Enad Global 7 AB (publ)

STO:EG7

Earnings Call Transcript 2021-Q4

[Unknown Executive]

Good morning, and thank you for tuning into this live Q4 earnings report presentation with EG7. My name is Petra Bergman, and I'm your moderator today. With us from the U.S., we have acting CEO, Ji Ham; and from Stockholm, Deputy CEO and Chief Financial Officer, Fredrik Rüdén. I'm going to hand it over to you, Ji, shortly, and then I'll be back after the presentation to moderate the Q&A session. If you have any questions for Ji during this presentation, you can e-mail them to the Investor Relations inbox by clicking on the e-mail icon and I'll get to as many of them as possible afterwards. So with no further ado, please go ahead, Ji.

[Ji Ham, Acting Chief Executive Officer]

Thank you, Petra. Good morning. Thank you for joining. I will start with a summary overview of EG7. First slide, please. EG7 is an emerging global gaming group. We currently operate 22 live service games, including some of the most iconic classic MMOs. Our live service games are the core foundation for EG7, providing stable recurring and long-life cash flows. Our live games are based on some of the most iconic IPs, a combination of 9 owned and third-party IPs. Owned IPs include EverQuest, H1Z1, My Singing Monsters and PlanetSide. And some of the premier third-party IPs include most recognized global brands such as Lord of the Rings, DC comics and Magic: The Gathering among others. These IPs provide our products with key differentiations. Additionally, we currently have a very compelling pipeline of new projects. We have 10 products under development, 2 titles on track for release in 2022, 2 major updates for existing live games for 2023 and 6 new titles under development for release thereafter. Organizationally, we have strong presence across all our major markets, 16 offices, 880 employees across North America, Western and Eastern Europe. Next slide, please. We're very excited to report our best quarter yet. We ended the year with very strong momentum results exceeding our guidance for both net revenues and adjusted EBITDA. Net revenues for the quarter came in at SEK 573 million that represents 193% growth year-over-year and 28% organic growth. Adjusted EBITDA of SEK 118 million with 21% margin, operating cash flow of SEK 103 million, representing a very strong cash conversion. For the full year, we achieved SEK 1.67 billion of net revenues and SEK 397 million of adjusted EBITDA. Additionally, beyond the strong operating performance, we also delivered a great M&A transaction with the acquisition of Magic: The Gathering Online deal. Next slide, please. So this is the Magic Online transaction that we successfully closed middle of January. Magic Online is a great addition to our portfolio. It's an online version of Magic: The Gathering, the #1 trading card game in the world with over 50 million player base. The transaction structure was very unique and highly compelling. We hired the development team from Wizards of the Coast. It is immediately accretive as we're taking on a live service game with ongoing revenues and profits. The deal was structured as an acquihire/license deal. There is no upfront purchase consideration. We'll be paying Wizards market royalties for Magic license over the term as the only consideration. This type of deal sounds very compelling and also almost too good to be true. But we have similar precedent with deals like Lord of the Rings Online and Dungeons & Dragons Online, both of which were acquired in a very similar structure and these games contributed over SEK 1 billion of revenues for Daybreak since 2017 when they were acquired. And we expect similar great outcome for Magic Online as well going forward. For 2022, we expect net revenues of SEK 90 million to SEK 100 million and game level EBITDA of SEK 25 million to SEK 30 million, and we'll be investing in upgrading the product with the goal of meaningfully growing the revenue similar to what we're able to achieve with LOTRO and DDO. Next slide, please. Fredrik Rüdén, our CFO, will now present more details of our fourth quarter performance. Fredrik.

[Fredrik Ruden, Deputy CEO, Financial Officer & CFO]

I will start with a short introduction to myself since I'm new here. I'm the Deputy CEO and CFO. I joined in first of December 2021. And as we can see on this picture, and as Ji stated the other day, I'm a full grown man. I was born in 1970. I've had several leading positions in mainly high-tech driven-listed companies. such as being CFO in the online gaming operator Betsson, engaged in LeoVegas, being in the eHealth records business and also in the telecom sector. In the fourth quarter, as you stated, we delivered SEK 573 million in revenue, corresponding to a quarterly growth of 193% and an organic growth of 28%. The full year figure is SEK 1.7 billion, and we are delivering this with profitability, so the full year EBITDA margin amounted to 24%. Meanwhile, fourth quarter margin, due to the mixture of revenue, amounted to 21%. One explanation for the lower margin in Q4 is that we have a greater portion of Service segment revenue. This follow what we communicated in Q3, saying that we had a strong momentum in the Service segment starting Q4. Games segment delivered 40% of our revenue in Q4, meanwhile 55% in the full year. Given the strong game portfolio, the release pipeline and the add-on of Magic: The Gathering, this segment will continue to deliver more revenue than the Service segment going forward. Looking at the contribution to EBITDA. On the full year scale, we see that the Games segment delivered SEK 286 million. Meanwhile, the Service segment delivered SEK 145 million. So the Game segment stood for 55% of the full year revenue. Meanwhile, over 70% of the EBITDA, indicating strong margins in the part which will continue to contribute most to our profits. Looking then on the different segments. We know that Daybreak is our greatest contributor in the game segment. They delivered SEK 172 million in net revenue in the fourth quarter and SEK 51 million in EBITDA. Big Blue Bubble delivered SEK 27 million in revenue and SEK 16 million in EBITDA. In this segment, we also include Piranha, Toadman Studios and Antimatter Gaming. Looking at the Service segment. Here, as we communicated, we had a very strong momentum specifically for Sold Out. They were successful with the sale of a Jurassic Park title. They delivered SEK 204 million in revenue and SEK 32 million in EBITDA. Petrol also had a strong momentum in the fourth quarter. They delivered SEK 64 million in revenue and SEK 17 million in EBITDA. This segment also includes Innova with a high margin, they delivered SEK 26 million in EBITDA and SEK 74 million in revenue. I would like to manage expectations and guide you a little bit. So the fourth quarter, as we know it was a really strong quarter for us. It's explained by seasonality. Fourth quarter is normally the strongest quarter for us. It's also explained by the Corona situation where several project revenues and releases were delayed into the fourth quarter. But it's also one thing that we would like to lift in this report, and it's the -- what we call the stable part of our revenues, which is constituted by the strong live game portfolio, which we have, and it normally it stands for a stable and predictable foundation of our revenue. That part constitutes 62% of our revenues and excluding Innova, which is then our Russian subsidiary, that portion is 46% of the total pro forma revenues in 2021. This portfolio will continue to increase further in 2022 through new content releases games upgrades and the contribution from Magic: The Gathering. If you look then in the full year, adjusted for negative FX effects, the revenues pro forma in 2021 is more or less flat from the full year 2020. So we come from a flat year. We accelerated growth in the fourth quarter and then to manage expectations for the first quarter, January, reflecting normal seasonality where the revenue amounted to SEK 141 million. For the full year 2022, we -- the target for us is to reach a run rate annual net revenue of SEK 2 billion, with sustained margins. And the sustained margins is supported then by a stronger growth in the Games segment where we have higher profits. I also would like to say a few words about the leverage and our balance sheet. So looking at the cash, we started the year with SEK 1.1 billion in cash. We ended the year with SEK 484 million. And we -- the explanation for the reduction in cash is that we, first of all, had a positive operational cash flow, then we invested SEK 661 million. The lion part of that is earnouts to Daybreak, Big Blue Bubble and Piranha. We also had a negative financing of SEK 128 million, which means that we repaid external credit facilities.But if we look into Q4, we started the Q4 with SEK 442 million in cash, and we increased that cash with SEK 42 million in the quarter due to a strong operational cash flow. So it's the first quarter where we actually start to build cash. The blue line that you see to the left is the leverage calculated according to the definitions that we have in this slide. So we see that the yellow one, the cash goes down according to what I explained. And the black one, which is the cash debt also goes down and the explanation for the difference between Q3 and Q4 is mainly that we revalued part of the remaining purchase consideration for Piranha. So ending the year, the cash is almost the same as the net debt or the cash debt, meaning that we end up in a neutral leverage situation, meaning that we have a strong balance sheet to take on further debt to accelerate any possible M&A activity. Summary from my side is then that the Q4 all-time high, best quarter for the group, both on revenue and EBITDA. We guide that we will reach a run rate revenue of SEK 2 billion in 2022 with sustained margins supported by the stronger growth in the Games segment. And January, again, started according to our expected seasonality of SEK 141 million. Magic Online, Magic contribute with SEK 90 million to SEK 100 million in revenue and SEK 21 million to SEK 30 million in EBITDA. Meanwhile the cash will be neutral to positive due to that we will invest in upgrading that product. We haven't decided exactly how that will play out. But we will do that -- we will set that plan during Q1. So we have a stable business due to that live service portfolio with strong upside and also a strong balance sheet going forward. So I would like to hand it over back to you, Ji.

[Ji Ham, Acting Chief Executive Officer]

Thanks, Fredrik. We'll now go through the -- some of the key priorities we have for 2022. For 2022, we have several key priorities divided into 3 buckets, short-term, medium-term and long-term value drivers. Short-term priorities represent deliverables for 2022. One of our top priorities for this year is successful release of Evil v Evil and Block 'N Load 2. Both games are continuing to make great progress and both are on track for release in the second half of this year. Magic Online transaction closed on January 14, but the full carve-out from Wizards and the transition will take up to 6 months. So we're working hard to make sure that we successfully transition and stand up the development team as well as the prime outside of Wizards as soon as possible. And Amazon's Ring of Power, a Lord of the Rings TV series that is finally coming out this year in September. LOTRO team is working hard to capitalize on this big spotlight that they'll be getting for the IP as well as the game with compelling new content development for release later this year, which we expect to benefit greatly from. And we're continuing to value M&A opportunities. Magic Online is a great deal. We'll continue to look for opportunities like that. We may not get the same type of unique structure, but live games portfolio is what we want to continue to grow to really strengthen our foundation. So we'll continue to proactively seek those opportunities in 2022. Medium-term priorities are value drivers for us for the next 2 to 3 years. These include large content updates and product upgrades for some of our biggest existing titles, including LOTRO, DCUO and now Magic Online. Additionally, we have a strong pipeline of new games under development that we'll continue to invest in for the release over the next 2 to 3 years. Long-term value drivers that we want to begin prioritizing include franchise and product plans for our top own IPs: EverQuest, H1Z1, PlanetSide 2. These projects would be big, long-term investments with significant upside. Along with planning, we need to further bolster our development resources. We have some of the best top live service game teams for the 22 live service games that we currently operate now. But for these additional projects that are new game development, we'll have to expand our new game development resources. We have great talent at Toadman, Piranha, Antimatter but we'll also selectively bolt-on additional resources for these new projects going forward. We're confident that we can execute successfully against our short-term priorities this year and excited to invest in our medium and long-term priorities and continuing to grow and create value going forward for all the shareholders. Next slide, please. We're very happy to have finished the year very strong, which has set us up nicely for 2022 and beyond. With the realignment and transition firmly behind us, we're now able to focus fully on executing against our business plan, which is very exciting. We believe that EG7 represents a very unique and compelling opportunity within the gaming industry. Our portfolio of live games provide a stable, recurring and long-life cash flows, providing the solid foundation to really grow from. Our world-class IP portfolio is one of a kind, a great asset for current and future games that we get to exploit that IP more and continue to grow our games and our business. We deliver on strong profitability and cash flows for second half of the year last year, and continue to do so with a solid business plan this year. And we believe our business has a very favorable balance between risk and upside. 62% of our revenues come from non-hits driven live service games that really mitigates the risks while our new product pipeline and continuing M&A will provide nice upside potential. So we're very thankful to all the shareholders for your continuing support, and we're looking forward to delivering compelling growth going forward for all the shareholders for 2022 and beyond. That wraps up the Q4 Investor Presentations section. And I think Petra, I'll hand it over to you for Q&A.

[Unknown Executive]

Yes. Thank you for that presentation. Yes, we are going into the Q&A part of this report presentation now. We have already received some questions from investors. I'm going to start it off by asking you, Ji, how is the strategic overhaul to a more decentralized approach going?

[Ji Ham, Acting Chief Executive Officer]

Yes. We completed this successfully last quarter. The group level changes had minimal impact on the subsidiary level, and each business has been performing very well under the decentralized collaboration approach and our strong results for the fourth quarter, I think, is a great indication of this successful transition in our view.

[Unknown Executive]

And since recruiting Fredrik Rüdén, Deputy CEO and CFO, are you still happy with the senior management now on group level?

[Ji Ham, Acting Chief Executive Officer]

First of all, very happy to have Fredrik on board. He joined us beginning of December. He's already made a lot of difference with this leadership and experience and Fredrik will be a great asset for us going forward. Additionally, we'll be joined by an experienced Investor Relations manager, who we have been seeking to hire for some time. Finally, we had to bring new talent on board to help in that regard. That will strengthen our group management even further. So yes, very happy with where we are. We'll continue to evaluate areas that we want to invest in, but we're in really good shape.

[Unknown Executive]

Good. Turning to Fredrik now. Q3, you delivered within the guided range. What can you tell us about Q4 and going on forward?

[Fredrik Ruden, Deputy CEO, Financial Officer & CFO]

Yes, in Q4, we clearly over-delivered on our targets. So the end of the year was, as we said, really, really strong. But looking at the full year for 2021, we are flat with 2020. And we are aiming for continued growth in 2022. So what we guide is that we say that the seasonality that we expect in January, the revenues came down to SEK 141 million. So that's the level that we expect to continue to trade on in the first quarter. But in the full year, we say that we will have a SEK 2 billion run rate revenue with sustained margins. And those sustained margins will come then through that will grow the Game segment further in relation to the Service segment and 1 contributor there is then the add-on with Magic: The Gathering.

[Unknown Executive]

How would you describe the seasonality?

[Fredrik Ruden, Deputy CEO, Financial Officer & CFO]

Fourth quarter is normally -- it's a little bit different from company to company in our group. But on a consolidated level, fourth quarter should always be the strongest up until the Christmas and also during the normal winter season where our players are. And then it's a drop down to Q1 where some businesses like Innova, for example, they celebrate Christmas a little bit later. And then it will build up during the year. And also that we have a lower season in the summer. Meanwhile, the mobile part tend to be more attractive during vacation period. So it's a little bit of a mixture, but it's clearly so that Q4, even if Q4 this year, maybe was stronger than what the normal season would give, that should always be the strongest quarter for us.

[Unknown Executive]

So what is your main focus on now as the Deputy CEO and CFO.

[Fredrik Ruden, Deputy CEO, Financial Officer & CFO]

I think key has been -- and I've been working a little bit with the company even prior to me joining, has been to, first of all, have solid guidance and then also to deliver in those guidance and that we did in Q3 for the first time. And then we followed up with overperforming on that in Q4. And now we have quite clear guidance for 2022 as well, so we need to deliver on that. That is one part, which I think is important to regain trust in the market as well, given our history and what's happening in 2021. One part of that is also to continue to strengthen the administration in the parent company, EG7. And he mentioned the investor relation manager that will join in April, Ludwig. We're looking forward to that. And we will also have some other hires out that we're looking for more people. But obviously, we're also running a global business. And there's a lot of different questions to handle over time. And as you know, we also have operations in Russia and that was a recent thing to look at and figure out how to handle. So it's a lot of different things.

[Unknown Executive]

Okay. Let's talk a little bit about Magic: The Gathering, Ji. How is work progressing in taking over the title Magic: The Gathering?

[Ji Ham, Acting Chief Executive Officer]

Yes. We're so excited about this opportunity as I said earlier. We closed the transaction in mid-January, and we're currently parallel tracking on multiple fronts. A key thing is being able to carve out the product from Wizards. We have a very clear road map to be able to do that, but the full carve-out will take some time. And then during this transition period, we want to make sure that we're providing seamless live service to all the players so that they continue to enjoy the great game and then content. And we're mapping out plans for product upgrade and investment. And I think this is a one-of-a-kind product, a faithful simulation of what Magic: The tabletop game is online, and we get the opportunity to really invest in this product to grow it again. So very excited, but it's going to take some time. And over the first quarter, we'll be mapping out these investment ideas and also plans around that. And Magic is the #1 trading card IP in the world. And we believe in significant upside for this product going forward. There will be investments that we'll be making over the next year.

[Unknown Executive]

And what can we expect on further M&A activity?

[Ji Ham, Acting Chief Executive Officer]

Yes. As I noted earlier, I think it's important that we continue to invest in live service portfolio because the world is continuing to head in that direction, a lot of buzzwords about metaverses and Web 3.0, et cetera. We're not getting pulled in any direction because of those buzzwords. But what's important is that our existing portfolio already represents, in our view, slices of these metaverses online simulations of the world with some of the most iconic IPs. We want to be able to continue to move that by bringing on additional live service games and add great IP into our portfolio. So M&A effort, that's an important element of how EG7 will continue to grow. And Magic, obviously, a very good transaction that we're happy about, and we'll continue to seek out opportunities like that aggressively throughout the year.

[Unknown Executive]

In light of recent organizational changes, what can we expect in regards to strategic changes, or is it more a continued business?

[Ji Ham, Acting Chief Executive Officer]

Yes. We're feeling very good about where we are. I think the -- there's obviously a lot of effort that went into transitioning to get to where we are, but a lot of that is behind us now. So with a lot of those transition efforts behind us, now we get to focus 100% on our operations as well as efforts going into growing our business. So shifting into this growth mode, shifting into this more of an offensive sort of mentality for business with a firm foundation that we've been able to establish, we're very excited about. And as for where we are today as a business, we'll continue to evaluate opportunities to improve. But I think we're in a very good place to really drive our growth for 2022 and beyond.

[Unknown Executive]

In terms of the escalated situation in Ukraine and Russia, do you have any business there? And how does that affect you?

[Ji Ham, Acting Chief Executive Officer]

Yes. Innova is based in Russia, and it's one of our subsidiaries that focus on live operations of MMOs in Russia and CIS primarily. And first of all, I think all of us, we must say that it's a truly terrible and sad situation that's unfolding. It's too early to judge how this is going to affect us, but we are proactively evaluating the situation and developing measures to mitigate any potential risks here. Our key priority here is to ensure that our employees in Russia and in Eastern Europe feel safe and that we continue to operate respectively between us. And then we can only hope for the people in Ukraine that the situation will be resolved soon.

[Unknown Executive]

Just a last question. What would you say differs you from your peers? What's the strength in EG7?

[Ji Ham, Acting Chief Executive Officer]

Yes. I think 1 of the key strengths that we have is really our foundation. Our foundation comes from one of the biggest and one of the most compelling portfolios of MMOs and live service games. In the Western market, we're one of the biggest MMO operators and MMO has become a major growth driver for the gaming industry once again. The new world game that came out from Amazon recently, a Smilegate game that just came out called Lost Ark, Final Fantasy XIV. All these MMO have been growing tremendously. And we have some of the best iconic classic MMOs, and we intend to invest further into these products to be able to grow them. And I think that's probably one of the biggest differentiation that EG7 has over others, and that foundation also provides us with a very strong and stable cash flows with long life cycle. That allows us to have this nice balance of risk versus upside. And then as we continue to invest in this solid and stable foundation, allowing us to take risks and invest in products for existing games as new games and be able to have a balanced growth approach versus more the hits-driven nature of the number of the other competitors that are out there.

[Unknown Executive]

Okay. I'm afraid that's all the time we have today. If you are watching this and have any questions, you can always e-mail them to the Investor Relations inbox on the website. Thank you, Ji and Fredrik, and thank you, everyone, for tuning in. Have a nice rest of the day.

[Ji Ham, Acting Chief Executive Officer]

Great. Thank you.

[Fredrik Ruden, Deputy CEO, Financial Officer & CFO]

Thank you for listening.