Enad Global 7 AB (publ)

STO:EG7

Earnings Call Transcript 2021-Q1

[Unknown Analyst]

Hello, everyone, and welcome to this Q1 presentation with EG7. With us today, we have CEO and Co-Founder, Robin Flodin, who will go over that report, and I will come back afterwards for the Q&A session. So over to you, Robin.

[Robin Flodin, CEO & Director]

Thank you very much. And I also want to welcome all of the investors and also all of the gamers that I know is always watching. I know that you're always very excited about game announcements, but I want to remind everyone who's a gamer that those will come through our gaming channels, but you're very welcome to sit in and listen to the strategy of the company. So let's get into it. This is the best quarter in EG7's history, and I'm extremely proud of the team's performance to be able to deliver this. We've had 100% increase in revenue from last year's quarter 1 and 500% increase in profit EBITDA level since quarter 1. We also closed a SEK 1.1 billion transaction Innova Games, which is really furthering our strategy, and we're also looking at growth throughout the year, both for Q2 and throughout the year. So I cannot say that I can be more excited than I am right now. The vision that I created back in the day when we're just starting out is coming true, and we are really setting up ourselves for the future. EG7, as a company, is an ecosystem for video games companies. We have 3 major ways that we generate our revenue. These ways are through our world-class IP portfolio of live and premium titles where most of it is generated 80% from live titles. These are games that are constantly out there being updated and consumers are spending in them every day. This creates a really solid rock for our company to be able to grow in the future. It's a baseline and it's a growing baseline. With Innova, we also added our own platform, which we're going to talk more about, but it's a very exciting combination with all of the live games that we have. And then also, of course, our world-class service platform, something unique to us where we created a way where we really thought about what are the pieces needed for a video games company to be the most successful it can with all of the pieces sitting together as a M&A strategy, as a buy and build, how are we actually giving these companies coming into the group a bigger reason to be a part of us rather than just sitting and having a bunch of assets. These are about how these assets become stronger together. We're also very happy to see that, on a rolling basis, on annual, it's SEK 2 billion in revenue from the company and SEK 600 million in EBITDA. If we look back a little bit quickly, we can see in 2015, we were a small consultancy studio. And in 2017, we listed the company with a vision and idea, and from that day, an SEK 11 million in revenue, we've been growing massively. Over 3 years, we've had a -- over 300% CAGR in the company, both through our very aggressive M&A agenda but also through organic growth. And we've now created a really strong company in the video games industry that is set up for further growth with strong IPs, with a platform and with our world-class services. And once again, I just want to stress, I cannot be more proud of the team that I have behind me and all the people that are working so hard to have made this possible. So if we look at the actual numbers, doubling the revenue since Q1 last year, 500% in profit increase from last year, and we are growing still. And you can also see that just as we've been telling investors, our margins are significantly increasing. And this is something that you can expect going on into the future as well. Something that we've always said, and I think that this is important, things being consistent about your strategy and executing on that. It's always been that we want to control the value chain. We think that this is crucial to have our high margins to be able to actually supply our IP in the way that IP is interacting with the gamers that we control the full value chain, and in all ways, really a testament to one piece in this continuously building puzzle of how we are putting all of this together. And we think that now we've really established our way, all the way through that we can sell through to the consumer and control it all the way there, and we think that you're going to see all of the upside from that as we go forward in time. Today, the company has an IP portfolio of live games on world-class, both some of the best licensed IP in the world like Lord of the Rings, or as we can see with our own games like EverQuest, which has generated $1 billion in revenue and has an amazing amount of fans, or H1Z1, which everyone always are so excited about what we're going to do with in the future. Today, 50% of our revenue on a pro forma basis, including Innova and Piranha, is coming from these live games, reoccurring revenue, stable and growing. And then with Innova added, we can also see, which is also coming from live games directly from consumers, diversified between 13 different games, we have 16% of our revenue coming from there. And then our world-class service platform with 22% of the revenue. And here, I think a lot of investors usually ask me, do you see that this segment will significantly grow? And I always said, from the beginning when this segment was quite a large part of our revenue, no, I think that the gaming segment will outperform in terms of growth. But it is very much because we have this segment that we can then outperform even more than what could be normally expected. And I think that, that's very key. But you should still expect that we could add more things into our service platform if we believe that this will further grow the company. But you're going to see the growth coming mostly from our platform and from our live games. EG7 is a global company, and this was a core mission from the beginning. Games are global, and they're becoming more and more global for every day. So also having a company that is truly global has always been our strategy, and we keep thinking this way and you're going to see more acquisitions on a global scale, games that are launched globally and fans all over the world. And already today, that's true. And I'm super happy to say that even in Antarctica, we have players, live right now. Incentive structures is a key element of how to work together and achieve success. That's why I'm super happy to say that today, in the company, Board and management hold 51% of the company. We are very much aligned. So let's talk about the growth. So I've told you that we have stable revenue, we have growing stable revenue. Something that you can be -- can be predictable, something that is a really strong base for investing in games and doing more things, IPs that we can do, expansions and sequels too, but how are we growing? How are we significantly growing into the future? And here, we see 4 different things. We are going to put our games on the 4Game platform. This will make sure that the gamers can come in to one place, and this means that it will spread out, and we know that this creates revenue increase on the different games. We will expand geographically as there are several of our live titles right now and the platform that has not been utilized on this geographic location, and we see this as a low-hanging fruit and a great short-term expansion of revenue and profits. And then, of course, very importantly, expanding the games and new titles. And then last but not least, we're going to continue our very successful M&A strategy. So if you look a little bit about 4Game. So why do we think that this is really interesting approach? Well, with 4Game, of course, we get better margins. We are on our own platform. And today, we have many of our games on our own platform, but they're all spread out in different places. So gamers has to go to many different places to achieve this. What we see is that there's a revenue uplift in the 4Game platform for every new game launched around all the other games because consumers see new games and they want to go in and try them, and they have one way to interact. And this improved way for us to funnel and channel marketing and everything that we do into one place will increase the revenue and performance of all the games together. But then, of course, it's also where did this platform started. So 4Game has the licenses for this IP that it does in the Europe and CIS territories. But what was the biggest reason? Why didn't it grow before? Well, it didn't have the IP rights to be global. But today, we have some great IP, we can decide. So now there's nothing limiting us from growing the platform globally. And this is going to be also something very interesting. And then we will look at the games. So already today, we have several initiatives started that are expanding the current live games in different ways. It's new expansions, new content, updating to the modern standards the new platforms and giving gamers something that they really want. And then, of course, it's also our new titles. And in the new title segment, we also want to say we have a new MMO in the works, it's AAA MMO and one of the greatest brands in the world. And then, of course, our M&A. We've done 8 different companies throughout the 3-year span, that's about 2 to 3 companies a year. And I think that this is very important when you look at our strategy. We are very fast running and aggressive when it comes to M&A, but we only select the things that fit in our strategy. We are very active with the companies. We integrate the companies, and this requires time and consolidation, but it also has a future-proof upside where these companies actually fit together into this group. And this is part of our core philosophy, our strategy and the way we operate. You can expect us to see more M&A for sure, but these are going to be the companies that we've truly selected and chosen to be the right ones. And this is something that I [ full-hardly ] believe is going to be what leads EG7 to stand out in the marketplace in terms of how we do M&A. So why should you invest in EG7? Well, I want to say that, first of all, there's many people who've started trying to do similar things to us after we were first with coming up with our service platform, combined with the video games space and the way that we do it, many others who also want to do an ecosystem for games. But we've already applied this strategy for several years now. And we are winning many engagements in terms of M&A with lower prices paid because people want to be part of EG7 and our strategy because we're selective, because we don't pick up every company that comes along that we could have acquired. So these are very important parts. But we are also based on high IP, some of the best IP in the world, diversifying solid revenues, high margins, and we have upside option potential going into the future. I think that there are a few companies that have all of these characteristics that you can look at in the gaming industry. And we have been the best performing, in terms of growth, video game company on the stock market for the last 3 years. Thank you very much.

[Unknown Analyst]

Great. Thank you, Robin. And congratulations on a strong quarter. If you would like to pick just 1 or 2 highlights from the report, what would that be?

[Robin Flodin, CEO & Director]

I mean, there's many things that are very exciting. And I think it's truly starting to show all of the great things. But let's say, 100% profit growth -- 500% profit growth and 100% revenue growth, I think, is just amazing. And continuously seeing growth. I know many other companies might see that they're not growing, we are seeing growth throughout the year. So I think that that's extremely exciting and there's even more to come.

[Unknown Analyst]

Okay. So we have received a lot of questions already, and you can keep them coming by e-mail. You can send them to [e-mail], and we'll get through them as we go along with this session. So you closed 2 acquisitions during this quarter, Piranha Games and Innova. How did these companies change the group?

[Robin Flodin, CEO & Director]

I think that both of these companies was very good to add to the group. I mean, soon we're launching MechWarrior 5. And now with the combined work of Petrol and Sold Out to joining in to help out using our different channels to also support the marketing efforts towards all the gamers that we have, which they could have never done before, being able to add a kind of marketing body that they actually need for the game to launch successfully. So this is just one example of how a game company like that. And we need strong game companies that are going to work on expanding our portfolio and expanding the -- all of the great IPs that we are having in our portfolio. So Piranha is a great addition to that. And then we have Innova, which really is, I would say, it's a perfect match for us. For us, we've always been looking at how do we consolidate to a platform in this way. And then here, we have an established platform, generating revenue with a great management team, very good at what they're doing, which just matches perfectly with all of the games that we have and are about to launch. And this means that for every game that we launch now, let's say, we launched a title like EvilvEvil. We spent a bunch of marketing towards that into the platform. We're now getting, even if it will be poorer result on the game, we will get extra results from all the other games, right? Because people might come in and say, "I didn't like that game, but I like this game." So it is going to be -- generally, it very much fits into our approach and our thinking around how to really control the value chain. And I think, yes, I couldn't be more happy with the company and also the fact that they took 100% shares. I mean, that shows you that they truly believe in what we're doing.

[Unknown Analyst]

That there's an upside there, yes. So you booked revenues for SEK 346.5 million during the quarter, but you also mentioned that on a pro forma basis, revenues were SEK 2 billion. Can you explain that big difference?

[Robin Flodin, CEO & Director]

Yes, of course. And that's on a 12-month rolling basis. So I think that this is just -- there are some things that moved out of the quarter, like, for example, Sold Out have some big launches and so on that affected the revenue for the quarter, that will be happening in the future. But I think that, in general, we are performing really well. And like I said, it's so also that you add in, of course, Innova and the Piranha, which wasn't in this quarter, which is important that they will come in the next quarter.

[Unknown Analyst]

Okay. So we have a question coming in here from Daniel. How is the rest of the year looking in terms of M&A? What does the pipeline look like?

[Robin Flodin, CEO & Director]

We have an extremely strong pipeline in M&A. And I would say it's really stronger than ever. And then people might ask, when is it coming? And I can't say, of course, but the truth is that we have a very selective approach, and we've also been very much working on integrating this businesses that we have now and looking at what is the next step, which companies of all of these companies we're talking to is the right approach. So I would expect more, but I can't say what.

[Unknown Analyst]

I see. So we had another question that came in earlier. 80% of revenues were reoccurring? How significant is that?

[Robin Flodin, CEO & Director]

I think that is -- I mean, compare that to any other video game companies, most companies are based on launches, right? And we have most of our revenue in very, very stable games that have been around, some of them -- the EverQuest one has been around for 22 years. I think that, that gives us a very solid base, both for investors, it's sort of a bottom line of the revenue, right? These games has that sort of staying power. It's not just a hit. It's just not something that came and went, right? And it's not -- so you could say, okay, maybe mobile games have similar characteristics. But usually, that's -- they still launch new games all the time. Very few mobile games have staying power, right? They go in and they go out and go in and go out. Here, we have games that have generated these stable kind of revenues for a very long time. And now we're also seeing a lot of growth opportunities. So I think that that's -- I mean, that's -- few companies have had that benefit, and we're very happy about it.

[Unknown Analyst]

We also had another question on revenue. 63% of the group revenues originate from live titles. Do you want to comment on the significance of that? The live titles?

[Robin Flodin, CEO & Director]

Yes. I think, I mean, we've always said that one of our key ways of thinking around the games that we want to have is we think about long-term communities, right? And this fits perfectly in that because we can serve these gamers constantly on a rolling basis, with new content that they want, the new things and the thing that they love, and it creates a stability that few other video game companies have. But it also means that we can do -- we can put in this expansion and new things and we're quite sure that we're going to be able to make the money back and then have new bets coming up, right? Both in the terms of the IP that is very strong, but also, of course, in new games as well. And this puts us in a very strong position.

[Unknown Analyst]

So we had another question that came in on the COVID-19 effects on the marketing agency, Petrol and the Publishing division in terms of Sold Out. Could you care to elaborate a little bit on how the pandemic has affected the company during the quarter?

[Robin Flodin, CEO & Director]

Yes. So there's been some things that have been pushed into the future because of partners having issues with launching games, which we all know, right? But in general, we've been performing really, really well, on average, in the company. So I think that's just going to be exciting for us going forward as we're going to see a lot -- we do see those things are still coming. They're just coming, looking forward in this year.

[Unknown Analyst]

Okay. We have a question coming in from Johan here, too. How do you see the mix of income from your divisions, Games and Services, going forward?

[Robin Flodin, CEO & Director]

So we truly -- like I also commented on the presentation, we think Games is going to be the growing -- the massively growing part of the business. While Services is still going to grow, it's going to be -- it's not where we put our focus in growth. We put our focus in using the Service division to help grow our Games division. But I think that is it possible that we add more service companies and in that way, that revenue grows significantly in that -- the acquisition? Yes, sure. That's possible, but it is not our major strategy. We're focusing on IP now and games. We have a strong Service division. There might be some things that we can add in there, but in general, we're quite happy with where it is today.

[Unknown Analyst]

So if you want to point to a few key figures that are the most important one for shareholders to keep track of when it comes to the performance of the company, what would those key figures be?

[Robin Flodin, CEO & Director]

I don't want to say that they're quite good, all of them. But I want to point them out, I think it's the high margins that we're able to produce, especially if you also take out some of the onetime costs that has happened in the quarter. And a lot of this is just through all of the things that are happening. IFRS, we're not doing that again. The transition to IFRS, of course, took a lot of time and effort, a lot of these sort of short-term things as for restructuring and fixing things.

[Unknown Analyst]

The accounting standards there, too.

[Robin Flodin, CEO & Director]

Exactly. The IFRS, of course, has massive increased, SEK 600 million to the result because we don't have to down ride or amortize goodwill on a linear basis. So that, of course, affects the results positively and gives us a much better understanding of what's actually going on, I think.

[Unknown Analyst]

So we need to address this question, though, because we do always get a lot of questions about it. What are the highlights in the games pipeline coming forward? You're seeing a lot of questions from fans about H1Z1, for example.

[Robin Flodin, CEO & Director]

I mean you saw the games that were up there on expansions. I think that that's where I have to leave it, that we are having several initiatives of what we're doing with the IP and games that we have, and it's definitely part of our strategy.

[Unknown Analyst]

Do you have any updates on major game releases such as MechWarrior 5 and EvilvEvil or -- we do get questions about this that are expected to be released during the second half of the year. Any update?

[Robin Flodin, CEO & Director]

Yes, MechWarrior 5 is coming in, I think it's 2 days now. Very exciting. Hype is starting to build. So let's see how that goes, we're very keen to see. But then I think EvilvEvil and Block'n'Load 2 is scheduled to come out in some way or form throughout the end of the year. So that's also looking very good. I think on the development side, we're very, very happy. But I think something that we also said, and I can repeat this for those investors who haven't heard it, is that we really see that these free-to-play types of games don't really benefit from a big hype up. You're just wasting money, right? You want to spend when the consumer can have a call to action and go in and play the game. You don't want to spend before the game comes out. This is more traditional, and this is what we do for premium titles. It's all about spending up until launch, getting people in the game rather than the sort of long-term spending of getting people constantly coming back inevitably. So I think that, that's also something that people should expect. But we're looking good for those games. Absolutely.

[Unknown Analyst]

Okay. So we have a question coming in from Fredrik. What are you currently missing in the ecosystem? Any specific type of companies you're looking for in your M&A hunt?

[Robin Flodin, CEO & Director]

Yes. I think -- I mean, the good thing about all these pieces now is it's very scalable to add new games companies with IP into this platform, into our systems, into the way that we start operating now as a business. So of course, we would like more IP and more game series that fit in today, or game studios that can help with development. But then I mean, are there small pieces in terms of platform? Absolutely. But I don't see, at the moment, that there are any specific ones that are the most key, and that I want to at least want to talk about and to not give our competitors an edge in looking for them. But I do think we have everything we need there. It's really just building out IP and games that is the most important for us.

[Unknown Analyst]

We have another question there from Fredrik. Any changes to the games pipeline strategy? Will you continue to develop your own IP? Or what does that look like?

[Robin Flodin, CEO & Director]

Absolutely. I think that that's -- but it's all about what is the size of that bet. And I think that what I really like about our strategy is that now -- and this was -- if you go back and listen to me, you can see that I'm talking about this. One of our strategies with M&A was also producing an area, a way to create a great company that is able to generate revenues on this sort of more predictable way so that you can invest in the game long term. Because new IP is very hard to predict how long it takes to develop. It's a lot of R&D., it's a lot of figuring out things. And then if you imagine that maybe a while ago, we had a huge bet on these new games. Now the bet is much smaller, but it still gives you that huge upside potential. If one of these games are very successful, it could double the revenue of the company, right? But if they don't, they don't hit us in any major way. There's now -- there's no big risk to it. And then we can keep having a certain percentage of the company's profits betting on these really great potentials. Some of it is, of course, betting on the things we know and then some of it are just generated revenue from day-to-day activities. And I think that, that creates a really strong gaming company.

[Unknown Analyst]

Right. So your revenues are more diversified that way. So can you talk a little bit about how you work with synergies within the group when it comes to development, marketing and distribution?

[Robin Flodin, CEO & Director]

Yes. We really worked a lot on how to integrate and work together with these companies. And I think that that's something that if you compare, there are some consolidators out there that mostly just own assets. And then they put them in some different ways in the group, but they're really just owning assets or just a holding company and managing that well. Let's call it the Berkshire Hathaway principle, which is a really good strategy. It's just managing through balance sheet. But we are managing in a sort of a semi active. We're constantly engaging with our entrepreneurs. We're trying to -- we're a company not just to consolidate it. We are managing strategy from a group level, helping the companies together, work together, and it's bringing in Petrol to really form marketing strategies, talk about how can we improve. And we've done some tests on this on the live games and already seen a significant uptick in revenue from these synergies and the things we're bringing in. You have Big Blue Bubble bringing out a console version of My Singing Monsters. Sold Out is helping out bringing it to stores and so on, which was never the plan before, and already creating extra revenue that wasn't there previously.

[Unknown Analyst]

So is that an advantage in your M&A strategy then to be able to offer more than just cash or equity?

[Robin Flodin, CEO & Director]

Absolutely. And we know that we won several of our positions at lower cost to the acquisition. And because people believe that this strategy is the way to go in this business, or at least many people believe that in the video space, they see all of the upside to this and then they want to take the share and be part of the upside.

[Unknown Analyst]

So we have another question coming in here. What can investors expect from EG7 going forward? Kind of a broad question, but if you want to pick something in particular to highlight.

[Robin Flodin, CEO & Director]

I mean, we are in a really great momentum at the moment. We have been throughout last year and still, I mean, we are working extremely hard to forge all these pieces together. And I think what you're going to see from that is, as these synergies start taking effects more and more, you're going to see more growth, you're going to see margins improving, and you're going to see some new really cool investments into game and expansions that will further give multiples of upside in revenue potential. And not just -- let's say, that organic growth is somewhere around, let's say, 20% a year, but then this could create -- these things that we're building could create instead of 20%, there's 100%, 400%, 500% maybe revenue increase if they do well. And I think that that's going to be something that I think about a lot is how do we create this. It's not just how do we sustain, grow and have a margin, but also how do we become 5, 10x bigger as a company through great content and through adding some amazing companies to the group.

[Unknown Analyst]

Well, that's about all the time we have today. So we have to wrap it up here. Thank you so much, Robin, for joining us today and thank all of you who tuned in and watched us live.

[Robin Flodin, CEO & Director]

Thank you very much.