Rovio Entertainment Oyj

OMXH:ROVIO

Earnings Call Transcript 2022-Q3

[Timo Rahkonen, executive]

Good afternoon, everyone and welcome to Rovio's Third Quarter 2022 Earnings Audio Cast. My name is Timo Rahkonen. I'm the Vice President of Investor Relations and Corporate Strategy at Rovio and I will be your host for today. In today's audio cast, we will go through Rovio's third quarter 2022 financial results and some strategy updates.

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 your question, please dial into the conference call numbers shown on the screen. Your question will then placed in the queue and asked in order of arrival.

But let's kick off now. Alex, please continue.

[Alexander Pelletier-Normand, executive]

Thank you, Timo. Good afternoon, everyone and welcome to our Q3 2022 Earnings Call. Thank you for joining us this afternoon. Let's start by having a look at the highlights for the quarter. And I believe that the main point to highlight for Q3 is the performance of our live operation which remains a big focus area for us.

Angry Birds 2, our biggest game, grew 7.7% year-on-year, but perhaps even more impressive is the performance of our second biggest game, Angry Birds Dream Blast, which grew double digit both year-on-year and quarter-on-quarter. During this time, the market continued to face headwinds and declined 15.3% in the U.S. according to data.ai.

Our group revenue grew 8.4%, reaching EUR 77.4 million and our adjusted operating profit margin was 15.6%. This is a good performance with slightly lower margin than Q3 2021, given the opportunity we found for marketing investments.

Our UA spend in Q3 ended up in the range we guided, lending just shy of 29% of games revenues. Another interesting data point is that while the U.S. market declined double digit year-on-year, it only declined 1% quarter-on-quarter, which is a positive sign for recovery. We continue to be optimistic about the long-term growth potential of the mobile gaming market.

We took advantage of the last few months to execute on our strategy and to make structural changes aimed at strengthening our positioning for future growth as the market recovers. Those changes will be covered later in this presentation. The last point to highlight is that we made good progress in our games in development, and we have new information to share here as well.

But before we dig deeper into those plans with animated content. The study showed that Angry Bird is the third most watched IP for teenagers aged 12 to 16 in the U.S. on Netflix, showing that our brand efforts for that segment are bearing fruits. Let's now look at the gross bookings per game.

As a whole, our gross booking increased 6.2% year-on-year and declined 2% quarter-on-quarter. Those results were supported by our top games, which did particularly well. Angry Birds 2 continued its solid performance since the beginning of the year and grew 7.7% year-on-year in Q3. It is interesting to note that the game also grew 4% in the U.S. in comparable currency.

The team is working on a new bird with totally new mechanics to be introduced before the end of the year. This is exciting for our fans as the last time we introduced a new bird was for the release of the Angry Birds Movie 2 in 2019. Angry Birds Dream Blast had a great quarter, growing 17.5% year-on-year and 25.3% quarter-on-quarter.

We're excited to see the strong performance after several quarters of stability. Our efforts on both UA and game developments are showing positive results and we continue to work on a plan to grow the team further both in Espoo and in Barcelona. More on this later in this presentation. The current quarterly run rate for the game is EUR 20 million.

Angry Birds Friends gross bookings declined 2.2% year-on-year, and we're not used to that type of performance from Friends, and it is explained by a technical issue with one of our partner which caused some players to temporarily lose access to their progress. The issue was fixed, but created a gap in revenue generation for Q3. However the game's daily active users and revenue run rate recovered.

Seeing our top games growing is a good segue to the section covering strategy. We launched several initiatives in the past months to strengthen our positioning in the market. Let's first start by resuming the main growth drivers we identified and then we will cover the recent actions for each.

One of the main points we talked about in our CMD in May was the importance of our live games and the potential we saw to make them grow further. We started to reinforce our teams and have additional plans to accelerate. Of course it is also important to have a rich pipeline of new games to create additional growth vectors for the future. We currently have 10 games in different stages of development, and I will share more on this as well today.

Finally, we suspected that the market would bring opportunity to strengthen the flock with new talent. I will shortly introduce a small new studio that joined us recently. So pursuing this strategy had an impact on our roster of Studios. The first one is that in order to be able to continue to grow live games, especially in the Puzzle Studio, we believe that we need a new talent pool to recruit from.

We evaluated different options and decided to open a new location in Barcelona, Spain. This studio is a bit different. As for now, they will exclusively work on supporting our current live games that are growing. They will focus on level design and live ups together with our Puzzle Studio in Espoo. This is also allowing us to do in-house things that were largely outsourced until now.

Another change is that we now have a second studio in Montreal, a small team of industry veterans decided to jointly leave their former employer to join Rovio. They are specialized in very fast prototyping and market test and aim at producing hybrid casual games. We internally call the team Studio 6.

Finally, we always strive to concentrate our resources where we see the biggest opportunities. And accordingly, we started negotiations on plans to reorganize the Battle Studio in Espoo, which is focusing on strategy games. Our current plan would be to move most of the positions within that studio to other areas where we see better market fit and growth opportunities.

In the previous slide, I briefly introduced Studio 6, our second studio in Montreal, but there are also some changes regarding our historical studio in the city. Their mission is now to expand Angry Birds beyond mobile and they have one game in development, which is a multiplayer cross-platform title targeted at the Gen Z audience.

We appointed a new studio head to support the studio in this mission. Her name is Andreane Meunier and she has a great background to achieve this task. Among other things, she occupied many leadership roles within Ubisoft, including on Assassin's Creed. She also worked at Unity and Google Stadia. We believe that our personality and our past experiences are very fitting for bringing new Angry Bird experiences across platforms.

The last part of the strategy to cover is our pipeline of new games. All of our studios are working on new titles, and in total we have 10 games in different stages of development. I will now briefly introduce some of the multiplayer shooter game currently called Hunter Heroes and a second is offering a single-player game play and is called Hunter Assassin 2. Ruby also has…

[René Lindell, executive]

Alex, and good afternoon to everyone on the call. So let's take a deeper look at the third quarter and year-to-date financials. In the third quarter, reported revenues grew by 8.4%. The revenue growth was driven by Ruby Games acquisition, a strong U.S. dollar versus euro and the new game Angry Birds Journey that we launched in January this year.

The comparable revenue means that constant currency and including Ruby Games, only for the month of September and that declined by 4.6. The adjusted operating profit for the quarter was at a good level at EUR 12.1 million and the adjusted operating profit margin was 15.6%.

This was a good level of profitability even though lower than last year, which had a very high profit margin due to much lower user acquisition in that comparable quarter. Also the adjusted EBITDA was solid at EUR 15.7 million, and the adjusted EBITDA margin was over 20%, with the same items impacting the EBITDA year-on-year as the EBIT.

If you look at the year-to-date revenue for the first 3 quarters, we have a significant revenue growth of 16.1%, again, driven by Ruby Games, launch of Angry Birds Journey and strong U.S. dollar. And the comparable growth is 2.1% and this has to be compared within the context that in our main market, U.S.A., we have seen a decline year-on-year during this whole period.

And the year-to-date adjusted operating profit was EUR 33.3 million, which is about EUR 3 million ahead of last year's level at this point of time, and our adjusted operating profit margin was about 1% lower at 13.8%. The higher absolute EBIT was driven by higher revenue during this period and lower profitability was related to PPA amortizations from the Ruby Games acquisition which amounted to about EUR 2.9 million.

Also the year-to-date adjusted EBITDA grew and was EUR 6 million higher year-on-year and landed at EUR 44.3 million, while the EBITDA margin was similar to last year's level at 18.4%. Thus we can see a larger absolute improvement in EBITDA than in the EBIT and the difference was explained by the Ruby Games. PPA amortizations as I said in the previous one.

If you look at the total UA investments in Q3, those were EUR 21.3 million. So a bit up from Q2 this year and clearly up from Q3 last year. It amounted to 28.7% of games revenues, which was in line with our expectation of between 25% and 30% that we said in our last earnings call in August. The increase from Q2 this year, mainly due to Angry Birds Dream Blast, which continued to scale up. Even though Angry Birds Journey UA was a bit lower quarter-on-quarter and, of course, significantly lower compared to Q1.

And due to the fast scale-up of Angry Birds Dream Blast UA, its strong top line growth and consequently it's lowered game level profitability, the game has been factored -- it's profiled into a growth game in our portfolio, and we have also reclassified it as such in this earnings report.

The Q3 operating cash flow was EUR 8.6 million, which was lower year-on-year due to lower profit and changes in working capital. Total cash balance grew to EUR 192.1 million. And yesterday, on the 27th October after the Q3 reporting period, the second tranche of the Ruby Games acquisition was paid. In cash terms, this amounted to $19.7 million and shares worth of $13.1 million or just below 2.4 million shares that will be paid from our treasury shares.

We also made a slight update to our full year '22 outlook with regards to the revenue and it's now as follows. We are expecting the reported revenue to be significantly higher and the revenue at comparable FX to be somewhat higher year-on-year. The second part of the outlook which concerns the profit remains unchanged.

We also give additional guidance for user acquisition investments in the ongoing quarter. During Q4 we expect the user acquisition to be between 28% to 33% of games revenues. In other words, slightly up from Q3 and this is due to Angry Birds Dream Blast continuing to perform well and starting the ongoing quarter at a higher UA run rate versus Q3. This also means that Dream Blast revenue is still growing and the quarterly run rate is around EUR 20 million.

[Timo Rahkonen, executive]

Thank you, Alex and Rene. So we are now ready to move on to the questions. Operator, please.

[Operator]

[Operator Instructions] The next question comes from Veikkopekka Silvasti from Danske Bank.

[Veikkopekka Silvasti, analyst]

So let's start with a few questions on the hyper-casual. It was quite weak and quite big decline quarter-on-quarter. So what's happening in the ads market at the moment and can you describe how, for example, the weakness in what we've seen in Meta and Google, how that affects Ruby Games and your ads business?

[Alexander Pelletier-Normand, executive]

Yes. So without entering into all of the mechanics, the effect that it has on hyper-casual of the weaker ads market is that the download declined sharply quarter-on-quarter. I believe it was 18% quarter-on-quarter for the hyper-casual market. And as a result what's happening with Ruby Game is they're accelerating their transition towards hybrid-casual games. So that's why they have more games in the pipeline as we covered during the presentation. And we really feel at this point that this is a strategy that makes the most sense for Ruby Games.

[Veikkopekka Silvasti, analyst]

Does this mean that the CPIs are lower as well if the ads market is weak?

[Alexander Pelletier-Normand, executive]

Yes.

[Veikkopekka Silvasti, analyst]

Yes. And at least according to the data that I follow from data.ai, you've kind of capitalized on this. Angry Birds 2 has been in the top 30 downloaded games in the U.S. during the Q3. So can you just explain what's happening with the download of Angry Birds 2 and what's your expectations of the game for, let's say, 2023 given that the base of gamers should be up quite significantly?

[Alexander Pelletier-Normand, executive]

Yes. I mean, the game has been doing well since the beginning of the year, which allowed us to make additional UA investment. What's interesting with the game is that the profile of the DAUs changed slightly because the game performed particularly well in the U.S. where we were able to grow it, you know, even in comparable currency. So that's very positive.

We have lowered DAUs on other countries that were historically not performing as well, right? So we have higher paying users in the game right now. So we continue to make, you know, events for the games and it looks good so far. We talked about the addition of a new bird in the game in December, which is highly anticipated by the fans and we have a nice pipeline of new things to add on the game next year. So the game has been performing very steadily and even growing. So that looks good.

[Veikkopekka Silvasti, analyst]

So did I understand correctly that the base of gamers is largely Angry Birds 2 now than it was, let's say, in the beginning of the year?

[Alexander Pelletier-Normand, executive]

No, it's actually lower. But it's the provenance of those players or where they are changed, right? So for instance, we have less users, for instance, obviously in Russia and China and more in the U.S.

[Veikkopekka Silvasti, analyst]

So less players and higher spenders. Clear. Let's see. Can you describe the normal timeline of development to launch of your hybrid-casual games? So now obviously you're shifting your strategy a bit towards this kind of hybrid-casual in both Ruby Games and then this new studio in Montreal. So what's the timeline should we expect? Is it like 2 quarters or 1 quarter or obviously it varies on average?

[Alexander Pelletier-Normand, executive]

Yes, that's a very good question because that's a little bit of a new segment for us and for the market for that matter. So what's important to understand with those games is that they get tested on the market extremely fast, right? We're talking -- it's very different than casual games where sometimes we take 6 months or a year to test and to start the soft launch.

Here we're talking about weeks or months, right, to test this. And now it all depends on how they performed in soft launch. So we expect that the "fail rate" of those type of games to be higher than casual games. Meaning that when they read soft launch, the probability that they will not reach global launch is probably higher than what we see in casual games. But they reach that point much earlier, which allow us to make the changes if needed or to continue with the game if it looks good.

So how long between the soft launch and the global launch is a good question and, I guess, we'll see soon with the games that Ruby is putting to soft launch right now.

[Veikkopekka Silvasti, analyst]

So quite a new initiative for all of us that you address. Okay. Then moving on to the game. So Angry Birds 2, Dream Blast, Friends, they are looking solid. They are growing and so forth and you're probably growing the teams as well. How about Angry Birds Journey? What's your outlook for that game? And are you still expanding the team and investing into the team?

[Alexander Pelletier-Normand, executive]

No, we're not expanding the team at this point, but we keep the same thing that we had on this game. So what we saw in the past few weeks is that the run rate of the game stabilized. As you remember, we reduced the UA investment in the past few quarters. So as a result, the top line of the game also was reduced.

And now we see that it's stable. Obviously it's not at the level that we have as an ambition for a new game. But I guess we have to remember and keep in mind that for games like Angry Birds 2, Angry Birds, you know, even what we saw with Dream Blast now and Angry Birds Friends is completely possible to change the scale of those games as we worked on them.

So the team is still working and iterating on the game. They haven't quite found the right levers to move the needle and we'll see what's going to happen in the next few quarters as they continue working on it.

[Veikkopekka Silvasti, analyst]

So work still continues and you've shown already that you're able to actually turn the tide for games like you did with the Dream Blast. But on another topic. So have you seen any updated estimates on the growth of the mobile gaming market in the Western economies and, well, in the U.S., specifically, now that the consumer is getting under pressure, we've seen a sharp decline this year, but 2023 shouldn't be probably too much better or what's the estimate at the moment for the market growth?

[René Lindell, executive]

Yes. Of course, it's very hard to kind of give you the short-term view. I think nobody has a clear understanding. But as we said in the report as well that in U.S.A., we saw is plateauing of the -- in our purchase market in Q3, which kind of at least for now looks like the decline Q-on-Q slowed down.

And of course Q4 is seasonality plays a role. And typically Q4 is the best season for mobile games. So from that perspective, I think we are optimistic when we come into this season now. And for next year I think, of course, what impacts also is that at some point your comparables will look different than this year and that kind of impacts.

But with a long-term perspective, I think we do agree with the estimates that there is a -- there's a big demand for gaming across the platforms and with mobile being still the biggest one in terms of estimates for the kind of long-term growth and that's what we think still is very much possible. But of course, short-term fluctuations are hard to predict.

[Veikkopekka Silvasti, analyst]

And the final for me. So Angry Birds Dream Blast, we classify it as growth games. And do you really think that this is a sustainable change in the profile of the game? Or is it just a quarter of strong performance, maybe 2, and then back to the EUR 16 million, EUR 15 million run rate? Or what makes you think that this is sustainable?

[Alexander Pelletier-Normand, executive]

Yes. So, I mean, there's been -- this is not coming as news for you, but that's been live ups and those live games that we have has been quite a focus for us and we talked about it as well since the CMD in May. So we approach the game differently. There's more people working on the game, keeping -- doing more live ups. We have more people working on analytics. We opened new channels to do UA for the game. We have more creatives that we use to do marketing for the game. So for now we -- that -- all of this together created new opportunities for UA. As you know, we're very disciplined when it comes to UA. So when we do those investments, it's because we know that the money is going to come back following our rules which is like a year for -- to get the full return.

And we still see those opportunities, right, as we enter Q4. So it seems that we're going to be able to continue to in that trajectory, right? We have a run rate right now of EUR 20 million quarterly on the game. And it looks stable for now.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Timo Rahkonen, executive]

Thank you everyone for your questions and joining us today. We wish you all a nice weekend and happy Halloween.