Rovio Entertainment Oyj

OMXH:ROVIO

Earnings Call Transcript 2022-Q1

[Timo Rahkonen, executive]

Good afternoon, everyone, and welcome to Rovio's First Quarter 2022 Earnings Audiocast. My name is Timo Rahkonen and I'm a Vice President of Investor Relations and Corporate Strategy at Rovio and I will be your host for today. In today's audiocast, we will go through Rovio's first quarter 2022 financial results. With me, here in the studio, are Rovio's CEO, Alex Pelletier-Normand; and CFO, Rene Lindell. After the presentation, we will host a Q&A session. In order to ask a question, please dial into the conference call number shown on the screen. Your question will then be placed in the queue and asked in order of arrival.

But I will now hand it over to Alex. Please.

[Alexander Pelletier-Normand, executive]

Thank you, Timo. Good afternoon, everyone, and thank you for joining us today for this Q1 2022 earnings call. So before going through the quarterly highlights, let's open by looking at the industry as a whole. This quarter has been not a one-off transition for the mobile free-to-play market, this was the third consecutive quarter-on-quarter decline of the market according to data.ai. And we attribute it to the combination of, first, the normalization of spending and playing habits after the COVID stay-at-home period; and second, the shifts in the marketing landscape resulting from Apple's ATT policy. We still observe residual volatility in user acquisition as publishers are trying to adapt to the aftermath.

That said, for Rovio, Q1 was a continuation of the momentum we saw in Q4 2021. Group revenues grew 26.6% year-on-year and games reached a new record gross booking of EUR 80.8 million, which represents 25.8% year-on-year growth. The growth was 10.6% in comparable currencies and excluding Ruby Games acquisition. All of our top games performed very well during the quarter, with our flagship Angry Birds 2 growing over 20% year-on-year. Angry Birds Friends celebrated its 10th year anniversary with its best quarter since Q4 2016.

Our new release, Angry Birds Journey was the third largest game with EUR 10 million gross booking in Q1 and we also released a premium game called Rovio Classic: Angry Birds and I'll explain the rationale behind this project shortly. Ruby Games had a very good quarter as well, with EUR 6.1 million gross bookings, a 44.7% pro forma growth. And overall, the profitability was at a good level, with the adjusted operating profit margin reaching 11.8%. Our marketing investment were slightly lower than expected and represented 37.8% of Games revenue.

We start digging a little bit into the details, the global launch of Angry Birds Journey was on January 20, after a 1-year soft launch period in the U.S. that showed healthy KPIs and good cohort maturation. The global launch was supported by great featuring from the platforms and by a boost of marketing investment, which led to one of our best launch months ever. This strong initial push resulted in Journey generating EUR 10 million in gross bookings for Q1. And now that we exit the launch period, we are cautiously observing and optimizing our UA spend as we prepare for a second push, including a U.S. TV campaign and celebrity-backed in-game events starting June 10.

Angry Birds has been part of the popular culture for 12 years, and this campaign will give us the opportunity to engage with all new audiences in totally new ways. The current quarterly run rate is just shy of EUR 10 million in gross bookings. And by following our other games, we are barely at the beginning of the road for this new title. Most importantly, we're very proud to have been able to successfully launch a new Angry Birds Slingshot game and to extend [ this genre ] to the casual audience. We continue to believe that this type of wide appeal and inclusive game fits well in the current market environment.

We also released Rovio Classic: Angry Birds in March. This is a premium game, which is a recreation of the original Angry Birds game released 12 years ago. The price point is [ EUR 0.99 ] and there are no in-app purchases nor ads, so releasing a game with this business model as opposed to free-to-play is exceptional for us. And the goal was to answer a passionate call from our fans around the world to re-experience the original Angry Birds game. They actually created a Twitter hashtag which was #bringback2012 that trended for several months.

We're not expecting significant revenues from this title, given the business model, but seeing it reach the top download position with a rating of 4.9 out of 5 is a great testament to do -- a great testament to the strength of the brand. It also shows the devotion we have towards our fans and to our brand. Fan service initiatives like this will help ensure that Angry Birds remains culturally relevant and beloved by our fans for decades to come.

Another testament to the lasting relevance of Angry Birds, our game Angry Birds Friends celebrated its 10th year anniversary last February. This is our social and competitive slingshot title. When we talk about Angry Birds being cradle to grave and appealing to all demographics, games like Friends with a stronger male and competitive strength showed this strategy in action. Our current growth and momentum here help show that our teams know their audience and how to engage them extremely well.

Let's now look at the revenue trend per game. As you can see at a glance, the portfolio has performed well. We reached EUR 82.3 million in Games gross bookings and custom contracts during the quarter, which is a record for Rovio. Angry Birds 2 grew both year-on-year and quarter-on-quarter. The growth was driven of course by solid live-ups operated by the team, but also by marketing opportunities we were able to take in the aftermath of Apple's ATT. This was the best quarter for the game since Q1 2019 and the fourth consecutive quarter of growth for the game. And the game recently crossed the bar of EUR 600 million in gross bookings since launch.

The team is working on moving the game even further towards the RPG genre. They will be adding a new bird to the roaster and work on clan features. Angry Birds Dream Blast was stable year-on-year, which is a good performance considering that the UA investment were about 20% lower than at the same period last year. The game just passed the bar of EUR 200 million in gross bookings since launch in 2019. Angry Birds Journey is in third position with EUR 10.1 million in gross bookings for its first quarter and Angry Birds Friends grew 12% year-on-year and had a record quarter in over 5 years. This was the sixth consecutive quarter of growth for the game. Ruby also continued to grow, reaching EUR 6.1 million, a 49% quarter-on-quarter growth. They had 7 games reach the top 100 download U.S. in Q1.

If we look at our emerging titles, this hasn't changed since the last time we presented this slide. We are still working on Moomin: Puzzle & Design in our Puzzle Studio and we're also working on Hunter Assassin 2, which is our first hybrid casual games made by Ruby Games. They are held right now by other Rovio studios for longer-term retention, monetization, and engagement features. It was exactly the sort of collaboration that were top of mind during the acquisition last year. We strongly believe that Rovio's [ tooling talent ] and know-how can unlock potential for other developers as well.

Our sustainability initiatives were of course greatly impacted by the war in Ukraine during the first quarter. Our highest priority was to make sure that our employees and our partners were safe and got the needed support. On the business side, we joined the many other companies setting restriction to business and services. And as a result, we deactivated our games on the app stores in Russia and Belarus and provided ads inventory in selected countries to humanitarian organization. We also ran an employee donation campaign together with our partner UNICEF to support Ukrainian children and their families.

We have been working with UNICEF since 2019, and despite additional challenges created by the COVID situation, we concluded successfully the Salmaitou Senegal project. The purpose of this initiative is to give a second chance to the most vulnerable girls in and out of school so they acquired skills, allowing them to master the basis of digital technologies, innovation and social entrepreneurship. So we will continue to use these calls to share updates on our sustainability initiatives as we strongly believe that acting responsibly is more important than ever. We're happy to be doing this by using our voice and our strong brand to help drive positive changes throughout the world.

Finally, I'm very proud to announce that, in April, we achieved another major milestone. We reached the mark of 5 billion downloads for our games. Having reached this very exclusive milestone places Rovio as the mobile games publisher with the third most downloads worldwide. I can tell you that it's very humbling and exciting for our teams to think about how our fans engage with our beloved characters around the world all these years. Angry Birds has brought a lot of joy over the last 12 years, 5 billion times [ and counting ]. With the projects, teams, and investments we're making today, we will ensure that Red and friends stay culturally relevant for decades to come.

Rene?

[René Lindell, executive]

Thanks, Alex, and good afternoon to everyone on the call. In the first quarter of the year, we saw record Games revenues and the Group revenue growing by 26.6%. On a comparable basis, excluding Ruby Games and at constant currency, the growth was 11.8%. The strong growth was driven by the global launch of Angry Birds Journey as well as the good performance of our top live games, especially Angry Birds 2 and Angry Birds Friends. Also our hyper-casual studio, Ruby Games had a very good quarter and grew 44.7% year-on-year on a pro forma basis, with the growth based on the continuing strength of their hyper-casual games and especially the addition of the new word game, puzzle game Wordus.

The Q1 adjusted operating profit landed at EUR 10 million, which was at the same level as 1 year ago, but with a lower profit margin of 11.8% compared to 15% last year. The lower profitability was as expected as we invested significantly more in user acquisition during the launch of Angry Birds Journey. However, the absolute profit level was still good due to the strong top line and operating leverage. The difference in operating profit during the 3 periods shown here reflects the changes in user acquisition as well with Q1 '20, UA being at very low level compared to Q1 '21, and of course now Q1 '22.

If you look at the adjusted EBITDA in Q1, it was slightly higher compared to last year, but with lower margin, 16% compared to 18%. As with EBIT, this reflects the fact that the top line was strong, but also user acquisition investments were higher. The user acquisition investments in the first quarter amounted to EUR 31.1 million and represented 37.8% of Games revenues, which was in line with, but slightly lower than the 40% level that we discussed during our last call in February. The UA, thus, increased significantly both year-on-year and quarter-on-quarter due to the launch of Angry Birds Journey that quickly scaled up to become our third largest game in the portfolio.

As Alex mentioned, post the launch, we have scaled down UA and are optimizing the performance to drive further growth in line with our UA payback requirements. The operating cash flow in the first quarter was a solid EUR 14 million, reflecting the level of EBITDA in the quarter as well and the cash balance grew to EUR 172.3 million. On April 20, after the reporting period, a dividend of EUR 0.12 per share and total amount of EUR 8.9 million was paid to our shareholders.

And moving on to our audience network and player statistics, our daily active users grew to over 7 million during the quarter, both due to the launch of Angry Birds Journey and also due to daily active user expansion in Ruby Games. This is the highest level of [ the year ] since Q3 2018. The amount of monthly unique [ players ] grew to 522,000, mainly due to Angry Birds Journey launch and this is the highest number of paying users since Q2 2018. The monetization metrics ARPDAU and MARPPU remained stable during the quarter. Thus, the overall revenue growth in the quarter was driven by the increase in amount of users.

Finally, our 2022 outlook remains unchanged. We continue to see a trend for strong top line growth for the full year, but with a lower adjusted operating profit. Similar to the previous quarter, we are giving additional information regarding the expected level of UA during the ongoing quarter. As we have said during the call -- today's call, the user acquisition investments post Angry Birds Journey launch are now at the lower level. And for the second quarter of 2020 (sic) [ 2022 ], we expect the UA investments to be 25% to 30% of Games revenues.

[Timo Rahkonen, executive]

Thank you, Alex and Rene. And actually before we go -- move to the questions, just there is a reminder about the Capital Markets Day, which we will organize in May 11 in Stockholm and also webcast. There is a link to the registration. So please do that if you haven't done that already. And you can also see more information from our web page.

But that concludes our review for today. So, operator, we are now ready for questions.

[Operator]

Thank you. [Operator Instructions] The first question we've received is from Veikkopekka Silvasti, Danske Bank.

[Veikkopekka Silvasti, analyst]

It's Veikko from Danske Bank. Few questions. So, firstly, can you give any update on how the quarter so far, so the Q2 so far has gone for your top games? I've understood, obviously, that AB Journey is a bit lower compared to Q1, but what about the other main games?

[René Lindell, executive]

So, yes, Angry Birds Journey, as you've said, is a bit shy of EUR 10 million in gross bookings. So that's slightly lower and Angry Birds 2, we have seen pretty much, let's say, similar levels continuing. And that's really positive. Overall, as we said, the UA levels are a bit lower. So naturally that would impact a little bit the UA going -- the revenue going forward as well if kind of this level continues for a longer period.

[Veikkopekka Silvasti, analyst]

And then Friends and Dream Blast, are they also flattish?

[René Lindell, executive]

I think on those, no major changes as we see of this point of time, but I mean, it's very early in the Q2 as well.

[Veikkopekka Silvasti, analyst]

And then secondly, if you, Rene, could remind us how the second tranche of Ruby Games could look, given that the studio is performing quite strongly? So how much was the amount you're going to pay in H2 2022 and are we getting closer to the higher end of the acquisition base?

[René Lindell, executive]

Yes. So the contingent liability, that is associated with the Ruby Games transaction. So we update that every quarter based on the performance and how we see the performance going forward. So there is also an update in the current quarter. So we somewhat increased the contingent liability by EUR 2.5 million. And the second tranche which happens in autumn is estimated at EUR 30 million of value, including both the cash component and the share component and the remaining is then in the future periods for multiple years.

[Veikkopekka Silvasti, analyst]

And what was the maximum of the second tranche? Was it EUR 80 million?

[René Lindell, executive]

Yes, that's for the full transaction. So we are not there yet at the maximum as you can see.

[Veikkopekka Silvasti, analyst]

Yes, indeed. Great. And then maybe continuing on the hyper-casual games, so it seems like you spent over 100% of revenue in user acquisition in hyper-casual games. So can you just give us a reasoning behind that, because I would think that the Games are very ad-driven revenue model and so forth? So is it sensible to do such heavy user acquisition in there?

[Alexander Pelletier-Normand, executive]

Yes. I mean, I think when we look at hyper-casual game, what's interesting is, when we have a game that is -- that can receive those investments and is ready to be scaled, we take the opportunity, right. Then sometimes, in this hyper-casual world, we don't necessarily see them coming with a lot of time in advance. And if we have many of those games at the same time in the quarter, which was the case in Q1, we had 7 games that reached the top 100 download in the U.S. from Ruby, so that means that there is a lot of games that we can receive those investments. That said, those investments are always made in such a way that we believe that it will be profitable. We're very disciplined, as you know, when we do those investments.

[Veikkopekka Silvasti, analyst]

Clear. Is there any kind of in-app purchases in Wordus or it's purely ads-based?

[Alexander Pelletier-Normand, executive]

I think, I don't know if there was a component, like it's mostly ads-based for sure. I cannot say for sure if there is...

[Veikkopekka Silvasti, analyst]

And then, can you give any update on the Hunters Assassin 2? So I guess people have been expecting it to be launched already in Q1 and still in soft launches, everything going according to plans and how does it look?

[Alexander Pelletier-Normand, executive]

Yes, that's a good point. And, like, so we had a very good quarter for Ruby in Q1 and it -- but the revenues were not exactly where maybe we would have thought they would be. But if they are there, it's good. But the Hunter Assassin 2 is a game that, as you know, is slightly different than what they've been doing in the past, because it has component of in-app purchases, more long-term monetization and retention that needs to be perfected. And we want the game to be really ready when we push it. We already tested in terms of virality and we know that there is a lot of people that are eager to download the game, but we just want to make sure that those more longer-term engagement mechanics are there in the game before we release it. And so that's why we are working together with different studios of Rovio to kind of help the hyper-causal teams of Ruby to make it perfect before we release it. So as it is the case for other games and soft launch, we're going to release it when it's ready. So let's see.

[Veikkopekka Silvasti, analyst]

Clear. So it sounds like Hunters Assassin 2, so the virality is there, but now you are just working on the retention and so forth?

[Alexander Pelletier-Normand, executive]

Yes. Those more kind of long-term metrics, right, both monetization and retention.

[Operator]

The next question comes from Felix Henriksson, Nordea.

[Felix Henriksson, analyst]

Congrats for a good quarter. I have 2 questions. I will go one by one. It sounds like your perhaps incremental EBIT more costs regarding the market environment due to the post-pandemic reopening effect. So wondering how does this play out to your Q2 user acquisition guidance? Are you being a bit more cautious because of this? Or does it sort of effect your decision-making here?

[Alexander Pelletier-Normand, executive]

Yes, I would have to say that, generally speaking, for user acquisition, we're very pragmatic and disciplined. So we have our models and we follow them and we don't improvise there, right. So it's really data-driven the way that we're acting towards this, but it is true that what we've seen in the past few months is that there is a lot of fluctuation in the CPIs between the different platforms, between the different networks to user acquisition. So I would say that the long-term trends of those costs is harder to predict than it used to be. But I'm very happy of the approach that we used and it really paid off for us in Q1.

But, yes, I mean, when we talked about the different level of user acquisition that we plan on having in Q2 compared to Q1, it's also related to the fact that, in Q1, we released a game, right. So -- and there was very good featuring that we received as well from the platforms. It was a game that was fitting the marketing landscape perfectly. So that really opened doors to making a nice user acquisition push that was profitable, right. So now that we scale that, we are kind of going back and making sure that we're trying to reduce the spend while keeping a similar amount of user joining the game. So that's how we expect for now that the percentage of our games revenue that will be invested in user acquisition will be slightly lower in Q2 than in Q1.

[Felix Henriksson, analyst]

Got it. That's helpful. Then on top of the games that you do currently have in the soft launch, I was wondering if you could provide an update on how many games you have in the development pipeline. And my apology if I missed this comment earlier.

[Alexander Pelletier-Normand, executive]

No, it's true that we didn't include this number this time around in the presentation. This hasn't changed much since last time we discussed this previous quarter. So there is 7 games right now in the development pipeline.

[Felix Henriksson, analyst]

Got it. That's very clear. Regarding the Canadian studios, just wondering how the team building there is going on the studio ramp-ups in Montreal and Toronto and when we can -- when can we expect to see some tangible initiative launches by these studios?

[Alexander Pelletier-Normand, executive]

Yes, so like the -- so those 2 studios are in the little bit of a different shape and what they are focusing on is also different. The Montreal studio was obviously started before. So the headcount is slightly higher there. We are a little bit south of 20 people, I believe right now. And I would say that the scaling has been going well in the sense that we're really looking at very specific type of people to do this. It's very, very innovative studio and we were cherry-picking and it took some time to reach that. But we are happy with everybody that was recruited in the studio. And the projects that they're working on are a little bit different than the others -- the other project in development in mobile free-to-play across the world. So it's harder to have a very clear time line on this one.

And the Toronto studio is more similar to what we're doing in our other studios, for instance, in our Puzzle Studio in Espoo. They are much newer, but they recruited the key core team members that they need to start working on a game. They have a prototype of a game already, but we're not there. We're not at the point yet where we can announce even a soft launch period, right. So this is going to come later. But the team is being built following a time frame that goes according to our predictions.

[Felix Henriksson, analyst]

Got it. And then the final question from me, regarding M&A, I know you're constantly screening for targets and being very selective on that matter, but I was wondering if you could provide an update on how the deal pipeline is looking and then perhaps some valuations. Wondering if you're seeing any developments on the private side given that the public valuations have come down quite a bit?

[René Lindell, executive]

Yes, few comments on the M&A pipeline. I think we still see quite a lot of interesting companies out there in different sizes. And of course, we are screening them and we are looking at the same way as we have done before. So I think that's -- nothing has changed there. We are still kind of being very, very prudent in what we're looking for, looking for those companies that have a clear fit with us and clear synergies and something where we can help our team, but that has general mastery to scale up their game to a global success. So that is still there.

In terms of valuations, I think the private market doesn't necessarily always follow quickly what happens in the public market. So I think it's too early to say how that will impact. But definitely, it's something you always have to look at what the -- what's the total value of the deal you're doing and for the long-term. So that hasn't changed from that perspective.

[Felix Henriksson, analyst]

Okay. And again congrats for a good Q1.

[Operator]

The next question comes from Matti Riikonen, Carnegie.

[Matti Riikonen, analyst]

It's Matti Riikonen, Carnegie. One question related to your growth expectations quarter-over-quarter into Q2. Now, when you say that your Journey revenue run rate should be a bit below EUR 10 million, doesn't that mean that you are basically a bit down from Q1? And then if Dream Blast is basically shifted to earn category, doesn't that mean that you are not expecting growth in that either? So it's basically AB 2 and then Friends that could provide some momentum quarter-over-quarter. But is this really the case that you are seeing at the moment? Do you see other kind of revenue drivers that could have an impact in the short-term?

[Alexander Pelletier-Normand, executive]

Yes. I mean, I wouldn't say that about, for instance, Dream Blast, what is clear is that we still believe that there is growth opportunities there and where the team is focused on that. So I wouldn't discard this in this way. Journey, it's interesting because, as I said, of course, there is the launch period which there was a series of factor that I listed earlier which made it a great opportunity to reach a certain scale. Right now, as said, the run rate is slightly lower, but just shy of EUR 10 million. But we also have a marketing campaign that is planned in the U.S., including a TV component with some celebrities. So that hopefully has an impact as well. So it's -- I wouldn't say that the current run rate is necessarily indicative of what's going to happen in the future. And Angry Birds 2, as you've seen and as we've reported for Q1, is doing very well. So it will depend, of course, on how the marketing landscape evolves, but in terms of the game implementation and optimization and improvement that we can do, I mean, we're certainly not running out of ideas on that front.

[Matti Riikonen, analyst]

But of course the guidance of 25% to 30% UA in Q2, that also kind of indicates that you have lower expectations on where you can spend the money to grow the games further, or is it so that the marketing campaign in June is not included in the UA estimate? Or is it outside the UA estimate?

[Alexander Pelletier-Normand, executive]

No, it is included. So when -- everything is included when we talked about those UA estimates. But I would also just point out that when you look at the UA spend for Q1, it was perhaps higher than the normal percentage that we invest and that's going to make sense, because we launched Angry Birds Journey during that time frame. So I see it more from that perspective, right. The launch quarter of a game, you can expect, generally speaking, that the UA investment are at a higher level.

[Operator]

The next question comes from Tyler Parker, KeyBanc.

[Tyler Parker, analyst]

Ruby Games and hyper-casual obviously seems to be growing nicely. So a couple of questions there. #1, how has the cross promotion been between those users in your games kind of relative to your expectations coming in? And, 2, do you expect that group through the games group to continue growing sequentially throughout the year?

[Alexander Pelletier-Normand, executive]

So I'll take the first question and maybe Rene can take the second one. So when we -- part of the process when we're looking for acquisition targets, for instance, is that we do look for the comparability between the users of that company in our own and we know, for instance, that on a game like Angry Birds 2, we have players that are coming from hyper-casual games, for instance, so that are -- so we knew that there was this type of audience fit between hyper-casual games and other games in the portfolio like Angry Birds 2. So we started cross promoting between the games and we already see some results, but we will continue to do so -- increasingly so in the future. Second?

[René Lindell, executive]

Yes. I mean, basically we don't give quarterly guidance for the top line, but for the full year the guidance is still strong growth. We're in a good momentum in Q1 and that should -- there is a combination of elements that then will impact how each quarter goes and what we will be doing, of course, is driving those live games as we always do as a service and continue to optimize the UA even though now Q2 likely going to be a lower level. But as Alex said, Q1 was at the very exceptionally high level due to the initial launch push. Now we are maybe more to what we could say normal levels in Q2. So I think we'll just have to see how the -- how each quarter turns out this year.

[Tyler Parker, analyst]

All right. And I guess one more from me just on, I don't know if it's been asked directly yet, but on the user acquisition market, broadly. I know you guys have said that Apple [indiscernible] hasn't impacted you as much with the others or very little at all. But just curious where we're at in the market evolution? We're a couple of quarters in now. You think we turned the corner. The impacts mostly played out. And I guess has there been a major shift towards contextual advertising for you guys versus heavily targeted spend in the UA front?

[Alexander Pelletier-Normand, executive]

I mean, I would definitely say that we continue seeing shifts in the market regarding user acquisition. So I'm not sure we know exactly where things are going to land. What I do think is that we knew or at least we had, as an hypothesis, that the type of game and the type of brand that we have were great fit for this type of market. So very wide appeal, so that you don't have to be extremely specific and ultra targeted when you do user acquisition. And then of course the goal for us at this point is to work on our game, right, to make sure that they are as inclusive as possible and they are offering something different depending on the type of players that are joining the game, because it's like this selection of player or this recruitment of players instead of being very precise before joining the game it's happening a little bit later in the funnel when the players are in the game, right. So, that's a change that I don't think is going to go away. So it fits well with the strategy. So we continue to execute on our strategy. But, yes, I mean, there is still definitely a lot of movement still in the UA landscape.

[Operator]

There are no further questions at this time, I hand back to you.

[Timo Rahkonen, executive]

Okay, thank you. It seems these were then all the questions for today. So thank you everyone for your questions and joining us today. We wish you all a nice rest of the day and a relaxing weekend.