Rovio Entertainment Oyj

OMXH:ROVIO

Earnings Call Transcript 2020-Q1

[Alexandre Pelletier-Normand]

Hello, everyone, and thank you for joining Rovio earnings audiocast. My name is Veli-Pekka Puolakanaho, and I am the IR Director at Rovio. Today, we will go through Rovio's Q1 2020 results. With me are Kati Levoranta, Rovio's CEO; and Rene Lindell, Rovio's CFO.

[René Lindell, Chief Financial Officer]

Hello.

[Veli-Pekka Puolakanaho]

We have a Q&A session after the presentation. [Operator Instructions] Now Kati, the floor is yours.

[Kati Levoranta, Chief Executive Officer]

Thanks, Veli, and good afternoon, everyone. Despite these, to some extent, unusual circumstances that we are all unfortunately facing currently, I'd like to welcome you to our Q1 2020 audiocast. Before we start going through the first quarter, let me say a few words about how we have addressed COVID-19 at Rovio. Our employees' health is, of course, the most important thing. And thus, to safeguard this, we all moved immediately to a working-from-home mode when the Finnish authorities recommended it. This means that since March 13, we all have been working remotely. Our employees in China have naturally moved to work remotely already earlier. I'm happy to say that the transfer from business as usual and from office work to remote work has gone exceptionally well. There's always some hiccups when things in this magnitude are happening in a very short period of time, but, overall, the transfer has been smooth and has not caused disruptions on our business. We have also continued recruitment activities. Our IT and HR have played a big role in making all this happen as well as keeping everyone well informed about the pandemic situation in general. I would like to take the opportunity here to thank actually all Rovions for adapting fast and keeping the productivity on a very good level. We are fortunate as our core business, Games, is digital by nature. In general, the gaming industry has seen increasing number of downloads as well as increased player engagement. We have seen similar signs in our key games, although it is good to remember that at this point of time, it is too early to estimate what part of this is attributable to the actual improvements in the games through new updates and features, and what is the actual impact of the lockdown. With regards to Brand Licensing, we have seen certain slowdown in consumer products deal-making and disruptions in supply chains as well as in retail. On the other hand, the demand for digital content has increased, which may bring new opportunities to us as well. So again, at this point of time, too early to draw conclusions what will be the net impact of the COVID-19 situation for the Brand Licensing business and activities in longer run? Needless to say, we will continue to monitor the pandemic situation very closely. All right. Moving on to key things of the first quarter. During the first quarter 2020, we improved our profitability and operating cash flow. The adjusted operating profit was EUR 13 million, representing 73% growth year-on-year, and adjusted operating profit margin was close to 20%. The high operating profit of the quarter was driven by the lower level of user acquisition and the stability of our key games, especially Angry Birds 2. We introduced a series of updates for Angry Birds 2, Angry Birds Dream Blast and Sugar Blast that were well received by the players. As a result, the performance of the games improved gradually during the quarter. The user acquisition investments in Q1 amounted to 21.5% of the Games revenues and were at significantly lower level than a year ago when the investments amounted to 35.8% of the Games revenues. Operating cash flow increased to EUR 11.5 million and was driven by the improved profitability. Our cash position continues to be strong. The group revenue was EUR 67 million and declined by 6% year-on-year. Our Games road map remained healthy, and we have currently 10 games in different phases of development. Out of these 10 games, 3 games are in soft launch, and we are actually happy to announce that one of the soft launch games, Small Town Murders, is scheduled for a global launch in June 2020. We will talk about it and other soft launch games a bit more later. In March, we announced a cooperation with Netflix regarding the Angry Birds long-form animated series, the Angry Birds: Summer Madness. The series is much love birds, Red, Bomb, and Chuck as well as cast of brand-new feathered birds as tween birds at summer camp under the questionable guidance of their counselor Mighty Eagle. The series is scheduled to be released in 2021. Hatch entertainment has completed the consultation negotiations related to restructuring of its operations. According to redefined strategy of Hatch, Hatch is now focusing on Hatch Kids product, which is a subscription and streaming-based digital entertainment and entertainment service, tailored for children and families, offering a safe place for children to play. The organization is aligned with the current strategy, and the annualized cost savings are estimated to be around EUR 6 million from June onwards. Let's then move to take a closer look at the Q1 financials. So Rovio Group revenue was EUR 67 million and declined 6% year-on-year. The Games revenue declined 5% to EUR 63 million as a result of lower level of user acquisition investments. However, we're especially encouraged by the performance of Angry Birds 2. The revenues grew quarter-on-quarter, which is a very good achievement given the weaker seasonality of Q1 compared to Q4. Brand Licensing revenue declined 16% to EUR 4 million. It performed in line with our expectation. Revenue was lower year-on-year, while profitable. As discussed already, we delivered a strong profitability in Q1, and the adjusted operating profit margin was close to 20%. Games adjusted operating profit increased by 64.4% and was driven by lower user acquisition investments and stable performance of our key games. Brand Licensing adjusted operating profit increased by 33%. The increase in Brand Licensing was due to decrease in operating expenses. And now over to Rene.

[René Lindell, Chief Financial Officer]

Thanks, Kati. Let's go more -- in more detail in Games gross bookings for the quarter. Total gross bookings was EUR 62.1 million, so a decline of 5.7% year-on-year. It's good to note that the comparable quarter of Q1 2019 was quite good for being the first quarter of the year. And in that quarter, Angry Birds 2 had still quite high revenues on the back of the UA investments done in 2018 as well as due to successful launch of Angry Birds Dream Blast that scaled up very fast during the quarter. Still, normal seasonality plays its role in Q1, and despite this, as Kati said, Angry Birds 2 did manage a slight revenue growth, which is a very good result. There was a large set of updates in mid-February for the game and those improved the performance of the game during the mid-second part of the quarter. And this started to happen already before we saw the global lockdown due to coronavirus that started impacting the overall gaming market revenues really at the last weeks of March and in April. Angry Birds Dream Blast gross bookings declined $16.1 million from the Q4 peak, partly, of course, seasonality, but also that, as we said, user acquisitions were significantly lower compared to the end of last year, and thus, the user base was lower from this impact as well. However, after a slow start of the game, we've already seen steady improvements in Dream Blast during -- end of the quarter, and we have a good road map for features and updates for the game for the rest of the year. Angry Birds Friends declined somewhat during the beginning of the quarter, starting also to recover. And it's actually performing -- we're quite happy with the performance overall and its stability during this first quarter. And for Angry Birds Match, if you compare quarter-on-quarter, it looks like a big drop, but actually, this has been very stable throughout the quarter. So the drop happened very quickly around the year shift. And after that, we've seen stable gross bookings. And also, this game has a good feature road map coming ahead. Angry Birds Pop continued steady performance and Sugar Blast, a slight increase to EUR 2.3 million. So naturally, Sugar Blast has been scaling up much slower than we hoped for, and we are continuing to work on the game's features, still it's too early to say how much we can scale up, but as said, we do have also a good feature road map and learnings from that game. Let's look at the gross bookings also from a game life cycle viewpoint. We see that the growth category of games in Q1 was at a similar level as Q3, a bit lower than Q4. And we classified into growth category the 2 newest games, Sugar Blast, Angry Birds Dream Blast, which received the highest user acquisition spend last year, and they continue also to have significant investments this year. The earn category was quite stable in Q1. As said, and this is a group that generate a big part of the company profit. And of this group, Angry Birds 2 is the only one that has any significant UA and the rest are, at the moment, at very low UA or zero, and thus, very profitable. The catalogue games dropped quarter-on-quarter. And this is something we did expect and in line, overall, with how that legacy portfolio is developing. And good to remember these are run without any UA spend, so the margin is very high for these games. So the UA or user acquisition in the quarter was EUR 13.5 million. So a quite low level if you compare to the previous quarters. And as we said during the Q4 report in February that this was expected and that we were running closer to 20% of Games revenues. As we saw that some of the incremental UA spend end of last year was not on our payback requirements, and we've been seeking that, let's say, right, stable level to be -- to start growing from. And I think we have found that. So I think this is a reasonable amount at the moment, but not fully, let's say, satisfactory for, let's say, starting to a significant growth. So we are looking at all the games that are in our key games categories to try to find improvements, both on the game side and user acquisition performance so that we can gradually start to grow the UA over the year. And I think here, gradually, a keyword that we are carefully following those payback times and seeing that we are spending the right amount at the right point of time. And of course, as Kati said, we have a new game coming up very soon in June. And of course, during that time, we will be also increasing UA, but most likely, also here, watching how the paybacks behave during the first weeks and months. So the UA split per games category. Last year, Q4, we were at about 80-20 between the categories grow and earn. And now we are more to 2/3 in grow. So still, the grow games do have the largest part of UA and 1/3 in earn, and as said, earn category is basically Angry Birds 2, which is driving the user acquisition in that category. Moving on to cash flow. In Q1, operating cash flow improved to EUR 11.5 million, and this was on the back of the improved profitability. The cash and cash equivalents was about EUR 121 million. So a bit lower than end of December. However, we used EUR 11.1 million cash to purchase treasury shares during the first quarter. There are no changes to our 2020 full year outlook. We state that we aim to launch 1 to 3 new games, of which one will be in June time, and as said, overall, it's always true that timing of new game launches depend on how the games progress in soft launch and also what's the right timing for -- to market the games. So we don't have a full year 2020 revenue guidance. And we also, as you've seen, we did start the year at the lower user acquisition investment than we ended last year, and due to this, and they also mentioned savings in Hatch Entertainment means that the operating profit for the full year also improves. And it's good to remember that our long-term strategy is to see growth in the Games business, and we keep on improving the performance of our live games, which is a very key to growth as well as developing new games and launching them, as we have been stating and as we are doing in June.

[Kati Levoranta, Chief Executive Officer]

Thanks, Rene. Let's then move to look at what's actually cooking in the studios. So as discussed, we currently have 10 games in different phases of development, both with Angry Birds Friends and new IPs. During Q1, we also boosted the creation of new ideas and concepts to strengthen the very early part of the game development funnel. This is part of the continuous effort to build and maintain a healthy game pipeline, a key enabler, for long-term growth that we are aiming for. As we have guided in our outlook, we're going to launch 1 to 3 games this year. And as mentioned in the beginning, we currently have 3 games, all with new IP, in soft launch: World Quest, Small Town Murders and Phoenix Rangers. During the soft launch, we test the games, improve them and validate the KPIs. If all goes well, the KPIs reach an expected level and we're confident we can scale the game, we continue to do the global launch. However, if the game doesn't reach the set targets during the soft launch phase, regardless of improvement and scalability becomes an issue, we will not launch the game. This is, for example, what happened to Angry Birds Pop blast. During the soft launch, we did not become satisfied with the KPIs and thus, we decided to discontinue the game. So the exact timing of the game launch is depending on the KPIs and scalability. Game will be launched when the game is ready. Out of these 3 games in soft launch, we see now good progression with Small Town Murders. And as said, we are approaching very exciting times with the target to launch the game in June. The current intention is to scale Small Town Murders gradually, as this is a slightly different genre for us. We will learn along the way how well the cohorts will monetize in the longer run. So in our base case, we intend to start gradually scaling the game, while monitoring the payback times carefully, as Rene was already saying. And of course, in case, we see good and solid payback times, we are naturally prepared to increase the user acquisition investments as well. The game itself is a gripping puzzle game, where players are challenged to solve crimes as they progress through the levels. We're mixing a novel type of narrative metagame to a puzzle action phase, where the players investigate the scene, follows the leads and narrows down the suspects until they find the killer. This is a game where players long for discovering how the stories will unfold. At the start, we have 7 cases to be solved, and we're planning on adding new cases and levels more or less every month. The game reached targeted KPIs earlier during the year. And until June, the team is working on polishing the game even further and create more levels. It was indeed actually very clear from the soft launch phase that the players are deeply engaged and are consuming levels very rapidly. Not so much about the words, describing the game, let's look at a short video clip how the game looks. [Presentation]

[Kati Levoranta, Chief Executive Officer]

All right. Then moving on to the 2 other soft launched games. So World Quest is a mid-core game although very accessible. We categorize the game to be idle RPG game, which means that characters keep on progressing even when the game is not actively played. We've said before that this is a very innovative take on RPG, and hence, it does take a longer time for us to have the exact right angle. In fact, in Q1, we decided to make a pivot on the game and to take it in a bit of different direction as we were not reaching exactly the KPIs that we were targeting. We now have a small team working on it and rethinking the direction, focus being on what our audience seem to enjoy the most, discovering the vast and rich world. And then moving on to Phoenix Rangers. That -- this game is our take on the puzzle RPG genre that entered soft launch in November last year. We're still adding important social features to the game, which are especially important for games in this category. We're also doing user acquisition tests to understand better the audience for the game. And we continue to gather data, and we'll see more clearly where the game is heading during the summer. So with these words, I would actually hand over back to Veli and potential questions.

[Veli-Pekka Puolakanaho]

Thank you, Kati. Thank you, Rene. [Operator Instructions] Please, operator, we are now ready for questions.

[Operator]

[Operator Instructions]

[Veli-Pekka Puolakanaho]

[Operator Instructions] Thank you for the call. This is all for now.