G5 Entertainment AB (publ) (G5EN.ST) Earnings Call Transcript & Summary

So welcome, everyone, to our second quarter results. My name is Stefan Wikstrand. I'm the CFO of G5 Entertainment. With me, I have Vlad Suglobov, our CEO as well. Unfortunately, Vlad is traveling today, so he has a bit of a poor connection. So I will walk through the presentation and go through that part, and he will be available for the Q&A that we get to afterwards. We expect the presentation to take roughly 10 to 15 minutes before we get into the Q&A. So we'll start with some of the highlights from this report. And we are rather happy with the sequential dynamic. In USD, revenue declined by only 1.7% in what normally is a seasonally slower quarter, Q2. If we look at the USD performance, which is more relevant to us, we are primarily a USD business. We saw a decline of 11% in USD terms year-over-year, much better than the corresponding figure in the first quarter. If we compare it to the Q1 USD dynamic, this is quite important. And if we look at the portfolio in more detail, our actively managed portfolio of games only shrank 0.2% sequentially in USD terms and Sherlock revenue was actually up 2.4% from Q1 to Q2. This performance was driven by the improvements that were made in the game and the increased UA spending that we did in the quarter. The Jewels family of games delivered a relatively stable performance in the quarter. And of course, the team will be working on making improvements to those games that can change their dynamic, just like they did with Sherlock. User acquisition was 18% of revenue, back within our previously communicated range of 17% to 22%, up from 17% last year, but only 15% in the first quarter. So this has been achieved by expanding the number of UA channels and the volume of acquisition on the back of the improvements that we did on existing games, specifically Sherlock then. G5 Store continues to show strong growth and now makes up 23% of our net revenue, compared to only 15% a year ago. And thanks to the continued success of G5 Store, our gross margin reached a record 70%, up from 67.8% last year. In the quarter, we paid an annual dividend of SEK 62.2 million, which is SEK 8 per share, which was the same as last year. But despite this, our cash position at the end of the quarter stood at a strong SEK 247 million, up from SEK 196 million last year. As you may notice in the report and is kind of going through all the numbers that we look at, this quarter was impacted by the substantial and continued weakening of the U.S. dollar and the strengthening of the Swedish krona, which affects our reported numbers. In addition to having an impact on the reported turnover, it also has an impact on earnings and specifically on this revaluation that we do of our operational assets and liabilities. And this quarter was impacted by minus SEK 10 million on these other operating cost lines, and that impacts the earnings quite drastically. But we remain debt free. We continue to have a strong solid cash flow, and that is something that we're very, very proud of. If we then move ahead a bit and talk about the G5 Store, which is our third largest source of revenue on platform, and during the quarter, it accounted for 23.3% of total net revenue, which is up significantly from the 15.2% that we had last year. The G5 Store continues to build momentum despite a much larger size than a year ago. So gross revenue growth in USD terms was 38.5% year-over-year and 8% sequentially, which is a significant pace of growth and one of the fastest we had for G5 Store in any given quarter. As you know, one of the key advantages of the G5 Store is the lower payment processing fees, which are in the low single digits. This is in store contrast to the 12% to 30% fees that we typically charged by third-party application stores such as Apple App Store and Microsoft Store. This cost efficiency directly contributes to our improved profitability and the expansion of our gross margin. Last quarter, we mentioned that G5 Store has a significant opportunity to scale its revenue by licensing and distributing third-party games that are or were successful on mobile platforms. We're currently working on the technical preparation for third-party developers to be able to distribute their games on G5 Store. The goal is to release the first games from other developers on G5 Store before the end of the year. This will bring much desired incremental revenue to mobile game developers while further expanding our reach and scale of the G5 Store operations. G5 Store is now at the size where its strong continued growth may start positively affecting the overall top line dynamic from the sheer size of the store. If we then go ahead and looking at the gross margin and what is leading up to that, the own games accounted for over 72% of net revenue. And active own games accounted for 62% of total net revenue, up from 59% last year. This is then excluding Mahjong Journey that was put into harvest mode in Q1, but it's reflecting a strong performance from our in-house titles. Our gross margin, as mentioned before would reach a record high of 70%, up from 67.8% a year ago, thanks to the G5 Stores growth. Our monthly average gross revenue per paying user reached an all-time high of USD 68.9, a new record and significantly higher than last year's figures of USD 63.7. And this number reflects the improvements of the underlying quality of the audience, where we see a shift to having a smaller number but of higher paying users, and this is also primarily driven by the growth of G5 Store. If we then move to the operating profit. The operating profit for the period came in at SEK 5.6 million, compared to SEK 21.8 million last year. This equal to an EBIT margin of 2.4%, which is down from last year. But as mentioned on the first slide here, the lower EBIT was mainly due to foreign exchange revaluations, specifically related to SEK-USD fluctuations. And those amounted to SEK 10 million in this quarter, compared to SEK 3.4 million in the previous quarter. As we have mentioned before, we are primarily a USD business and most of our revenue and most of our expenses in the form of U expenses, [indiscernible] in USD. However, we are reporting in SEK and being a USD operation means that we have the majority of our balance sheet in USD as well, which then needs to be revaluated to SEK upon reporting. And therefore, when the SEK-USD rate moves fast, it causes these other operating income expenses to move, and they can move quite drastically and can go both ways. And currently, with the USD weakening, we see the negative results here in Q2 as well as we saw in Q1. But if we adjust for this negative impact from other income and expenses, our EBIT margin would have been 6.8%, which is a healthy margin for the quarter. At the same time, we saw that net capitalization impact on earnings was only minus SEK 0.4 million compared to minus SEK 8.1 million last year. Let's then move on to our cash position, which continues to be very strong. We have a capitalization impact on cash flow of minus SEK 22.5 million, which is a bit less than minus SEK 27.1 million we had last year. That then moves us into cash flow before financing activities, which was a solid SEK 25.7 million compared to SEK 6.5 million last year. Total cash flow for the period was minus SEK 38.8 million, down from SEK 56.3 million or up rather from a negative SEK 56.3 last year. And this was -- the quarter was heavily impacted as it was last year by the dividend payout of SEK 8 per share. And this year, that was a total of SEK 62.2 million that was paid out to the shareholders. Total cash at the end of the period was SEK 247 million compared to SEK 196 million last year. We move ahead to the status and outlook for the rest of the year. And looking ahead, we continue to maintain a healthy profitability as we've done over the years and looking forward to sustainable growth in the next half of 2025. We'll continue to make improvements to the active games to stabilize the top line and increase UA spend to facilitate growth. During the quarter, we made 7 iterations on new games, of which one game, Twilight Land, is expected to launch globally later this year. Our collaboration with third-party developers continues and we want to be able to distribute their games on the G5 Store with the goal to release the first games before the end of the year. We are strengthening our management team with expertise in development, marketing and growth, and these strategic hires will be essential in ensuring that we stay on track with our long-term growth goals. Our focus on operational efficiencies remains a priority, and we continue to make improvements in our development funnel and our game evolution process with the aim of releasing 1 to 2 games globally per year. A key driver of our future growth is the rapid expansion of the G5 Store. And as we grow the G5 web shop for direct payments and mobile users to G5 and leverage scalable distribution opportunities in G5 Store, we expect a positive impact on both our top line and gross margin from the G5 Store. In terms of user acquisition, we are taking a disciplined approach. We expect to stay in the range that we have indicated over the years of 17% to 22% for UA as a percentage of revenue, which will help us to continue optimizing growth while maintaining profitability. If we see opportunities for venturing outside of this UA range, we will communicate that to the market in advance, as we've said before. Throughout all of this, we maintain a strong financial discipline, generate solid cash flow, and we're proud of our very strong net cash position, which gives us the flexibility to execute on strategic initiatives and strengthen the foundation for future growth. We would like to end by thanking you for following G5 and also thanking the G5 team, obviously, for their outstanding efforts in the quarter. And that concludes our presentation for the day, and we are ready for opening up the Q&A.

[Operator Instructions] We'll start here with Hjalmar Ahlberg from Redeye.

Just curious about you mentioned some improvement of scalability of games. Can you elaborate some on that? What are you seeing in terms of upside from that from your existing portfolio?

I can probably take that question. So my connection freezes sometimes randomly, so I apologize in advance if that happens. So the team was able to narrow down on what's driving user acquisition channel performance and understand better the underlying dynamics. So they've made changes to the games that align their performance more with the user acquisition channels. And that created the opportunity to expand the spending and kind of give the channels the opportunity to know better what kind of users are better for our games and that we're looking for. So these were changes in the underlying mechanics of the games, but with the goal to improve the performance of user acquisition, and it did work out on Sherlock. So we're seeing increasing spend and the resulting performance of Sherlock Q1 to Q2 is basically the result of that.

Right. And mentioning Sherlock there, I mean, it's been kind of a flattish development over the past year or so. Do you think you can see this moving back to growth from here on the back of these changes maybe?

Well, we are hopeful that this will eventually happen. We have this first signs that this may be possible, but the next few months will show.

And you reiterated the potential launch of Twilight Land here in the -- before the year-end. What kind of challenges or main things are you working on ahead of that potential launch?

Well, we are obviously working on the understanding of whether it's going to be scalable and also taking into account the experience that we just -- the positive experience that we just had with modifying Sherlock for better scalability. I could go deeper into this, but I would say the scalability is the main focus. We want to make sure that the game is launched with the best metrics possible for the successful marketing launch campaign. And this involves iterations and measurements of metrics, acquiring users in smaller numbers to understand the way they interact with the game and whether or not we are on target when it comes to these metrics.

Understood. And looking at the potential third-party games added here to G5 Store, what kind of ramp-up would you see if that is launched before year-end? Will it be slow? And are there any kind of technical challenges? Or is it mainly just getting the content up to the store to say?

Well, usually, the dynamic that we see in the store is quite gradual. I don't think we expect any explosive launches. But I think that having more games in the offering will help expand G5 Store in the next few quarters. And it's still quite a bit early. We're going to begin with 1 or 2 games, and we'll see how it goes. But from experience, the growth in G5 Store is very stable, but also very gradual. So we haven't seen any big explosive releases, but instead, it's a very gradual, but very reliable growth over many quarters. And this is what we will aim with these new games as well.

Got it. And looking at the game pipeline here, you had a decrease of the games in early stage. Is this kind of the natural flow or anything specific impact that? I mean, is it that you have a lack of new ideas? Or is it a lot of games being canceled or cut in an early stage?

Well, we certainly don't have lack of ideas. If we go to the ideal level, we are counting tens of ideas in a quarter. It's more of a natural flow where we do some pre-marketing testing and development of the concepts with more marketability testing and then some of these concepts get thrown out and some games that would make it to the soft launch, they are sometimes getting thrown out. I would say it's just a normal process. It will go a little bit up, a little bit down. There's nothing to be worried about. And we are providing this illustration just to show there is work going on under the hood, right, we're at.

I see. And also a final question. I mean, you continued to have a strong balance sheet. I guess, as you say, the market is still challenging. Do you see any potential to do M&A here? I mean, is that something you would consider to improve growth as well?

Yes. We are open. We are looking at opportunities that come our way, but there's not much more to say.

Then we have Simon Jönsson from ABG.

Can you hear me?

Yes, we hear you.

Good to hear. So first, a couple of more follow-ups on Twilight Land. Could you maybe talk a bit more about the sort of changes you have made to the game since you first announced it?

I missed most of your question, unfortunately, I heard Twilight Land and then changes, please...

Yes. So I was just wondering if you could talk a bit about the changes you have made to it since you announced it the last time.

Yes. So I can go into deeper detail. But basically, it's about providing certain information points and achieving to the user acquisition channel and also achieving certain lifetime value or you can call it average revenue per user by a certain day. So our work was focused on comparing Twilight Land to Sherlock and making sure that it delivers or overdelivers on the key performance indicators of Sherlock. But now that Sherlock has been taken to sort of a new level in the last quarter, the bar has been raised for Twilight Land as well. So right now, the focus is on how do we make sure Twilight Land is even better than Sherlock launches. So that's -- and then it seems like a rather simple thing. But when you start looking into the details, then, of course, game mechanics are an important part of that and that the mechanics are an important part of that and changing that and trying different combinations is a time-consuming work and also just the number of iterations and every time you need to measure the results and make conclusions from that. So it just takes time to different -- to try different things and see what works best and then settle on what we're going to go to the global launch with.

All right. And maybe you said or talked about this, and I may have missed it, but what quarter here in the second half should we expect the game to be releasing?

Well, we said before the end of the year. So we hope to do it earlier than later, but we haven't committed to a specific date yet.