Modern Times Group MTG AB (MTGB) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for our Q2 and half year 2026 results. My name is Anton Gourman, and I'm the VP of Investor Relations at MTG. Hosting this call today are our CEO, Maria Redin; and CFO, Nick Hopkins. [Operator Instructions] I now hand over the call to Maria. Maria, please go ahead.

Thank you, Anton, and hello, everyone. I'm very happy to deliver a second quarter with continued good business momentum. And before we go into the detailed number, there are 3 things I want to call out that I'm particularly proud of. The first one is another quarter of strong financial results, combining organic growth, healthy margins and high cash generation. This demonstrates that our portfolio and our logistics strategy works well. Our key growth highlights in the quarter were PlaySimple, which has delivered another outstanding quarter from scaling new games and also RAID: Shadow Legends, which had a strong second quarter after the exceptional Q1 that we saw. The second is the progress that we're making across our strategic priorities, including our rapid pace of AI adaptation and also our direct-to-consumer initiatives. By integrating AI directly into our internal tech and tools and leveraging our vast amount of data, we are accelerating and amplifying work in our marketing and data platform in the mid-core district as well as the PlaySimple technology platforms. And to give you just one complete example, on the marketing side, one of our best-performing marketing creatives in RAD this quarter was actually produced entirely with AI tools. The third that I want to highlight is the progress that we are making on our key value creation initiatives. We continue to make strides with the transformation of the Midcore district with shared central services now live and supporting our studios. We have also developed a new brand identity for the district, which I look forward to unveiling to you later this year. And on the casual side, the preparatory work to list PlaySimple is continuing as we work towards a potential listing in the second half of the year. This progress that we are seeing across our different studios and the group continue to showcase the strength of our people and the quality and the longevity of our games. But let's now turn to our financial results. We reported nearly $3 billion in net sales or approximately USD 312 million in Q2. That is representing a 6% year-over-year increase in constant currencies or 2% in reported currencies. This growth is all organic. So therefore, the pro forma growth rates are the same this quarter as we began consolidating Clarium from February 2025. However, as we talk to year-to-date rates, they are different with 10% pro forma and 9% organic growth in H1. So we will, therefore, continue to report on both organic and pro forma growth throughout 2026. Q2 also marks our seventh sequential quarter of organic growth. We're very happy to see that we continue to find good opportunities to invest in marketing at attractive return levels in the quarter. We invested a total of SEK 1.2 billion in marketing, and that is just above USD 120 million, which was a 15% year-over-year increase on a constant currency basis or representing 39% of total net sales. This level is a step-up of 3 percentage points from last year, and it primarily reflects 2 things. The first is the ramp-up in marketing behind rate during the last year to help unleash the full potential of the game. And the second is a rapid scaling of PlaySimple's new games, driving the growth we keep seeing in our Casual District. As to EBITDA, we reported SEK 707 million in adjusted EBITDA in Q2. That is equivalent to roughly USD 74 million with a strong 24% EBITDA margin in the quarter and 25% for the year-to-date. Adjusted EBITDA was up 10% year-over-year in Q2 and 20% in the first half. We generated SEK 474 million in unlevered free cash flow in the quarter. That is equivalent to $50 million, which corresponds to a cash conversion of 81% on a rolling 12-month basis, which again exemplifies our capital-light and capital disciplined business model. So let's now take a closer look at our revenues and our largest games. As I just mentioned, our revenues were up 6% year-over-year in pro forma terms for the quarter and 10% for the first half. Our Midcore District generated 75% of our revenues in the quarter and the Casual District contributing 25% versus 78% and 22%, respectively, in the first quarter. Our 3 largest games, RAID: Shadow Legends, Forge of Empires and Warhammer 40,000: Tacticus together accounted to 48% of total revenues. That is down from 53% in the first quarter. The mix dynamics reflect the fantastic growth momentum we are seeing in PlaySimple with a continued rapid scaling of several new casual titles, albeit still with solid growth in the Midcore District. Let's go further into the different games then. So starting with RAID: Shadow Legends reported revenues just under SEK 1.1 billion in the quarter. That is growing 9% year-over-year in constant currencies. And I'm particularly pleased with this performance, which was underpinned by the ramp-up in the user acquisition in the last year I just mentioned, as the game deliberately had a more measured pace of new content in the quarter following the exceptionally strong Q1 that we delivered. Highlights in the quarter included the launch of new champions, the second iteration of our human IP partnership and [indiscernible] events. Looking forward, RAI has an exciting content slate for the remainder of the year, and the plan is to step up the pace of new content during the second half of the year and into the important fourth quarter, as we have previously mentioned. Moving on to Forge. Forge of Empire revenues were down 22% year-over-year in constant currencies to SEK 189 million. This shows an improved trajection from the first quarter where we saw a 30% decline in revenues. And as we discussed last quarter, the team is focused on delivering new content aimed at retaining and engaging our long-term players, and we do expect to see this being deployed and give effect starting from Q3 and onwards. And in the meantime, the team is remaining focused on having an active live ops schedule, and that included in this quarter, the new King Arthur events. Revenues in Warhammer 40,000: Tacticus were up 5% year-over-year in constant currencies to SEK 169 million and was up high single digits in the underlying U.S. dollar currency. The game delivered a very strong June on back of a well-received event following a slightly slower April and May. The team continued to expand the games content, including the Thousand Sun Survival style season events and a major skull events. And in June, celebration of the launch of the 11th edition of Warhammer 40,000, the latest version of the Games workshops tabletop war game with a dedicated in-game events. Looking across the broader group then, revenue from our other games were up 10% year-over-year in constant currencies, and this mainly reflected the continued rapid scaling of PlaySimple's new titles, Crossword Go, Cryptogram and Tile Match, which are now included in other games. We will look closer at our casual game performance when we discuss the Casual District with Nick. Moving forward and then looking at the revenue streams. Our revenue mix reflects the dynamics that I've already alluded to. 74% of the Q2 revenues came from in-app purchases, while 23% came from in-app advertising with 3 percentage point increase in the in-app advertising contribution from Q1, reflecting again the rapid growth we're seeing in PlaySimple. We continue to focus on the direct-to-consumer revenues to drive lower platform fees, and this is one of our key strategic priorities we'll be talking to you about. We're, therefore, happy to see the proportion of our total revenues coming from DTC within our Midcore District, which include direct user billing web stores, the [ Pay-and-play ] launcher to be up 51% in the quarter, and that was 49% in Q1 and significantly up from the 31% we had in Q2 last year. The increase reflects major D2C initiatives in RI and Warhammer 40,000: Tacticus in particular. At a group level, the proportion of total revenues coming from DTC was broadly flat quarter-on-quarter given the PlaySimple growth. And as a result, total platform fees has been reduced from 17% of total revenues in Q2 last year to 12% in Q2 this year. Next, let's look at our user acquisition dynamics to which I will hand over to Nick.

Thank you very much, Maria, and hello, everyone. So in the quarter, we invested nearly SEK 1.2 billion or over USD 120 million in user acquisition in the second quarter, and this represents a 15% year-over-year increase in constant currencies or a 10% increase on a reported basis. Our total UA spend, therefore, represented 39% of total revenues in the quarter, up from 36% a year ago. This increase of around 300 basis points was driven by higher marketing spend in both of our districts. So in the mid-core district, we increased marketing spend by 5% in constant currencies in Q2, and this largely reflected higher marketing spend to support the continued momentum in RAID, offset somewhat by lower UA spend in Forge of Empires and select other games. Double-clicking on RAID, the game had very good momentum in the quarter, as Maria has already mentioned, after an exceptional Q1, and that's in part driven by the user acquisition investments we have made in prior quarters, which were successful in attracting high-value players. This is a great case study of our UA philosophy. We invest behind titles when our data and our algorithms point towards strong player LTVs. This is a long-term mindset where we are able to translate UA spending into value and returns over multiple years. It is also why we stay disciplined in our spend and maintain a holistic portfolio approach to how we spend across titles and channels over time in order to optimize the pace and channel investment and therefore, our returns. The casual district scaled UA spend by 36% in constant currencies, in particular to support the continued scaling of new games, including Crossword Go and Cryptogram in the Word genre and Tile Match in the non-word genre. There is a similar dynamic at play here as per the mid-core district with users acquired into these newer titles in recent quarters, delivering higher monetization when compared to some of our more established casual games. And this is underpinned by PlaySimple's AI-enabled platform little engine, which enables faster time to market and at a lower unit cost, again, driving higher returns. So now let's turn to profitability. As Maria mentioned, we reported adjusted EBITDA of SEK 707 million in Q2, which is equivalent to approximately USD 74 million. This represents an increase of 10% year-over-year with an adjusted EBITDA margin of 24% in the quarter, up from 22% in Q2 last year, despite the increased UA investment that I just spoke about. The year-on-year margin improvement was primarily driven by the strong growth momentum in RAD as well as the positive margin impact of our DTC initiatives that Maria already just talked through. Our adjustments to reported EBITDA came to SEK 17 million, and these related to adjustments for M&A transaction costs, which mainly reflected the performance-based revaluation of put call options related to the acquisition of Snowprint. So now let's turn to the performance of each of our 2 districts. The Midcore District reported total revenues of just over SEK 2.2 billion in the quarter. This represented revenue growth of 1% year-over-year in Q2 and 5% for H1 on a pro forma basis. Growth of RAID: Shadow Legends and Warhammer 40,000: Tacticus more than offset the continued decline of Forge Empires and certain other games that Maria mentioned earlier. The Midcore District delivered a strong adjusted EBITDA of SEK 581 million in Q2, up 9% from SEK 534 million last year with a margin of 26%, up from 23% in Q2 last year. This margin expansion reflects 2 main drivers. Firstly, the healthy player base in RAID with engaged long-term players who drive an increase in ARPDAU in the game when we have strong content as most acutely seen in our Q1 results. And second, the continued strong growth in our margin accretive D2C revenues where the savings on platform fees directly flow through to the bottom line, of which we partially reinvest those into disciplined user acquisition. On that point, I'd like to reiterate the milestone that Maria just mentioned earlier, whereby the mid-core district generated over 50% of its revenue from direct-to-consumer sales in Q2. Daily active user levels for the district was stable year-over-year at SEK 4 million, and ARPDAU came in at SEK 6.1, down 2% from SEK 6.3 last year. This was driven by lower ARPDAU in several games more than offsetting ARPDAU growth in RAID. Now let's turn to the casual district. The casual district reported revenues of SEK 736 million in Q2, up 29% in constant currencies. This continued outstanding performance was driven mainly by the rapid scaling of Crossword Go and Cryptogram within the word genre and by the rapid growth of non-word games, in particular, Tile Match. But was also driven by growth in several of our established titles. The District reported an adjusted EBITDA of SEK 177 million in Q2, up from SEK 151 million last year, and this corresponds to a margin of 24%. Despite significantly higher UA spend, PlaySimple's margin was only down slightly year-over-year as this increase in UA was offset by slightly lower-than-expected operating expenses in the quarter. PlaySimple had SEK 4.5 million DAU in the quarter, down from SEK 4.7 million last year as the rapid user intake in new games was offset by lower player count in some of the established titles. Now just as a housekeeping note, our historical casual district DAU figures for 2025 have been updated to align with the calculation and disclosure in PlaySimple's draft red herring prospectus, which reflects PlaySimple's internal data rather than third-party measurement. Q1 and Q2 2026 have already been calculated with the new methodology, so this only impacts 2025 numbers. ARPDAU was up 28% year-over-year to SEK 1.8, and this dynamic reflects the evolution of PlaySimple's portfolio as the new rapidly scaling games typically have higher levels of monetization enabled by Little Engine and are also predominantly focused on higher ARPDAU Tier 1 markets. Now let's look at our cash flow and balance sheet. We delivered cash flow from operations of SEK 471 million in Q2, and this comprised income before tax adjusted for items not included in cash flow of SEK 621 million, taxes paid of SEK 187 million and a positive contribution from changes in working capital of SEK 36 million. Our CapEx remained consistently low at SEK 66 million, primarily comprising capitalized development costs. Our consistently low CapEx levels reflect the asset-light nature of our business model that Maria mentioned at the start and our prudent approach to capitalization. Adding back both realized currency effects and interest paid, we generated unlevered free cash flow of SEK 474 million in Q2. And therefore, on a rolling 12-month basis, we have now generated over SEK 2.3 billion in unlevered free cash flow, which corresponds to an unlevered cash conversion of 81% of adjusted EBITDA. And this is well above our medium-term guidance of conversion in excess of 60%. This strong performance reflects robust underlying cash generation across the group, complemented by the timing of certain working capital items mainly related to accounts receivables. We, therefore, continue to expect some quarter-to-quarter variation during the remainder of the year due to both the natural seasonality of our business and the timing of working capital items. But for the full year, we expect unlevered cash conversion to remain materially above our medium-term guidance. We also delivered adjusted net income of just under SEK 1.8 billion on a rolling 12-month basis, and this translates into an adjusted EPS of SEK 14.72 and an unlevered free cash flow per share of SEK 19.56, up from SEK 13.54 and SEK 18.5, respectively, when we spoke to you this time last year. And then turning to the balance sheet. This was an important quarter as it relates to paying our acquisition-related commitments. During the quarter, we paid USD 52 million to the sellers of Plarium, which is a combination of the deferred consideration from the 2025 acquisition and also the first performance-based earnout, which has now been fulfilled. We will also have exercised the final put/call option for Snowprint by the end of July, after which we will own 100% of the studio. As a result of these as well as the final earn-out payment to the founders of PlaySimple in Q1, all major acquisition-related commitments on our balance sheet will have been resolved by the end of July. This reinforces our financial flexibility and further strengthens our ability to drive returns and shareholder value going forward. So our financial net debt amounted to SEK 3.4 billion at the end of the quarter, corresponding to a financial leverage ratio of 1.29x based on our LTM EBITDA, whilst our total net debt, including the remaining earn-out liabilities and put call options amounted to SEK 3.8 billion and corresponds to a leverage ratio of 1.45x. So thank you for listening. And with that, I'll hand back over to Maria to conclude the presentation.

Thank you, Nick. Before we move back to Q&A, I would just like to summarize where we stand now that we are halfway throughout the year. As you will have seen from the report and also heard on this call, we are very happy with our performance this quarter and for the first 6 months of the year. We continue to make good progress across our key strategic and operational initiatives, and we have equally an exciting second half ahead of us. This includes several games going to soft launch, major new content going live into some of our biggest titles and continued evolution of our service organization in the mid-core district. We have a strong balance sheet with low leverage, reinforced by a highly cash-generative business. And as you just heard, we have also just closed all our significant M&A-related commitment and earn-out that we had on the balance sheet by the end of July, which means that going forward, the cash we generate will provide us with increased optionality when it comes to executing on our strategy and driving direct returns for our shareholders. We will also continue to execute our share buyback program, which was approved by our AGM this year, which is 25% larger than the program that we delivered on last year. On back of the performance we're seeing, we reiterate our full year 2026 outlook, and we remain equally committed to deliver on the medium-term targets that we presented at our Capital Markets Day. Last but not least, also, we continue to work towards the potential listing of PlaySimple in India during the second half of the year. And that concludes the presentation from me and Nick. And operator, we are now ready to move to questions.

[Operator Instructions] The next question comes from Jacob Edler from Danske Bank.

I have a couple of questions, but I'll take them one by one. Starting a bit on cost control. I mean it was very good cost control in the quarter despite the nice increase in user acquisition. Just one question I have there. You talked a bit about lower-than-expected costs within the casual segment. And I note, for example, that personnel expenses were down SEK 50 million roughly quarter-on-quarter. So I'm just trying to get some more flavor on how big that delta was versus your expectations in casual and how much was driven by the cost savings you announced at the end of last year for Midcore?

Yes. And thanks for the question. So if you look overall at our personnel costs as a group, as you rightly point out, those have been on a downward trajectory. And in particular, if you do a comparison against Q4 last year when they're at their peak, you are now starting to see the benefits flow through from that run rate cost savings that we've been executing on, and you can see that in our quarterly performance. And so the large part of that personnel cost reduction does relate to that cost-out program. There is also then the offsetting impact that you mentioned to within PlaySimple, we did have a reversal of some personnel-related costs, but that is a less material part of the quantum compared to the overall cost savings that we're achieving across the group.

Very good and clear. Just speaking a bit about DTC then and focusing on mid-core, it continued to expand as a percentage of sales here sequentially, up from 49% to 51% of sales. And would you say -- I mean, given all the nice work you've done RAID and Tacticus already, would you say this is kind of a good level, plus/minus 1 percentage point or 2 to expect here for the remainder of the year at this level?

Yes. Thank you for the question. I think we said last time as well, there is not a perfect percentage point. I think that's -- we are always trying to get the customers to come through our channels, but we also respect that there's a freedom of choice and they should use the channels they prefer. I think the one thing that is outstanding a little bit is the ruling now in the second half that we are waiting to see, especially on the Google platforms. So I think that is one part that could potentially impact the levels that we are seeing. But I think what we are excited about is sort of how our web stores and the Play and Play progress is going. And I think that's an exciting avenue for us that we will continue to try to double down our initiatives on backup.

Very clear. Another question, if I try to work out the residual within other games for mid-core, it was a bit on the weaker side this quarter. And are you able to add any flavor on the Formula 1 Clash performance this quarter or any of the other noncore titles within Clarium? I guess maybe Formula 1 Clash has been impacted a bit by all the turbulence for the season with the Middle East conflict and also the World Cup. Any flavor there and also Plarium.

No, I think it's a fair assessment that you're saying. I think on a good note, our top titles and franchise is performing extremely strong, which we're happy about. I think there is more that we would like to see in some of our smaller games. And I think the work that the team are doing for the second half of the year should hopefully drive progress. When it comes to Formula 1 in particular, you're absolutely right. I think that the start of the season provided a challenging start in the sense that it was races that were canceled and so forth. So that created a hiccup in the excitement around it. And I think also in general, I think this has been a season that has created probably less excitement compared to last year when I think the excitement around the season was extremely high. On top of that, you had the movie. And I think the season reset we did last year was also extremely strong. So I think the combination of different sort of external factors and some internal factors has sort of driving a negative performance in the game year-over-year. I think the team is excited to continue to build on the game, and we're now starting to think about the reset for next year. So I think that the focus and the momentum is there. But for sure, we would like to see better progress in the game there. And there are a few smaller games that we would like to see it as well. I think on a positive note, I think we have stabilized in Ninja Kiwi and BTD 6, which is driving growth, which is positive to see. So I think you see it's still a mixed bag, but I think some of the titles that are in the bigger games in the other games has not performed as well as we would like to see them. But that gives us something to work on.

Very good. Just a question on casuals or PlaySimple's organic growth here. I mean it was really strong, keeping the same number as in Q1 at 29% despite the more challenging comps. Comps are getting a tad more challenging here in H2. But I mean, given the ARPDAU trends and the scaling of new games, is there anything we should be aware of when we look at the Q2 growth rate here outside of the comps in H2?

Yes. No, I do believe what you should remember is that Crossword Go and Cryptogram, which are the 2 key games are scaling. We started to scale up in the second half of the year last year, which means that we are getting into tough comps in the second half of the year, which also will impact the year-over-year growth. Having said that, of course, PlaySimple has a really exciting slate of new games. But it's always that sort of question about when and which game will they be ready to start scaling. So I think that is what can drive the incremental growth above and beyond. But I think that growth you should expect are getting into tougher comps in the second half versus the first half of the year.

Very good. And just a last question without getting into too much details, but just summarizing the outlook for mid-core, I guess what you're trying to say here is that good growth opportunities for H2. However, I guess we should be aware of that you had plus 11% in comp in Q3 and it's minus 2% in Q4. So the growth prospects for Q4 should look a bit stronger relative to Q3, if I understand you correctly.

Yes. If you're moving now to Midcore, I think that Q3 is the quarter where we will have the toughest comps for sure.

The next question comes from Simon Jonsson from ABG Sundal Collier.

So first of all, on casual and maybe a bit of a follow-up here on Jacob's question on the growth. But can you maybe explain a bit more about the dynamics between sort of organic growth trends and -- or organic sales trends rather and user acquisition costs and what we're seeing here for the segments? Because when we look at recent quarters, you, of course, invested in the second half of last year, and you saw also a quite significant step-up in sales because of that. And you have carried that into Q1 and Q2, maintaining sort of a higher sales base, but the user acquisition is down a bit. So I guess my question is if you've been able to sustain flat sales here throughout Q2 or if you have seen sort of sales fading a bit through the quarter here given the slightly lower base of user acquisition costs.

Yes. I can start and can continue. I think that what you need to remember is that the 2 key games or you can argue, Crossword Go, Cryptogram and Tile Match, they were launched in the second half of the year last year, and that's on back of those 3 games in particular that we scale up marketing. That means that even though we are keeping marketing at a higher run rate going forward, I mean, you're just simply pure math, you're going to come into tougher comps in the second half of the year. So even though we continue to scale marketing at the same high level, I mean the year-over-year comps will just be more difficult to achieve this growth levels that we've seen in the last few quarters in particular. Then I think that the other part that also, of course, fits in is in general, the marketing environment to make sure that you can also deliver the marketing spend with healthy ROS and that is incrementally to the new games opportunities that we're seeing and the existing games opportunities, we also need to make sure that we deliver the ROS and CPIs needs to be manageable. And I think that's where we probably scale back a little bit on some select few games. But I think in general, we are keeping a good level of UA that we are excited about. But I think to come back and continue on the strong growth momentum as a number point of view, we need to get some of those games that we have in the pipeline to have them to go live. And I think that is always a million-dollar question on which game and when. And I think that's what the team is very focused on working.

All right. So if I understand correctly, it's fair to assume that absolute sales levels could be relatively flat, excluding new games, that is?

Yes. I mean we don't provide kind of very specific guidance on a kind of segmental basis, but it's fair to characterize that as Maria just alluded to, given the natural kind of growth phases of those games, which we really start to scale up in H2 last year, kind of if we do look forward into kind of key growth drivers for the rest of the year and moving into 2027 and that positive momentum, it is going to become kind of increasingly incumbent on those new games coming in to be the primary drivers of that growth as we work forward, but not the total drivers of that growth.

All right. Then just one more for me on mid-core. And I'm curious to hear a bit more about the productivity gains you talked about coming from AI tools. You have shared some examples and all that. But I'm curious if you can be a bit more specific on tangible results that you expect from this? Is it going to be mainly on the growth side and player retention? Or will it ultimately be more of a factor driving cost savings, you think, if we look coming year or coming years basically?

Yes, I'm happy to say with that. I think ultimately, it will hopefully be a combination of both, but where our primary focus is, is more on the growth side. So it is about achieving kind of more with the same teams rather than kind of reducing the size of the teams. And to give a couple of kind of context and examples around that, that is, for example, as we look at the new games pipeline and how the studios are setting themselves up around kind of early-stage development of new games, that is with a kind of very AI native approach to it, so much smaller leaner teams, exploring more projects so that we can then actually have more shots on goal over time. But it also holds true for some of our existing games as we think about either content for those games or creative campaigns, as Maria just alluded to, for example, the RAID campaign, creative campaign this year, which was made exclusively using AI tools. So it's more about primarily doing more with the same size teams. That being said, of course, we will evaluate if there are actual opportunities to drive underlying cost efficiencies, which we can take down to the bottom line and/or reinvest in other areas of the business. And we do believe that there will be those opportunities over time, but that's not the primary near-term focus.

All right. And then maybe a more philosophical follow-up on that longer term. Given that most likely most of your competitors have tools to be more efficient. So how do you actually view the long-term potential to what the actual benefit will be of producing more if everyone else is doing more compared to focus more on the cost side?