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

Welcome back. My name is Simon Jönsson. I'm an analyst covering tech and gaming here at ABG. Next up on today's agenda, we have the CFO of G5, Stefan Wikstrand. Stefan will hold the presentation of the company and after which, I will host a short Q&A. With that said, Stefan, I'll leave the floor to you.

Thank you very much, and thanks for having us. So my name is Stefan. I'm the CFO of G5 Entertainment. And for those of you who haven't seen us before, so G5 is a developer and publisher of casual free-to-play games for tablet, smartphones, but also personal computers. We operate in the global environment within the gaming space, but also, we are a global company. So we are headquartered here in Stockholm and listed here on the Stockholm -- on NASDAQ Stockholm. We've been listed in Sweden since 2006 and on the regulated market since 2014. We have the majority of our staff in Russia and Ukraine, where our development staff sits. So that's -- we have, well, more or less half in -- a bit less in Russia and then the rest in Ukraine. We have a small office in Malta. And we have an office in San Francisco as well, where our CEO resides so 7 offices across the globe. We have a very strong history in creating successful free-to-play games in mobile. I think the core of our strategy has always been running a portfolio of games and getting a portfolio game to the market. But obviously, you always want to highlight the successes that you've had. And we've had Secret Society, and it's done over USD 150 million in sales over its lifetime. And then Hidden City. That's done over USD 400 million in sales so very strong-performing games. We are focused on a female audience of women over 35, which has been the kind of core audience for the company since going into mobile in 2009 so very much focused on the audience and their wants and needs and building a portfolio to kind of -- to serve them. Just a quick glance on the gaming market. So as I said, we operate in -- primarily -- well, in general gaming market but primarily in the mobile space, which is then represented by the red here in this chart that we've stolen with pride. Mobile has grown, obviously, the fastest and is the fastest-growing part of the mobile ecosystem. To me, the growth in mobile represents an expansion of the market in the sense that we can serve more players' gaming experience, people that didn't play before. And it has also meant that the casual gaming experience has kind of taken over and is now the kind of dominant part of the gaming market. As I said on the previous slide, we do a lot of our revenue -- it's coming from PC today. But I think it is once again a representation that we do casual gaming, and you can play casual games on a mobile. You can play casual games on iPad. You can also play casual games from PC. So the mobile platforms have kind of expanded the market and shown a lot of users a new kind of gaming experience that they can -- or a new entertainment experience, you could say. And I think this especially goes as well for our target demographic of female 35-plus category. If we look at kind of G5's shorter history. So from 2014, we listed to the NASDAQ Stockholm Exchange. It was also the year -- at that point in time, we had a few free-to-play games in the market, one of which was Secret Society that had started growing quite aggressively. We also released Hidden City in 2014, and that then started exited -- or exited soft launch in 2016 and started growing. After '16, so going into '17 and '18, G5 did a lot of investment in the workforce, in the development capacity of the company so both expanding the workforce. We did also changes in the structure of the development teams. So in '18, we did only -- we only released 1 game. So we got a bit of a hole in the release cycle due to these investments that we did. But then from '19 and onwards, we've started to see the kind of effects from those investments. So in '19, we released 5 new games. In 2020, 8 new games. We have 4 new games released this year. And then we have further in the pipeline then for coming years. So definitely building out the portfolio. And once again, based on these investments that we did. And we'll come back to these games that were released in the last years later on in the presentation. But as I said, we focus on the target audience of women over 35. It is still a growing -- it is a growing demographic. We would argue that it's still underserved, even though it's not as underserved as when we started focusing on the target audience. But still, there is a tendency for releasing games towards what you like in terms of development companies, whilst we're very focused on this target audience and their wants and needs. So a very loyal audience. They play the games for a long time, also a very strong paying audience. We target them through 4 categories of games. So our biggest category is hidden object games, here represented by Sherlock, with one of our latest releases in the hidden object genre. It is a niche genre so not as big. But usually, when a company is successful, the entire hidden object market expands because new people find the hidden object games and enjoy the gaming experience. So we are one of, well, a few companies that make larger hidden object games in the market and have a sizable chunk of that market. We also have match-3 as a segment. Match-3, obviously, a much bigger subset of the markets, one of the biggest genres in mobile gaming, much more competitive. So we have a much smaller share of the market. But then the potential within the match-3 genre is then very big. So we have invested quite a bit in match-3 the last years and released quite a few games expanding our offering in match-3. We had the Mahjong Solitaire genre, which is Mahjong Solitaire match-2. It's been with the company since -- well, since before we went into mobile when we did casual PC gaming. So we've had different iterations of the Mahjong games. Also an area where we've invested quite a bit the last years and released quite a few Mahjong games with the Mahjong mechanic built into it. And then we have word games, which is our smallest genre. We have 1 game there -- here. Well, the word play game that you see here. So definitely the smallest one in our 4 genres that we currently operate. And everything is then built together with the social network that we have in our games, which is called the G5 Friends network, where people can interact with each other and they can help each other forward. They can -- well, you can chat, build friends, send each other gifts across the games and really kind of help each other forward in the game. We, of course, have some benefits that we get another touch point with the end user. We can work with reengagement, et cetera, et cetera. I won't spend too much time on this slide, but we usually have it in the deck because I think it's always good to remind the audience that the longevity of the free-to-play games, which is the predominant business model in mobile gaming, the lifetime of a mobile game is much longer than people expect. You obviously have the development phase where it's, well, within the company. And then you get to the soft launch, where you test and see how the game behaves, you see how the audience reacts to the game. If they come back and play, how often do they pay, what's difficult. You start to tweak the gaming experience to be the best for the player and as well for us, of course. And then you start scaling the game with marketing. At some point, the game will reach a peak, after which, you usually see a churn of users, so you have a drop-down in revenue as well. So the red line here is revenue. And then that flattens out. And you have very stable long-tail revenue, which is with you for years and years and years. We sometimes get the question, the -- how long is the life cycle for a successful free-to-play game? And I think for us as well for other games in the market, the true answer is that we don't know because we haven't reached the end of them yet. So this revenue just continues to go. Usually as well, you have better profitability in this part of the life cycle of the game. So you invest a lot in marketing in the beginning. You grow the revenue, which is then optimized in the -- when the game becomes a bit older, so the profitability of the game is much better. And I think this is good -- always good to kind of carry with you when you look at mobile gaming companies, that it's much more sticky, and the longevity of the games are much better than you would expect. So as I said, we work with a portfolio approach, which is the -- essentially the strategy that the company has had since mobile -- since we went into mobile. We have always worked for -- with a portfolio approach because we believe that's the best way of running a mobile gaming company, focusing on the portfolio, releasing new games and continue fueling that kind of cycle of releases and getting games to the market, testing them. Some will be very successful. Quite a few of them will be profitable, and a few fail. And that's just the natural course of things, and you need to get those games out to find both the nuggets and all the pieces that you want to see. So as I said, we invested quite heavily in '17 and '18 in the development capacity and started releasing games in '19. We have since started calling them the new generation of games to kind of distinguish them from the older games that we have in the portfolio, which is then in these charts you see here, it's represented by the orange bar. So in the last -- it's now representing 50% of our revenue, is coming from games that were released in 2019 or after '19. So a very strong -- Yes, we're very, very, very pleased with that, of course, that we've seen this coming from essentially 0 and building it up to 50% of our revenue in a bit over 2 years. The yellow bar is the owned old titles, so games that we own ourselves, but they are older. And then we have the dark blue, which is the licensed games, primarily then represented by Hidden City. So if we look a bit more at the new generation of games so as I said, games that are released in '19 and onwards. So we released quite a few games, and we released 18 new titles. And we're more obviously coming in the coming year to kind of building out the portfolio. We've had very good success with this kind of portfolio of games. As you can see on the -- it looks even better when you isolate the chart over the growth of the new generation of games, which then in Q3 had a 36% growth year-over-year, which is very strong. We've invested in all kind of -- all of our genres so primarily then match-3 but also hidden object and quite a few Mahjong games have come to the market as well. In Q3, the kind of highlight that we took was Sherlock that were released just a year ago. It was the breaking point between Q3 and Q4, which is now over 10% of our revenue and has grown very consistently since release. Whilst we've done this, we have also invested a lot in our user acquisition efforts both in terms of tools and people and expanded the teams to be competitive in that part of the gaming market as well. Making a successful game is one part. Finding the audience is the second part of running a game, and then user acquisition becomes a very important part. So we've done quite a bit of investment there as well, as I said, both technically but also in people, expanding the teams, finding specialists for making the marketing efforts as efficient as possible, which you also can see if you look at the numbers that the efficiency in user acquisition has increased drastically the last years. And in 2020 and 2021, we've been very stable at around 20%, 21% in marketing spend in percent of revenue. So very stable performance there whilst achieving good growth in this new generation of games. And all of this, once again, running a portfolio and having a portfolio strategy, it's about building a foundation for long-term growth. The games that we release today will likely not contribute to the revenue until, well, maybe second half of next year in any significant way. Sometimes it's faster. Sometimes it's a bit slower. But building out the portfolio, having these shots on goal in the market is the foundation for long-term growth. And I think if you look back to our revenue numbers, you can see that we've actually achieved that as well with this strategy that we still kind of employ. Looking just quickly on the kind of numbers. If we look at the top line revenue, I wouldn't be a CFO if I didn't run some numbers for you. But looking at the top line, which you have there, obviously, the new generation of games that I mentioned has grown very consistently the last years. The share of owned games in the portfolio has increased. Whilst in the owned older games, we lost a bit of revenue. So on the consolidated level, it's been a bit flattish, but we've seen growth where growth should come from, which is the new generation of games. In the second chart, you see the gross margin. And you can see a very steady gross margin improvement, which is the balance between having a licensed game where we need to pay royalty for the use of the title, for the publishing of the title to the owner of the IP and the developer. But the higher share of own games we have, we don't have to pay royalty. And thereby, the gross margin has expanded over time slowly but surely with the increasing size of the owned games portfolio. And then in Q3 this year, it took a bit of a jump upwards because we -- now we have a decent chunk of our revenue coming from Microsoft platform, and Microsoft lowered their store commissions from 30% to 12% in -- well, on August 1 this year, which then helps our gross margin quite significantly. And here, this is -- Microsoft is the first one in this space that lowered their store commissions from -- well, they lowered it quite drastically then from 30% to 12%. And we have more trends like that. So -- And I think that this is a big topic for the mobile gaming industry currently, especially with the Epic versus Apple court case, what will happen with them with the store fees going forward. And that would then obviously have a very significant impact on our gross margin if more changes like the Microsoft one would come. Thanks to the gross margin improvement and as well, the increased efficiency in user acquisition, our EBIT margin has also gone up over the last years. So we're looking at a record year in terms of profitability this year. And we're now having a very healthy margin of 18% on EBIT level. We have a very strong cash position. And still, we have no debt, and we financed the development into new games, all other aspects of the business. But then we convert cash quite well from EBIT. And so we add on cash and account every month, which we've then used in part to make -- pay a dividend during spring, but also then some significant buybacks the last years, which is then why the cash position that you see in the bottom chart then is going down. But that is the investments in G5, you could say, or repurchases of own shares. If we then look ahead a bit. So we're coming from Q3, Q4 is a seasonally stronger quarter so expecting some sort of sequential growth in the quarter. UA, we have been very consistent in terms of the user acquisition. And it has stayed in the established range of 17% to 22% that we communicated to the market. Rather, it's been even more tight right around 20%, 21% with some anomalies. And this has fueled kind of increased gross margins and then in expanding EBIT margin as well, a trend that we expect to continue going forward. With expanding gross margin, a higher share of owned games, one should expect that falling through to the profitability as well. And we are quite primed for growth, expansion in the owned games, expansion of the portfolio. We have a significant -- we have a very good mix in terms of platforms. So we generate 50% of our revenue outside Apple and Google. And so Microsoft is a big platform for us that I alluded to earlier. We also have our own store, the G5 Store, that has grown sequentially every month since its release late last summer, and it's still growing very nicely, which is -- we're very proud of that. So very kind of well-diversified across the different platforms and more games coming to the market. So yes, we feel quite proud of where we've taken the company and quite pleased with the position that we're in for the future. And I think that concludes my presentation.

Thank you, Stefan. Very good. So let's turn to some questions. We think that it's very interesting that you have initiated buybacks. And could you maybe elaborate on why you think buyback is a good investment and what we can expect going forward?

Well, it is -- as I said, we convert cash really well. We are profitable. So we had cash in account. We can't just sit on it in the end. We are looking into -- as we've said before, we are looking into M&A, scouting the market. But we have a very high threshold as well to what we want to see in a company and that would be interesting to us. So we've looked at quite a few, but nothing has materialized. In the meantime, and to be said in M&A as well, sometimes the price tag is maybe a bit high for our taste, or there could be other factors that make it fall through. But then in the meantime that we can invest in a company that we know and that we think we have a bit of clarity or at least more detailed knowledge. And that is kind of, in our opinion, reasonably priced and then repurchases is a very good way to create shareholder value over time. So we've done quite significant buybacks in, well, this year and last year. I think one should expect it to continue unless other kind of opportunities materialize. If it's on the same scale or a different -- that is a different thing. One has to also bear in mind that it's also beneficial for us to do the repurchases of shares because we have these performance share programs in the company for a quite big chunk of the staff that are involved in this, and we need to have shares to cover those as well. And so instead of pending new ones, we can buy back and then issue them or give it out to the staff at a later point. So that is one element to it as well.

Thanks. And you aim at growing the share of own games. Could you explain how you balance between investing in new games versus old games like Hidden City, for example and how that impacts use acquisition costs?

Yes. I think in general, when it comes to user acquisition -- or with the majority of the things that we do, both in terms of development but also user acquisition, we try to -- a lot of our business is data driven, and we have plenty of people just doing that digging into data. And that kind of guides parts of the development but also the user acquisition. So it's very data driven. Of course, having a new portfolio of games, usually the new generation of games is better than the old ones. So having a successful game, you tend to allocate capital to the growth points you have in the portfolio and then relocating that from other games. So all the games that aren't growing, you might relocate a part or large parts of their user acquisition to a newer title that can grow. But in the end, we still do user acquisition. On Hidden City, for example, it's on a lower level. It's much more optimized to finding kind of really the best users that we can find for the game. But a lot of it is though -- it is, as I said, we are a very data-driven business. So the numbers kind of guide us as well where to invest.

Okay. And yes, we have to talk about IDFA changes as well, I think. How would you say you were affected by the changes? And both in near term but also how do you see the long-term landscape for mobile games developing?

Well, it was kind of a wide end to the question if we start with the IDFA part. So obviously, IDFA has impacted us as well. It's done user acquisition trickier in certain channels. I think we are lucky or lucky, but we're in a good position given that we have a very good kind of mix between the platforms. So we're not as dependent on Apple as some other players might be, and we can see some companies out there that are very reliant on Apple that have been hit very hard by this change and also then may be very reliant on certain channels that got hit the most. So of course, but we get impacted as well. It is trickier to the user acquisition. So we're working hard. I think we were fairly well-prepared, but it's -- in part is the nature of the game though because it's always -- the technical development is always there. Either it's from competitors making you uncompetitive in making your bids, or now this was kind of a shock to the system instead. But we work on our tools to be competitive all the time. And -- But yes, we got impacted. How this impacts the kind of wide -- the kind of mobile gaming landscape over time, I think that's a bigger -- very much a bigger issue. I think it's kind of interesting the success we have currently with the G5 Store, which essentially is providing casual games through a web interface. It is kind of not -- well, an unnatural market, given where we're coming from in mobile. I think plenty of people wouldn't expect it to be good. But we can see that casual gamers, they have adopted the type of games that they play. They enjoy playing them. A lot of our games work better on large screens. So that's why we also have good PC revenue base. But I think it's -- we found an audience that enjoy their casual games. And I think that's the kind of key pillar for -- at least from our point of view, is that it's the casual games that is carrying -- that's the kind of key here. It's not the platforms themselves. It's not your iPhone. It is the gaming experience that we provide. And people enjoy it, and they will find that on different platforms. And I think that's a very interesting trend, at least in our view.

Thanks. I think that's -- that was all we have time for. But thank you, Stefan, and thank you to the audience.

Yes. Thank you.