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

Good afternoon, and welcome back to Introduce Investor Day at ABG. My name is Jesper Birch-Jensen, and I work as an equity research analyst here at ABG. And the next company that we have for you today is G5 Entertainment, where we have the CEO -- CFO of the company, Stefan Wikstrand, here to present. So I think with that said, please go ahead, Stefan.

Thank you very much, Jesper. And thanks for having us. Again, it's a fantastic tradition to come back to this event. We can skip to the next slide, I think, this doesn't tell you that much, but this does. So to start from the beginning. So G5, we're a developer and publisher of casual free-to-play games, so usually puzzle games. And they are targeted to a wide range of -- kind of family-friendly wide range of players, but the target audience that we focus on is females over 35, which is a target audience that we've been working with since, well, essentially going into this type of game in 2009. So a core focus for the company over the years. So we operate in the mobile gaming space primarily, and that is a quite large market today. It's a $70-plus billion market and continuously growing. We operate through 7 offices worldwide. And so I'm based in Stockholm. Our CEO is based in San Francisco. We have an office in Malta, and then we have 4 offices in Ukraine and Russia, so 2 in each country, where we have the majority of the staff. And that is where our development is done. So we have roughly 750 people in Russia and Ukraine. So you have the revenue chart there on the right-hand side, which shows the development we've had since doing -- kind of moving into the mobile gaming space and doing these casual games. In 2013, just to point out some highlights, we pivoted over the business totally to the free-to-play game. So today, we're a pure free-to-play game company. And 2013 was also the year when Secret Society, our first biggest hit, was -- exited soft launch and started growing. And Secret Society has since then made over USD 130 million in lifetime revenue and 30 million downloads. In 2016, we had Hidden City started growing after it was released in 2014, and that game grow very aggressively up until 2018. And currently, it has generated over USD 330 million and 70 million downloads, and it continues to be our biggest game in the portfolio as well. The company has been around for 20 years. So we celebrate our 20th anniversary today -- or this year. And also, we've been listed in Sweden since 2006, so that is 15 years, and we moved up to the regulated market in 2014. So we can move to the next slide, just to look at the market that we primarily target. So as I said, mobile gaming market has been a fast-growing market over the years, obviously, given that it's a fairly new market. And it continues to be the fastest-growing segment of the gaming market. And the growth rates have come down a bit, but we still look at 10% growth over the coming years, and we also see an increasing in end users and gamers that play on mobile devices. So that is expected to grow as well. So even though that growth is quite heavy, you can see that Asia is now the biggest market for mobile gaming. It is more than 50% of the revenue. And you have a lot of players there, but maybe they spend a bit less. Our focus is, well, the entire globe essentially, but our core market is North America, where we have always been the strongest. So North America is 60% of our revenue currently. Europe is 22%. Asia has dropped off a bit and is 12%. And here, it is primarily Japan and South Korea, where China, being a very regulated market, we don't have any business so significant currently. And then we have the Rest of the World as well, constituting 6% of revenue. I think we can skip to the next slide. So we target our market, as I said, primarily females over 35. And that is also -- it is the target audience. It is the audience that we have. We have, roughly speaking, 70% of our users being over 35 and 70% being female. It is a growing demographic that has served us really well. It might not be as underserved as it was historically. So more and more companies realize that there is a very good target audience to work towards. So that is slowly fading out. But we have amassed a lot of knowledge in targeting this audience, and we see that there's still things to do there, obviously. The audience is good. It's a very loyal audience. So when they start playing the games, they tend to stay for months and quarters and not -- well, fairly often as well years. So they stay with the game for a long period of time, and they also are a very strong paying audience. We focus on audience with 5 categories of games. It is the 3 top ones that, well, matters, so to speak or the main ones. So our biggest genre is the hidden object games. Hidden object games is a bit of a distinct genre in the sense it's not super big. We are a few players so it's not super competitive either. So we are 4 or 5 companies that essentially make up the hidden object market. But a very good market to be in, people that like playing hidden object games, they come back to this type of game and there's definitely the room to grow in this subset of the market as well. If you have a successful title, you're usually applying the new audience that comes in and plays the games. Here, it is represented by our game, Sherlock, which is our latest hidden object release, which is doing quite well currently. It was released in Q4 -- or late Q3 to be totally accurate. Our biggest game in hidden object is still Hidden City, which is also our biggest game. So it kind of falls naturally. And the second category here is the match-3 games. Match-3 games is a much bigger segment of the market. It's likely one of the biggest in mobile gaming. It is here represented by Jewels of Rome. So being a bigger market, it's a lot more competitive, but also people know what a match-3 game is. So it's easier to attract -- in some aspects, it's easier to attract an audience that really like match-3 games, and just taking a smaller part of the match-3 segment would mean a lot for the company as well. So we've had some really good success in the last years, primarily with Jewels of Rome, but also other -- our match-3 games. And thirdly, we have the mahjong or the match-2 category of games, which has been with the company for, well, for many years -- well, longer than mobile gaming. So it's what we consider an evergreen genre. People that like playing mahjong games, they continue to playing them for, well, forever. It's very casual, soothing gaming experience. And yes, once again, the people that start playing mahjong games usually play them for years. So very good. It has a bit of a difference in terms of KPIs, if you look between the 3 genres, where mahjhong might be the weakest. But still, it's a very good genre to be in. And as I said, we've operated this for many, many years as well. Then we have 2 categories in the bottom, we have the word games and the blast games, which both are kind of more early entrants in the genre mix for us. The word game was released late in '19, and the blast game was released in Q1, so still doing tests on these and figuring out the mechanics and -- yes, we're working on the genre, so to speak. So only one game in each of these categories, and fairly new to the company. All of the games that we have are tied together with a social network called G5 Friends network. So the G5 Friends network gives the players the opportunity to store their progress. They can play on -- across device. They can play on multiple devices. You can play on an iPhone on the way home, an Android tablet, and you can switch to web or PC when you get home. So it's very, very good for the users. Obviously, was, as I said, storing the progress as well, if they lose their advice. They also build friends in the social network and kind of help each other forward in the game. That gives us as well some -- well, it increases loyalty from the users. And they also get prompted, for example, one of their friends start playing another game of ours, they will get prompted that their friends started playing our games. So it helps us with cross-selling, and also -- the social network also gives us further tools to kind of work with cross-selling and kind of maintaining and working with the audience because it is -- in the end, it is the audience that makes up what we do and serving them with good content and retaining them over time. So we can skip to the next slide. So well, G5 operates with a portfolio approach of games. So we always have plenty of games and release quite a few every year. As you can see here on the right-hand side on the chart there, you can see the development since 2016. From the top, you have the dark blue bar, which is the licensed games, so primarily Hidden City. Today, you have the yellow, which is our own games, so games developed and published by G5 are a bit older. And then we have the orange bars, that is a new generation of games, which is defined as games that are released from 2019 Q2 and onwards. Now I will take a few minutes to describe why we make that distinction. So in 2016 and especially from '17 up until -- or you could say, '19, we worked really hard with changing the -- or not changing the development teams, but enhancing. And so we expanded the teams, we hired more teams, so we can run more games simultaneously, and then did a lot of work taking home games that were -- where we had outsourced development, for example. And this was very -- these were very busy years, setting new structures in place and processes. So in 2018, we only had 1 release. And usually, before that, we usually have 2 to 4 games per year that we released. So 2000 was a bit of a gap year due to the investments and all the work done in development. And then in 2019, we started to release games on the back of the investments made. We got a bit of a catch-up effect there as well. So from '19 in Q2, that's why we distinguished them as new-gen as they're based on the investments made. But we also released quite a few games since then. So in '19, we released 5 games, which is then starting to build up the revenue that you can see there. And then in 2020, we released an additional 8 games, so in total, 13 games that belong to this kind of new generation of games. And then we also have released already 2 games this year. So the pace has definitely increased on the back of the investments made as well. The gray line you can see on the chart is the share of revenue coming from own games, which is an important KPI to look at as a higher share of revenue from own games will improve the gross margin for the business, and thereby, also the margin potential that we can achieve. So that number has gone up drastically over the last 2 years, and now it's 63% of revenue. And it's continuing to growing based on the successes of the new generation of games. In the bottom, you can see the constitution of the portfolio a bit as well. So harvest mode games are games that we don't retain a development team. So they are all the games that collect money in the stores. We have active games and we have in-development. Numbers are a bit skewed just because in-development also includes games in soft launch, so it should actually be a bit more games in active, but it at least gives you a bit of a feeling on how it looks. Let's skip to the next slide then, please. So coming back to the kind of life cycle of a free-to-play game that is important to understand. So the life cycle of the game, if we take Hidden City, for example, that is represented in the long-tail revenue category there. So Hidden City was initially released 2014. In the long-term revenue, we also have Secret Society that was initially released in 2012. So the time frame that we're looking at here is quite long. It isn't highlighted here, but -- because it's hard to say how -- for how much many years a game can live. But the long-term revenue or the longevity of the lifetime of a mobile game is probably underestimated a bit in the market. So if we start from the beginning, we take an idea to the market, it takes usually 9 to 18 months to get the game in production and getting it to the market, and then you release it, you see how it works with the audience, you collect KPIS, you make changes to the game. And in this kind of soft launch period, eventually, hopefully, you will figure it out and the KPIs look good and you can start to market the game, which is then the scaling process that you can see where the kind of red line starts moving upwards. Eventually, at some point, the game will reach a peak where it's tough to market a game, either because there are other games in the market, so competition-wise, or you have served so many ads that you have tough time finding an audience or whatever reason it would be. But it reaches a peak. Usually, you see a churn in revenue after that as you adjust the marketing strategy on the game. And you can see the dotted line here, which is the user acquisition, which is then taking a smaller share of revenue when you reach kind of peak revenue and also in the long-tail revenue phase. So you see a turnover of users based on the change in strategy for user acquisition. Then the revenue stabilizes and is usually very stable and very healthy. And in this part of the life cycle of the game as well you see the majority of the profits from the game as user acquisition or marketing is optimized, and on a lower level, kind of optimizing the user base, keeping as much revenue as possible and just maintaining that revenue level. So after long-term revenue, you also have some games that the revenue stream that we get from the games doesn't justify the fact that we have development team attached to the game because in long tail, we still have a development team. They send out monthly releases to kind of give as much content and stuff to play for the users. When it comes to the harvest mode games, the revenue stream that we get from the game doesn't justify having either marketing or very limited marketing or a development team, and then it's very profitable, but usually on a lower revenue level. And the games essentially sit on the stores and just collect long-term revenue. Okay. Let's move on to the next. So a bit of the last quarter highlights that we achieved. So we've had a very good strong year in 2020, and we continue that in Q1. So in Q1, we saw a top line growth in USD terms of 22% year-over-year. And what we measured this in USD is because of what I said before. So -- and North America is our biggest market. It's 60% of revenue. I think Sweden is roughly 0.4% of our revenue, and -- but we have to report in SEK. So the numbers get a bit distorted. So we -- the report -- the SEK growth is 5%, which is still okay, but underlying, the growth momentum was much better. EBIT was almost SEK 60 million, and EBIT margin was over 18%, which is very strong. And we've seen a shift here during the last year where we -- the EBIT margins have come up quite significantly on the back of the revenue from own games, both the fact that the business that we operate is very scalable. So if you add on revenue, you don't need to add on cost. So a very scalable business. We've done a lot of work within user acquisition and optimizing that. Over the years, that has really shown through in the EBIT margins. And user acquisition as a percentage of revenue has come down quite significantly from earlier years. So from the start of 2020, we had -- well, Q1 last year, we had 22% of revenue in user acquisition. Q1 this year was 70%, so on the lower end. But still, all of these numbers from Q1 last year up until Q1 this year and the quarters in between show that we were much more effective in the user acquisition. So if you break down the revenue growth a bit. So as said, 22% in USD terms, the own games grew 68% and the new generation of games almost grew 200% in Q1. So we are growing where -- growing the business and growing with these new generation of games that we have released. Also, the audience metrics have had a positive development where the monthly active users has gone up and also the average spend producer has gone up 25% year-over-year, which is a lot. And it's now -- the average spend per paying user is now USD 63.5, which is a very strong number. Let's skip to the next one. I see the time is my enemy today. But I think we've covered a lot on the revenue side during the presentation. Also EBIT, once again, reinforcing that the scalability of the business, getting growth in the own games expands the gross margin, but also all the work that we put into to reduce our acquisition has really shifted skills in our favor in terms of profitability. So you can see the red in the middle chart there, the red bar, which indicates EBIT has been very consistent and growing over 2020 and into 2021. We also have a very strong cash position, which has grown over '20 and '21 as we convert cash really well from the EBIT that we generate. Even though we have added cash here, as you can see, but we've also repurchased a lot of shares and paid dividends to our shareholders. So without those, it would look even better. So in Q1, specifically, we bought shares for SEK 34 million. But over the last year, we've almost bought shares for SEK 100 million, so that impacts that quite drastically. But we still end on a record cash position of SEK 214 million. And yes, let's move on to the last slide. So just a quick few words on 2021. So we expect the growth of the new generation of games to continue and continue the trend that we've seen. We will continue to release more games. So we released 2, as I said, one is a licensed game that was just released 1 or 2 weeks ago. But we have 4 more games to release during the year. We will continue to optimize the user acquisition efforts and the tools that we use for that. The G5 Store, together with advertising, which is we're quite proud of, started -- exceeded 1% net sales in the quarter and continues to grow month-on-month. So very positive there because we don't pay any store fees on those revenues. So the profitability is much higher. And also finally, we have that little thing that Microsoft has reduced their store fees. So effective August 1, they will lower their store fees from the customer at 30% to only 12% going forward. And that will have a significant effect on the company's profitability. That went quick, but now, I think I'm done, Jesper. Almost 20 minutes.

Thank you, Stefan. A couple of questions for me. First off, I'd like to pick your brain on the user engagement and spending levels here in April and May of this year compared to last year, which as everyone knows, had quite strong tailwinds from the COVID-19 lockdowns. How is -- are your games performing this year compared to last year in terms of spending and engagement?

Yes. As you rightly point out, we saw -- we had a very distinct COVID effect, which was limited to April and half of May when it comes to revenue. We started seeing downloads from mid-March, but revenue kind of kicked in from April and mid-May. Since then, it's been very normal, so very normal seasonality. We see very limited effects of lockdowns. Of course, then April-May then, it's tougher comps. But we've also -- since then, the new generation of games have continued to grow. Hidden City, as we communicated in Q1 has stabilized and shows a bit of signs that it could potentially grow a bit, but that's very slow and steady but more stabilizing, which is very positive. So I think we're kind of comfortable where we perform currently. But then Q1, as we look, that you can see, we had quite a significant FX impact. That is still with us as well in Q2. So when it comes to the SEK reported numbers in Q2, it's really tough comps in that sense, but that will ease up in Q3 and Q4.

That makes sense. And I'd like to move on to the Microsoft store fees, which you mentioned. And I think people are well aware that they chose to lower their revenue split here a couple of weeks ago. You mentioned you have 17 games out of the top 90 games on the store. What does that mean in terms of revenue percentage, number one. Number two, how does the dynamics of the store differ from perhaps Android and iOS? I'm thinking in terms of user acquisition spending and so on.

Well, as we've said before, Microsoft is a very good platform for us. It has been strong for years. We don't disclose the exact split, but it is a big platform for us. That is definite. And you can see that we've had true success there given that we have so many games on there. So it will have -- this will have a significant impact on the company, the lowering of the fees, and we're obviously super happy about their decision. I think it was a bold and interesting move from Microsoft. When it comes to user acquisition, it's not -- well, the mechanics are the same, so to speak. It is about chasing ROI. We allocate budgets to where it makes most sense. It's not like we're only doing Microsoft. We do all platforms. All games are growing on all platforms when they're growing. And so we have a very healthy mix. If it would stand out in kind of -- to be much, much better than anything else, we would naturally allocate even more capital. So it's still a competitive market. It is the same -- channeling might be a bit different. Other stuff might be a bit different, but it's not hugely different than other platforms. In that case, we would, as I said, likely even more successful. It was just an open field that we could play around in.

So the ROI levels are similar as to the other platforms?

Yes, I would say so, yes. Yes. I would say so.

I think we're unfortunately out of time, but I'd like to thank you, Stefan, for joining us today and telling us more about G5 and also to the audience for tuning in.

Yes. Thank you. Thank you all, and thank you, Jesper.

Goodbye.

Bye.