G5 Entertainment AB (publ)

STO:G5EN

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Stefan Wikstrand, executive]

All right. It's 2 minutes past. I see that attendee list has stopped counting. So let's get this show on the road. I hand over to Vlad Suglobov.

[Vladislav Suglobov, executive]

Good morning, everyone. Welcome to the, Q1 2024 presentation of G5 Entertainment. I'm Vlad Suglobov, as Stefan mentioned, the CEO of the company, and, we have also Stefan, the CFO, with us. So, we're going to go through the presentation for about 15 minutes, and then we'll open the line, for questions.So I'll start with a brief overview of this morning's report. Revenue was SEK 298 million, which was 14% lower than last year in Swedish kroner, and in USD terms as well. We saw stable performance in our actively managed portfolio, which are all of G5's games, which receive regular updates as opposed to the games that we call in Harvest mode.The active games fell 3% sequentially in USD terms, with -- on the other hand, audience metrics improving sequentially for the first time in a long while. Monthly average gross revenue per paying user was continuously strong at USD 63.5.And G5 Store continued to show strong growth and now makes up 13.5% of total net revenue. This is compared to 7.9% a year ago, so close to doubling its revenue share in the year. As you know, G5 Store has lower processing fees than alternatives. They are low-single digits compared to the 12% to 30% third party application store fees.Growth for G5 Store was 55% year-over-year in both SEK and USD, and it was up 2% sequentially in Swedish kroner and 5% sequentially in USD terms. User acquisition expenses were at 17% versus 18% last year. Our gross margin came back to record levels from the third quarter at 68.1% versus 67.4% last year.We had a strong start of the year, which led to a record cash position of SEK 256 million, up from SEK 205 million last year. And I believe this is the record amount of cash we've ever had at the end of the period.We have 0 debt and the solid cash flow, something we are very proud of, and in the first quarter, our earnings per share were SEK 4.76 compared to SEK 5.85 last year. We also repurchased 101,000 shares for SEK 13 million in the quarter.So now let's move on to the next slide and I'd like to talk about the strong gross margin and stable performance in Q1. Our own games made up about 71% of net revenue during the quarter on the same level as the first quarter of 2023. G5 active games were responsible for 63% of the quarter's revenue, in line with the 62% last year.Gross margin came in at 68.1%, rising slightly from the 67.4% a year before, mainly increasing thanks to the fast growth of G5 Store, which continues to be a welcome development for us. Monthly average gross revenue per paying user was strong at USD 63.5 versus $61.8 in Q1 2023.Let's continue on the next slide with G5's operating margin during the quarter. We see a strong EBIT margin during the first 3 months of the year. Our operating profit or EBIT was SEK 39.2 million versus SEK 39.8 million a year before. This gave us a strong EBIT margin of 13.2% in Q1.During the first quarter, the EBIT got a boost from revaluations related to currency effects, primarily from SEK USD pair. When we adjust for that positive income, the EBIT margin would be 10% versus 11.2% a year prior. So even with FX taken out, we still had a very healthy EBIT margin in the first quarter.At the same time, net capitalization impacted earnings with SEK 11.1 million negatively compared to SEK 8.8 million negatively last year.Now let's talk about our cash position. Again, we pride ourselves on being financially strong, and this quarter was no exception. We had record cash in Q1. Our capitalization impact on cash flow was SEK 25.7 million versus SEK 28.3 million last year.Cash flow before financing activities was SEK 84.7 million compared to SEK 40.3 million last year. Cash flow was impacted significantly by working capital, which added SEK 30 million -- almost SEK 30 million in Q1 2024 compared to negative effect of about SEK 12 million in previous year.As a consequence, total cash flow during the first quarter was SEK 71.4 million compared to SEK 26.3 million last year, and this was after repurchases of SEK 13 million versus SEK 14 million last year. As I said, this was a record cash position for us in the history of the company. We had SEK 256 million, up from SEK 205 million a year before.So let's start to wrap it up with some final thoughts. And let's shift focus to the rest of 2024. We started the year with stable revenue generation of the games in our actively managed portfolio. As have been demonstrated during the first quarter, we continue to maintain a disciplined approach to costs. Our growth and gross margins and profitability will continue to get a nice boost from the success of our G5 Store.New games are key to success and executing on the new development funnel process will continue to strengthen our teams and build a promising pipeline of future games. This means we are on track to release one to 2 games globally in 2024, and we will continue to keep our UA spend at a sustainable range of between 17% and 22%.With new games in the pipeline, G5 Store doing well and the disciplined approach to costs, we expect a strong balance sheet through robust cash generation. I would like to end by thanking you for following G5, but also thanking the whole G5 team for their outstanding efforts.So this concludes our presentation, and I'd like to open the line for questions.

[Stefan Wikstrand, executive]

And you can either ask questions by raising your hand and you can ask the questions by voice or you can type the questions in the Q&A box that you have available as well. We start here with Hjalmar Ahlberg.

[Hjalmar Ahlberg, analyst]

Yes. Maybe first a question on the games pipeline. You said that you still expect one or 2 games this year. Do you have a good idea of which games or are still working on which potential games it could be?

[Vladislav Suglobov, executive]

Well, I have my thoughts on what's more probable than less probable. But in the end, it's a decision that we make based on the metrics and all the other games that have the potential to be globally launched this year, they're still in the soft launch phase. So it will be a little too early for me to say. But I do think we have games to launch globally this year -- more games. I don't think it's going to happen in Q2, but in the second half of the year, I do think we have great candidates.

[Hjalmar Ahlberg, analyst]

And coming to the Twilight Land, which was released now in Q4, you have seen good initial progress and you're working on monetization. Is that according to plan? Or is it slower than expected in terms of monetization?

[Vladislav Suglobov, executive]

So we've made an exception for Twilight Land, because we were so optimistic about it, and we like the engagement metrics so much. So we sort of skipped the last stage of the soft launch, which we now made mandatory. And that was the stage where we would spend a little bit extra time fine-tuning the monetization.And so unfortunately, it means we're going to have to do some iterations while already in global launch. For the other upcoming games, I don't think we will skip the step. And so our ambition is to -- with the following games to come out, with the global launch, with a much more -- with a game that's much more ready to be scaled in the market.

[Hjalmar Ahlberg, analyst]

And you mentioned some seasonal challenges in Q2 and Q3. Is that more than normal? And why is that? And how do you think about UA investments in terms of the challenges?

[Vladislav Suglobov, executive]

Well, it's just historically, we seem to have certain metrics kind of on the lower side during Q2 and Q3. So that's just acknowledging that fact. It doesn't really affect our decisions with regard to the user acquisition. They work on the predicted return on advertising spend and whatever it is, they -- I mean they chase a certain goal with regard to that. And then depending on the situation in the market, we end up being in a certain range of spend.So I don't think these are necessarily connected. I was merely saying that it's actually a first thing -- it's the first time that our user metrics have improved sequentially in, I think, 7 or 8 quarters. So that was my comment with regard to Q2 and Q3 was just to highlight that I sort of view it a little bit with caution. We'll see what happens in the next few quarters. But it was an interesting quarter in the sense that our user metrics have improved.

[Hjalmar Ahlberg, analyst]

And maybe a final question. You talked about the improvements in your R&D departments, I'd say. Could you elaborate a bit more? Is that kind of a lowering cost for that or a more efficient in the game funnel or games coming into that game funnel?

[Vladislav Suglobov, executive]

It's everything. We are still working out the process with all the stages from working on the idea to refining the idea to doing the preproduction on the idea to actually working on creating the soft launch build and doing all the tests that we need to do with all the iterations before, we go to the global launch. And we are realigning all the processes in the company to work for that funnel to improve the quality of the decisions that we make on each stage. With hundreds of people, it takes some time.And obviously, we started it a while ago, but while we started doing it, we were finding new ways and new ways of thinking about things and making decisions and new things that we wanted to improve. So it's sort of an ongoing process where we are committed to fine-tuning and calibrating this funnel as much as possible.We do see progress certainly. We have -- so one of the latest games that we brought to the soft launch and did the first iteration on -- it actually showed the best engagement metrics of all the games that we have tested after we've switched to the new funnel.So we clearly see that teams start to understand that they're focusing on specific metrics they have to achieve and then they kind of built their process off of that and of finding the best possible solutions for all the creative tasks and creative problems when building a game. So we see progress happening. That's good news.On the other hand, just the development times, it takes months to get a game from the idea to a soft launch build. And then we go into the soft launch, and it can take months to be in that soft launch period. So the quality is improving. I'm quite certain we're doing the right thing.Question is when we will see something tangible that graduates into the global launch at scale substantially, right? And I think we'll have to wait a few quarters before that happen -- before that happens, honestly. But I think we're on the right way.

[Stefan Wikstrand, executive]

Yes. So if you want to raise your hand, please still, we can take a question from the Q&A box. In the meantime, we've got one here.What are the consequences of AI for your company?

[Vladislav Suglobov, executive]

Yes. Well, so far, they've been positive. We were able to reduce certain costs in our development processes, mostly sort of routine work with data, which was labor intensive, but could be relatively easily automated with AI.But we also see -- I mean, we certainly use AI in kind of tackling creative problems and issues. And it's great for creating concept art even when you're playing with ideas and trying to be creative. So it helps in a number of interesting ways when working on games. So I think generally, it was positive.I think we even said we even tried to put an estimate on how many people -- I mean, by how much we were able to reduce our staff count due to AI. So that's a good thing.

[Stefan Wikstrand, executive]

We have Rasmus Engberg from Handelsbanken. Unmute yourself. You should be able to ask your question.

[Rasmus Engberg, analyst]

I just wanted to pick your brain on the market situation. It seems that many companies in the mobile space have a hard time finding success with new launches since -- in particular, since the pandemic. Would you sort of agree with that? And do you think if that is the case, is it that the games aren't really good enough? Or is it a crowded market? Or what kind of explanations are there for such things?

[Vladislav Suglobov, executive]

It does seem so, Rasmus, thank you for bringing that up. But also, we're looking at the analytics on the market, and we can see that there are new successful games that are able to deliver scalability and they just come to the market with a great idea. And obviously, there's some money probably put into the marketing.But it's -- you cannot really say that like there are no breakthroughs among games in the market. Maybe there are fewer, but there are still new successful games happening.So perhaps there has been a little bit over investment, perhaps the mobile market for the first time in many years, did not grow, right, for a couple of years at least. And perhaps marketing became a little bit more difficult. And so all of these together probably raises the benchmark of quality or the efficiency of the operations that companies have.And so that's why we see all the difficulties that some companies are going through. And it's an interesting -- I mean, obviously, we're not performing in line with the market right now. On the other hand, I can see plenty of companies that are performing even worse than we do.So yes, it's quite a different performance in different corners of the market. So we are just really focused on our strategy, on our users, on our genres. But also may be thinking of other genres as well, we have some of those ideas in the pipeline. And I'm just really committed to being very optimal financially, fiscally in terms of decision-making and keep going through game ideas, keep going through games, keep coming up with great game ideas. I mean what else can you do in this market?

[Rasmus Engberg, analyst]

You certainly have brought your costs a lot lower than I think people anticipated already in this quarter. Is this a continuous trend going forward or is it kind of low because it's a Q1? Or how do you see the year progressing on your cost side?

[Vladislav Suglobov, executive]

Yes. No, I think in terms of cost in Q1, this should be the new normal. We went through the reductions at the end of last year. So with Q1, we have the full effect. But the work on integrating AI into our processes is ongoing. We have certain estimates on how much we can save from using AI through the end of the year. Those are some interesting numbers.I think we can also be more focused, to be honest. So maybe there is an opportunity to be even more optimal. I mean if you think about it, we have 830 or 840 people. That's still a lot for the company of this size. If you compare us to other companies of this size, they usually have fewer employees. So we know why we have so many, but maybe there's an opportunity to do things more efficiently.And yes, I think we'll continue adjusting and we'll continue to have strong cost discipline, right, because we have to get through this. We have to stabilize the revenue, and we have to release new games that will make a difference, and we'll have to make sure we get there. And we want to be profitable, cash flow positive and I would say, very conservatively fiscally managed through this process.There's a question from [ Ole ], which is how many employees do you have right now? And I think I just answered it. We have, I believe, 840 or so at the end of Q1.There's another question, our Hidden Frontier and Quantum Secrets, which seem to be the subject of soft launch in the U.K. candidates for global launch.Yes. Well, every game that we soft launch is a candidate for a global launch. But these are 2 of the recent games we have soft launched. And as such, they are candidates for a global launch. Yes.

[Stefan Wikstrand, executive]

All right. If you want to ask a question, either please raise your hand or type it in the Q&A box. We'll give it a few seconds to see if someone else has anything to raise. I think like that's a no. Go ahead, Vlad, final remarks?

[Vladislav Suglobov, executive]

Well, thank you, everyone, for participating in the call. Thank you for joining us. Thank you for following G5. Have a good day.

[Stefan Wikstrand, executive]

Thank you.