Enad Global 7 AB (publ)

STO:EG7

Earnings Call Transcript 2023-Q1

[Ludvig Andersson, executive]

Good morning, and welcome to this presentation of EG7's First Quarter for 2023. My name is Ludvig Andersson, and I will be your moderator here today.

Together with me to present, we have the company's acting CEO, Ji Ham; and the company's Deputy CEO and CFO, Fredrik Ruden.

After the presentation, we will have a short Q&A session. So if you have any questions, please feel free to e-mail them to the company's IR e-mail.

But now without taking further ado, over to you, Ji.

[Ji Ham, executive]

Thanks, Ludvig. Good morning, everyone. Thank you for joining us. We have some excellent results to share.

Let's go to the next slide. We started out the year very strongly for Q1 with Q1 net revenues coming in at SEK 572 million, representing 43% growth and adjusted EBITDA was very strong with SEK 190 million, representing 33% margin and almost 80% growth year-over-year and strong operating cash flows of SEK 171 million. And all of these results represent all-time highs for the group, which we're very excited to report.

And the group is in its best financial position since inception with significant cash on the balance sheet with SEK 453 million. And additionally, we have fully paid down our debt, and we no longer have any bank debt remaining at the holdings level.

Next slide. Big Blue Bubble continues to be a highlight for us with a solid performance throughout Q1. Additional growth on top of Q4 results with net revenues and EBITDA. SEK 218 0 million of net revenues and SEK 133 million of EBITDA, representing 61% margin. In December 2022 was the peak along with the viral uptick in My Singing Monsters but we are seeing a nice follow-through for Q1 with continuing momentum, generating the additional growth from Q4 levels in Q1 this year. We do expect ultimately that My Singing Monsters will settle down at a higher normalized baseline compared to pre step-up in this performance, which we will communicate further as we see additional data.

Next slide, please. Some additional KPIs for My Singing Monsters to demonstrate the sustaining performance with strong user engagement. Over 7 million new users came in Q1, representing all-time high daily active user base for Q1 with 1.63 million average for the quarter. And this higher average daily active user in Q1 does demonstrate this continuing solid engagement and retention trend for the title, which we're very happy about. And we have some exciting updates planned for the second half of the year with the anniversary and the holiday events that will be coming up, and the team continues to work very hard to deliver additional compelling content for all of its user base to sustain and retain and engage the user base that has expanded along with this final uptick over Q4 as well as Q1.

Next slide, please. On the segment side of things, our Gaming segment operational highlights. Net revenue for the quarter came in at SEK 475 million, representing 86% growth on an FX neutral organic basis, 69% growth, adjusted EBITDA of SEK 194 million, which represented 129% growth year-over-year and 41% margin.

As noted, My Singing Monsters [indiscernible] 70% of adjusted EBITDA for the segment.

Daybreak is continuing to perform very steady and stable with this portfolio of live service games. Our net revenues came in at SEK 201 million, a slight decline from the year before and adjusted EBITDA margin sustaining at 26%.

And Piranha, since joining the group, delivered this best quarter ever with net revenues coming in at SEK 51 million.

The 4 DLC that came out from MechWarrior 5 in January was a nice success for the group. Along with that, Piranha continues to make nice progress on the work-for-hire strategy, recently signing a new contract with [ Piranha ] in excess of SEK 100 million to be earned over the next 18 months.

Next slide, please. On the Service segment side, net revenue came in at SEK 97 million, representing a decline of 33%. Adjusted EBITDA was SEK 80 million, representing 8% margin. Q1 net revenue declined compared to the year before, was primarily due to 2 reasons. One was related to a different product lineup with Fireshine having delivered a nice success with core keeper in Q1 2022, but no longer have that impact for 2023.

Additionally, for 2023, early part of this year, a slower and lighter pipeline compared to last year.

Having said that, Fireshine is performing according to plan. No big releases were planned for Q1 and the remainder of 2023 pipeline is strong, and we're looking forward to getting additional products delivered throughout the year.

And then on the digital public side of things, Fireshine released a game called Shadows of Doubt in April as an Early Access title on Steam, which has performed nicely tracking at 92% positive rating on Steam, which is phenomenal. And we're looking forward to that title coming out ultimately out of Early Access and contributing meaningfully to Fireshine and overall group's performance.

On the Petrol side, they do what they do best, continuing to work with top publishers and developers representing Mighty DOOM launch in Q1 with over 10 million trailer views and more than 3.3 million units shipped for the first 2 weeks of release and working closely with digital streams on Warframe's 10th anniversary brand identity campaign and, of course, maintaining and working closely with Activision on the Call of Duty franchise with the launch of the new season of Call of Duty Warzone II.

Next slide, please. Over to you, Fredrik.

[Fredrik Ruden, executive]

Thank you, Li. Next slide, please. So as said, net revenue in Q1 was SEK 572 million, which is a growth of 43%. FX neutral organic growth is 31% based on the high-margin revenue mix, the EBITDA margin was as high as 33%. .

The net revenue and EBITDA over the last 12 months continued to show a constant increase from 1 consecutive quarter to the other, but end of Q1, LTM net revenue amounted to SEK 2.38 billion, corresponding to an increase of 30%. This growth is driven mainly by strong operational performance, but also FX and M&A activities.

The strong margins over Q4 and Q1 has had a natural positive effect on the LTM adjusted EBITDA margin, which came in at 28%.

Next slide, please. Net revenue of the last 12 months in the Games segment was nearly SEK 1.5 billion, corresponding to a growth of 54% explained again by strong organic growth from Big Blue Bubble, but also M&A and FX.

In this segment, we have our live games portfolio, which is the foundation for a more stable and predictable revenue and cash flow. Net revenue from these assets amounted to SEK 423.8 million corresponding to 74% of total net revenue in the quarter.

In the last 12 months, net revenue from these assets amount to SEK 1.3 billion, corresponding to 64% in total net revenue.

The last 12 months net revenue in Service segment amounted to SEK 575 million, corresponding to a decline. As previously communicated, the Service segment is volatile and to some extent, hit-driven, resulting in revenue fluctuations between quarters.

Next slide, please. Looking at the more stable Game segment. We see a steady growth, which has been much stronger in Q1 and Q4 following the great success of My Singing Monsters. Daybreak is normal and the single largest contributor to the group and the largest contributor to our more predictable revenue base, generating SEK 201 million in net revenue and SEK 52 million in adjusted EBITDA, corresponding to 26% EBITDA margin.

Big Blue Bubble generated SEK 280 million in net revenue and SEK 133 million in adjusted EBITDA, which is EBITDA margin of 61%.

Piranha has had its best quarterly performance ever, with a net revenue of SEK 51 million and adjusted EBITDA of SEK 23 million This, as Ji mentioned, comes from successful launches of different DLCs to MechWarrior and the latest one was [ DLC 4 ] in January.

Furthermore, Piranha successfully delivered on group's work-for-hire strategy and signed this new contract that will bring SEK 100 million over 18 months.

Toadman, Antimatter Games also included in this segment, and they continue to pivot towards work-for-hire but until further notice, they also conclude their ongoing activities.

Next slide, please. The Service segment is a said, volatile. First half of the year last year, the segment had a strong momentum coming out from the pandemic delays in favor with the successful digital hit that was released in '22. This gave a strong contribution specifically in the first half of the year.

Fireshine had a stable quarter, mainly attributable to the continuity being in digital publishing success. The company generated SEK 48 million in net revenue and SEK 2 million in adjusted EBITDA. This correspond to a lower-than-expected margin.

Fireshine continues to add to the strong pipeline. And as Ji mentioned, the Shadows of Doubt has been a successful for us with over 90% positive reviews on Steam. But we anticipate Fireshine to mainly be dominated by lower-margin physical releases in the second half of the year.

Looking at Petrol, they generated SEK 49 million in net revenue and SEK 6 million in adjusted EBITDA.

Next slide, please. And April has started with SEK 154.6 million in net revenue. We expect to reach SEK 2.2 billion in the full year, with a margin around 23% to 25%. And there are some items that we write about in the report that you need to kind of understand here. And one is this rollover effect from high activity quarter. That is a seasonal natural effect that we always had. Specifically, we see that in Q1, but this Q1, the effect is SEK 35.6 million.

We also have SEK 42 million positive FX effects in Q1 and it's expected to turn negative throughout the remainder of the year.

Looking at net capitalization during the year. This is expected to be SEK 18 million under last year's level, which is negatively affecting our margins, but not the cash generation.

And this is mainly explained by the transition to work-for-hire but there are also other reasons for this.

And then again, Fireshine will generate more physical revenues throughout the year, which has a lower margin.

And as you see in the chart, My Singing Monsters had a very strong uptick in Q4 and Q1 with an activity peak in December, and we expect normalized baseline above the level prior to the viral uptick. So above the Q1 to Q3 level last year. But it's too early to judge exactly where that will show. So we will come back with that later.

Next slide, please. Looking at the net debt and EBITDA ratio and cash. Again, then fueled by the successful divestment of Innova and continued improved operational cash flow and lower investments.

We have had a positive cash situations in Q3, and the net cash is SEK 448 million, excluding cash components for earn-outs, IFRS 16 and some smaller items. And including them, we have this SEK 365 million that you see in the slide.

The strong operational cash flow continued to improve Q1 following the great success of My Singing Monsters game.

To further optimize the capital structure in the group, we repaid the remaining SEK 100 million of our rolling credit facility in February. This improved our net financial items with approximately SEK 20 million on an annual basis.

Meanwhile, we still have an attractive flexibility with an unutilized SEK 400 million facility to be utilized if we want.

We have also now in Q2, started to gain interest in our liquid funds through active low-risk capital deposits.

Looking then in the Q1 cash flow, we see that from operation, we have a strong cash flow of SEK 171 million. The cash is drained by investments of SEK 18 million. In those SEK 18 million, we have a positive amount of SEK 8 million following the divestment of Innova. So it's a remaining purchase consideration that was settled. So the underlying investments is actually SEK 8 million higher than those SEK 18 million that you see here.

Financing then, minus SEK 107 million, and then there you have those SEK 100 million that we repaid in February.

So all in all, we increased the cash with SEK 45 million up to SEK 453 million.

So we have a strong balance sheet with plenty of opportunities and the opportunity to use the cash, and we will come back on that topic later, but not in this presentation though.

So over to you again, Ji.

[Ji Ham, executive]

Thanks, Fredrik. All right. Next slide, please.

Right. So in summary, we're quite happy with where we are as an organization, ending the quarter with all-time record results, and My Singing Monsters, one of our key core IPs performing and continuing to deliver with the -- as the biggest game in our portfolio and contributing significantly to our current performance and expect it to continue to do so going forward.

And additionally, overall position as a group financially. We're very happy with our conservative approach to how we have managed our balance sheet currently debt-free at the group level. Given the way the market is, we believe that it's very important to be prudent and conservative in this approach. Significant liquidity on the balance sheet with over SEK 450 million of cash as of the end of the quarter, and we're making great progress on the business line that we're building up with work-for-hire.

And overall, we will continue to stay the course with a clear focus and maintaining our discipline in managing risks and approaching our investment opportunity with a conservative risk management approach and balancing that with the rewards profile and overall, prioritizing our long-term business growth over the short term.

And all in all, once again, quite happy with where we are and looking forward to delivering -- continuing to deliver on what we're promising to deliver in terms of financial performance and growth for the business and the shareholders going forward.

So thank you all for joining us. That wraps up for our Q1 presentation, and we will now transition to Q&A. Ludvig?

[Ludvig Andersson, executive]

Thank you very much, Ji and Fredrik. We have a first question from Rasmus Engberg at Handelsbanken.

What kind of scenario have you penciled out for My Singing Monsters in your guidance?

[Ji Ham, executive]

Yes, we continue to evaluate the data. We're very happy with the results for Q1 as we communicated with this presentation. There's nice sustaining momentum with the title, with expanded fan base, and we have some great plans ahead with additional content that we're going to bring to our user base. .

With that said, the peak was December 2022, and that was the viral peak, where we saw significant uptick in volume of new users and overall engagement. We are at a lower level now, and we expect that we will settle ultimately at a new normalized level that's lower than the peak level but still meaningfully higher than what we had been prior to the step-up.

So we haven't disclosed a lot more detail beyond that with this presentation and we are continuing to evaluate data. And at some point, we may be able to communicate more. But for now, we aren't disclosing any more than the fact that we expect it to be performing at a higher normalized level compared to the -- prior to the step-up level of performance.

[Ludvig Andersson, executive]

Thank you, Ji. Another question from Hjalmar Ahlberg at Redeye, or it's a few questions regarding work-for-hire, which I tried to summarize as one.

Could you give some more color to the work-for-hire. How it's proceeding and what margins we can expect going forward?

[Ji Ham, executive]

Yes. So Piranha signed a nice contract where we expect to generate over SEK 100 million of revenues from the contract over the next 18 months. Quite healthy margins. Margins do vary depending on what studio we are going to be utilizing for some of these work-for-hire contracts. Some of the studios we have in Europe tend to have potentially higher margin possibilities as their overall cost is lower compared to North America. But nonetheless, Piranha's contract, we do expect to generate a pretty meaningful margin in excess of 30%, and we're targeting opportunities such as that where the margins would be above 30% for the type of contracts that we are seeking. .

Piranha, once again, it's one of the first contracts that we have secured. We're continuing to aggressively pursue other opportunities. We like the market dynamics in terms of where the work-for-hire supply and demand imbalance continues to exist. And we have a significant pool of talented resources, both in Europe as well as North America that we intend to aggressively pursue opportunities similar to what we secured at Piranha.

[Ludvig Andersson, executive]

Thank you. Another question from Yuan at Danske Bank.

The new Lord of the Rings MMO by Amazon and Embracer, what potential impact will this have on Lord of the Rings online?

[Ji Ham, executive]

Yes, we do not expect any impact from that title for the foreseeable future. And I think as maybe some of you know developing an MMO is a long-term investment endeavor where sometimes it does take over 5 years to bring a product to market as we've seen with the likes of Riot and Blizzards of the world who have taken over 5 years to bring out their MMO.

So in terms of where Amazon is with the title and what the timing is for that ultimate MMO 2 release, we do need to learn more about that. But if they are investing in an MMO similar to what we defined as MMO, it's a lengthy investment cycle. And between now and then, we do not expect really any impact on our [ Lord of the Rings ] title, which is the only game out there with that Lord of the Rings IP on a type player -- massively multiplayer online format.

[Ludvig Andersson, executive]

Thank you very much. Question here from key investors, [indiscernible]. What is the plan for the cash of SEK 450 million? And what can we consider now for 2023?

[Ji Ham, executive]

Yes, in terms of not having to work .

[Technical Difficulty]

[Ludvig Andersson, executive]

Could you repeat that? I think will last you for a few seconds there. So could you take from the beginning.

[Ji Ham, executive]

Okay. And let me start over. So yes, so we are evaluating multiple opportunities. We do have significant cash on the balance sheet, which we are quite happy about, given where the market is in terms of the economy and some of the uncertainties, we do believe that being conservative is the right approach. And then, we have demonstrated that operating conservatively could result in great results over the last 6 quarters since the new management has taken over here.

With that said, there are some attractive opportunities that we're evaluating, and we want to come back with additional details behind what those are when we're ready to disclose them. But once again, good news is that we're not operating under any significant time pressure internal or external given the strength of the balance sheet and continuing performance from our existing set of assets and businesses that are doing really well.

[Ludvig Andersson, executive]

Thank you very much. Another question from Hjalmar, Redeye. Can you elaborate on the deferred revenues? And how much is from -- or impacted by Big Blue Bubble and Daybreak?

[Ji Ham, executive]

Maybe, Fredrik, are you able to provide some additional detail around that?

[Fredrik Ruden, executive]

Yes, I can elaborate a little bit about that. And I mean, the total amount is around SEK 36 million, which has a positive effect in Q1 and there are no attached cost to that. So it goes straight through to EBITDA. We haven't kind of splitted that amount between Daybreak, Big Blue Bubble in the report. So I guess you can assume that it's a little bit like 50-50 from those 2. We also have from other entities, but it's mainly Big Blue Bubble and Daybreak, yes.

And obviously, we have this effect between all quarters, but then the net effect is normally close to 0. So we have a rollover effect also into Q2 from this. But the positive effect now in Q1 is because we have more activity by end of 2022 than we have leaving Q1. Right, that's...

[Ludvig Andersson, executive]

Thank you. And question here from Simon at Carnegie. Anything new regarding the almost completed games from Toadman and Antimatter, Evil v Evil, Block N Load, et cetera.

[Ji Ham, executive]

Yes. I think -- so along with our year-end, we ended up taking significant write-down for those new titles that the studios have been developing, and we have been proactively transitioning those studios into work-for-hire opportunities. So we are not counting on nor are they really factored into any performance forecast for our business. So there may be some upside possibly based on at least some of the titles that we may ultimately bring to market, but we are not categorizing them as core to what we're trying to accomplish here.

And ultimately, we continue to evaluate opportunities with third-party publishers and potential investors for those titles. But we are, once again, have fully written down a number of those investments and not counting on those to be an impactful part of our business going forward.

[Ludvig Andersson, executive]

Thank you very much. I think that's all the questions that we had. So thank you very much, everyone, for tuning in, and the presentation will be available on our website later today.

So yes, thank you very much for tuning in. Have a good day.

[Ji Ham, executive]

Thank you.