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

Good morning, everyone, and welcome to this exciting day, and our announcement of the acquisition of PlaySimple, a leader within the mobile world game genre. My name is Lars Torstensson. And with me today, I have our Group President and CEO, Maria Redin; and Arnd Benninghoff, our EVP Gaming and Esports. We will begin by presenting the transaction and then take your questions in Q&A session. And as always, please keep in mind that only dial-in participants can ask questions. With that said, I'm now handing over to you, Maria, to take us through the acquisition together with Arnd.

Thank you, Lars, and thank you all for joining this call. And I think we can then quickly move on to Slide 4. We very much look forward to present to you the acquisition we announced this morning, and I will tell you why we are so excited about their business and how we see them adding value to our gaming group. So before we doing so, let me take a step back and just touch upon our strategy. With our 2 verticals, Esports and Gaming, we are uniquely positioned addressing a growing audience of 2.7 billion gamers worldwide and with both verticals having a strong underlying growth projection. Our focus lies in building shareholder value through both organic and inorganic initiatives. In Esports, we hold a leading position in the market of independent Esports leagues and platform operators, and we want to continue to build on back on this position. We did announce in Q1 accelerated investments, and this is on back on industry trends, learning mainly during the pandemic, and are starting to see the light in the tunnel with the return of fiscal events towards end of this year. For us, it's important to diversify our product offers and further enhance our platform proposition. Whilst driving organic initiatives, we also continue to see growth for inorganic opportunities equal in Esports as in Gaming. So if you then can turn to Slide 5. In Gaming, we want to build a stronger position within the casual and mid-core mobile segment, hence driving acquisitive agenda, combined with organic growth. I'm therefore very pleased to see the progress we've done in the last 6 to 8 months. Not only do we have a much more exciting organic new games pipeline, but we've also done several strategically important acquisitions. We started with the roll-up of the InnoGames mobile racing in early December, which was then followed by the Hutch acquisition and thereafter the Ninja Kiwi acquisition that we now recently also closed. These transactions bring an aligned structure for the group, which is very important, but also more so improved genre and revenue profile, along with a much broader reach. We are therefore very excited also today to then present our most recent acquisition, PlaySimple. We want to go through and show you the strength of this business and how we will complement our existing companies and help us take important steps for us in order to building a gaming powerhouse. So with that, I hand over to you, Arnd.

Thank you, Maria, and hello, everyone. I'm very happy to introduce you to PlaySimple, a leading, fast-growing word game studio with strong analytics and an innovative ad-tech platform. So let me introduce you to this highly attractive growth company from India, which is -- has been founded in 2015 by the group of ex senior managers. The business is based in India's gaming hub, Bangalore, and fully focused on word games. With 9 live games in the portfolio, they've built a great business and shown growth trajectory, which is quite extraordinary. 75% of the revenues come from ad revenues. The 4 core titles which are the driver of PlaySimple at the close are all in the word game genre. Let me show you how this translates into a highly attractive financial profile, which has attracted us in the first place. On the left side, you can see the comparison of their fiscal year '20 and '21, which always ends in March. As you can see, they have shown 100% top line growth with a highly effective margin of 24% in '21. On the right side, you can see the first -- the comparison of the first 6 months of our calendar year. So first 6 months in '20 and then the first 6 months in '21, where they've just confirmed the growth trajectory, with 80% top line growth. So landing now end of June, around SEK 510 million to SEK 540 million in revenues and SEK 145 million to SEK 155 million in EBITDA. So expanding the EBITDA margin to 28%. And if you take our up-front consideration what we're paying for this attractive asset and then look at the 6 months' EBITDA run rate, apply this on the calendar year, then it translates into a 10.5x EBITDA multiple, which is, I think, a very fair attractive multiple. On the right side, we want to illustrate the growth trajectory by showing you the quarterly growth. And here, it's important to highlight that there's not really a material COVID impact. So if you take the Q2 from '20 and compare it with Q2 this year, you can see they're growing by nearly 100% top line. So there's not a drop, and they haven't really benefited from COVID. It's a continuous growth. Also, it's important to call out that now being roughly 8 weeks into the IDFA changes, we haven't really seen in place any business material impact. It's quite the opposite. They managed to continue the growth, top line, and show very strong and stable ECPM. The continuous growth of PlaySimple is fueled by their robust operating model. It's a highly data-driven model, growing the LTVs, and it's based here on PlaySimple's 5 wheels. So let me just walk you through these 5 wheels. Based on their strong analytic system, where they capture more than 5 billion data points per day, they won a very sophisticated LiveOps system, with the focus on the users and are able to retain users much longer in their games than any competitors. The game development cycle is fairly short with 6 to 12 months on the first idea to full commercial launch. Their strong LiveOps translates into very high retention rates. The day 1 is probably still a bit average since they are not that focused on polishing the games. But once the game is live, based on the data points, then we can use this. If you take the day 30 retention rate with 12%, it's clearly above market average, which sits around 8% to 10% for similar casual games. Through the strong retention, this leads to growing LTV and higher revenues. And here, I just want to see retention to also be strong and fast payback of the AUA spend. So after 5 months in the current cohorts, they breakeven. And based on a 1-year LTV calculation, they are showing around 200% of ROI meaning EUR 1 or $1 invested gives a $2 payback. So this is all driving the growth of the business on the back of expanding EBITDA margins. So to give you another proof point that PlaySimple has built up quality cohorts, let me show you how nicely the cohorts are stacking. Here you see a graph on showing the cohorts from January '18 until April '21. More than 40% of the revenues of PlaySimple are still driven by cohorts from '18 to '20. And another important learning and takeaway here is that the quality of cohorts are the same pre-COVID and now being in May-April '21. So they show exactly similar revenue profile, there's no difference. But let's take a closer look at the 4 core growth games and their stellar retention rates. PlaySimple's approach to game development is following a franchise system. So they look at their games as franchises. All the following games are also paying or buying into this concept. DTC, Daily Themed Crossword are the biggest game. But all 4 live games are showing a similar revenue contribution. So there's not a single game dependency. DTC is around delivering roughly 35% of the revenues; Word Trip and Crossword Jam, 125%; and the newest game, Word Wars, already 8% of the revenues. On the right side, you see a nice DAUs and MAUs are growing. DAU's growth year-over-year was 50% and the bottom again, to highlight the strong retention, and as I said, much stronger retention days 30 and 90 than their competitors. And there are already 4 new games ready to be launched in the second half of this year. Four games in the word game and solitaire genre. A fifth game is already live, that's Tiny Crossword and go explore here in the middle, which belongs to the crossword franchise, already showing very strong retention KPIs. All games following the success formula, the triangle between genre mastery, strong analytics, and LiveOps. So PlaySimple, with its game portfolio and asset capabilities, nicely complements our games vertical. They're adding revenue capabilities, where we can leverage our advertising revenues. They're adding to our audience network female players, which is highly effective. And as you know, we like genre focus, and they focus on word and solitaire genre. When we take a look at our gaming powerhouse setup as a whole, then PlaySimple will help us to accelerate the buildup of our centers of excellence. So on this layer, center of excellence from marketing to ad optimization, PlaySimple with their ad technology, analytics system which strengthen the ad optimization and help us to build up a cost promotion system. So let me summarize investment highlights. It's highly profitable growing business, focusing on the word genre, a really data-driven org, a strong experience management and they have developed an in-house ad stack piece of software, which we can leverage across our group to cross-promote and become less dependent on external UA channels. The data-driven operating model is very strong and guarantees a continuous growth over the next years and help us to adapt to any market changes and then [Technical Difficulty] portfolio and [Technical Difficulty] So that's why I believe, it's a great acquisition [Technical Difficulty] details.

Thanks, Arnd. A few words on the financing structure of this very exciting transaction then. The upfront consideration amounts to USD 360 million or around SEK 3.090 billion, that would be made up of 77% in cash and 23% in shares. The transaction would remain a debt financed combined with available cash. We are pleased that the founders of PlaySimple will take 40% of their consideration in shares, showing confidence in the bright future of the PlaySimple business. These shares will have a lock-up period of up to 2 years. The sellers are also entitled to a performance-based earn-out estimated by us to amount to around USD 150 million over the coming 3.5 years. The earn-out will be fully paid in cash. We are now a much more diversified gaming business. This also means that we are ready to carry debt in this transaction, following the strong support provided by our shareholders in our earlier transactions during the last 6 to 9 months. Hence, the upfront cash consideration will be financed by using cash at hand, a secured credit facility of SEK 1 billion and a bridge loan of the same amount. The credit facility is a 2 plus 1-year construct, while the bridge is 12 months. We will now initiate the process of evaluating the most attractive refinancing alternative for the bridge loan facility, including, but not limited to, the bond market. The equity consideration will be paid with MTG B shares following Reserve Bank of India's approval. This is required in order for the sellers of PlaySimple to receive payment in shares. As a result, entities, therefore, unable to issue Class B shares upon closing and the shares will be issued once approval has been obtained. Our net debt following the closing of PlaySimple will amount to approximately SEK 1 billion, which would be equivalent to approximately 1.4x trailing 12-month consolidated adjusted EBITDA on a pro forma basis. This is a leverage level that we feel very comfortable with. With that, I would like to hand over to you, again, Maria.

Thank you. And as Lars said, I mean, we are sharing information as part of this acquisition and also the recent acquisition. So therefore, we want to take the opportunity to share with you our unaudited pro forma financials for the new group. We're very happy to see the strength and the growth profile that we are building. On a pro forma basis for 2020, we will report revenues of SEK 4.4 billion with a margin of 29%. And if you look at Q1 '21, what is really strong on the pro forma numbers that are close to SEK 1.2 billion, and they are having a higher underlying growth rate and the 8% organic growth we reported in Q1, whilst also having a margin expansion. Looking then at the breakdown of the revenues, we are enhancing our share of mobile revenues, which is now close to 70%. We've diversified our revenue streams to also include paid up, and we're increasing our share of advertising contribution. We now reach over more than 30 million monthly active users, and we're having 53 live games ranging across the racing, idle, city builders, tower defense, and now also the word games genre. So we're therefore very proud when we look at our current games' portfolio. And as you can see on this slide, it's becoming very balanced. All in all, we have 53 live games in different growth stages and 16 games in development. This is a slide when we look at it, that gets us excited for the year to come. So with that, I'll conclude my point, and I hand back to you, Lars.

Thank you, Maria. That concludes the formal presentation of our PlaySimple acquisition. We are now ready to take any questions that you might have on the transaction. So operator, can you please help us with the first question?

[Operator Instructions] The first question comes from the line from Fredrik Olsson from Handelsbanken.

So I have a couple of questions on the acquisition itself. First of all, I was wondering if it's possible for you to disclose the revenue distribution by platform for PlaySimple?

Thank you, Fredrik. Revenue by platform for PlaySimple. We haven't disclosed it, but Arnd, are you able to support that with some indications?

Yes. Sure. I mean these are mobile revenues. And when you meet platform between iOS and Android, it's rather now on 60% Android and 40% iOS.

All right. And I also see that the revenue model, I mean, advertising is the largest share. Within this segment, conversion rates tend to be quite high. So I was wondering regarding in-app purchases. Is there any plans to implement this or to scale the advertising expertise to the rest of the group and then the vice versa, so to speak?

So Arnd, could you take that question, please?

Yes. So PlaySimple has IAP revenues between 30% to 25%, which is quite stable also. The ad revenues are more profitable since we don't pay any App Store tax on them. We definitely want to leverage their ad revenue capabilities across the group since we have ad revenues, 10% roughly in Hutch, in Ninja Kiwi, and also in Congregate. And in the near future, we could also consider to implement ads in mid-core games as long we can secure a great game experience. The -- so this is stable and well balanced and helps us also to diversify our revenue streams across the portfolio.

At the moment, we have no further questions. [Operator Instructions] We have no further questions coming through.

Okay. That is -- understood. In that case, I should just wait a few minutes just to see if there's anyone on the call that would like to ask a question, we don't miss that opportunity. But in that case, we see that the presentation is crystal clear to the audience as well, which is very good. So thank you, operator. That concludes the conference call, and we appreciate, of course, that you take the time. We look forward to stay in touch. And please feel free to reach out to either myself or Maria during the course of the day if you would like to follow up with any additional questions. So that concludes the conference call. Thank you very much and stay safe.

Thank you very much. Ladies and gentlemen, you can now disconnect.