Rovio Entertainment Oyj
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Hello, everyone, and thank you for joining Rovio Earnings Audiocast. My name is Veli Pakola, and I am the Head of Investor Relations at Rovio. Today, we will go through Rovio's Q3 2020 results. With me are Kati Levoranta, Rovio CEO; and Rene Lindell, Rovio CFO. We will have a Q&A session after the presentation. To ask your questions, please dial in the conference call numbers shown on the screen and use the pin. Kati, the floor is yours. Thanks, Veli, and good afternoon, everyone, and warm welcome to our Q3 2020 interim report audiocast also on my behalf. During Q3, we continued to scale up Small Town Murders gradually. Small Town Murders was launched in June. And for the first month, it was available only in English language. However, in mid-October, the game was localized to 10 new languages, including French, German, Japanese, and Korean. We believe localization is important for this type of narrative game since it creates deeper immersion, which translates into better retention and opens the door for further opportunities to scale up the game in these markets. In addition, we are bringing new levels and mysteries to the game on an ongoing basis, and we also introduced an end game feature in the game to increase player engagement, especially with the most advanced players who play through the content very fast. The game is now our fourth biggest game, and our goal naturally is to grow it further. The Montreal studio, which we established in spring, continues to build the core team. The focus of the studio is on forward-looking projects and opportunities around the future of gaming. This is clearly an exciting long-term initiatives and part of our strategic take on the future. The Copenhagen studio, which we acquired in June continues developing Darkfire Heroes game. The integration has been going smoothly, and the studio is now converted to Rovio Tech and BI platforms. Unfortunately, as we all know, the pandemic situation has been worsening in many countries, again after the summer. And thus, we have continued working primarily from home. However, we have organized our offices so that those who prefer to work at the office are able to do that. Teams have implemented best practices for them to support efficient ways of working when balancing between remote and office work. One of the concerns we had when the pandemic started was how this would impact recruitment and onboarding of new employees. But all in all, we have been doing well. And for example, one of our key positions, Head of Stockholm Studio was fulfilled in September when Andy Muesse started leading the studio. During Q3, the games revenues normalized after the shelter at home hike in April and were stable throughout the quarter, continuing on a similar level as in May and June. This is a solid result given a moderate level of user acquisition investments made during the quarter. The revenues were higher than in Q1 2020, and in comparable currencies, games revenues grew by 1% and gross bookings by 3% year-on-year. Profitability remained on a high level, driven by moderate user acquisition investments and the stability of our key games. Operating cash flow was strong and increased significantly year-on-year. Overall, the financial status of Rovio is very good, and this gives us, for example, flexibility in executing our strategy. In the beginning of October, we announced that I will be leaving Rovio at the end of the year and a search for a new CEO is ongoing. Let's then turn to look at the financial performance a bit closer. The group revenue was EUR 67.9 million and declined 9.2% year-on-year, mainly due to lower brand licensing revenues. The decline in brand licensing was attributable both to declining movie revenues from the first Angry Birds movie as well as lower sales in consumer products, which was in line with our expectations. Games revenue was EUR 64.2 million in comparable currencies, gains revenue grew 1% year-on-year. The user acquisition investments were on a moderate level in Q3 compared to Q3 2019. And thus, this is a solid result. Angry Birds 2 and Angry Birds Friends gross bookings grew year-on-year. Angry Birds Dream Blast and Angry Birds Match declined. Scaling up of small down mergers continued gradually, as already explained. Rene will come back to these games specific gross bookings a bit later with more details. The group adjusted operating profit more than doubled year-on-year, and the group's adjusted operating profit margin increased to 18.9%. Increase is attributable to high adjusted operating profit of games, which was driven by stable revenues of key games despite the moderate level of user acquisition investments. Brand licensing units adjusted operating profit decreased due to lower licensing revenues from the first Angry Birds movie as well as lower consumer product sales. Then moving onto year-to-date figures. The year-to-date revenue of the group was EUR 203.8 million. Revenue declined 6.3%, and this is mainly attributable to lower brand-licensing revenues, especially from the first Angry Birds movie. Games revenue declined year-on-year by 2.2% to EUR 193.8 million. In comparable currencies, games revenue declined 3% year-on-year. The U.S. acquisition investments have been on a moderate level during all 3 quarters compared to the investments made last year during the same time period. However, despite this, our key games have shown good stability. This also shows that we have been able to make improvements in our key games. Brand licensing revenues decreased year-on-year by 49.2% to EUR 9.8 million. The maturity of this decline is attributable to decline in revenues from the first Angry Birds movie, as already said. Group's adjusted operating profit increased significantly, and the adjusted operating profit margin was 19.5%. The drivers for the year-to-date are the same as just mentioned for Q3, moderate user acquisition investments and revenue stability. Brand licensing unit adjusted operating profit decreased mainly due to lower revenues from the first Angry Birds movie. And then over to Rene.
Thank you, Kati, and good afternoon to everyone on the call. Let's move to gross bookings of the games. Total games gross bookings in Q3 was EUR 64.5 million, which was approximately 1% lower year-on-year. However, 3% higher in comparable currencies. In Q2 this year, we had a record gross bookings and the peak, which was due to the COVID-19 situation around the world. And we saw already May, June that the play engagement and revenue started to normalize after the peak, which was mainly in the March, April timeframe. However, during the summer and also in Q3, we saw the run rates of our key games, so Angry Birds 2 and Angry Birds Friends to continue on a higher level than in the beginning of the year, and this run rate has continued fairly stable also in the third quarter. Our largest game, Angry Birds 2 bookings grew by 6% year-on-year to EUR 26.5 million. And while it was still lower than the peak of Q2, this was the best quarter since Q2 last year. And we are really happy how the game has performed so far this year, and we're happy with its roadmap of new features for the rest of the year. Among others, the team is working on an update to the player arena, play versus player feature in the game, which we hope will be well received by the fans and increase engagement further. Angry Birds Dream Blast, our second largest game, bookings were EUR 15.5 million, which was lower than last year. However, as we've stated before, this is on the back of much lower UA compared to the end of last year. And overall, we see that the game is going towards cumulative year-on-year growth for the full year. Angry Birds Friends had another solid quarter, and it reached almost the same bookings as in the corona peak of Q2 '20, and it's on a good trend towards beating its last year's numbers for the full year. And our U.S. Small Town Murders reached the top 4 position in the portfolio with EUR 3 million gross bookings. And we have gradually increased the user acquisition for the game. Currently, the game is trending at about EUR 3.5 million quarterly run rate. So increased a little bit also in October, and we are trying to push the game even further for the rest of the year. And as Kati mentioned, introduction of local language versions of the game. We expect to drive further engagement and monetization along with other features that the team is developing. Sugar Blast, which is based on the Angry Birds Dream Blast game mechanics, but with different IP, was quite stable during the quarter with EUR 2.5 million bookings. Angry Birds Match, which has already negligible new amounts invested, as well as the other games continued to decline. If you look at the gross bookings from a game life cycle viewpoint, we see that in this quarter, Small Town Murders was introduced into them. The growth category, and it increased the growth category's share of the total, earned a little bit down from Q2, but higher than Q1. Remember, the [indiscernible] category is the one where we generate the most of the absolute profit for the games segment. And then the catalog segment has the highest profitability with basically no UA and that category continued to decline during the quarter. Now, next, let's discuss the user acquisition. In this quarter, the moderate level of UA continue, and with a small incremental increase, mainly due to the Small Town Murders ramp up. In total, we invested EUR 15.3 million, which equals 23.8% of games revenues. Now, that we entered the fourth quarter of the year, we are starting the quarter with similar run rate as in Q3. However, we do expect a marginal increase in UA for the last quarter as we anticipate to further be able to scale up Small Town Murders and also invest marginally in other growth games, such as Dream Blast, but also in Angry Birds 2, whenever we see the opportunity in the market to do so. And if you see where the user acquisition has been invested by games category, we see the grow games now are 3 quarters of the total spend. So similar as last year, when we were ramping up Dream Blast, earned games 1/4 of the total, and it's practically Angry Birds 2, which is the investment in that category. And the catalog games is insignificant amounts. And moving on to cash flow. The cash flow continued strong. And remember the high operating profit and amounted to EUR 15.8 million for the third quarter, and cash and cash equivalents amounted to EUR 123.5 million. During the quarter, we used EUR 6.5 million in share buybacks, and this was the last purchase of the current share buyback program. And today, we updated our 2020 outlook, which now runs as the following: that the group revenue will be somewhat lower than last year, and adjusted operating profit will improve significantly. Some further color on the updated outlook given by the fact that we have released one new game this year, Small Town Murders, in June 2020. And at the moment, we have 3 games in soft launch and several in different stages of development. And we think these games will benefit from having slightly more time in development. And accordingly, there will be no further new game launches this year. The brand license segment, which we have optimized to be profitable at a much lower revenue base than in early years, we expect to decline approximately by 50% year-on-year, and the year-to-date is now at 49.2%, which is very much in line with our assumptions at the beginning of this year. Overall, in 2020, we have used and are using much less user acquisition compared to last year. While at the same time, our key games have been quite stable. These 2 factors, jointly are main factors that the adjusted operating profit margin is seemed to improve significantly and also lower operating expenses in Hatch Entertainment contributed somewhat to the increase in group margins this year. So back over to Kati.
Thanks, Rene. All right. Let's next look at the games road map and the games in soft launch. So our games road map is healthy with 3 games in soft launch and in total, 8 games in various stages of development. During Q3, we soft launched one new game, Angry Birds Legends and other 2 games in soft launch are Hardhead Squad and Darkfire Heroes. We continue to manage the game development pipeline by adding new projects to the beginning of the funnel. And of course, at the same time, assessing the potential in existing projects and also discontinuing projects if they do not meet our targets. Hardhead Squad is a real-time 4X strategy game. 4X games are usually, by nature, quite complex. However, our goal for Hardhead Squad is to create the most approachable 4X strategy game in the Western market. Thus, we have set the bar very high for ourselves, but this is what we feel it requires to succeed in this competitive segment. We know that this is not a simple task, and we're learning along the way. The team is currently focusing on early retention, core gameplay, technical foundation, and marketability. In Q1 2021, focus will be shifting towards testing and improving the monetization. The game is in soft launch in U.S., Finland, Sweden, Denmark, and Philippines, and the target audience is a male around 30 years. The second game in soft launch is Darkfire Heroes, which is developed by our studio in Copenhagen. During Q3, we have finished integrating Rovio's technology into the game, enabling close tracking of the game's performance, and now we're acting on the findings. The team is rolling out new content and feature updates on a monthly basis, and we are seeing good improvements in the game's KPIs with each iteration. In addition, the studio is fully engaged in live operations on the game. They are running both events and competitions on a regular basis. This way of doing live operations is particularly important for mid-core games. In Q4, the focus remains on solidifying the game's KPIs, in particular monetization as well as testing user acquisition strategies and campaigns for the game. Currently, the game is in soft launch in several European countries, U.S., Canada, and a few Asian countries, targeting predominantly male between 25 and 40. The most recent game in soft launch is Angry Birds Legends, which is a turn based role-playing game set in Angry Birds universe. It focuses on bringing together approachability, meaning making it relatively easy to start playing the game and also deepness, which means that the players can always find new interesting strategies and ways to play. The team is currently focusing on user engagement and optimizing the early funnel and retention. The target audience for this game is male 30 plus/minus, the game is in soft launch in U.S., Sweden and Finland and Poland. All right. With this update, I would turn back to Veli.
Thank you, Kati and Rene. [Operator Instructions] Please, operator, we are now ready for questions.
[Operator Instructions] Our first question comes from the line of Olli Eloranta of Danske Bank.
It's Olli from Danske. A couple of questions. First, you mentioned the run rates for AB 2 and AB Dream Blast. Just wanted to check that I got it correctly. Was it that they are looking fairly flat in Q3 so far?
Yes, that's correct, Olli. We see pretty stable revenues for those games during this last month.
Okay. Yes. And then about Small Town Murders. So the game has been live for now almost five months. So what I'm wondering here is sort of the reasoning for you to still gradually ramp up the game. So do you want to see how the long-term retention holds up? Or why are you still so sort of cautiously growing the game? So any color on this would be appreciated.
Yes. So as always, we follow the payback model that we have for games. And for Small Town Murders, even it's a new game. We have, of course, previous experiences in the puzzle segment of multiple games. So we have expectations of how that payback will go. We gather data, of course, from this new game all the time and update the model. But we are -- we have a certain ramp up speed that we are following as we get more data. So basically, also taking kind of a risk approach, kind of managing the risk in this case of the ramp-up speed.So far, going mostly according to plan, but we've also seen in a market a bit higher CPIs lately, so that might also impact basically the speed of scale up during the last few months.
And maybe to add here, it's good to remember, it's a new IP game as well, which creates some additional considerations when ramping up the game.
Yes, definitely. And then lastly, sort of a high-level question on your UA level, which has declined from the 40% level of games revenues in H2 last year, it's a little over 20% this year, which is, of course, quite a big decline in also absolute terms. And of course, the biggest driver ever behind your profitability this year. But still, if we think of you as a growth company, what do you think would be sort of a normalized level of UA in the long-term that should enable you to grow at a [indiscernible] market? So any sort of ballpark here. So do you think the 40% level is an outlier and sort of 30% level would be enough in the long-term to you to grow at a rate of market?
Yes. It's a good question, of course, something which there is not one answer that would basically be in all situations applicable because it really depends on your portfolio mix. If you have a catalog or earned games, which are very sticky and have good long-term retention with core users, you can basically run a good base revenue with low UA.And then if you have a lot of growth games, then naturally, or new games, you will need to push UA. So I think 40% would be pretty much a portfolio where you are ramping up a new game quite fast. We see, of course, in the market that you can even go faster than that, depending on -- if you really have only one game and you're pushing it, then you can go higher. But we have a balanced portfolio of different games. And at the moment, I think the level is quite on the low side when it comes to, let's say, growth speed. So -- and we said earlier also that 30% is an average level that we've seen in the market. So let's say, around that 30% would be basically a good estimate of having a certain growth rate, not too fast, but basically managing a balanced portfolio.
Our next question comes from the line of Matti Riikonen of Carnegie.
It's Matti Riikonen, Carnegie. Two questions. First of all, now that we have started to see the second wave of corona coming to many, many countries, do you think that, that would give another stay home boost as it did in Q2? Have you seen any signs of that? Is it kind of in your expectations that, that would be the case? Any comment on that would be good.
Yes. Thanks, Matti. Yes, I was expecting that question as well when talking about the gross bookings and the peak in Q2. At the moment, we haven't seen a similar impact even though the pandemic seems to have a second wave or considerable second wave in many parts of the world, almost everywhere. We haven't seen similar peak in engagement revenues, as we saw in March, April.We are not basically expecting that peak, but let's see what happens. I mean it's really -- we are living in interesting times. And of course, now we enter into the holiday season, which from a gaming perspective, is typically quite strong and where we have a lot of events and special features for those holidays that we have upcoming. So those can also drive further engagement and monetization. And with the COVID on top of that, we don't yet know what will happen. But at the moment, there's no large trend change in what we saw here.
And then secondly, regarding the cost of doing UA, now that you got some benefit in the cost of UA in Q2. Do you see that, that cost benefit is kind of fading away now that the situation has normalized. How would you comment UA price levels at the moment or in Q3 going forward?
Yes. I think from our perspective, the UA governance and where we want to have those payback, it's been fairly stable this year. And I think in Q2, we discussed the fact that the [indiscernible] were falling that time and we didn't push more UA in that space. Of course, we got some benefit from that as well. However, the user base that were coming in with the lower CPA were not of the same quality at normally.And basically, now this end of the year season, typically, you see rising CPIs when you get closer to the end of the year. And we're seeing some of that as well, especially in USA. So from that perspective, looks like normal seasonality combined with bigger activity in the marketing space. But so far, this level, we have been able to increase a little bit the UA already in Q3.
Our next question comes from the line of [ Anna Karonanin ] of [indiscernible].
I would actually have 3 questions. The first one being about user acquisition costs that you already somewhat discussed here. So what would be the reason -- the main reason for the drop in your user acquisition costs in comparison with last year's figures? Is it just profitability that you're seeking? Or is there another reason for the drop?
Yes. So as I said, the user acquisition model, how it works is basically that we invest up to an amount that we can see a return in 12 months, and that pretty much governs the amount. And at the moment, this is basically -- and it depends on 2 things. One is that the monetization of games, which, for us, is fairly constant, and overlies the market levels of -- within those same game genres.And at this point, it's -- we have been investing as much as basically we can according to get that payback. Last year, we were ramping up Dream Blast, and we saw a good opportunity during the -- also during Angry Birds 2 Movie launch to invest more UA. But not later when we analyzed those cohorts that came in, they were not having the paybacks, all that we expect. And therefore, we started to seek the level where we are getting back to that payback. And basically, this is what we have been doing for this year. So basically, seeking kind of a steady state there and then building up from there, again, optimizing the games, and optimizing the marketing.
You said that you are not releasing more game this year because your games will benefit from more development. So are your game developers working from home at the moment? And if they are, how has this affected your game development? Does it have anything to do with the fact that you're not putting out more games this year?
Thank you for the question. As discussed earlier, we are predominantly working remotely, so from home, but there are also a possibility to work from the office. So we've been able to set up the offices so that it is safe to come here for those people who need and want to work from office.But all in all, this has not had an impact on the game development or our efficiency levels. And when it comes to launching new games, it's always depending on how the KPIs develop. And can we scale those games up with UA when they are released. So it is a normal process that we are going through at the moment. And the remote working does not play a role here.
So the last question is also about COVID. Do you think the pandemic has changed gaming in any way?
That's a good question. Obviously, we discussed about how the first wave that came in last spring, changed, to some extent, the behavior of people, some people. There were more people downloading games and more time was spent with the games. And then also, it did transfer to some extent to monetization as well. So of course, that has been something that we have seen.And now with the second wave, we need to see how that develops. But all in all, from our perspective, if I look at the situation from a side of game development itself, it hasn't actually changed things. There might be some, obviously, concerns, as I said, about the recruitment and also the creativity and innovation are things that we are following very closely so that we don't lose those and try to create an environment where we can still do that face-to-face when needed. So in that sense, there are certain things that we need to obviously consider differently. But all in all, I wouldn't say that there's been drastic changes, at least at this point of time.
[Operator Instructions] The next question comes from the line of Veikkopekka Silvasti of Nordea Equities.
It's Veikkopekka Silvasti from Nordea. My first question would be about operational expenses. So how much does your current fixed costs of the gaming segment reflect the expenses brought in by Darkfire Games and the Montreal studio. So with the fixed cost, I'm meaning employee costs and other OpEx and allocations.
Thinking that -- do I understand your question right, I'm looking for kind of -- at the moment in these numbers on a run rate basis, that how much it is? Or is it already reflected there? Can you specify the question?
Yes. So should we expect that those operating expenses would increase notably going into Q4 and maybe Q1 next year?
Okay. So basically, the Copenhagen studio is pretty much -- when acquired was a complete team. And from their perspective, there are no big recruitment needs at the moment for making Darkfire Heroes. So no major cost increases there for the rest of the year.And for Montreal, as Kati said, they're building the core team and they have been doing recruitments. But still, it's a minor theme, a couple of handfuls of -- is the size of the team. From that perspective, it doesn't really impact a lot this year.
And then secondly, do you expect that the cost savings -- sorry, do you expect that the cost of Hatch Entertainment would stay at this level as we saw in Q3 going into 2021?
Yes. I think for the rest of the year, that's pretty much the run rate. And of course, next year's planning is in full speed ahead, and it's too early to comment on those. So that's the overall budgeting and planning process that we do in the company.
And then maybe finally, you mentioned that the CPIs have been on an elevated level during the past few months. So do you expect this to continue throughout -- through the strong -- seasonally strong Q4? And do you maybe see that the upcoming change in IDFA will affect these CPIs?
Yes. I think that's a really good question, but also one very difficult to answer from that perspective that we have seen an increase during the last months. How long will this take? And will it sustain toward the whole fall, end of the year? Or will it go back to normal levels? And then again, speed up when we get back closer to the year-end, which is typically, when we see a lot of activity from -- in marketing also outside games as sort of brands to also advertising in the same digital channels. So that's too early to say.And from IDFA perspective, also, I think the verdict is out there that will we see an increase in CPIs or a decrease. That really depends on how the overall market will either increase spending to make tests or then decrease spending to basically reduce the risk level. So that's very early to say. As I said, Apple postponed IDFA change to next year. So there's still some time here to make test and analyze and see the best way to approach marketing in that world.
Okay. That's clear. Well, that's all for me. And maybe finally, Kati, thank you for all the collaboration and all the best for your future ventures.
Thank you very much, and thanks to everyone online. Thank you so much.
And as there are no further questions at this time, I'll hand back to our speakers for the closing comments.
Thank you for the call and the questions. That's all for now.