G5 Entertainment AB (publ) (GENTF) Q3 2023 Earnings Call Transcript

G5 Entertainment AB (publ) (OTCQX:GENTF) Q3 2023 Earnings Conference Call November 8, 2023 2:00 AM ET

Company Participants

Stefan Wikstrand – Chief Financial Officer

Vlad Suglobov – Chief Executive Officer

Conference Call Participants

Rasmus Engberg – Handelsbanken

Hjalmar Ahlberg – Kepler Capital

Stefan Wikstrand

Good morning, everyone and attendee list is filling up. We’ll give it a minute probably to make that everyone can — that wants to have logged on to the call. [Operator Instructions] It looks like we have a full attendee list.

So then, I will hand over to our CEO, Vlad Suglobov, for the presentation.

Vlad Suglobov

Welcome, everyone. So we’ll take about 15 minutes to run through the slides and the results. And then we’ll open the line for questions. And I’m going to start by giving you some of the highlights from this morning’s report.

Revenue was SEK327 million which is 9% lower than last year. That’s in Swedish kroner. And it’s about 10% lower in USD terms. Revenue in USD was also down 5% sequentially from Q2. Overall, I would say that the market for mobile games continues to perform flat or slightly below last year’s depending on which analytics you use for the market. Q3 for us is a seasonally weaker quarter. And our revenue is stagnating in the absence of a new global game release which we didn’t do in quite a long while. So this last — this latter point, we will actually fix before the end of the year by releasing a new game globally, as we promised. So stay tuned. We are excited about this.

In the quarter, our own games stood for 71% of revenue compared to 73% in the same period last year. Our new generation games, those are games released in 2019 and later, generated SEK197 million which is also down 9% year-over-year and down just 1% sequentially. They stood for 60% of total net revenue. The Jewels family of games continues to be a stable performer and it stood for 32% of the group’s total net revenue in the quarter. Sherlock continues to be our revenue highlight. The game stood for 23% of total net revenue in the quarter, same as 1 year before, it was also 23%.

And turning to the real highlight of the report, G5 Store which stood for 12.1% of net revenue in the quarter, up from 4.8% a year ago and from almost 0, 2 years ago and it continues to grow fast. We are very excited about the success of G5 Store. The growth in Q3 was 126% in USD terms, sequentially 20% from Q2. Growth figures in SEK were even more impressive. And as you know, G5 Store has lower processing fees than alternative distribution channels. These fees are low-single digits compared to the 12% to 30% third-party application store fees. And the fact that G5 store reached these higher levels helped us achieve a new record gross margin. Yes. And it was 68.1% compared to 67.6% a year ago.

User acquisition spend in the quarter was 19% of revenue, down from 22% a year ago and in line with our communicated range. And I’d like to remind you, last year, in Q3, we still had 1 month of UA boost for Sherlock and some other big items but we’ll talk about it more when we’ll look at the EBIT. So we have a strong cash position and we ended the quarter with cash of SEK184 million and that even after we have repurchased 91,472 shares for a total of SEK15.7 million. And we brought the number of shares on the market to a new low. We remain debt free and we have a solid cash flow. And all in all, we had a strong third quarter and our EPS in the quarter was SEK3.83.

Finally, once again, I’m glad to report that we are on track to release a new game globally before the end of the year and we are very excited about this new game release. So stay tuned for that.

And now let’s turn to the Q3 figures. So the quarter is the evidence of the new stable normal, we alluded to when we reported Q4, almost a year ago now. Again, our own games stood for over 71% of revenue. Our main growth driver continues to be our new generation games which is our biggest segment of the portfolio at 60% of revenue. Jewels of Rome grew 8% year-over-year and stood for more than 32% of net revenue. Sherlock decreased 5% year-over-year and stood for over 23% of revenue. And finally, monthly average gross revenue per paying user actually increased to US$63.2 from US$61.2 last year.

Now let’s look at the earnings and margins. So for the quarter, the gross margin was record 68.1%, primarily driven by fast growth of the G5 Store. UA was 19% of revenue, within the communicated range, a decrease from 22% last year. The capitalization impact on earnings was a negative SEK13.1 million compared to a positive SEK7.7 million a year ago. EBIT was SEK22.3 million and the EBIT margin was 7%. This includes a onetime write-off connected to underperforming license game Hidden Epee which we harvested in Q3 — put it in a harvest mode. Adjusted for the write-down, EBIT margin was about 10% actually. And the low EBIT margin in Q3 last year was a consequence of a temporary UA boost in Q2 and then 1 month of Q3 and also write-offs.

Due to the changes in our development funnel back then in Q3 last year, we wrote off the full capitalized amounts for all games that were not launched globally in the total amount of SEK73 million. So the improvement is due to that. And when you look at the numbers for the total users and other metrics like that. Keep in mind that last year’s metrics were slightly inflated by the UA boost in Q2 but also the remainder of that was in Q3.

Now let’s turn to the cash flow and our cash position. We continue to generate cash, thanks to stable and high cash conversion and we have a strong cash position. Cash flow before financing activities was SEK25.6 million in the quarter. And then financing activities were the share buybacks we did for the total of SEK15.7 million and the resulting cash flow was SEK9.7 million. And at the end of the period, we had SEK184 million which is more than what we had last year at the end of the third quarter.

So let’s turn to a brief outlook. We have started the year in line with the new normal that we discussed in Q4 last year. And going forward, we expect to see continued stability but we also look forward to the global release of our new game to be released before the end of the year. It’s a game that we are quite excited about. But, of course, we’ll see how it performs.

In addition to that game, we also have 7 games in soft launch development and iterations and a strong pipeline of 36 new game ideas. We can see that among these 7 games in soft launch, we already have quite strong candidates for release in the next year 2024. So I would say we go into the New Year well equipped to deliver on our promise to release one to 2 games globally every year.

Increased revenue from G5 Store will continue to fuel growth and further improve our gross margin and profitability. We intend to continue to maintain a stable UA spend in the communicated range of 17% to 22% of our revenue. Our cash position remains strong and we will continue to strengthen our balance sheet through strong cash generation. At the same time, we remain committed to dividend payments and buybacks. You can expect us to continue with both.

I would like to end by thanking you for following G5 and also thanking the whole G5 team for their outstanding efforts.

And this concludes my presentation. And I’d like to open the call for questions.

Question-and-Answer Session

A – Stefan Wikstrand

[Operator Instructions] We got a question in the Q&A box. Let’s start there then. So you have introduced intangible asset as a new post in your balance sheet. What is in it? Is it anything new? Or is it a reclassified post? I can tell you that it is a new item. So I don’t know, Vlad, do you want to fill in on the details?

Vlad Suglobov

Of intangible assets? This sounds like a question to you, Stefan. What is this referring to…

Stefan Wikstrand

Yes. No. So this is the — we bought the domain name g5.com from the U.S. entity.

Vlad Suglobov

Okay. Yes. I can tell — I didn’t know that this is — what this is about. Yes, you tell them.

Stefan Wikstrand

No. That kind of answered. So we bought to the domain name g5.com and we’ll migrate over to that in the near future which we’ll improve our conversion and the SEO efforts as well. So that’s going to be exciting when we can move over to the new domain name.

Vlad Suglobov

Yes. It’s already functioning. If you go to g5.com, you can see that it directs you to our website. So we took possession of this domain name. I think it’s a good price for a 2 letter domain. And I think that we’ve — it will consolidate the brand. And I think in the long run, we will more than recoup the investment in this streamlined brand which has a relevant domain name. And you can expect our logos and information and links in our games to be updated over time to point to the new domain name. And we’ll continue to maintain the old ones as well. All right.

Stefan Wikstrand

All right. We have Rasmus Engberg from Handelsbanken.

Rasmus Engberg

I just wondered about this game release, obviously, that you talk about. When will we know which game it is? It should be now soon, I guess, it’s November already. And can you also say what genre it is, if you can?

Vlad Suglobov

Well, I can say that it’s going to be quite close to our — the genres where we generate most of our revenue. So it’s not going to be something very, very new and unusual. I would rather not say what game it is. I’d rather just wait a few weeks, hopefully, maybe a little bit more or a little bit less. And then you’ll be able to see. We will obviously announce it. And the team is just making final preparations to launch the game. We say before the end of the year because that’s what we promised. I hope it happens a little earlier than that but it’s not too much time to wait. So let’s just wait and see when it launches.

Rasmus Engberg

And in your sort of hopes and expectations, the company has been now declining 5% to 10% in constant currency now for about 2 years. What kind of scale do you think this might have? I mean, the Jewels games are different because there’s like 10 of them and they account for 20%. Is this like one game that, in your mind, can account to compensate for those 5% to 10% that we have seen negatively?

Vlad Suglobov

So Jewels, there are actually 3 games that…

Rasmus Engberg

You own —

Vlad Suglobov

Yes. There’s only 3 and then 3 Mahjong variations of those, so 6 total, that’s the maximum number. But Mahjongs really generate a smaller portion of that revenue; so mostly it’s just 3 games. And there’s a good question whether or not we had to really release 3 games. Maybe if it was just one, it would be about the same total revenue. It’s kind of a rhetorical question now because we did what we did.

And then, the success of other games such as Sherlock and Hidden City and so forth, shows that we can certainly see more revenue being generated by a single game. And then it’s just a question of the success of a particular game. So the reason we are excited about this new game release is because we used this new approach. I mean, technically, this game started as an idea even before we switched to the new approach. But there are certain elements of this new approach that were used on this game and we did all these prechecks and we saw that this is the best game from the ones that we have in soft launch iterations. And we have certain thresholds, where we aim for certain scalability.

So we do expect that if we are right, if we build out our funnel the right way and we did all the right things, we do expect good scalability from this game. The ability to — within a few quarters, scale to meaningful revenue that can have impact on our top line. But it’s not the only game we’re planning to release in the next few quarters, right? Because we’re entering a new year and we plan to release from one to 2 games globally in the New Year as well. So I hope that this very long period of no successful new global game releases that we’ve had is going to be replaced with a steady stream of games that scale decently and able to change the dynamic of the top line.

And meanwhile, we will make sure that we remain profitable, generating good cash flow. And that we’re able to finance all these new game ideas and continue to market the existing portfolio of games. If need be, we’ll take cost-cutting measures. But we will — it’s still a lot of revenue, even though there’s this gradual decline, it’s still a lot of revenue that we can work with to develop new games and to continue marketing the existing games. We just need to right size for this as we’re looking for new growth drivers. And if we find one, we know what to do with it.

Stefan Wikstrand

Thank you, Rasmus. We also have a question here from Hjalmar Ahlberg from Redeye.

Hjalmar Ahlberg

Yes, just a question on the global launch, so say, outlook over the coming years. I mean, you now have the new development funnel in place and you look to release one to two games per year. Do you think this will be kind of the run rate from here? Or could it be just maybe one game 2024 and then make one to two ’25-’26? Or are you up to that run rate already now you would say?

Vlad Suglobov

Well, I would say from one to two per year. And then it’s a question of philosophy. Like do we want to — and it’s also a question of calibration between the thresholds that we set internally and the outcome. So we have this new approach but we haven’t launched a single game yet. So we have our experience, we have our theory that if we do this way, this is the scalability we’re going to have. But we need to have an outcome and we need to compare the result to the idea. So with this first game, we hope to sort of calibrate this approach and we will either adjust the threshold up or down depending on that and that may affect the decision whether we release just one game a year or two games a year. And also, what affects this decision is what kind of games we have in the pipeline.

So I think we have some very exciting new ideas that we will develop during the next year and maybe launch towards the end of the year if they show themselves — if they perform well in the soft launch. But we also have the ideas we’ve been working on that, depending on the information we gained from the launch of this new game, they may be suitable and would be — it would be a sensible thing to release these games globally as well. So I mean, theoretically, we may release even more than one or two, we’re just saying that one or two is the minimum that we will release per year. I hope it makes sense what I’m saying. But please understand it was a new approach. We spent a year sort of working in accordance with that approach but we haven’t yet launched the game.

And so finally, we are going to launch a game with this new approach. So we will gain more information and it will affect our future plans but we will never do less than releasing one or two games globally and we will always release the best ones that we were able to make during the course of the year. And we aim to develop from five to six, as we said. So it’s going to be a stream of new ideas, new games and we’re going to be releasing the best of them. Question is, are we’re going to release one or two or maybe three if we have three games per year. So we’ll see.

Hjalmar Ahlberg

That makes sense. And maybe a more short-term question. If you list this game globally now in Q4, I mean you did say that you expect stable performance. But I guess in terms of UA spending, would that mean that UA might be on the higher end if that game is launched in Q4?

Vlad Suglobov

Not really. So out the gate, we’re probably not going to be dropping an amount that’s going to be so significant that in just 1 or 1.5 months, whatever we have left until the end of the year, realistically, that it will change the overall situation for user acquisition in the quarter. So I think Q4, you can expect to be pretty much same kind of boring at this point. And with hopefully, some uplift from seasonality. And then Q1 is probably, depending on the performance of the game in Q4 where we might decide to spend more. And my view of this is that if everything is great, then yes, you will see some impact — you may see some impact on Q1 in terms of profitability if we decide to go.

If we see results that are so good that we decide to kind of really go all in on this game or you may see a more balanced approach like Sherlock, was actually a very steady grower where it didn’t really make sense to push it. And so if we see that kind of performance, then it’s going to be a very gradual thing. You may not be able to really see a strong impact on profitability in any quarter then. So we’ll see. We just don’t have the information now and we are a few weeks from finding out. So let’s just do that wait and see.

Stefan Wikstrand

Okay. So we have some additional questions from the Q&A box at the moment.

Vlad Suglobov

I see a question here. Is it correct that you would not go to the market with a new game global launch, if you expected lifetime revenue below $10 million? Yes. I mean, realistically, if you imagine a game that is active in the market for 1 or 2 or 3 years. And for us, a successful game is a game that can sustain itself in the market for at least a couple of years, right? Usually, it’s more. And you imagine a relatively significant amount of revenue per month that allows to pay for the team and user acquisition on the game, then it’s really easy to see how the lifetime revenue of the game should not be below $10 million. So if that helps, the answer is yes.

Okay. Another question. How does the start of Q4 look? Is the seasonal pattern stronger than in Q3?

Well, it’s not amazing, I would say. I think speaking about the situation in the market and just what we see in the analytics, I think that for most developers, the situation is quite similar to what we are experiencing. The overall market is underperforming. It’s difficult to get downloads. The revenues are still slightly down from last year or they’re at least not higher. And then it differs depending on the genre and so forth. But even if you look at the pockets of growth, they’re very concentrated in a small number of hands and then majority of developers are not showing great results year-over-year. That’s my analysis of what we see in the market.

And we’ll see how this new release performs. But I start to feel that maybe consumers are feeling something at this point. That said, we have an audience that is — there are a lot of retired people. They usually get their adjustments from 1 year to another. So the situation may change. But I’m not super excited right now about the kind of the evolution of revenue from Q3 to Q4. But it’s also still quite early because usually in December, there is an increase in connection with the seasonal events and so forth.

All right. Anything else? All right. So this is a question about some rumors on Twitter. We don’t really like to comment on rumors on Twitter. But I’d like to say we — as you know, our operations in Ukraine were established in long in 2008 and we have a very large presence there. Since then we’ve created hundreds of jobs in the country and we’ve been committed to investing in development of our games in Ukraine for a very long time.

We have tried to do our best to help our employees in difficult situations. We try to be there for them and do what is possible, what is reasonable to do. We did some charity projects locally in Kharkiv where most of our employees are or they’re from. We’ve helped collect money for humanitarian relief in Ukraine. We supported our developers — some of them are Ukrainian developers in their efforts of doing that. So we are committed to that. There’s no change in that position. So I think that is an important context.

And then there’s a question, what is the mission of the company, right?

And for G5, the mission is to bring joy to millions of players. We’ve formulated that. And that is the philosophy and the strategy of the company and the mission — the mission, not strategy but the mission of the company. And as company that creates peaceful games for predominantly female audience, 35 plus.

Our mission really is to make sure as many people as possible play these games. And the widest possible commercial distribution of these products supports our competitiveness as business and helps us support our employees as well. So in my view, if we are to stick to our mission, we should be distributing the games worldwide, period. Wherever people are willing to play our games, we should be bringing our games. And with the hope and my belief that our games make the world a little better and make people a little kinder.

So I would just answer with that because we don’t like commenting on rumors.

Stefan Wikstrand

Okay. I think that was all the questions that we had in the Q&A box and we have no other attendees raising their hands. So yes, I hand over to you, Vlad, again for closing remarks.

Vlad Suglobov

Well, thank you again for following us and for your questions and that you found the time to attend the call early in the morning.

Once again, we’re very excited about the new game release. The pressure is on. We’ll see how the game performs but we have other games too. So wish us luck with the new game release and it’s not a long time until we know the name of the game and until we see how it performs. And hopefully, we should be able to comment on that already in the Q4 report, if not earlier.

All right. Thanks again. And with that, let’s wrap up the call.