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

So great to see you in real life.

You, too. It's strange to be in a big room with actual people.

Yes, I see some people. Great. You can -- the stage is yours.

Thank you very much. Thank you very much. Well, yes, thanks for having us. So my name is Stefan, I'm the CFO of G5 Entertainment. I assume that everyone -- no one sees the presentation maybe. But to start, G5, we are a developer and publisher of free-to-play games. We've been around since 2001. So we actually celebrated our 20th anniversary in October which was a milestone. Unfortunately, I forgot the 20th anniversary hoodie, so you can see that today. But I promise you it's very pretty. And -- so we make free-to-play games for primarily female audience, women over 35, which we have focused on since going into the kind of mobile gaming market in 2009. We are a global company serving a global audience. We have offices in -- development capacities primarily in Russia and Ukraine, where we have the majority of our staff. We are over -- I think we're over 900 people today, and that's where they're based, the majority of them. We have an office here in Stockholm, where we're listed. And we have an office in San Francisco, and we also have an office down in Malta. And as we said, we serve a global audience. Let's see if we get the technology to work as well. I will just take some water while you do that. It's good no one started the clock, so I assume those are connected. [Technical Difficulty]

So these 7 minutes never happened. Welcome again in real life.

Yes, indeed.

Stefan Wikstrand, the CFO.

Yes, if you feel like you've seen this introduction before, it just happened, but we don't talk about that. And we hope that this works now, yes. So to start -- start where I started before. So my name is Stefan, I'm the CFO of G5 Entertainment. G5 is a developer and publisher of free-to-play games for tablet smartphones and personal computers. We have just celebrated our 20th anniversary as a company in October, which was a big milestone, of course, for us. So we were founded 20 years ago, then listed in Stockholm in 2006 and moved up to NASDAQ in 2014. We operate on a global market, with a global presence as well. We have our developer capacity in Russia, Ukraine, primarily. We have today over 900 people, and they are primarily based in Eastern Europe. We have an office here in Stockholm. We have our office in San Francisco and an office in Malta as well. But bulk of the people are down in Russia and Ukraine. We have a very strong history in creating games, and you can see our revenue development on the top right. We have especially The Secret Society, that's made over USD 150 million in lifetime revenue. And then Hidden City, that you can see, started growing there from 2016 in the revenue chart, which has reached over 400 million in sales over its lifetime. And gross margin has been a big trend for us the last years given that we focus a lot on our own games, which has expanded the margin over time, with the kind of increasing share of own games compared to licensed games. And then in Q3 this year, you see a big bump up, which is related to Microsoft lowering their store commissions from 30% to 12% from August 1. So that impacted Q3, with full effect from Q4. So we look a bit at the kind of gaming market. I won't dwell upon this that much but, obviously, the gaming market has grown massively lately, in mobile primarily. We've stolen this picture with pride. But I think the key -- one of the key things, at least for me, when looking at this slide, is that we look at mobile revenue. But as we've communicated, we have a fair share of our revenue coming from PC as well. But I think mobile, in my book, in large, also represents casual gaming being more popularized and that people have the devices to play casual games, which has found a new audience. So you have people that never played games before that, through their mobile phones, started playing games, maybe primarily casual games, which then has expanded the margin. Now we're kind of in the brink between mobile and PC, we do both. But the core here is the casual gaming, which then primarily is represented by the mobile here. So G5, we are then focused on a female audience of women over 35, that I said before, which is essentially the same audience that we've had since 2019 -- 2009, 2010 when we went into mobile. It's a growing demographic. It is an underserved market still, even though there's plenty of companies out there that focus on the female 35-plus audience. They're very loyal when you get them in, so they play for a very long period of time. It's also a very strong paying audience. So we address that through, I would say, primarily 3 categories. We have 4 categories, but we have the Hidden Object genre, which has been with us for quite a while. It's our biggest genre, here represented by Sherlock. But we also have Hidden City and Secret Society being hidden object games. And it's more of a niche genre where we have a significant presence. It's not that many companies of size that make hidden object games, but they appeal very much to our target audience, very rich graphics, detailed storyline, where sometimes the audience turns into kind of a mid-core gamer audience where they play these games for hundreds of hours and are really committed to the games. That can go by the way from match-3, which is our second biggest genre, where we've invested quite a bit in the last years. We released our first match-3 -- our first standalone match-3 game in 2016. But then from '19, we have released quite a few games. So now it's our second biggest genre, match-3 obviously being a huge subset of the mobile gaming market. So the market potential is bigger. We have the Mahjong Solitaire or match-2 games, which also has been with us for quite a while. I think Mahjong was one of the first games released for mobile in 2009. So mahjong games, we call it an evergreen genre, people tend to come back and play them for a very long period of time. Here, we've invested quite a bit in the last year as well and expanded the offering for the mahjong titles. And then we have the word games. It's absolutely smallest genre, represented by only one game, which is Wordplay. All of our games are tied together with the G5 Friends network, which is a social network built into the game, where people can kind of interact, do social features. They can help each other forward in the game. Players usually don't want to compete. They want to kind of help each other forward. It's very -- yes, it's a social part of the gaming, which is very important. Of course, it helps us with cross-selling, reengagement, et cetera. So a very good tool, which is incorporated in all the games. I won't dwell upon this, given that it's kind of a short presentation, but I think it's always good to remember the kind of revenue development for free-to-play games. And that you have the development, you have the launch phase, where you tweak the games a bit, start scaling games with user acquisition. At some point, you will reach some sort of peak, after which you realize that you adjust the marketing strategies. You usually see a drop-off in revenue and then it flattens out and you have a very stable long tail revenue on the kind of mature titles. Also, you kind of change to user acquisition here so that the games become much more profitable. So you have a more profitable game but not growing compared to early in the stage where you have a growing title, but you usually reinvest hard in user acquisition, so it's a little bit less profitable. And that is always good to keep in mind, that picture. If we look at G5's development in the last few years or essentially since we moved into NASDAQ, but also 2014 was the year when we kind of transitioned over to free-to-play. So we had Secret Society growing really well in '14,'15. Hidden City exited its soft launch in 2016. In '17 and '18, we did a lot of work on the development capacity of the company. We did a lot of investments in the people, rearranged the teams, et cetera. So we didn't have any launches in 2018. But from '19 and onwards, we released quite a few games. So we did 5 in '19, 8 in 2020. We released 4 so far. We actually released 5, but 1 is closed. So we have 4 that's going to carry us forward. These are the games that we call the new generation of games that we'll see on the next slide, which we distinguished just because we did a lot of work in the development capacity to kind of improve our efforts and then making better games. And we have an additional 6 games in the pipeline for 2022. And looking at this then, this is then the revenue development for the last years. So if you look at the red in the bottom, which is then the new generation of games that I just mentioned, which have grown quite significantly. And this is a part where we are very proud, obviously, that we built this revenue stream, which is now 50% of revenue in the last 2 years. It is a part of the kind of overall strategy that we've always had. We focus on a portfolio approach. We release games. Some will be very successful or a few will be very successful. Some will be good, kind of good growth drivers, and some will at least usually make the money back. And then we release games and kind of build upon that. But I think the last 2 years speak for themselves that we've come to this point. If you look at the own games and the licensed games, there you can see the kind of long tail revenue building up, which is very stable going forward and also they're very profitable. So looking ahead a bit. Obviously, we're coming out of Q3. Q2 and Q3, usually seasonally weaker. We're going into Q4, which is seasonally stronger. So we expect to see a sequential growth. UA spend will be in the kind of established range that we've established in the last few years. This is a very short presentation. But what we've done in the user acquisition part in the last 2 years is also quite amazing, where we switched. Well, we've done a lot of work in investment, but you can also see it in the numbers where user acquisition is much more stable and more effective. And that is then driven -- the user acquisition, combined with the new titles and the larger share of own games in the portfolio, has increased the gross margin that you saw on the first slide. You can also see that the EBIT margin has grown, so a much more healthy situation on the profitability of the company. And then, going forward, I think we're -- as we've said, we're quite primed for growth. We continue to releasing games, and we expect -- our overall kind of long-term goal is to grow faster than the market. That hasn't changed. That needs to be done with the new generation of games, taking a larger share of the revenue and then growing the total top line. We have 50% of our revenue is derived outside of Apple and Google, which helps us a bit, especially IDFA hit also us, but maybe less because we have a more diversified kind of revenue stream between platforms. And yes, as I said, more games coming to the market. And, that is, in the end, what it's about. Releasing games, doing the best that we can to make them a mix between kind of experiments and more kind of titles that we feel that we have more comfort in and kind of building upon that and using that kind of strategy that we've done for so long, releasing games and expanding the portfolio. Yes, and I think that was it for me.

So yes, some questions. Thank you for the presentation. So approximately 3 years ago, you started to bet big on the games genre match-3. Can you give us some thoughts on what your next big strategic move will be regarding new game genres? You said -- yes, you can.

Yes. No, but I think match-3, it's a well-known genre. It's a huge subset of the market, as I said. We know that it's also very popular with our target audience. And so in that sense, it made sense. We tested it before. And now it makes us millions of dollars every month. We do experiments. So we will continue releasing games in new genres, combined with kind of filling up the existing genres with the mahjong, the match-3s and the hidden object. So more will come. But what it will be, well, then time will tell.

You have done some mash-ups between Hidden Object and match-3. Will you continue experimenting on that or...?

Well, I think that is certainly a trend that we can see out there as well. And well, we don't close any doors. We try to be looking at the data, but sometimes you need to kind of branch out and try something new and see if we can get it to work, see if it fits with our audience, can we figure it out? And there are elements of gaming that maybe our way of doing some detail works better in some environment. We need to learn those things as well. So it's a very complex thing. But we will certainly experiment. We will certainly invest in the kind of safer areas as well.

You have been expanding your gross margins quite significantly with more revenues from own games and more revenues from your own store and now with the lower fees from Microsoft. So if you look at your own store, G5's own store, what is the main growth driver for this? How will you, yes, attract more players?

Well, I think it's quite interesting. We've had the G5 store since last summer, which is essentially a web store, which might feel a bit farfetched from where we're coming from. But we see a lot of the audience liking to play on PC. Here, we can also attract users from the kind of wider web ecosystem. It's been growing every month, very strong sequential growth month-to-month since we released it. It's taking a decent share of the revenue given where it's coming from. Now it's only for PC, soon we're starting to release games for MAC as well. So you can play it on the MAC through the same way. Next year, Android's coming as well. So we have quite a few kind of drivers in that sense. But I think just looking at development, we're super pleased with how it's going and the growth we've achieved so far. So we think we can continue just as we are as well, yes.

When I looked at our source holdings, I noticed that G5 is now the biggest shareholder in G5. So do you have any limit for how big your own ownership will be in G5?

Well, you have a limit. You can only own 10%. So there is kind of a natural ceiling by that. So we'll see. I think we try to be optimistic. Obviously, we make money every month. We have very good cash conversion, so we're building that up. We -- of course, we're looking at M&A. It's not easy. It's definitely not cheap. And we want to feel comfort there. And yes, it has been looking like a good idea to kind of reinvest in the G5, where we actually have good knowledge about what we're doing. So it's going to be a mix. It's part of the kind of capital allocation. As I said, we make money every month. So buybacks has been a thing. But in the end, if we're going to continue at this pace, we need to also expand shares because otherwise, we don't have the room to buy more.

Okay. I see I have some questions, but the time is over. So thank you very much.

Thank you very much.