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

Good morning, everyone, for the Q2 2026 earnings call. We wait a few seconds for the attendee list to load properly. [Operator Instructions] With that said, I will hand over to our CEO, Vladislav.

Thank you, Stefan. Welcome, everyone, to the earnings call for the second quarter. We obviously have Stefan Wikstrand, our CFO, with us today. And as usual, we'll go through the presentation in about 15 minutes, and then we'll open the line for the questions. And I'll start by giving you a brief overview of this morning's report. And first, I'll tell you about the current optimization of the workforce. As we disclosed in the first quarter report, the plan was to reduce our staff by approximately 180 employees with the aim to have a total of around 635 employees. And this first wave of redundancies was completed during the second quarter. And since then, we have continued to review the workforce and the active projects and we have identified further redundancies. So the second wave of optimization took the total number of employees down to now approximately 550, and it was completed in early August. So this is the number of employees as of today. And the total yearly savings from both these waves of redundancies combined is approximately USD 11 million. So let's continue with the numbers from the report. Revenue was USD 20.1 million, and this was a decrease of 16% year-over-year and 7% sequentially. We, unfortunately, continue to see a sequential decline across all 3 main pillars of revenue, Sherlock, Hidden City and the Jewels family of games. Hidden City, in particular, suffered due to new functionality that unfortunately had negative effects and the game declined 10.5% year-over-year and 8% sequentially. So that functionality has been restored. And as of July, the game was trending back gradually. Sherlock declined 16% year-over-year and 8% sequentially. And finally, we have the Jewels family of games that declined almost 30% year-over-year. And as we have stated in previous reports, we have had a roadmap in the second quarter. We worked on it. And this roadmap included a number of changes to the Jewels games that were supposed to change the trajectory of these games. And reached the end of the road in the second quarter towards the end of it with little success. So we see that we cannot justify continued investment in these games and the Jewels games will, therefore, be put in harvest mode. And we will maximize the profitability of these games going forward, assuming that they will continually -- they will continue to gradually decline. On the bright side of things, we have seen a very strong performance in the third-party distribution on the G5 Store during the quarter. Revenue from the distributed third-party games increased 100% sequentially, which is pretty good. The interest from the developers is growing. We are releasing more third-party games in the G5 Store and the pipeline of new games to be signed is forming very well, too. We have also reached another all-time high gross margin of 73.1%, up from 70% last year. The reasons are the same, the continued growth of our direct-to-consumer channel G5 Store, including third-party distribution and the continued positive development of our efforts to monetize players on mobile devices directly, including through the web shop. Monthly average gross revenue per paying user continues to go up as well. And here, we also set a new record of USD 79, which is a 15% year-over-year increase, reflecting the high quality of our loyal audience. User acquisition was 19.5% of gross revenue, higher than 18% a year ago. And at the end of the quarter, our cash position stood at a strong USD 24.4 million after paying the dividend and share repurchases. We continue to remain debt-free and to have a strong balance sheet, which gives us strategic flexibility. Now let's move over to -- and have a little closer look at G5 Store and our D2C strategy. So by now, the G5 Store has established itself as the clear #1 among our distribution channels. The low single-digit processing fees and the growing G5 Store continue to be a key driver of our margin performance, as just discussed, given that third-party app stores typically charge between 12% and 30%. And this cost efficiency directly contributes to our improved profitability and the expansion of our gross margin. And we're talking about the gross margin, of course. Third-party mobile store sales continued to decline for G5, while G5 Store grew 5% sequentially and 15% year-over-year, and it now accounts for 25.5% of total group revenue and 24% -- sorry, 29% of net revenue, which is after the commissions. The share of payments from the players of mobile devices processed directly continues to grow rapidly. In the first quarter, we saw a doubling of such revenue from the fourth quarter, reaching 11% in total. And in the second quarter, this trend has continued, and this share reached over 17% in the second quarter, further reducing platform fee exposure. The expansion of the G5 Store as a distribution platform continues. We launched 3 new games during the quarter. And of the games that were in negotiations during the quarter, 5 have been signed and negotiations are underway for 9 games as of now. Revenue from third-party games is growing steadily, and we continue to be on track to make this a significant fourth revenue pillar for G5 over time. Let's move on to the next slide and look a little bit more in detail on the development during the quarter. Right, the negative trend here is explained, as mentioned before, by the decline in all 3 main pillars of our revenue, Sherlock, Jewels family of games and Hidden City. And they all, unfortunately, underperformed, and that's why we have this dynamic. The share of own games is currently on the negative trend as well. And this is due to the weak performance of Sherlock and Jewels family of games, and this effect is further amplified by the increase of revenue from the distribution of third-party games in the G5 Store. As mentioned, our gross margin reached a record high at 73.1%, up from 70% a year ago, primarily due to the continued growth of the G5 Store and processing more of the mobile player revenue directly. Now let's look at our operating profit for the quarter. Reported operating profit for the period came in at minus USD 0.2 million compared to positive USD 0.6 million last year. The reported margin was minus 1.1% versus 2.5% a year ago. User acquisition was 19% as a percentage of revenue compared to 18% in the second quarter of 2025. EBIT margin was slightly impacted by the increase in UA spend for the quarter. EBIT was also impacted by positive currency exchange effects and negatively by severance payments. Adjusting for these, EBIT was USD 0.1 million, 1.6 million last year, corresponding to an EBIT margin of 0.4% compared to 6.8% last year. During the quarter, the net capitalization impact on earnings was USD 0.1 million compared to minus USD 0.3 million last year. Net capitalization will go down following the optimizations that we've made. Now let's talk about our cash position and move on to the next slide, yes. G5 remains debt-free with a strong cash position of USD 24.4 million, providing flexibility to fund new game development and marketing from our operations. The quarter was negatively impacted by the dividend of USD 1.6 million, USD 6.5 million last year and repurchases amounting to USD 1 million, USD 0.2 million last year. Total cash flow during the first quarter was minus USD 1.9 million compared to minus USD 4.5 million last year. And let's move on to the next slide and go through the final thoughts of our earnings call. As we move through 2026, we remain focused on key drivers. The organizational changes have materially been completed in the third quarter with a run rate decrease of USD 11 million. We remain vigilant about the cost structure while maintaining product momentum across the game portfolio, the G5 Store and other initiatives and as the second quarter, obviously, not third, sorry for saying that. We will continue to sign and launch high-quality third-party titles to G5 Store to solidify the store as our fourth revenue pillar. We are also looking to increase advertising monetization as another tool to stabilize the portfolio performance and further improve the gross margin. And finally, we are moving forward with our games in the pipeline towards potential global launch or cancellation depending on the results of the soft launch and utilizing agile teams for continuous innovation. We remain committed to financial discipline and generating long-term shareholder returns through dividends and buybacks. And I'd like to thank the whole G5 team for their resilience and our shareholders for their trust. And this concludes my presentation, and I'd like to open the call for questions.

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

Maybe start with a question on the core franchises to say Sherlock and Hidden City, some challenging environment or challenging development in the quarter. Hidden City, you said you see some improvements after removing that functionality. What about Sherlock, I mean is it -- do you see that it could be tough to regain performance of that game?

It is difficult to say, to be honest. We have teams that ideate and analyze the why the performance of the games evolves in a certain way. And quite often, they can identify changes that maybe led to some setbacks. And as the case is with Hidden City, from June to July, once these things were addressed, the situation improved. With Sherlock, I don't think we have identified one specific area which caused this. But if you look over the years, if you look at our monthly paying users trend, for example, over the years, you can clearly see a gradual decline there, which is only partly offset by the increase of revenue per user. And so I think the fundamental challenge in the present market for the portfolio of games that we have is whether we can replace the paying users that we are gradually losing due to the natural churn. And if you look at the industry analysis, you could have seen the news that the cost for user acquisition continue to increase in the market. And it really is a challenging situation on mobile for us because the sort of replenishing the users is becoming more and more difficult in the market and even improving the LTV of games and increasing the revenue per user in games, sometimes feels like is not enough because the costs in the market are -- costs for installs in the market continue to go up sort of at a higher pace than it's possible to get for the increase in the ARPU from the player. And so I think these local issues like with which feature has improved the situation and which feature may be temporarily kind of made the situation worse, that's kind of a higher frequency fluctuations that we work with every day. The fundamental reality of this market is that it is becoming increasingly more difficult to replenish the number of users that we need to -- for the revenue to stabilize or for the revenue to start going up. And especially with older games and Hidden City is now 14 -- 12 -- what was it? 12 years on the market, it's getting a little bit more challenging even for older games. And so that's the situation. And then I could sort of dive deeper into the details of what exactly was done and why it affected sales for some time or what do we plan on doing in order to improve the situation. But I feel more and more that the probability of us fixing the LTV in our older portfolio to such an extent that it will allow for the increase in the revenue of these older games I think that probability, to be honest, is decreasing after a few years of trying to do that with some wins, of course, along the way, like the stabilization of the last year, but generally still a gradual decline if you look at the underlying audience metrics. And so we definitely need new areas of growth. We have some of these areas like G5 Store and the user base there and the number of paying users in the G5 Store is growing. And with increasing the number of third-party titles there, we will be, at some point, offsetting the decline that we have on the mobile if the situation there doesn't change. And our user acquisition spend on G5 Store as opposed to mobile is actually driving the user base up. So we have this part of the business that is growing and growing quite quickly, but we have this older part of the business, older part of portfolio that is clearly stagnating in terms of the audience. And we would obviously like to have a driver of growth in our portfolio. As I said before, we remain cautiously optimistic about the remaining new game that we have in development. However, that is still probably months away from finding out the answer to the question whether it provides the LTV curve, especially on kind of deeper into the lifetime of the player that can justify big investments and scaling this game in the present market situation. So this is the situation we find ourselves in. And for now, we do what we can to stabilize the old portfolio and to invest in the promising game that we have and to try and invest as much effort as we can in building up third-party distribution in the G5 Store. Sorry for a very, very long answer.

And I mean mentioning the growth opportunities, you talked a bit about third party, but also own games. I don't know if you can confirm it, but we can see in App Store that Spooky Suits it's a game that has appeared on your portfolio there. Can you confirm that that's the game that is in soft launch? And I guess, it's always difficult to say, but would you dare to give any chance of the game going into global launch?

It is really hard to say. And as we've learned from before, sometimes we have really good metrics early in the game, but then we just cannot get longer-term metrics right. In this case, we have certainly moved deeper from the early days and kind of building out the LTV of first few days towards sort of a longer depth within the lifetime of the player. But it is still -- if you look at the current breakeven horizons that you have to assume in the market, that's still just a fraction of the sort of consistent LTV increase that we need to deliver. And testing these changes is also quite time-consuming because you have to make these changes and then you have to sort of see how new users flow through these changes, not only the old ones because you might have lost some users along the way. And then you have -- you want to watch how your new cohorts advance through the gameplay. And the reality of the market is such that even when if we get to the point of going to scale this game really dramatically, we would have to spend quite significant amount of money, while still taking a leap of faith because the -- we would have to do it realistically before we are certain that the LTV curve will take us where we want to be after, let's say, year 1, right, and year 2. And compared to even 6 or 10 years ago when we were launching other games, the cost of install has grown several times over. So to get a game to a certain level of revenue costs several times more money nowadays. And so there's more risk. And so we'd like to take a little bit more time to make sure these metrics are there. And it really is hard to say from having fixed, I don't know, first few weeks if the month 6 is going to look good. That's the reality of business. But again, I want to sort of compensate the gloominess of that with saying that this game has the best early metrics we've seen by far. So it's a really, really good start, and we have to work with that to make sure that it's also built out the right way into the -- sort of further into the depth of the lifetime of the player.

All right. It will be interesting to watch in the coming quarters here. And also interesting to hear that you have talked a bit more about ad revenue. Is that something that you push in your own games? Or is it that something that has evolved with more third-party games on the platform?

Well, the -- first of all, we do think that it needs to be done on mobile nowadays. If you look at the market, what's happening in the market is that basically even the biggest developers realize they have to put advertising into their games. This is just the way that the user acquisition industry has evolved and the way that the big players in this area are forcing the sort of the members of this market to behave. It's kind of imposed right now and assumed that really without having advertising in your games, it would be difficult for you to acquire users from other games, so to speak. That's the way the ecosystem has evolved. And so we've taken very patient approach with advertising. We always thought that it's a distraction that we'd rather not have. But now we -- like everyone pretty much in the industry, we have to do it. We're trying to introduce it in a very gentle way as much as we can. But generally, I think we will roll out advertising monetization over time across all of our portfolio on mobile. And when it comes to third-party games in the G5 Store, we'll certainly make this option available. And we have some initiatives that will make it possible shortly.

All right. And then just a final question, if you have any comments on the outlook for UA in H2 and going forward?

Well, we will try to -- we really take it on a case-by-case basis, let me say that. And we would have to look at the situation on a particular game and what the models are showing. We are trying to find a way to acquire users to stabilize the revenue of the games over the long run. As you can see, sometimes we are more successful like last year or less successful like this year. We'll continue to try and do that. We'll probably try to protect our margin or at least protect our reserve and not go negative unless we see strong reasons to believe that kind of becoming unprofitable for some time will certainly pay off. As the case may be if we decide to go into global launch with the new game, depending on its metrics. But for the older portfolio -- for the old portfolio of games, we will always try to find a balance to make sure we can fund both the development and user acquisition from revenue. So I would expect the same level in other words.

And then we have Simon Jonsson from ABG.

First of all, on Jewel [ family ] in harvest mode. And given the revenue decline we have seen so far and what we should expect now when you put it in harvest mode, should we expect the decline to accelerate further because of that or do you think that -- or do you expect that the games will continue to decline at a fairly similar pace? I think it was around 10% sequential decline here in the quarter, quarter-on-quarter. Do you think that, that pace should be or can be maintained? Or should we rather expect that, that pace will accelerate?