Rovio Entertainment Oyj

OMXH:ROVIO

Earnings Call Transcript 2020-Q4

[Alexandre Pelletier-Normand]

[Presentation]

[Veli-Pekka Puolakanaho]

Hello, everyone, and thank you for joining Rovio Earnings Audiocast. My name is Veli-Pekka Puolakanaho, and I am the Head of Investor Relations at Rovio. Today, we will go through Rovio's financial bulletin for Q4 and full year 2020. With me are Alex Pelletier-Normand, Rovio's CEO; and René Lindell, Rovio's CFO. We have a Q&A session after the presentation. [Operator Instructions]. Alex, the floor is yours.

[Alexandre Pelletier-Normand]

Thank you, Veli. Thanks for joining the call. So now that the introduction are done, let's jump right in the Q4 2020 and whole year 2020 highlights. Like the other quarters, Q4 was characterized by good profitability and cash flow. This is coming from relatively low marketing investment and the stability of our key games. We also released Small Town Murders in Q2 and match-3 games, which is new and exciting for us, and we scaled it to a run rate of EUR 15 million annual. Our live games had a solid performance. Angry Birds Friends released in 2012, reached its best quarter since Q3 2018. And the game -- the great performance is paving the way for additional growth in 2021. Angry Birds 2 also had a good quarter growing 5% year-over-year.And then team across the company prepared thoroughly for the new privacy policy to be introduced by Apple. As you know, in a nutshell, we're going to start to ask users to be tracked in between application, and this is expected to have a pretty big impact across the industry. And we did many things to prepare for this. But I'm just going to highlight 3 here. We broadened our network of advertiser. Second, we adapted, of course, our predicting model for a return on our marketing investment and also we're working on our games to make sure they welcome a broader audience, which is already something that we're strong at, given the casual and inclusive nature of our puzzle games and of the Angry Birds brand. So we're ready for this change.Related to this, our Stockholm studio shifted their strategy towards advanced casual in the last quarter, which I can describe by saying that it's the broad appeal of casual games in terms of simplicity, but also deep metagames that are more often seen in RPG type of games, so very often associated with good monetization. So all in all, the games have the profile that are similar to Angry Birds 2, that is also done by our Stockholm studio, but I will cover this more in-depth as I go in the strategy section. In terms of studio, we ended the year 2020 in a very different shape than where we started. We went from 3 to now 5 studios in the family. Our Montréal studio is working on future-looking initiative. And I will cover this in-depth at the end because that's quite important, and we acquired a studio in Copenhagen as well that has deep knowledge of RPG games. Speaking of that studio, their game Darkfire Heroes reached an important KPI milestone in Q4, and it's approaching its launch window. And I'll be back on this as well. And in -- as for our puzzle studio has also reached a KPI milestone in Q4 for their games Angry Birds Journey that led to the soft launch of the game in January of this year. So that's a really interesting project for us, and I'll explain why in a bit.Our game performance was stable even with lower UA investment compared to the previous year, which speaks for the steadiness of our game, and particularly the ones in the earned phase. And finally, the year 2020 has been a special 1 for everyone at the global scale. And for Rovio, the pandemic meant work from home starting early March. And I really want to salute their tenacity and efforts. During this period, they really took the challenge head on, adapted fast and executed flawlessly on our plan. So thank you very much to all Rovioians listening to this.All right. Now if we look at the game by game highlights, Angry Birds 2 has been updated during the Q4 quarter with what we call Arena 2.0, and this is especially targeted for the most engaged and competitive players showing them a deeper sense of progression. And the update was intended not only to have an impact immediately, which it did, but we also want to use it as a launch pad, opening new opportunities to operate the game in 2021, and we're starting the year in a good position. Angry Birds Dream Blast declined slightly but remained relatively stable given a significant reduction of marketing investments. We're in the process of renewing the game through the visual progression, for instance, an event system, which we think will improve payer retention.Angry Birds Friends performed very well, partly as a result of investment that we did in the game even as back as 2019 and giving us more flexibility on how to operate the game. And the game is in a really good position to continue to grow. We're very proud of the team. We're talking about a game here that has -- that's going to celebrate its 10-year anniversary next year. And it also shows that even for this game that released a while back, we can continue to grow them.Small Town Murders is an important game for us and a significant evolution on the meta game. It's a narrative aspect, and we believe that this is key to retain players in the long run. It grew relatively slowly as we learn to operate those type of games. But it's already the biggest IP that we released, new IP that we released since Battle Bay in 2017. So we feel that there's still many aspects that we can explore on this game to have it grow further.Now on the emerging titles, we actually have 3 games right now in soft launch, but I want to talk about 2 of them more precisely. Darkfire Heroes is a real-time competitive and co-operative RPG game being developed by our Copenhagen studio acquired in 2020. So this is very nice because the integration of the Copenhagen studio has worked like a charm, clearly showing a compatible culture with Rovio. But I think it's also demonstrating the capacity of Rovio to support and enable acquired studios like that to improve their games. And I'm very glad to announce today that Darkfire Heroes will be the next game to come out of Rovio, and it is scheduled to go live in April 2021.And then Angry Birds Journey from our puzzle studios, a game that reached soft launch in January of this year, and it's really a perfect fit with our strategy of leveraging the brand more widely. It's a much more casual take on our classic slingshot gameplay. And our goal to do this is to go after a broader and more casual audience. So it's very different from the deep meta game that we have in Angry Birds 2 that looks more like an RPG type of game. So we believe that this will enlarge the footprint of our slingshot game, bringing it to a broader audience. And we also expect to get a very good proportion of organic traffic on this title. This slide looks at the studio setup. So as usual, our studio are very much focused on a specific genre. That's what we call our genre mastery. Every studio is very specialized in what they're doing. We still have 2 studio in Espoo. Our Puzzle Studio is the biggest. And they're working on titles like Small Town Murders, Angry Birds Dream Blast, Angry Birds Friends, and they're the ones that recently released Angry Birds Journey in soft launch. Their focus is mostly casual audience, mainly female 35 plus. And we also have the Strategy studio in Espoo that is working now exclusively on Hard Head Squad. They aim at creating the most accessible strategy game on the market. And I believe that this is exactly the right strategy for this genre, and I'll explain why later. Their target audience is mostly male. And our Stockholm studio now focusing on advanced casual. Their main game is obviously Angry Birds 2. It is still the biggest game as well for Rovio as a whole. They have 2 additional games in development and they're also trying to leverage the Angry Birds brand with those new projects.Finally, very fast because I've mentioned it, Copenhagen specialized in RPG and Montreal leading the charge on our future of gaming initiative that I will cover at the end of this section.All right. Now on the strategy highlights, a new section that we cover here. So the mobile gaming market continues to evolve very fast. And as a result, we feel it is critical to be agile and review our strategy regularly. One trend that is of importance that I want to highlight is the increasing dependent on paid user acquisition, and in that context, the fact that we can rely on a strong brand with a wide variety of potential player and wide appeal is definitely a strategic advantage on which we want to continue to build. And I just want to say a few numbers to put that into perspective. And the first 1 is that today, the Angry Birds brand is known by over 90% of the world population. So there's very few brands worldwide that can say the same. And number two, the proportion of paid install in the U.S. relative to organic, is now around 60% in favor of paid. And this proportion is rising every year.Now if you look at Angry Birds 2, for instance, the proportion is completely reverse. In fact, over 70% of downloads on Angry Birds 2 are purely organic. So people are actively looking to download the game without us having to pay for advertising. And that's in the U.S. where we have our biggest marketing budget. Actually, worldwide, this percentage is 90% purely organic. So as part of our strategy update, we will utilize the Angry Birds brand further, particularly for games that are close to the brand's essence. And by that, I mean, slingshot, physics-based, construction and destruction.So the change of strategy in our Stockholm studio to advance casual is partly a result of this approach. Naturally, this does not mean that we're going to stop working on new IPs. We need to have a balanced portfolio approach. We also renewed the brand strategy to accompany our fans throughout their lives with different touch points. And the goal here is to keep the Angry Birds brand relevant for decades to come. So we're introducing the brands to player when they're kids and then we provide them with highly social experiences during their teen years, and we continue to delight them with nostalgia and innovation as they start a family of their own.It is also a view that the new privacy policy planned to be introduced by Apple will limit the precision of targeting and marketing campaigns. So our casual games are naturally less dependent on precise targeting, given the wide appeal they have, and they will be affected less. Hence, we recalibrated our portfolio to do more of those type of games relative to mid-core titles. We're also consolidating our future-looking initiatives to focus on consumer-facing product, taking advantage of the trends we believe will shape the gaming world in 3 to 5 years. This will be covered in the next slide.And finally, our strategy still include leveraging our strong cash position to seek acquisition target. And here, our focus is on companies that are on a growth path and for which we see good synergies and culture fit. A good example of this is Darkfire Heroes.Now on the future of gaming. So the year 2020 has been rich in changes across different sector, across different industry for everybody. The way we live our lives is shifting towards digital at an accelerated pace. And we believe that gaming is at the vanguard of those changes in consumer behavior. So in that context, we feel it is necessary and it is strategic to make investment for mid- and long-term revenue growth. And this is what we call our future of gaming initiatives. Our teams in Montreal are focusing on key trends we observed on the market, and we believe will continue to grow in importance for players. So a few examples of those trends. The first 1 I want to mention is that games are becoming the social network of choice. And we clearly see this, for instance, when we look at Gen Z, which is the digital native generation. They connect through games. The second trend is that game are highly social experiences with deep options for self-expression and creativity. So they are not just past time or hobby anymore. And the tools that allow players to build, share and even sell their content inside those virtual worlds are already widely used. And three, players want to maximize the amount of time they spend inside their favorite worlds, driving up the desire for cross-platform experiences. So games and technology that facilitate this consumer desire, for instance, cloud gaming, have a strategic value that we want to build on.These trends are laying the foundation for a vision for a future that is gaining in momentum and that is called the Metaverse. So in a few words, what is the Metaverse, it's a collection of persistent virtual spaces where user can have various type of rich interactions together. We plan to be a front-runner exploring those trends. And we have made meaningful investment to do so. One example of our commitment that I want to mention here is our podcast Tomorrow with Rovio that features industry's thought leaders and innovators sharing their vision, their analysis, their prediction of those key trends and drivers.So to recap all of this, we have the brand and expertise to continue to build on our leadership position in mobile gaming, but we also have the ambition, the vision, the technology and assets to take a meaningful share of future-looking opportunities. Gaming is the most exciting industry of the 21st century, and we're going to continue to impact its trajectory for years to come.And now on the financials with René.

[René Lindell, Chief Financial Officer]

Thanks, Alex, and good afternoon to everyone on the call. Let's discuss Q4 '20 and full year 2020 financials. In Q4, the group revenue declined by 4.3%, mainly due to the impact of currency headwinds in the U.S. dollar versus previous year, and this impacted mainly the games revenues. In comparable currencies, both the games revenue and gross bookings grew by 2% year-on-year. The growth in gross bookings in the quarter was driven by the good performance of our well-established games like Angry Birds 2 and especially Angry Birds Friends, as Alex mentioned, had its best quarter since Q3 2018. We also continue to gradually scale up our newest game, Small Town Murders.Brand licensing revenues was EUR 4.1 million, declined 16.2% year-on-year, and the decline in revenues was mainly due to consumer products, while the revenues from the first Angry Birds Movie were larger-than-expected in this quarter. The revenues of the movies are expected to decline over time. However, the revenue streams can have high variation on a quarterly basis.Our profitability in Q4 improved from having a moderate level of user acquisition, combined with the relatively stable games revenues. Total group adjusted EBIT was EUR 7.5 million, up from EUR 0.2 million in Q4 '19, and adjusted operating profit margin was 10.9%, up from 0.3% last year. Games EBIT grew from 4.5 -- EUR 4.6 million to EUR 12.7 million, and brand license EBIT declined year-on-year due to an additional EUR 1.3 million amortization of the second Angry Birds Movie.During the quarter, there were around EUR 3 million of additional operating expenses from 3 sources: the already mentioned Angry Birds 2 -- Angry Birds Movie 2 additional amortization; costs related to the CEO departure; and additional provisions for employee bonuses. The other segment costs, which include Hatch Entertainment and unallocated corporate costs were on the same level as last year. While the Hatch costs declined year-on-year, the costs related to the CEO departure impacted negatively the other segment cost base. And user acquisition was also incrementally increased during the last quarter and we will discuss that more in a while.And full year 2020 financials. Full year group revenue declined by 5.8%. The games reported revenues declined by 2.5% in comparable currencies -- games reported revenues declined by 2.5%, and in comparable currencies, the decline was approximately 1%. The games gross bookings were stable year-on-year in comparable currencies. Brand licensing revenue declined 42.5%, which was a bit less than we expected due to already mentioned higher revenues from the first Angry Birds Movie in the final quarter.All in all, the games revenues in 2020 were characterized by slower start of the year in Q1 compared to the previous year revenue peak in Q2 induced by COVID-19 shelter at home, that resulted in increasing player downloads, engagement and revenues, while the second half can be characterized as being relatively stable.The full year adjusted operating profit was a record EUR 47.2 million and the adjusted operating margin, 17.3%. The moderate level of UA, combined with relatively stable games revenues explains the high profit for the full year as was the case in each quarter during the year. The Games segment operating profit almost doubled from EUR 31.3 million to EUR 61.7 million. The brand license profit was lower year-on-year, due to overall lower revenues and the additional asset amortization of Angry Birds Movie 2. The Other segment's operating profit was minus EUR 15.3 million, so up from EUR 17.6 million mainly due to lower operating expenses in Hatch Entertainment.Our User Acquisition investments grew incrementally in the final quarter as we continue to gradually scale Small Town Murders. Total UA investments in Q4 was EUR 60 million, and this amounted to 25% of games revenues, thus continuing the incremental increase during the year. In our User Acquisition governance, we continue to target 12-month payback, and we invest up until we reach that point. The last quarter of the year is typically quite competitive in the digital ads auction space, and the cost per installs tend to be elevated. And Q4 2020 was no exception to that seasonal trend.If you look at how the User Acquisition investments was done across our portfolio, we see that a bit over 70% was invested in our 3 growth category games, mostly for Angry Birds Dream Blast and Small Town Murders and a bit less than 30% was invested in our earned games, of which majority for our largest game, Angry Birds 2. During the year, we saw a good performance of our top line games in the earn and grow categories while the catalog games, where we do not invest UA, continued to decline as expected. The higher profit year-on-year is reflected in higher cash flows. In Q4, the operating cash flow was EUR 17.6 million and also impacted by positive net working capital change in the quarter. The full year operating cash flow was a record EUR 63.6 million, up from EUR 10.6 million in 2019. Our cash balance grew to EUR 138.9 million at the end of the year. And during 2020, we paid EUR 6.9 million in dividends and used EUR 30.7 million in share buybacks.Today, we also announced that we have decided to discontinue -- we had discontinued Hatch Kids, our streaming service targeted to kids audience, which has been a soft launch last year. The performance of the service in soft launch did not show enough potential to reach significant scale. The service will thus be ramped down during the March month of this year, with annualized cost savings, approximately EUR 3 million, taking into effect late Q2 this year.Going forward, the proprietary cloud streaming technology created by Hatch will be utilized in Rovio's internal projects as part of our future of gaming initiatives, including in projects in our Montréal studio.For 2020 dividends, the Board of Directors proposes EUR 0.12 per share to the AGM on the March 30. The dividend per share thus would increase 1/3 year-on-year. Based on the outstanding shares at the end of last year, the dividend will amount to EUR 8.8 million, which represents 25% of the net profit adjusted for items affecting comparability.Lastly, our 2021 outlook. The mobile gaming market continues to grow with casual gaming being a major growth driver. The ongoing changes in consumer behavior and underlying market trends are accelerated by the COVID pandemic and plays an important role in both current games operation and new game development. This, combined with industry changes like Apple's privacy policy, fuels the near-term uncertainty in the market environment. We will focus on improving the performance of our key live games and are launching new innovative products. We continue to show diligence in our U.S. spend. Depending on market conditions, the performance of our investments and the launch of new games, we aim to increase our UA investments to build growth for the coming years. This may have implications on short-term profitability. We will continue investing in our future of gaming initiatives, taking advantage of the trends we see in consumer behavior and building our positioning in the rapidly evolving market. In addition, we see growth through synergistic acquisitions that can deliver long-term value growth.

[Veli-Pekka Puolakanaho]

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

[Operator]

[Operator Instructions] Our first question comes from Sami Sarkamies from Nordea.

[Sami Sarkamies, Senior Analyst of TMT]

I have 2 of them starting from the guidance or the lack of it that we'll probably be talking about quite a bit today. Just wanted to understand that is the reason for you not providing any sort of numerical or more precise guidance that both on top line and EBIT, you might actually be either below or above the last year level, depending on how things play out during the year.

[René Lindell, Chief Financial Officer]

Thanks for the questions. So I think when we look at '21, I said in the outlook, there are multiple factors that impact both from the market dynamics and also from our perspective. We have quite a wide range of scenarios, as you said, we are -- we have announced today the launch of a new game in April. We have other games in soft launch. At the same time, we have changes in the advertising industry that we are well prepared for. But I think everyone feels like there will be a point of disruption where we think we have an opportunity. However, it is hard to say at this point of time, exactly what the impact overall will be. So I think at this point of time, we are comfortable to say that we aim to grow, and we will do -- keep on doing incremental investments in UA and take advantages in the market whenever we see the performance of those marketing spends being aligned with our return requirements. And from that perspective, we are comfortable and positive for the full year. We have a great portfolio, great diversity in our games. But from that perspective, we are looking at a quite exciting year ahead of us.

[Sami Sarkamies, Senior Analyst of TMT]

Okay. Thanks. Then my second question would be on User Acquisition spend this year. Could you somehow elaborate on what will be the main targets for UA spend just thinking that which products are most likely going to receive the bulk of it?

[Alexandre Pelletier-Normand]

So for our User Acquisition spend, we have pretty clear guidance, right? As stated earlier, we aim for a 12-month payback of all of our investments. So when we look at the year ahead, we have a launch that is already announced, which is Darkfire Heroes. So usually, when games are launched, they enter this, what we call the growth phase. And usually, this is associated with some marketing investment, right? We do plan to grow the game a little bit like the approach that we took last year for Small Town Murders. And go gradually, this is slightly a different type of game for us. So we're going to increase the spending on it gradually and see what happens there, so yes. And we're going to continue following our guidance of 12-months payback for all of those investments.

[Sami Sarkamies, Senior Analyst of TMT]

Okay. And then finally, you did discontinue Angry Birds Legends. Can you open up a bit the decision on that one? What was the main concern there?

[Alexandre Pelletier-Normand]

Absolutely. So when we have games that are reaching soft launch, already, it means that they pass-through many hoops, and they have interesting KPIs enough for us to try them in soft launch, but it doesn't guarantee everything when they reach that point, right? So we -- the reason why we do soft launch that we want to continue testing the game and see how they're performing live. What is important for us, 1 of the things that we look at is how -- what is the trajectory of those KPIs in our games in soft launch. So it's okay if they're not perfect Day 1, but they need to go on the right trajectory to reach the targets that we have for each game. In the case of Angry Birds Legends, the KPIs were not improving at the pace we were expecting. And we felt that given the change of strategy that I talked about earlier for our Stockholm Studio that it was better to use those resources for other types of projects.

[Sami Sarkamies, Senior Analyst of TMT]

Okay. That's helpful. I don't have any further questions at this point.

[Operator]

Our next question comes from Pete from SEB.

[Pete-Veikko Kujala]

This is Pete Kujala calling from SEB. Can you hear me all right?

[Alexandre Pelletier-Normand]

Yes.

[Pete-Veikko Kujala]

Excellent. I'll continue from the UA question, so you mentioned that you're going to gradually ramp up UA on these new games, similar to Small Town Murders. Is this an approach that we should or could assume for basically all of your future releases or is this a trend for mainly for non-Angry Birds like new IP games?

[Alexandre Pelletier-Normand]

Thank you for the question. It's really a case-by-case thing. And in the case of both Small Town Murders and Darkfire Games, we're talking about games that are slightly different for us. They're going in a slightly different area of the market. So it's harder for us to know exactly how those games are going to behave with time, whereas, for instance, on puzzle games, maybe we have a better understanding of what the return curves look like. So in a case like that, when we're releasing a game that is new for us, then this is usually the approach that we prefer using. Whereas when we're in known territories we can use a different approach.

[Pete-Veikko Kujala]

Understood. Then on Angry Birds Journey, it entered soft launch in January. But this is a game that has a very familiar game plateau with a slingshot theme. Is it reasonable to assume that the soft launch period potentially for this game could be quite a lot shorter than it is, for example, for Hard Head Squad or Darkfire Heroes?

[Alexandre Pelletier-Normand]

That's a good question. Actually, the game just reached soft launch recently. So we were starting to see KPIs, right? So although it is interesting, the KPIs that we see, they're promising. We're -- it's still very early. Now there is 1 very good point that you made that in the strategy game, for instance, it is customary to see longer soft launch period. So that is true. So I would say that we could expect that a game like Angry Birds Journey could have a shorter soft launch period than a strategy game.

[Pete-Veikko Kujala]

All right, very clear. Then discussing a little bit about the Montreal studio. You mentioned that you have 1 internal and 1 external project. Can you mention anything about this project? And maybe give some comments on why you choose to use external partners for development there?

[Alexandre Pelletier-Normand]

Thank you for the question. This is when we -- as a general rule, we don't talk much about our games before they reach soft launch, right? There are so many things that can happen even when the games are in soft launch that before that, it's even trickier, right? So at this point, I cannot really communicate anything about the game that we're developing. The reason why we go external for some games, for instance, is typically, when we feel that there is a segment of the market where we want to go, but our internal studios, as explained, have their genre mastery, they're already specialized in some areas of the market. So let's say we want to go in a different part of the market, then that's the moment where we can ask ourselves if we can do business with an external partner that has deep expertise on this segment of the market.

[Pete-Veikko Kujala]

All right. And then on Hatch Kids or basically the Hatch team, after Hatch Kids is terminated, you mentioned that they will be supporting, for example, Montreal studio with the streaming platforms. But what will this team be working on? Will they be doing game development themselves? Or any comments?

[René Lindell, Chief Financial Officer]

Yes. So they will focus on further developing the technology that they've built, taking that forward. I mean we certainly believe cloud gaming and cloud powered games will, in the future, play a role. And however, game development is a cooperative. It will be a cooperation then with other studios. And in this regard with the Montreal, who has the lead on the game itself. So they will be part of this technology and support for any future projects there.

[Operator]

[Operator Instructions] Okay. There appears to be no further questions registered, so I'll hand back to the speakers.

[Veli-Pekka Puolakanaho]

Thank you for all the questions and the call. We will be back with the next earnings call on April 29. Thank you so much. Have a nice weekend.