clip with predictable profitability. That's what we're expecting. And Daybreak and the other live service businesses are the same where we have quite good insight as to their predictable trends going forward based on how we've been performing. So we feel very good about the stability of both the live service business and also Service segment being able to repeat and continue to show growth, albeit at a lower pace compared to on the Gaming segment.

Thank you. Last question from Hjalmar at Redeye. Piranha looks to have a good performance in Q1 with the new DLC for MechWarrior. Could you give some light to your expectation for the franchise going forward?

Yes. So MechWarrior IP is a very sticky IP. It's niche. But nonetheless, there's a huge fan base that loves that IP. So along with Piranha continuing to support the MechWarrior franchise with now the 4 DLC going out. As you noted, the 4 DLC has performed quite well. And we do see continuing ability to service that audience and generate meaningfully positive ROI on the investment being made to servicing MechWarrior. So the goal is to be able to continue the same model, which is, say, there's DLCs that we could be providing, and also exploring ideas around what else can we do with MechWarrior IP even for a new title that we may want to invest in.

Thank you very much. I think that's all the questions that we had for the call. So thank you very much for tuning in, and we wish you a great weekend.

Thank you.