Enad Global 7 AB (publ)

STO:EG7

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Ludvig Andersson, executive]

Good morning, and welcome to this Q3 earnings call with EG7. My name is Ludvig Andersson, and I will be your moderator during this call. With me to present, we have the company's acting CEO, Ji Ham; and Deputy CEO and CFO, Fredrik Rüdén. After the presentation, we will have a short Q&A session. So please feel free to e-mail your questions to the company's Investor Relations e-mail.

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

[Ji Ham, executive]

Thanks, Ludvig. Good morning, everyone. Thank you for joining us. Let's go to the next slide. For our third quarter 2023, some key performance figures here. Net revenues came in at SEK 517 million, which represented 16% growth from the same period last year. Strong profitability with adjusted EBITDA of SEK 141 million, representing 27% margin and also almost 25% growth from the same period last year. And cash balance with strong liquidity of SEK 473 million, an increase of SEK 22 million from Q2 levels. Next slide, please. .

The highlights for the group during the quarter included the Capital Markets Day, which we hosted on September 20, where we presented our updated business strategy and plan. We also announced the shareholder capital return program where we would be providing for dividends as well as possibility of share buyback. And we are working towards uplisting to the main exchange, with target of 2024 uplisting. Publishing deal that we signed with Cold Iron, a main part of our long-term plan in the middle market publishing, a new multi-player shooter based on a major global IP that's targeted for release in 2025. And this is meant to be the founding or the initiating title to kick off the middle-market publishing business.

Alongside that, MechWarrior 5: Clans announcement, exciting new entry for MechWarrior franchise, which we also do want to include as our long-term franchise and middle market publishing business. Target release for the second half of 2024. And then intended to be another one of our portfolio of core franchises going forward. Next slide, please.

Update on the business unit level. Big Blue Bubble leading the charge, another great quarter. My Singing Monsters trending down. Having said that, continuing to perform at an elevated level 157% higher in net revenue compared to third quarter of 2022 and trending nicely. Daybreak, on the other hand, a little softer than expected so far this year, performing at about 15% lower year-to-date on a net revenue basis compared to last year.

DCUO and Lord of the Rings Online have been performing a little under expectations. But we have plans already going, efforts to stabilize and reverse trends. DCUO is ready for the latest-generation console coming in sometime in December. And Lord of the Rings Online just released its expansion pack, which has been performing well. And the EverQuest and Magic: The Gathering Online, great performance year-to-date and exciting plans for EverQuest franchise, with EverQuest and EverQuest II's, 25th and 20th anniversary celebrations coming up in 2024. Next slide, please.

Piranha has been a great performer so far this year. Solid performance with MechWarrior 5 DLCs delivering great results. DLC 5 just released in September, and we have 2 more planned for next year. And work-for-hire contract is nicely profitable, but it's been ramping up a little slower than we had anticipated, but we expect to get to full ramp over the next coming months and get to the full contract value. Toadman is ramping, and it's continuing to inch towards profitability, with Cold Iron contract also contributing nicely. And we expect to be breakeven before the year-end this year, and crossing over to profitability and building upon that in 2024. Next slide, please.

Fireshine Games, nice volume of physical releases for the third quarter with a great performance. Some of the highlights of titles that came out include lines of Lies of P, Warhammer 40,000, Darktide, as well as F1 Manager. On the digital publishing front, we have Core Keeper and also Shadows of Doubt having released great content for this quarter. That's been driving nice performance.

Petrol, on the other hand, has had a softer year so far, a little more challenging this year compared to the prior years. But nonetheless, still the premier go-to shop for a number of the AAA premier titles, including Call of Duty franchise, Diablo and announcement for Star Wars Outlaws this year, and key titles for Remnant2 and Lies of P also this third quarter. Overall, lower volume this year, which is contributing to lower revenues as well as impacting its profitability, but we do expect the business to stabilize with the nice outlook for 2024. Next slide, please.

Okay. Over to you, Fredrik.

[Fredrik Ruden, executive]

Thank you, Ji. Next slide, please. Net revenue and EBITDA over the last 12 months continued to show a constant increase from 1 consecutive quarter to the other. By end of Q3, LTM net revenue amounted to SEK 2,131 million, corresponding to an increase of 18%. This growth is driven mainly by strong operational performance. LTM adjusted EBITDA margin came in at 29% for the second quarter in a row. This is higher than the 23% to 25% guided for, for the full year 2023 and is explained by higher margin revenue mix. .

Net revenue in Q3 was SEK 517 million, which is a growth of 16% and an FX neutral organic growth of 14%. And that 14% was 1% in Q2, with an EBITDA margin of 27%, which is 4 percentage higher than previous quarter. Our live games portfolio, representing a more predictable and sustainable part of our business, generated SEK 302 million, which is 58% of total net revenue in the third quarter. Over the last 12 months, net revenue from these assets amounted to SEK 1.4 billion, correspond to 66% of the total net revenue. Next slide, please.

As you may have noticed, we have changed our segments in this report to better reflect our different business units. Daybreak is the largest contributor to the group revenue and the largest contributor to our more predictable revenue base, generating SEK 101 million in net revenue and SEK 34 million in adjusted EBITDA, corresponding to a 19% adjusted EBITDA margin. My Singing Monsters continues to perform well. While gamers activities peaked in December last year, we continue to see levels above the pre-peak.

Big Blue Bubble contributed with SEK 123 million in net revenue and SEK 88 million in adjusted EBITDA, corresponding to a record strong 71% margin. There has been a bonus accrual adjustment in Big Blue Bubble, which increased the margin in the quarter by approximately 10 percentage. There is no reason to assume that the operating margin seen over the past 12 months should be higher going forward. Next slide, please.

There is a solid and loyal, even if limited, gaming community around MechWarrior. Piranha has successfully kept the audience interested with several DLCs and upgrades in MechWarrior 5. Piranha contributed with net revenue of SEK 28 million and adjusted EBITDA of SEK 8 million, corresponding to a 30% adjusted EBITDA margin. Toadman's net revenue came in at SEK 14 million, representing 162% growth year-over-year. Adjusted EBITDA came in at minus SEK 5.5 million.

Toadman continues to successfully ramp up its work-for-hire business, and is targeting breakeven profitability by end of 2023, with increasing profitability throughout 2024. The chart also includes a positive tax refund relating to the close down of Antimatter Games. This has a positive contribution to adjusted EBITDA with SEK 3.1 billion. Next slide, please.

The old Service segment, Petrol and Fireshine, as shown in the charts and also pointed out several times, both these companies are more volatile than the business is connected to the live games portfolio. Fireshine had a strong quarter, mainly attributable to a number of successful physical releases. The company generated SEK 120 million in net revenue and SEK 90 million in adjusted EBITDA.

Despite that the physical games are attached with generally lower margin and due to high volumes, adjusted EBITDA margin came in higher than past 4 quarters at 16%. Despite being a softer year for Petrol, they had several successful campaigns and generated SEK 51 million in net revenue and return to profitability. Next slide, please.

Over the past quarters, we have improved our operating cash generation significantly, mainly by reducing the overall risk and by increasing the business predictability. Based on what we previously have communicated, we have now also started to invest in adding new growth opportunities to the company. Net cash is SEK 473 million, excluding the Piranha earnout, IFRS 16 leasing and some smaller items. And if we deduct those, then the net cash is SEK 358 million.

Cash flow from operations amounted to SEK 112 million. The cash flow was negatively affected by SEK 83 million of investment activities, of which SEK 50 million referred to the Cold Iron publishing deal, SEK 17 million refers to various publishing deals in Fireshine and SEK 19 million refers to capitalized development expenses. Financing activities is minus SEK 7 million, and that's mainly leasing.

Furthermore, we have earmarked SEK 500 million to be invested over '23 and '24 in new growth opportunities. We do have an unutilized SEK 400 million rolling credit facility, which we plan to renew. But our new growth plan is independent of this facility. It was planned to distribute a minimum of SEK 40 million in dividend for expected full year performance of 2023. All in all, our balance sheet is and will remain solid. Next slide, please.

We have delivered LTM growth from 1 consecutive quarter to the other over the past 5 quarters and more. In Q3, the LTM growth is 18%. Most part of it is organic and way over the market growth. Based on the recent operational trends and our own project time lines, we do not expect to deliver organic growth way over market growth in 2024 before our new growth initiatives start to kick in, in 2025 and on. We expect to come in around our full year guidance for 2023.

Over to you, Ji.

[Ji Ham, executive]

Thanks, Fredrik. Next slide, please. We're very happy once again to have delivered a nice and solid profitability and growth again this quarter. We continue to focus on maximizing our cash flows with the existing business.

As communicated during the Capital Markets Day, our intention is to maximize and optimize cash flows from our existing businesses to be able to invest in some of the exciting long-term growth prospects and selectively investing in middle market franchise-based publishing investments going forward, which we expect to drive significant revenue and profitability growth, with a target of SEK 3 billion of net revenue in 2026 with SEK 1 billion of adjusted EBITDA for the same period.

Extra General Meeting is currently being scheduled for, target, December this year to obtain the approval for both shareholder capital return program for dividends as well as potential share buyback. And we are executing against a full-steam-ahead uplisting to the main market, targeted for 2024.

Thank you all for joining us for our earnings release. That concludes our presentation, and we will now switch over to Q&A.

[Ludvig Andersson, executive]

Thank you very much, Ji and Fredrik. First question from Rasmus at Handelsbanken. Are you surprised by the stickiness of My Singing Monsters?

[Ji Ham, executive]

We are very pleasantly surprised with the continuing strong performance, and the team is continuing to work very hard to provide nice content updates for existing players as well as attracting new players. September also benefited from My Singing Monsters anniversary celebration. And Q4 is a good quarter for all of our titles, including My Singing Monsters. So we remain optimistic of its continuing strength in 2023 fourth quarter, as well as going into 2024. .

[Ludvig Andersson, executive]

Thank you very much. Another question here from Rasmus at Handelsbanken. Besides the SEK 500 million in new game investments, should we model some maintenance CapEx for the existing business?

[Fredrik Ruden, executive]

Yes, you should. The SEK 500 million, they are earmarked for the new growth initiatives. We have so far this year capitalized SEK 140 million for the first 9 months, of which, part of that is connected to the planned game that will be released during next year. So after that, we do not expect the same level in capitalized R&D for next year. However, we have not done the budget for next year already, but you can assume that it will be around that level or under that level. .

[Ludvig Andersson, executive]

Thank you very much. A bundle question from Hans Mähler at DNB and Hjalmar at Redeye. Could you elaborate on your expectations for 2023 and going forward?

[Ji Ham, executive]

Yes. For 2023, we are continuing to progress towards our guidance. And for 2024, typically, we would provide our guidance along with our Q4 earnings release, which will happen sometime mid-February. So at that time, we'll be able to provide more information regarding that. As for our longer-term targets, during the Capital Markets Day, we provided our 2026 targets with net revenue of SEK 3 billion and adjusted EBITDA of SEK 1 billion. .

[Ludvig Andersson, executive]

Thank you very much. A question here from Lukas. Could you elaborate around the accrued bonus adjustment in Big Blue Bubble?

[Ji Ham, executive]

Yes. So onetime adjustment for this year or this quarter related to realignment of the incentive compensation for Big Blue Bubble staff based on a significant change in size of the organization prior to the viral peak compared to where we are now. So in order to realign the size of the compensation levels, we made an adjustment, which resulted in the onetime change to the bonus accrual. In the third quarter, we do not expect such changes going forward. It is onetime in nature. And now we are realigned for the -- and rightsized for the business and the incentive composition going forward.

[Ludvig Andersson, executive]

Thank you very much. And a question from Hjalmar at Redeye. What drives the lower project volume for Petrol during the year?

[Ji Ham, executive]

Yes. So Petrol has continued to track and have worked with some of the biggest AAA clients, but there's been some slowdown in the volume of releases that Petrol has been a part of for this particular year. So not really predictable, unfortunately. It's -- Petrol has had some great years and sometimes, depending on the volume from its client base where some of the projects may get delayed, it does impact Petrol downstream. So that's what we see as the primary reason behind a lower volume and also lower revenue for this year for Petrol, but we expect that they should be able to get back on track for 2024. .

[Ludvig Andersson, executive]

Thank you. A question from Simon at ABG. Can you please give some more color on EverQuest and Magic Online's performance in the quarter?

[Ji Ham, executive]

Yes. Magic: The Gathering Online has been a very steady performer since we have brought it on board. So it's not really just this quarter but throughout this entire year. And same thing for EverQuest. It's a perennial, the most consistent and the most profitable game that we have within Daybreak's portfolio even after its 24-year run. So we're looking forward to a great performance for 2024, where we get to celebrate its quarter century mark in 2024 with lots of great events and celebration and additional content that we're going to be celebrating, together with our very dedicated player base. So the comment relating to both really was more related to their consistent performance in contrast to some of the other games that may be more volatile within our portfolio. .

[Ludvig Andersson, executive]

Thank you very much. A question from both ABG's Simon and Hjalmar at Redeye. Can you elaborate further on the expectation were DCUO and LOTRO? When do you expect DCUO to be available on the new generation of platforms?

[Ji Ham, executive]

Yes. So we are targeting December for DCUO to be available on the latest generation PS5 as well as Xbox Vi. And along with that availability, it's another channel that we're opening up for user acquisition. So we're looking forward to being able to attract and bring the game to additional potential player base by bringing it to the current gen consoles. Along with that, more content updates that we plan for 2024 that we expect to have a positive impact on DCUO's stabilization as well as growth.

And the -- similarly for Lord of the Rings Online, we do expect stability for the title along with the new expansion pack coming out. And we are switching to a larger content model for the game going forward, where we will have a big expansion pack on an annual basis versus what we've done historically, which has been one big expansion followed by a smaller one, and going at to a big one. We will be switching now to be able to provide big content updates on an annual basis. And with that, additional content uptick in player activity.

[Ludvig Andersson, executive]

Thank you very much. Those are all the questions that we have. So thank you so much, Ji and Fredrik, and thank you, everyone, for tuning in. From our side, we wish you a great day. Thank you very much.

[Ji Ham, executive]

Great. Thank you.

[Fredrik Ruden, executive]

Thank you, everyone.