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

Good morning, and welcome to this Q4 earnings call with EG7. My name is Ludvig Andersson, and I will be your moderator during this call. Together with me to present, I 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 please feel free to e-mail your questions to the company's Investor Relations e-mail. But now without any further ado, over to you, Ji.

Thanks, Ludvig. Good morning, and thank you for joining us this morning for our presentation. Ludvig, let's go to the next slide, please. Here's the list of main topics we'll cover today. I will start off with our Q4 2023 and full year results. And after that, we will cover some of the key objectives that we were able to achieve for this year in the year of review. Industry backdrop, I think it's very relevant for our performance in 2023 as well as our approach to 2024. So we do want to talk about the current market conditions that we're operating under and how that has impacted our 2023 results and the -- our approach strategy and the outlook for 2024. Thereafter, we'll quickly go over our medium to long-term outlook, which we already talked about at the Capital Markets Day, and Fredrik will cover in more detail our financial performance for fourth quarter and the full year, and then we'll wrap that up with a summary and Q&A thereafter. Next slide, please. So it's another record year 2023 Q4 results, very happy result -- report that it's another great year for Q4. Group delivered net revenues of SEK 473 million. Adjusted EBITDA came in at SEK 98 million. For the full year, net revenues came in at a little over SEK 2 billion and adjusted EBITDA of SEK 542 million. Net revenue for the year did fall short of our full year target of SEK 2.2 billion by 7%, but adjusted EBITDA came in at the high end of the range with stronger margins. Net revenue shortfall, largely driven by the overall industry weakness for the year, which negatively impacted our business units, in particular, units that are providing third-party services such as Petrol and Fireshine. All in all, the group delivered solid results for the year, a 10% annual growth, outperformed the overall industry, which was largely flat this year with 0.6% growth according to Newzoo. Next slide, please. So year-end review, we did achieve a lot of the key goals that we have set forth for the year. Some of the key objectives that we had for the year included continuing to driving solid revenue and profit growth, delivered 10% net revenue growth, 27% adjusted EBITDA margin and SEK 438 million of operating cash flows. Another important aspect that we focused on was continuing to improve the risk profile and really improving our balance sheet and improving our business foundation. We fully paid down the debt this year, built up significant cash reserve, ending the year with SEK 481 million of cash on the balance sheet, and we shut down underperforming projects and businesses, and we refocused our strategy and communicated our long-term vision, our first Capital Markets Day that we hosted in September, communicated our vision of becoming a leader in the mid-market publishing segment, and communicated our medium-term financial goals, targeting SEK 3 billion of net revenues and SEK 1 billion of adjusted EBITDA by 2026. We began investing selectively in opportunities according to our long-term vision. MechWarrior 5: Clans development is underway, publishing deal for Cold Iron second title was signed, and we initiated concept exploration for H1Z1. We accomplished most of what we set out [indiscernible] for the year successfully, while many of our peers are dealing with the fallout from aggressive and risky decisions of the past, we get to focus on our future without distractions. As a result, we are starting out 2024 on a very solid footing. Next slide, please. Some charts here, industry backdrop is not so great. Industry performance where 2023 was largely muted, now it's going on over two years of weakness after declining 5% in 2022, industry [ EBITDA ] again, 0.6% growth for 2023. Even though the industry may have avoided [ down there ] nominally, the underlying dynamics tell a different story, many developers and publishers, big and small, lots of headlines, recalibrating, canceling or delaying many projects and meaningfully cutting back on staffing. Our big guys are doing it to improve profitability. They're not in trouble. They're trying to get -- become more profitable. Little guys, on the other hand, had no option but to cut back in order to survive in many cases. The industry has been setting some unwanted records this year. Over the last couple of years, actually, 2022, 8,500 job cuts, that was the record for the industry in its history. And 2023 clips that with 10,500 job cuts. And so far, in 2024, January alone, we saw 6,200 job losses, which unfortunately could mean we could likely set another record for job losses this year. So are we almost out of the tunnel? Not so sure. But we probably don't think it's the case. Big guys may be largely done, but likely there's more pain to come for the smaller guys. The reason the industry finds itself in this situation is because of too much supply, where demand hasn't kept up. Basically, it was irrational exuberance since the pandemic big guys with franchise will be fine, little guys who jumped on the bandwagon won't be. We have to give time for the market to ultimately rebalance itself out. Next slide, please. Industry impact. So how are we impacted? We managed relatively well compared to others, but no one is fully immune. Work for hire business this year has faced challenges. Ramp has been slower for Toadman. Piranha, as we just reported, work for hire contract was just canceled to start this year. They did realize 40% of the work for contract, but 60% that we were counting on for this year are no longer able to achieve that as that contract was canceled. Third-party service volume was also down as a Marketing Service business, Petrol, had a difficult year as marketing is typically one of the very first line items to be reduced in a market downturn. Fireshine's physical distribution volume also dependent on third party also went down with product delays. On the Life Service side, there was general pressure all around, decline in engagement as well as increasing cost. Daybreak's performance was negatively impacted. Big Blue Bubble, above the trend, but likely would have performed even better than our favorable market climate. But despite this challenging industry backdrop, the group still delivered 10% organic net revenue growth. And we believe that's pretty good compared to the overall industry, which was essentially flat. 2024 is likely another challenging year for the industry. As a result, we believe that we must maintain conservative approach and focus. Next slide, please. 2024 approach and strategy. Our main approach is to keep it simple, not the time to take big risks. At the top of the list is to stay conservative and actively manage risk, no big bets, maintain ample liquidity, control costs aggressively. We'll continue to execute against our long-term strategy. Fortunately, no near-term distress or risk for the company with our solid foundation. We get to focus on our future versus worrying about keeping our lights on to back. Also, we will stay opportunistic and target special situations. Industry distress could yield very attractive unique opportunities. We have thrived and driving exceptional results in such situations historically. We will remain ready to pursue opportunities where we can leverage our track record and expertise for outsized returns from distressed situations. Next slide, please. 2024 outlook is expected to be a little softer due to the combination of three main reasons: continuing overall industry weakness, as we talked about -- as we just covered. This could keep the pressure on our Service businesses, which depend on third-party marketing spend and pipeline of games. Beyond the Service business, the overall portfolio of Live Service games could also feel some pressure. My Singing Monsters' performance level will also be lower this year as we communicated previously, 2023 was a phenomenal year. We expect it to normalize at a lower level than that. However, it still should be normalizing at a meaningfully higher level compared to pre uptick level back in 2022. Returns from also our new product investments [ won't be ] yielding meaningful returns until latter half of 2024 when MechWarrior 5: Clans releases. Key highlights for the year. MechWarrior 5: Clans, releasing in the second half, Core Keeper coming out of early access on PC and releasing across consoles in the second half, full year of celebration for EverQuest franchise, hitting major milestone. EverQuest is turning 25 and EverQuest II is turning 20. We have lots of great content, special events planned for these big milestones, which should result in nice performance for the franchises as well as Daybreak. Evil V Evil is finally releasing. We just announced this last week on February 8, releasing latter part of second quarter, excited to finally get this game out. It is one of our legacy titles. But it's a nice [ little ] game and glad to have an opportunity to release and generate returns on the investment already made. We have written most of this down already. So regardless of the level of performance, it's all upside, which is great. And based on the confluence of these factors, we are expecting 2024 to be a softer year, net revenue target at SEK 1.8 billion, adjusted EBITDA margin level, 22% to 25% range. It's tough out there with the industry. We're well positioned to weather the storm, still expect to deliver solid profitability and cash flows for the year, which given the market circumstance would be a nice outcome. Next slide, please. Medium to long-term outlook here, a similar chart to what we shared at the Capital Markets Day, no real change here. We are reiterating maintaining our goals communicated at the Capital Markets Day for 2026, SEK 3 billion of net revenues and SEK 1 billion of adjusted EBITDA targets. We are continuing to take steps to building our Mid-market publishing business with core franchises focused product pipeline, MechWarrior 5: Clans in 2024, Cold Iron's new game in 2025, H1Z1 targeted for 2026, and we're exploring additional mid-market publishing opportunities for 2026 and beyond, including some of the special situations that we're starting to see. Given our solid foundation, rather than having to spend a lot of energy restructuring and trying to survive, like some of our peers, fortunately were able to focus on executing against their business plan without this direction. Now we will go into some detailed financial update. Fredrik, please. Next.

Thank you, Ji. Next slide, please. Yes. So the net revenue in Q4 was SEK 473 million, corresponding to a decline of 15% with an EBITDA margin of 21%, but the full year net revenue amounted to SEK 2.45 billion, corresponding to a growth of 10%, driven by operational performance. The full year adjusted EBITDA came in at SEK 542 million with a strong margin of 27%. This means, which Ji pointed out that we, EBITDA-wise, came in within the upper spend of our full year guidance, looking at EBITDA, despite lower than guided for net revenue. Our Live Games portfolio, representing a more sustainable part of our business, generated SEK 273 million, correspond to 57% of the total in the fourth quarter and SEK 1.3 billion for the full year, which is 64% of the total in 2023. Maybe also worth pointing out is that we have generated a positive net profit for the first time since the transformation period started. Next slide, please. Daybreak is the largest contributor to the group net revenue and the largest contributor to our more predictable revenue base, generating SEK 182 million in net revenue and SEK 29 million in adjusted EBITDA, which corresponds to a soft adjusted EBITDA margin of 16%. My Singing Monsters continued to perform well. While gamers activity peaked in December last year, we continue to see levels above the prepeak performance, and Big Blue Bubble contributed with SEK 86 million in net revenue and SEK 49 million in adjusted EBITDA, which correspond to 57% adjusted EBITDA margin. Next slide, please. So this slide visualizes further how My Singing Monsters have been performing with a peaking activity in December '22 and the slowdown to level still way over the prepeak levels. And we will need another couple of quarters to determine the new normalized level for the game. Next slide, please. Piranha continues to successfully release new relevant content to the MechWarrior franchise. Piranha contributed with a net revenue of SEK 30 million and adjusted EBITDA of SEK 11 million, which correspond to a 37% adjusted EBITDA margin. Toadman's net revenue came in at SEK 19 million, which corresponds to over 200% growth year-over-year and adjusted EBITDA came in at minus SEK 5 million. So Toadman continues to ramp up its work for hire business and is getting closer to profitability even in this continued transition to work for hire face with reduced capitalized R&D levels. Next slide, please. As shown in this chart and also pointed out several times, both these companies are fairly volatile. Fireshine had a solid quarter with a strong sales from the back catalog. The company generated SEK 107 million in net revenue and SEK 11 million in adjusted EBITDA. And the back catalog is attached with generally lower margin. And adjusted EBITDA margin was 11% in Fireshine. And despite being a softer year, Petrol had several successful campaigns in the quarter, and generated SEK 50 million in net revenue with stable profitability. Next slide, please. The cash box has constantly increased up to SEK 481 million over each consecutive quarter the past year. And this is achieved by improved operational cash flow and despite investing SEK 170 million in new growth initiatives, those that we highlighted in the Capital Markets Day. According to our updated forecast, we expect to invest another SEK 200 million in those initiatives in 2024. And to look at further details, we can go to Page 11 in the report, where all those investments are listed. And with the sale of a noncore IP in Q1 2024, we further strengthened our cash position with USD 5.9 million. In Q4, the operational cash flow was SEK 101 million, and the cash flow was negatively affected by SEK 63 million of investment activities, of which SEK 41 million refers to Cold Iron publishing deal and SEK 4.6 million refers to various publishing deals in Fireshine, and SEK 21.9 million is related to capitalized development expenses and mainly the Piranha's project, the Clans project that they have. In first half of '24, EG7 will execute its first-ever dividend distributing SEK 0.45 per share, which correspond in total to SEK 39.9 million. All in all, the balance sheet remains solid. Next slide, please. The net revenue in '23 amounted to SEK 2.45 billion correspond to an increase of 10%, driven by organic performance. The full year adjusted EBITDA came in at SEK 542 million, corresponding to a strong 27% margin despite SEK 72 million lower capitalized R&D than comparable figure last year. As Ji already mentioned, market declined in '22 and remained challenging over '23. In light of that, the 10% growth is a market gain. Between '23 and '26 , the market is expected to grow around 3% per year. Meanwhile, according to our targets, EG7 is expected to deliver 16% CAGR, up to a net revenue of SEK 3 billion and SEK 1 billion in EBITDA in 2026. So we anticipate to continue to gain market shares even in 2024, which started with several industry layoffs is, for us, expected to be a transition year with SEK 1.8 billion in net revenue and margins around 22% to 25%. And that concludes my part. So over to you again, Ji.

Thanks, Fredrik. All right. To summarize, let's go to the last slide. So we are a stronger company today compared to where we were over the last couple of years. The overall gaming sector under quite a bit of pressure due to a lot of poor decisions throughout the industry over the last few years. Thankfully, we made prudent decisions early on. So now we had to stay out of the frame and focus on just running our business. As a result, irrespective of the market volatility, we have been true to our plans and continue to deliver results successfully. Ultimately, our priority is delivering solid shareholder returns. And we believe the best way to do that is by staying the course and continue executing against the long-term vision. In the meantime, we are initiating, as Fredrik mentioned, our dividend policy and will begin distribution starting in Q1 as previously promised. So that concludes the presentation. And Ludvig, we could start the Q&A.

Thank you, Ji and Fredrik. First question here has been asked by a few investors, among them, [ Iya Ivalog ]. Could you provide more comprehensive details regarding the IP that was sold in Daybreak and the strategic reasoning behind it?

Yes. So we are limited in our ability to disclose too much details regarding that particular transaction as the confidentiality agreement with our counterparty. But having said that, the asset that we sold is a noncore IP that in terms of our long-term plans and what we plan to invest in, it's one of the IPs that we do not plan to invest in. So we were able to secure an attractive transaction that yielded USD 5.9 million of gross proceeds, which is meaningfully profitable given the book value of that particular asset on our books. So a good result for us, once again does not impact our business today nor the long-term strategy given that it's a noncore asset.

Thank you, Ji. A question from Hjalmar Ahlberg, Redeye. What are the plans for Piranha considering the loss of the work for hire contract, do you expect other work for hire contracts? Or how will the resources be utilized?

Yes. We are beginning additional conversations. It's a tough market out there on the work for hire side as well. But having said that, with so many layoffs that's happening around the industry, there are certain publishers that are looking to actually utilize work for hire as an extension of their resources more rather than utilizing their in-house staff, which they've been pulling back on. So it is something that we're evaluating. But having said that, it just happened just over the last few weeks that we got notified the staff that's currently working on that particular contract, they're weaning off over the next couple of months. And as they're weaning off, we will be looking for additional opportunities, but challenging environment. So we do have to see what's out there before we could comment further.

Just one more comment from my side. So it's also so that, that contract includes some new hires. So it's not that we do have all those employees in-house already. So it doesn't -- and obviously, it will not affect those people that we aim to hire for executing on that project during the year.

A question here from [ Nicolas Westlund ]. Could you elaborate on the expectations for Evil V Evil?

So Evil V Evil is an interesting game. It's a game that we obviously a legacy game that Toadman has developed, and it is a game that we do not consider to be a core to what we're trying to do as we're getting away from original IP-based titles and focusing on more core franchise-based titles. Having said that, the investments have already been made. And the team has done a great job of delivering a good product. We've conducted multiple third-party market reviews results from those market reviews, all very, very positive for the investment that we made and the type of game it is. So we are looking forward to its performance, but the reason why we did not really include it as our long-term plan nor really the -- our guidance for this year is partly because at the end of the day, it's something that we've already written down. We're looking for any upside from it versus putting significant expectations on it. So we do want to see how it does. It's very difficult to, at this point, provide a range of what it might do. But from a performance and P&L perspective because we have written it down, almost any result would result in a positive outcome for the company.

A bundle question from a few investors, one of them Nicolas Westlund and Hjalmar, Redeye regarding My Singing Monsters. Any specific reason to the significant drop quarter-on-quarter revenues for Big Blue Bubble? And can you elaborate on expectations from My Singing Monsters when it will stabilize in first half this year?

Yes. I think we've been quite consistent in terms of our communication around My Singing Monsters. 2023 was a phenomenal year, and it's taken a lengthy period for it to slide down to where it is today. But nonetheless, even at today's level for Q1, it's operating at over [ 200% ] of the level from a year before that. So from a performance perspective, we're still very happy about where it's settling down. And as to our Q4 overall performance, and I think I've seen some notes about My Singing Monsters contributing to our Q4 numbers being softer. But My Singing Monsters' actually performed to our expectations, so level that it performed is not lower. Where we are struggling with this really the service segment, where a number of projects that were delayed were pushed back. Earlier part of this year, we expected that those pipeline of possibilities could be coming back around in the Q4. But unfortunately, due to the overall environment in the gaming industry, some of those projects didn't come back, and they're getting pushed into 2024, and there's delays, cancellations, et cetera, that our service units are having to deal with. So with that said, My Singing Monsters, we do expect, based on the trends that we're seeing, monthly active users, daily active users, how people are engaging, we do expect that trend to really stabilize over the next couple of quarters. So by second quarter, mid-2024, we should have a pretty good feel for where that game could normalize with the inflow and outflow players that are engaging with the game, largely finding equilibrium.

A question from Hjalmar, Redeye. Are the investments of SEK 264 million for '24 total expected investments? Or do you see other investments in addition to that? And this is the investments into our new growth initiatives that he's asking about.

Yes. That's what we have budgeted. But with that said, I think one of the three main sort of pronged strategy and approach that we want to take for 2024 is to be opportunistic where opportunities present themselves. I think this ongoing distress in the marketplace, especially on the small to mid-market size developers as well as publishers will yield some interesting opportunities for, I think, organizations that have dry powder. So for us, we have significant liquidity on the balance sheet. We have great track record of delivering against opportunities like the special situations, distress where we can roll up our sleeves go in and fix and really create lopsided positive outcomes. And that's how we built up, whether it's Daybreak or Standing Stone or Cold Iron originally, a number of these transactions as well, we know how to do really well. So based on where the market is, we do expect that type of situation to become available. And if there is an opportunity where we could really see meaningful upside with limited capital exposure as well as risk, those are the type of situations that we would look to transact on going forward. So as to what size, how much capital, we have no idea at this point. We will be opportunistic. But nonetheless, we've done this a few times successfully. So we're pretty confident we would be able to repeat that type of outcome.

A question here from [ Marcus Anderson ]. Could you elaborate on the up-listing process? And can we expect any repurchase of shares to happen this year?

Fredrik, maybe you could provide some additional details, but maybe I'll start. So uplisting process, I mean, it's an ongoing process. It's not a matter of -- if it's a matter of when, meaning, we're working with advisers to continue down that path. So we're making great progress. We can't opine on the timing yet. But once again, we communicated that we expect to get that done in 2024, and we're on track for that. And along with that, that's the very first step before we could buyback shares. In order to be able to do so, we have to get up on the main exchange. And along with getting on the main exchange sometime later this year, we would be seeking approval from the shareholders at an AGM or EGM to be able to transact with share buyback program. I don't know if there's anything else you want to add, Fredrik?

No. It's -- I know that some companies are doing this also on First North. But if you're aiming for an uplist to NASDAQ main list, that could be a potential issue. So that's why we -- based on the advice from our advisers referring to do buyback before we are actually listed in a place where we -- where it's not restricted to do buybacks. And as Ji said, I mean, the IPO project, it continues according to plan. So will be uplisted during this year, and then we will evaluate the situation from there.

Thank you very much, Ji and, Fredrik. Bundle question here from few investors among them Simon at Carnegie. Could you elaborate a bit on the Daybreak and the overall MMO landscape?

Yes. I think -- so there's -- I would actually encourage a lot of investors to read this research that recently came out from a gentleman named [ Matthew Ball. ] It's a lengthy one, about 50 pages long, but he does a really good analysis of the market industry as we stand here today, reviewing how things have been and where we're headed. So similar theme as he covers essentially not just Daybreak, but a lot of the other live service game companies are dealing with lower engagement overall since obviously the pandemic, but even after the pandemic, engagement has been going down to a certain extent. On top of that, you have inflation rising cost that a lot of the companies are having to deal with their staffing, et cetera. So it is -- it has caused some additional pressure on our margins and performance. The only way to really combat that is through additional content. So we are looking at a great year ahead of us with 2024 being big milestone for EverQuest and EverQuest II, turning 25 and 20 years old, respectively. So we will engage and we will be investing additional great content as well as a lot of events for players to participate and reengage with. Same thing for My Singing Monsters, our key live service games, it's all about delivering quality content. We have a great track record of delivering great content that people really enjoy. Of course, there could be some [indiscernible] and misses as well. But for 2024, a great road map ahead for all of our titles. So we're looking forward to being able to deliver against that.

Thank you very much. I think that was all we had from the -- all the questions that we had. So yes, thank you very much, everyone, for tuning in to this call, and we wish you a great day. Thank you very much.

Great. Thank you.

Thank you.

All right. Goodbye.