Rovio Entertainment Oyj

OMXH:ROVIO

Earnings Call Transcript 2018-Q3

[Mikko Setälä, Executive Vice President of Investor Relations]

Welcome, everyone all around the world to Rovio's interim report webcast. My name is Mikko Setälä, and I'm in charge for Rovio's Investor Relations. I will be acting as your host today. We'll have presentation here first and then a question-and-answer session. [Operator Instructions] We have here our CEO, Kati Levoranta; and CFO, René Lindell.And now 9 months have passed. It's 1 month or so on it Christmas and time for Rovio's interim report. Now Kati, what were the main developments in the quarter and first 9 months of this year?

[Kati Levoranta, CEO & Interim Head of Games]

Thank you, Mikko. And also a very warm to our webcast on my behalf. Let's look at the some of the key points of third quarter 2018. Our revenue year-on-year was solid. We continued exploring ways to improve our existing games. We also continued putting a great deal of effort on new game development to strengthen our road map for coming years. As a result, with regards to existing games, Angry Birds 2 kept growing and had yet another record quarter, third time in a row. The game has grown a remarkable 68% in a year. And with regards to the new game development, in Q3 we had 2 games in soft launch. The other game in soft launch in Q3 is targeted to Chinese market. And currently, the game is waiting the needed approvals for actual launch. In addition to these 2 games, 1 new game just entered soft launch yesterday.On Brand Licensing side, we continued building the licensing program for The Angry Birds Movie sequel and also signed an agreement for long-form animated series for TV. Aim is to roll out this series in 2020 after the movie sequel. Overall in Q3, our profitability was good and cash flow was strong.Let's then move on and take a look at the Q3 numbers and thereafter the whole 9 months. Our revenue in Q3 was EUR 71 million. This is an increase of 0.5% year-on-year. Games revenue, which is represented in the red pillar of the chart was more or less on the same level than in the third quarter 2017. And Brand Licensing revenue, represented by the black part of the pillar, increased slightly year-on-year. This is -- increase was mainly attributable to higher movie revenues, which we see more as timing matter than a trend change. The adjusted EBIT was EUR 10.4 million, which is 157% increase year-on-year. And the adjusted EBIT margin was 14.6%.We saw some increase in cost of acquiring new users compared to previous quarter. And in order to keep the payback time of these investments within our target, we invested a bit less in user acquisition in this quarter. This is -- this and also higher movie revenues contributed towards the better operating profit.And let's then turn and look at the year-to-date financials 2018. In the period of January to September 2018, our revenue was EUR 208.5 million. This was 6.6% less than 1 year ago. However, it is good to remember that in Q2 2017, we saw a revenue peak from the Angry Birds Movie revenues, and this does impact the comparability. In comparable currencies, the revenue growth year-to-date would have been approximately 1%. Adjusted EBIT was EUR 25.9 million and adjusted EBIT margin for -- was 12.4%. This represents 2% growth year-on-year regardless of higher user acquisition investments.After this high-level introduction to our key figures, I will let René to go deeper in the numbers. Over to René.

[René Lindell, Chief Financial Officer]

Thank you, Kati. I will start with the Games segment and how we did in the third quarter. The third quarter was a bit slower than the second quarter, which is quite typical for this part -- time of the season. As you know, we didn't have any new launches in Q3. The gross bookings of Games were EUR 63 million, which means about 2% lower year-on-year. As Kati mentioned as well, Angry Birds 2 grew 68% and had its best quarter ever for the third quarter in a row. Angry Birds Friends kept up a steady revenue in the quarter while the other games, we did not be able to grow in this quarter. However, already we see positive trends in Q4, and we expect the business to pick up speed, and there are more seasonal events coming as well during end of the year.Growing a free-to-play game requires a good road map for updates. And here are some new updates for Angry Birds 2 that we've been having in Q3 and also actually in October. We introduced new characters to the game, the recent character, Stella, in October, and also we have other characters in the road map. The events in Angry Birds 2 have been improved, so basically there are more challenging events for our -- especially for our engaged players that enable to increase retention and monetization and, in that way, lifetime value of players. And we also added a third team, a third development team for the game to speed up new feature development. And all of these enable us to increase user acquisition in this quarter and also in the future.Now let's look at the overall user acquisition investments. Recall that these investments are fully variable costs that is steered by a payback requirement of 8 to 12 months. So each quarter, we invest the amount that meets that set limitation. If you look back to the previous quarter, in quarter 2, we reached actually a record amount of EUR 22.9 million. We also stated that this level may not be possible to uphold for the whole year as we saw that our cost per installs were trending higher. Accordingly, our user acquisition investments were a bit lower in the third quarter. They were also lower compared to the third quarter last year when we introduced Angry Birds Match and spent additional user acquisition on that launch campaign.However, at the moment, we are seeing improved game performance and optimized user acquisition healing results, and we believe that the fourth quarter new investments will be on similar level than during Q2, and that's much higher than in Q4 last year.Next, let's look at the Game's typical key performance indicators, starting with monetization. In the third quarter, both the average revenue per daily active user and the monthly average revenue per paying user improved, and we were actually able to monetize better in this quarter. So the figures grew to EUR 0.16 and EUR 36, respectively. On the active user side, we saw daily active users were lower in this quarter, especially for the whole portfolio, also on the top 5 games. The top fun (sic) [ 5 ] games DAU was a bit lower due to the lower user acquisition spend that we just talked about. On the overall portfolio, the older games that we maintain less actively, of course, continue declining on a quarterly basis.If you look closer to the top 5 games, you see that the level of the last 4 quarters has been fluctuating a bit with the user acquisition spend. But overall, it's on a similar level as it has been before. The monthly unique payers follows the total user trend, and they were also a bit lower in this quarter. However, as we discussed in the previous slide, we were able to monetize paying users a bit better.Moving on to our second business segment, Brand Licensing. In the third quarter, the licensing revenues were EUR 7.9 million, which was up 17.8% from last year. This was due that we received a bit higher revenues from The Angry Birds Movie in this quarter, and this led to the growth. However, I -- we see that this is more a variation in timing of revenues than a trend change. Adjusted EBITDA was EUR 5.6 million or 70.3% EBITDA margin. Overall, the Brand Licensing continued to work on the movie licensing program for the next year and upcoming Angry Birds Movie sequel.Operating cash flow during our third quarter was about EUR 11 million, and our cash balance grew to EUR 107 million. So basically, our operating cash flow was very similar to our operating profit. Finally, we specify our 2018 full year outlook. The Rovio Group revenue is expected to be between EUR 280 million, EUR 290 million. Our previous outlook was EUR 260 million to EUR 300 million. The adjusted operating profits is expected to be 10% to 11%; our previous outlook was 9% to 11%.

[Kati Levoranta, CEO & Interim Head of Games]

Thank you, René. So let's spend a little time to recap on our strategy. You probably all remember it consists of 4 pillars: growing Games business, exploring the future of gaming, leveraging our strong consolidation platform for mergers and acquisitions and growing the Angry Birds brand and the licensing business. When it comes to M&A, mergers and acquisition, activities, we have kept scouting acquisition targets with a focus on free-to-play mobile games, and we'll continue doing this. With regards to the future of gaming, we continued exploring several technologies and platforms. And in some of those, we have also invested in. One of these is Hatch, the cloud-based streaming service for mobile games. Hatch has been available in open-beta testing in 18 European countries in Android devices, and it has now moved from beta to public release on Google Play in the Nordics, U.K. and Ireland. Currently, the service is free with advertising. But as the next step, Hatch aims to begin piloting a paid subscription version that removes ads and offers additional content and features.When we have previously talked about the future of gaming, we have also mentioned augmented reality, virtual reality and mixed reality. In Q3, we saw launch of Angry Birds Mixed Reality game called Angry Birds First Person Slingshot, which is available on Magic Leap's platform. And now we would like to take an opportunity and show you a short video so that you can see how it feels playing Angry Birds in your living room.[Presentation]

[Kati Levoranta, CEO & Interim Head of Games]

So as you can see, this offers a totally new way of playing Angry Birds and trying to find different spots and angles to get after those pigs.Let's then move on to the 2 other strategic pillars, our games and the brand. Sometimes, we get questions like, when are you going to release your next game? 2017, we released 3 new games. 2018, we have kept operating these games with the aim to improve them over time. However, simultaneously in 2018, we have also increased the number of new game development projects. And as a result, we have 12 new projects in development currently. We have also brought 3 new games in soft launch in selected territories during this year. And one of these, as I already mentioned, was in soft launch targeting to Chinese market.So our road map for the future is looking quite exciting, and our goal is to launch at least 2 new games in 2019. And if you haven't noticed yet, we have appointed Alexandre Pelletier-Normand as our Head of Games. He will start in the beginning of 2019, so in few months' time. He has a very extensive industry experience for 15 years. He will come from Gameloft and move over here to Finland. So we very warmly welcome Alexandre to our Rovio team. There is no doubt that Angry Birds is one of the most recognized brands in the world and a big, huge, unique asset for Rovio. The first Angry Birds game was launched in December 2009. And thus, the next year, we'll be -- or we will be celebrating the 10th anniversary of Angry Birds. The Angry Birds Movie sequel and the strong performance of Angry Birds 2 game will provide us a great launchpad for this celebration. And all this is, of course, combined with an enhanced marketing and licensing programs.One example of this enhanced marketing of Angry Birds licensed products and the movie is the development of a new application, which ties in nicely the physical and digital elements from the Angry Birds universe. With this, we offer our fans additional content, which also includes some augmented reality experiences. This app is scheduled to be launched before The Angry Birds Movie 2019.So with these words, I think that I'll hand over to Mikko, where we started.

[Mikko Setälä, Executive Vice President of Investor Relations]

Thank you, Kati and René. So there's a lot happening in the future. So you can find this presentation and webcast on our Investor pages at rovio.com.Now it's time to take questions. So if you haven't already done so, you can ask question by using the webcast application.

[Mikko Setälä, Executive Vice President of Investor Relations]

So the first one would be, "The games currently in soft launch, AB -- Angry Birds Dream Blast, Angry Birds First Person Shooter (sic) [ Angry Birds First Person Slingshot ] and Angry Birds Blast Island, are these the 3 ones in soft launch?"

[Kati Levoranta, CEO & Interim Head of Games]

Actually, we have 2 games currently in soft launch, Angry Birds Dream Blast and also Angry Birds Blast 2, which will be probably renamed to something different going forward. And then the third game, we had in soft launch already in Q3, and it has completed the soft launch and waiting for certain approvals for Chinese market.

[Mikko Setälä, Executive Vice President of Investor Relations]

And then continuing actually on the same questions. So the -- "So at least 2 games will be launched or planned to launch in 2019. So is the target to launch them before August 16?" I think that is referring to the movie date here when the AB 2 promotion starts.

[Kati Levoranta, CEO & Interim Head of Games]

Well, when it comes to the games launches, we, of course, launch the games when they are ready to be launched. So we will need to see how that goes. But as I said, the games are already in soft launch.

[Mikko Setälä, Executive Vice President of Investor Relations]

"So would this affect Rovio's costs then in Brand Licensing and Games?"

[Kati Levoranta, CEO & Interim Head of Games]

Can you specify a little bit? What do you mean by...

[Mikko Setälä, Executive Vice President of Investor Relations]

So the -- or are we able to put more color in the user -- or MUPs in quarter 3? That's to René, I guess.

[René Lindell, Chief Financial Officer]

I mean, we are still in the planning phase for next year, so it's too early to say basically how that will look like. And of course, if you have new launches, then typically you can invest a bit more in user acquisition. But it really depends on how you plan that launch. And there are different ways of doing it, so it's too early to say. We still have to see how the game KPIs are. And of course, we are testing the user acquisition efficiency also in the soft launch and getting more data on that and then making decisions on how the launch strategy will be done.

[Mikko Setälä, Executive Vice President of Investor Relations]

Okay. And then we have a question regarding China. So referring the quarter 2 presentation, that we were stating that the Chinese authorities hadn't accepted new games in a few months. So has the situation changed? And so where we are with the Chinese markets?

[Kati Levoranta, CEO & Interim Head of Games]

Well, currently, at least, according to the information that we have, the situation hasn't changed. And that, of course, applies to every player in the industry.

[Mikko Setälä, Executive Vice President of Investor Relations]

All right, going forward with the questions. "So do you plan to invest in user acquisition as selectively as in quarter 2 and in quarter 3? And should we expect very polarized growth for the Game portfolio?" I think that's to René.

[René Lindell, Chief Financial Officer]

Yes. So I think our overall U.S. strategy, as we said before, is that it's payback time driven, which means that we invest in the games that -- where we see that achieves that 8 to 12 months' payback on the user acquisition and also has the ability to scale to a significant number. So of course, in this respect, Angry Birds 2 has been one of the major games where we have invested UA and of course in other top 5 games as well. So it's dynamic. It will depend on how the games perform and also how we are able to optimize the cost per installs for each game, which is an ongoing process. So I think at least for Q4, we see already at Angry Birds 2 will at least will continue at a high level in UA as well.

[Mikko Setälä, Executive Vice President of Investor Relations]

Okay. And then continuing with the user acquisitions. "So are the current user acquisition investment level enough to keep the non-growing games at the current level? What do you think?"

[René Lindell, Chief Financial Officer]

Well, the older portfolio, of course, as we said, is not as actively maintained, which means also user acquisition is minimal to 0. So of course, that is not part of that plan, and we focus really on the top games in UA and kind of keeping that high quality of users within those games.

[Mikko Setälä, Executive Vice President of Investor Relations]

And then another question regarding the Brand Licensing. "So the -- could you explain the Brand Licensing revenue pattern in 2019 when it's related to the movie, second movie?"

[Kati Levoranta, CEO & Interim Head of Games]

With regards to the Brand Licensing, we had the first movie out in 2016, as many know, hopefully. And the whole movie setup or the agreement was made in a quite different way than the second movie is now made. So we financed and produced the movie ourselves, and there was a certain revenue pattern that we have been opening up. For the second movie or the sequel, it's a quite different setup. We have licensed the brand to Sony, and Sony is now handling the production of the movie, also the marketing of the movie and distribution. And the revenues that we will get there is -- it's a revenue share, as we have discussed earlier. But how that then plays out, we will see then next year. But as the movie's out in August 2019, we start to expect revenues thereafter.

[Mikko Setälä, Executive Vice President of Investor Relations]

"Okay. But what about the revenue recognition then? So when will the movie revenues be recognized?"

[René Lindell, Chief Financial Officer]

Yes. So I think it's a bit too early to say as we're still in the planning phase for next year. So we'll come back to that in early next year.

[Mikko Setälä, Executive Vice President of Investor Relations]

All right. So the -- then a question. "Are you continuing producing Angry Birds games?"

[Kati Levoranta, CEO & Interim Head of Games]

Yes, we are.

[Mikko Setälä, Executive Vice President of Investor Relations]

That's an easy answer. So -- and okay. "Angry Birds 2, it grew 68% in quarter 3. So what is the main growth driver for that one? And how sustainable is that?"

[Kati Levoranta, CEO & Interim Head of Games]

Well, Angry Birds 2, yes, had a remarkable growth again. And as René said, third quarter in a row. So that's, of course, extremely great, and we are very happy about that. And the team there has been very innovative. They've kept coming with new ideas, new content, new features in the game. And we also added a third team to keep on this innovative -- innovations coming and -- for the Angry Birds 2. So we believe that, that's the way to get it or continue more.

[Mikko Setälä, Executive Vice President of Investor Relations]

Okay. So -- and then regarding the China thing, so the -- "Can we expect any revenue next year from China from Games?"

[Kati Levoranta, CEO & Interim Head of Games]

It's really early to say if the reference is to this game that has been in soft launch because we obviously need to see how the situation develops in China. But obviously, we are getting already some revenues from China from our existing Angry Birds 2 game in Chinese market.

[Mikko Setälä, Executive Vice President of Investor Relations]

Okay. So the -- "And quarter 3 saw a meaningful step-down on user acquisition costs, so the -- as a percentage of sales. So the -- how should we look forward in 2019 for these investments?"

[René Lindell, Chief Financial Officer]

I think 2019 is still -- as said, we're in the planning phase. And as the user acquisition is dynamic in nature and we have also 2 new game launches, so we will really have to come back to that once we have kind of more information on the KPIs. As we said this year that we target about 30% of Games revenues in user acquisition, and that's kind of where we are trending at the moment.

[Mikko Setälä, Executive Vice President of Investor Relations]

Okay. So the -- "How important is the Chinese market in -- and -- currently in revenues or profits or user figures?"

[Kati Levoranta, CEO & Interim Head of Games]

It's, of course, a very interesting market. But from our perspective, we need to see, as we said, how things develop and go with that then going forward. But like I said, interesting market, of course.

[Mikko Setälä, Executive Vice President of Investor Relations]

And then about the Games again in general. So the -- "How many non-Angry Birds games are in the 12-game slate we have for 2019?"

[Kati Levoranta, CEO & Interim Head of Games]

It's a pretty good mix of Angry Birds games and other IP games. And -- but of course, as we've said already earlier, it always depends on then, of course, how the games perform when they go to soft launch, how the development goes forward while -- when it comes to the decision that what games are then, at the end of the day really, launched globally.

[Mikko Setälä, Executive Vice President of Investor Relations]

Okay. And then one about Hatch. "How successful it has been so far for one thing? And are the investments for 2018 more than originally guided for this year?"

[Kati Levoranta, CEO & Interim Head of Games]

Hatch has been in beta phase in 18 countries in Europe. And now just recently, they have come out of that beta phase and are now publicly launched in Google Play in Nordics, U.K. and Ireland. And of course, the service is developed going forward as well, both technically and from the user acquisition perspective. So it's going forward. And when it comes to the investments, maybe I'll hand over to René.

[René Lindell, Chief Financial Officer]

Yes. So we had previously estimated in beginning of the year about EUR 10 million to EUR 15 million in total investments. And now we, in the specified outlook or -- we also gave information that we are investing about EUR 8 million this year. So that's the estimate for 2018.

[Mikko Setälä, Executive Vice President of Investor Relations]

Okay, thank you. So the -- I think this is the -- that was actually the final question. So is there anything else you wanted to share with the -- or the audience here?

[Kati Levoranta, CEO & Interim Head of Games]

Well, I think that we want to thank you for the questions and your being there and watching the webcast and wishing a good day.

[René Lindell, Chief Financial Officer]

Thank you.

[Kati Levoranta, CEO & Interim Head of Games]

Thank you.