Modern Times Group MTG AB

STO:MTG B

Earnings Call Transcript 2022-Q3

[Anton Gourman, executive]

Good afternoon, everyone, and welcome to the conference call to present MTG's results for the third quarter of 2022. The call is hosted by MTG's President and CEO, Maria Redin; and CFO, Lasse Pilgaard. There will be an opportunity to ask questions after the end of the presentation. Please use the questionnaire feature in the video stream or follow the telephone operator instructions if you are dialing in by phone.

I now hand the word over to our CEO, Maria.

[Maria Redin, executive]

Thank you, Anton, and welcome, everyone. Looking into Q3, we're very happy to see that MTG returned to organic growth in the second half of the year. Organic sales were up 4% year-over-year in Q3, and this is thanks to the continued focus in live ops in our franchises and efficient marketing and this, combined with our ongoing work on scaling new titles. Even though we're happy to deliver organic growth, our overall sales increase in Q3 was lower than what we initially expected in the beginning of the year. And this reflects the continued low visibility on the market, along with a wider economic uncertainty that we see around us. If you're looking at the growth expectations throughout this year, it's really come down as we gradually progressed.

And most recently, in September, Sensor Tower revised the forecast for the full year 2022 from plus 5% growth to a year-on-year decline of 2%. Well, of course, this isn't what we would have wanted, and our growth continues to demonstrate the quality of our gains and our ability to take market share in the current market, which really, again, highlights the strength of our portfolio and the people that we have within the group.

Further in the quarter, with the strengthening of the dollar versus the Swedish krona, we have benefited significantly from a positive currency effect. This is primarily because of the revaluation of our cash deposits, which are reported in krona, but sit in our accounts in dollars. We delivered high profitability in the quarter with an adjusted EBITDA margin of 27% this was a tangible increase from the levels we saw in Q2 and is driven by the underlying organic growth in our business, along with our strict focus on profitable marketing investments.

Our balance sheet continues to be in a very strong position. And of course, it's boosted further by the realized and unrealized currency exchange in the quarter. And on back of this, the Board yesterday announced a new SEK 400 million share buyback program. The program is planned to run until the AGM next year, and we will begin buying shares already tomorrow. We now enter the Q4, which is for the gaming industry, the most important quarter for the year. We have an exciting pipeline of new content updates and in-game events ahead of us.

Our plan is to continue to invest in marketing and to ramp up the investment levels if we see the potential to do so in an efficient way with a good return potential, which is the policy and a rigid approach that we've done throughout the year.

If we then turn to the next level, I think it's fair to say that the market conditions has changed, but we are very proud, and we feel that we delivered a solid quarter in a market with low visibility. Our pro forma sales were up 6% year-over-year in Q3 and reported sales up 31%, boosted on top of the reported growth by positive currency effects. Starting from August, all of our companies are now part of the organic growth revenues. The underlying performance was mainly driven in the quarter by InnoGames and Hutch, returning to organic growth in Q3 as well as the continued high growth levels from Play simple.

On an annualized basis, our pro forma revenues were up 9% year-over-year, driven primarily by the strong performance by PlaySimple and Ninja Kiwi, both acquired in 2021. And then when including the foreign exchange gains that we've had in looking at our reported sales, sales were up 65% year-over-year for the same period. Organic growth was up 4% year-over-year in the quarter, and we do expect to have grown our overall share in the declining market.

If we now move to the next page and look deeper into our key franchises. At the Capital Markets Day, we introduced a new reporting structure, which we updated in June, and we now report our franchise revenues on a quarterly basis. And when you look at the number, as you see on this slide, you should know that they are calculated in constant currencies and a pro forma basis in order to give you a fair picture on how we actually develop within our franchises. And if we then look at the different franchises, the word game continues to be our largest franchise after taking over the Strada simulation genre during the first quarter of this year. Our revenues from this franchise grew significantly in the quarter and year-over-year compared to Q2 and is really driven by successful user acquisition investments in the quarter as well as a lot of new features within the different games and anagrams in particular.

The statin simulation franchise is our most mature gaming property, and it continues to deliver steady performance. Forge of Empires, which is our largest individual title launched several in-game events during the quarter, but growth was somewhat dampened by the structured decline on the browser gaming side. It is important to note, however, despite the longer-term dynamics of browser as a platform, this continues to be a preferred way of playing for many of our dedicated long-term players. And we do see a big value in the opportunity to have a cross-platform play for them. And because of this, we are also planning to launch a browser version for Rise of Cultures now in the fourth quarter.

Further in games, we’ll continue to invest in the scaling of Rise culture and Sunrise Village during the quarter. And even though some in-game events and updates didn't perform as expected towards the end of the quarter, the games overall progressed well in the quarter. Q3 was also a good quarter for our racing franchise, and this can mainly be attributed to 2 things. First and foremost, a combination of successful and well-received updates for the Formula 1 class and also top drives that drive further customer engagement and monetization. And on top of that, we also improved our marketing efficiency through the work that the marketing team at Hutch had done together with our central team within MG. I will come to the Flow platform later in this presentation, but it's really great to see the Flow platform come to life with Hutch as they're adopting several of the cloud-based systems that we are now offering in our service on the cloud.

Finally, on the franchises, the -- to defend franchise, it continues to be one of our strongest and most recognized global IP. Franchises revenues were flat year-over-year and down slightly versus Q2, and this is mainly because of a very successful steam sale last year in the same quarter. And with Steer, we're expecting to hold the same sale in the end of October. If you look at the Bloons TD 6 players, they were also treated to significant content updates during the quarter. And on back of this Nidec also raised the prices for the game to actually reflect the enhanced content and the richness of the game.

If we then drill further down and looking at our games IP, our gaming portfolio today contains a very healthy mix of well-established and fast-growing games. While the vast majority of our revenues come today from our 50s live titles, we are committed to both launching more new games across our franchises over time as well as scaling our current games to bring in players who are more engaged over the long term.

We continue to invest in our 5 soft launch and full commercial loans IPs during the quarter with the rise of culture and Crossword Explorer being a full commercial launch and thus being the most significant growth drivers of InnoGames. We reported sequential growth for our roll-of new games in the quarter, but a small month-on-month decline in September in a market where we did have a low visibility, and we'll also be more cautiously driving new investments in marketing. But also a small part of the performance was also driven that we found bugging one of the most recent updates in Rise of Cultures which the team now have addressed, but it came a short-term decline in revenue.

As to the other 3 games, Bates 2, Sunrise Village and lost survivors. The marketing has been scaled down and the team is rather focusing on improving the gameplay and the player experience in order to boost the game's key performance and monetization metrics. Positive is, in all 3 games, we really enjoy strong retention data, which is the most important fundamental to any new game.

In addition to the games that we're scaling, our students are working hard to make sure we have a healthy new games pipeline to enter the soft launches. And we do expect some exciting updates and launches to come in the next 3 to 6 months. And these include, for example, a browser version, as I just mentioned, Rise of Cultures, and that should come towards the end of this year and PlaySimple, who has already Crossword Explorer in commercial launch. They will also have up to 3 new titles moving into soft launch. And Kongregate is also set to expand the NFT initiative by launching 2 new games in the Bitverse universe as well as Blood Vessels, which is examples of our early testing going into the NFT universe and seeing how that can, over time, play an important part in gaming.

But that's not all. If we then extend the time line, our studios also have some very exciting games in the pipeline. There are tiles arising from Hutch and Kongregate both next year and then Ninja Kiwi started several developments of games that would go live in 2024, which means that we have a very healthy balance between games in limo, early rose and also in development. And on top of this, of course, our relentless focus on live ops in existing IPs and franchises continues.

Turning on to the next page. I'm really happy to see the progress on our buildup on our flow platform and operating model. In the environment that we're currently experiencing, having strong franchises that you can build upon is critical. And it also enables us to double down on live ops in games with established player bases. We are really focused on building a global village for game makers that shares a common belief on driving growth and also, therefore, show a shared common layer of capabilities, which will help all our game makers to accelerate their growth in evolution. We call this common layer the flow platform, and I previously mentioned it talking about Hutch. And there are 4 key areas that we want to drive progress across our different gaming studios. And these are the BI and analytics, marketing and user acquisition, cross-promotion and ad monetization.

The Flow platform itself was only announced in June this year, but I'm proud to report that we are really making significant progress. Our CMO, Christian Per, who was appointed earlier this year has been moving really fast, and we already had a small team in place now in the second quarter. And this team has been working very closely with the market team as Hatteras mentioned, to help the study to accelerate the execution on its user acquisition initiatives. And the team has also been executed on the wider flow platform road map and has achieved several important tangible milestones for us.

One of the most important part, which is the foundation for a lot of things that we want to do is the launch a central business intelligence framework, and we have almost finished the onboarding of all our studios onto that. And by having this, it really enables us to have a common approach to data, which over time will enable faster and more efficient resource allocation and decision-making across the group.

Our marketing efficiency tools that we developed also at InnoGames have now also been redeployed into the cloud and onboarding of our companies is also progressed in this part. And I would say even though we're doing great progress. This is still only the beginning for the platform. But we're seeing the clear benefits of having this common layer and we will continue to develop this initiative across all our 4 pillars as we progress going forward.

We then, moving into looking into our Mow and Dow and the diversification. As we talked about before, our acquisition of Play Simple last year has really enabled us to achieve 2 things. The first one is to diversify our revenue mix. And the second one is to provide our gaming studios with access to world-leading in advertising expertise. The more diversified revenue mix is fantastic as it does provide us with increased resilience in the current uncertain market environment, and it also offers us opportunities to implement incremental revenue streams in our games, which we see now in the recent gaming launches for InnoGames as an example.

And looking then in our revenue mix in the quarter, it has been relatively stable this year. We had 61% of the revenues from in-app purchases in the quarter compared to 28% from advertising and 11% from third-party platforms. If you then look at user developments, our monthly and daily active users have declined slightly from the second and first quarter this year, which, to some extent, is part of the normal seasonality pattern.

Above and beyond this normal seasonal patterns, there are 2 other drivers that I just want to highlight. We did see in the beginning of the year a temporary boost in usage, primarily from Battles 2 and Rise of cultures, which has some high promotionals and early hype. And this has now been staggered down and normalized from the normal customers that we see on a long-term retention basis. And also when you take this combined with Kongregate that has started to actually scale down and closing down some of the legacy games portfolio, meaning also that is negatively impacting our daily and monthly active users.

So overall, while we're not happy to see the decline outside the normal seasonality, the bigger part of the decline is actually representing lower-value customers. But having said that, we are, of course, monitoring the overall install trend and paying customer conversion to make sure that we're adapting and seeing if there are any changes to the normal pattern of our customers in the market that we see around us.

So with that said, I would like to hand over to Lasse, who now will comment on our profitability, user acquisition and financial position.

[Lasse Pilgaard, executive]

Thank you, Maria. And as you can hear from Maria, the fairly strong commercial performance that we've had, both sequentially and year-over-year has enabled us to deliver a strong quarter when it comes to adjusted EBITDA in total SEK 374 million and a margin of 27%. That's approximately 1 percentage point higher than last quarter, which is enabled by a strong FX but also keeping UA and other OpEx items fairly constant between the 2 quarters.

If you look at then the growth rate in that adjusted EBITDA, it corresponds to a 10% year-over-year increase, so a little bit more than we have done on revenue. And on a sequential basis, it's 5%. As you can see here on the slide, we've also started to report a simple cash flow metric, which is adjusted EBITDA minus CapEx. So the margin you have here. We believe this is a strong indicator of profitability in the group and with 23% delivered in Q3. And as you can see on the previous quarters around the same level, we are demonstrating a very high degree of operational cash flow from the business, and that is even remaining at a 35% UA spend as a percentage of our revenue.

We believe that these results reflect a strong performance across the portfolio, we’re focused on profitability keeps being important in an environment with less visibility. As a good example, and we've discussed this before, Nidec, maintained a very high EBITDA margin again this quarter. And year-to-date, they are now a little bit above 60% for the full year.

Commenting a bit on the right-hand side of this slide on the differences between reported and adjusted EBITDA for the quarter. There's 2 corrections or items that I would like to just call out. The first one is the SEK 29 million, which is the nonrecurring bonus structure as part of finalizing the full equity bridge and closing the last items of the Play Simple transaction, we did a correction of additional SEK 10 million, which is basically reflecting an under accrual of the bonus program, referring back to this liability of SEK 200 million that we took over as part of the acquisition. In the previous quarter, we had SEK 15 million here. We also have about SEK 15 million every quarter going forward for the year '22, '23 and '24. That's the only real item we're not adjusting for when it comes to LTIP.

We've also done a reversal of a capitalized expense in InnoGames. This is basically due to the fact that we chose to discontinue development of a fairly early game as it was not showing sufficient operational metrics to allow long-term scaling monetization. This is, of course, also in a combination with the other games and the strong portfolio that they have.

So turning towards UA and deep diving a bit more on that. We were able to do another 35% of revenue. So in total, we landed at SEK 499 million for the quarter, maintaining very high levels as we've done in the previous quarters as well for this year. And just to recap a bit at the Capital Markets Day, we guided a long-term spend level between 39% and 42%, although with variations in the quarters, which is really what we're seeing now.

We do expect to increase investment significantly into Q4 this year. However, given the low short-term visibility that do exist in the market, there's some uncertainty on whether we actually can reach that high level that we originally planned while maintaining the profitability requirement that we have. But I would say, even with this uncertainty taken into account, we do in all scenarios expect that Q4 will be the strongest quarter when it comes to investments, also beating the levels that we saw in Q1. We have mentioned this a couple of times in terms of the visibility. So I think I just wanted to highlight a cup of more insights on what is actually the uncertainty that we are seeing in the market when it comes to UA and how we're navigating it. Because we do actually see relatively low CPMs right now going into Q4 historically. And normally, Q4 is a very strong month. And that means advertisement is more expensive to buy. That's a positive for our revenue coming in through IAA, but also, of course, making it more expensive to acquire new customers.

We are not seeing that uptick yet, which, of course, is creating the same dynamic in our portfolio, some very interesting potential marketing opportunities that coupled with new smartphone releases and also new game updates that we have potentially from that angle can look like a very interesting quarter when it comes to investments, and that's also why we have a plan to invest quite significant in the quarter. But of course, the other side of the equation is looking at what's the lifetime value of the customers that we are getting in. And that's probably where the uncertainty is higher and where we are more, I would say, cautious and aware on what is happening the day-to-day. We are always adjusting our models. So whatever marketing we are spending now is based on what we've observed in the market in the last 3 to 4 months. But of course, we don't know what the future brings in terms of potential recession and how that further could hit the numbers. And that's, of course, why we are being even stricter on the profitability requirements to make sure that we have some buffer in the way that we spend our money.

So I would say on top of this, Maria already mentioned the Flow platform as an important tool. And especially when it comes to UA investments and capital allocations, it is really extremely important. It enabled us to do effective allocation between the games between the companies and the group, which is, in this environment, extremely important, but it also enables us to across the games look at trends that are changing so that we can quickly react to basically changes in patterns when it comes to monetization opportunities.

So jumping to cash flow from operations. We, again, have had a really strong quarter when it comes to that. So cash flow from continued operations before taxes and changes in working capital accounted to SEK 445 million for Q3 and now SEK 1.132 billion year-to-date. The change in working capital in the quarter is mainly related to the one-off payment in Play Simple dating back to Q2. And hence, you should not expect further impact from this going forward given that Q3 was the last quarter that we saw revenue recognition from this bonus.

Free cash flow before earn-out payments ended at SEK 134 million for the quarter and SEK 500 million year-to-date, reflecting a 53% cash conversion for the first 9 months. Year-to-date, the group has used SEK 317 million to fund earn-out payment and hence deliver the free cash flow after earn-out payment of SEK 253 million. At the end of the period, we had SEK 4.695 billion in cash in MTG. And on top of that, we have SEK 407 million sitting in long-term bank deposits, so a total of SEK 5.1 billion. We're currently carrying no debt other than earnout liability, which totals almost SEK 2.6 billion as per the end of the quarter. And as you know, we've included a table in the document where you can see this.

Just one note on the earn-out debt because it has increased due to revaluation of the FX as a majority of their liabilities are sitting in dollar or currencies highly correlated with dollar. This effect is approximately SEK 138 million, so an increase of liabilities on that. That's something we do every quarter. But of course, this quarter, given to U.S. dollar movement, it has been bigger. However, in the quarter, we further had a number of positive FX effects as the proceeds from the ESL divestment is sitting in U.S. dollars in our bank accounts. So specifically, we saw on unrealized FX effects, SEK 269 million.

And if you then net out the SEK 138 million on the earn-out liabilities, you get to SEK 131 million positive contribution. On top of that, we also had a realized FX difference of SEK 95 million, which is boosting the cash flow from operations further. So that's why if you compare the SEK 445 million, will we actually report in our report, you would get to a higher number. But here, we are showing it without that swap. But of course, if you were to add that swap in, our cash conversion -- or sorry, the FX difference in, our cash conversion for the quarter would become 61%. And year-to-date, it will become 62%.

So in totality for the quarter, just to finalize on the FX effect from deposits, if you look at it from a net-net point of view, we have basically increased our net cash position with SEK 230 million. And again, I think one of the questions that could come is how much dollar versus sector we have, and we are carrying a majority of the cash position that I just mentioned is sitting in dollar. The only thing that we have sold is to cover our share buyback program that was initiated or communicated yesterday and to be initiated tomorrow.

So given the strong cash position and the committed undrawn RCF of SEK 1 billion, we are in a really strong position to do further M&A and at the same time, allow further distribution to shareholders as we communicated last night. And of course, we're really happy to see that.

So I think with that, I'll give it back to you, Maria to comment a bit on the outlook.

[Maria Redin, executive]

Thank you, Lasse. So if you then look to the full year 2022, we are seeing fast change in market around us. And the most updated data according to Sensor Tower is now implying a decline of 2% for the gaming market full year compared to where we were in the beginning of the year and expect a growth of 5%. So as we look into the short-term future visibility and uncertainty is clearly remaining quite high. As a consequence, we are also adjusting our full year revenue outlook. And now we expect to deliver in the range to 5% to 6% revenue growth for the full year 2022. And that is, of course, implying us still growing our market share quite significantly.

At the same time, we're also reiterating our adjusted EBITDA outlook, and we continue to expect the margin ambition of between 23% and 24% for the full year. We are now going into the seasonally important Q4, which Lasse just mentioned, and we would like to ramp up marketing. However, we will always maintain our strict commitment to make sure we deliver marketing efficiency and the healthy returns on the money that we invest in. That also means that there could be a potential of a performance on the margin outlook, depending on what we see in the marketing environment now in the last quarter of the year. And especially, as I said before, November and December are the 2 most important markets, sorry, 2 most important months.

So as the short-term visibility remains limited, as I just said, we firmly believe in our long-term outlook and the strength of our portfolio in the gaming market in totality. We believe that gaming is one of the most relevant gaming, sorry, entertainment segments that you find around us. And it is well positioned to outgrow other forms of entertainment over time. And really, the drivers behind it is a cause of it. If you look at the underlying dynamics, 90% of the teenagers, and nearly 50% of the adults play games regularly. And there are 3 billion gamers worldwide and that is expected to grow. And 50% of those 3 billion gamers are spending money in the games and content and they play regularly.

So despite the current short-term sort of limited visibility, both in purchases and the advertising market are predicted and continue to grow in the next 5 years. And if you look at our position within it, we feel very strong when we look at our games pipeline, when we look at the franchises we're having and the game makers and people that we have in the group. So in addition to that, and Lasse just mentioned, we continue to believe that M&A will be an important part of our growth. And the current climate, of course, that is interesting opportunities that we can find, but also from a timing point of view, it is challenging to some extent because there are big discrepancies between public and private multiples. So we're not in a rush, but we're having several interesting conversations.

So in the meantime, as we just mentioned as well, we have a strong balance sheet, and we are in a good position then to continue to return value to our shareholders, and we're doing that short term by initiating our share buyback program.

So before we're moving to the end of this call, I just want to wrap up and briefly summarize our position. We feel very proud about delivering our organic growth in Q3, and we are doing it thanks to our ongoing focus on Liveops, profit and marketing investments. And we feel that MTG has significantly outgrown the overall gaming market in Q3, just like we've done in the previous quarters this year. We delivered also a higher-than-expected adjusted EBITDA margin while maintaining the stable levels of marketing investments, along with a very strong operating cash flow.

And back on the strong balance sheet and our commitment to deliver shareholder value, the Board of Directors announced yesterday the third share buyback program for the year of in total SEK 400 million to be started tomorrow. With that, I would like to say thank you to all of you listening in on the progress of our company and on building of our gaming village. We also look forward to sharing more news of you in the future. And I really also hope to see many of you, and I would like to remind you also that we hosted the game-makers Day in London on the 30th of November, which we are very excited about. This will be a fiscal event where guests will have the opportunity to hear directly from our gaming company leaders about the franchises and also the future initiatives that we have within these franchises.

We will, of course, also hold a stream to the event for those of you who cannot make the trip, but we hope to see as many of you there as possible. So by that, we're now ready to take your questions. And operator, please go ahead.

[Operator]

[Operator Instructions] We have a question from Dennis Bergin from Carnegie.

[Dennis Berggren, analyst]

So could you perhaps provide some comments on the development throughout the quarter? And perhaps if you also could sort of give an indication of how much you think you outgrew the market in Q3? And then a follow-up on that. Given that you referred to the 10% pro forma guidance in July, is it reasonable to assume that the visibility has decreased month by month since then?

[Maria Redin, executive]

Thank you for the question. I would say probably, we saw a little bit different growth between the 3 different months, but also the 3 different months has different seasonality impacts. And also you need to be mindful that depending on which market you are in the holiday seasons are some in July and some in August. So I would say of the 3 ones, I would probably say that July was one of the stronger quarters. And then you saw a mixed bag between companies in August and September. So I wouldn't say that there was anything that was totally accelerating in September, if that's what you're after. You obviously, it's rather mixed bag between August and September.

And if we then look in the forward and also exact market share, it's always difficult to say how much market share did we actually gain in the quarter because there is no precise data. I mean we, of course, follow the data points that we see from Sensor Tower, very closely. And of course, that is implying a double-digit decline. We could demonstrate the 6% pro forma growth and 4% organic, which we're very happy with when you see the market trends that you're seeing around us.

If you then looking forward into the full year, I mean, the Sensor Tower update implies a negative 2% and I'm not sure if the visibility has gone worse or better. I think the macro we have around us, and we are very mindful around we're very humble about how that could potentially impact our customers so that we always track and follow our data very closely. I think that we do that even more so now, to be fair, to see if there are any trends to be picked up. November and December, as I said, are the most important months. So of course, we would like to see that scaling up both from a sort of CPM level when you look at Play Simple and the ad revenues, but also when you look at InnoGames and they have a Christmas calendar in December, which always makes December being their best month of the year.

So therefore, of course, we are mindful about how market develops. But I think the range that we gain, we feel good about as we see it right now.

[Dennis Berggren, analyst]

Very clear. And also, thanks for the comments and slide on the UA investments. As a follow-up on that, would you be able to sort of comment on the level to the changes you've seen on CPMs year-over-year? And generally, how do you think about this sort of market development from an IP versus IAA perspective so far?

[Lasse Pilgaard, executive]

So on your first question, typically, what we see is that as you come in to October, the CPM level starts picking up. What I mentioned is that, that hasn't happened yet, and that means the current CPM level that we're seeing in October is actually comparable to what we've seen in the last couple of months, but that pickup normally would now start to happen, and we will come to an elevated level. We're not seeing that yet, and that basically means it's likely that, that pickup will, of course, come the closer we come to Christmas, but -- maybe it's not going to end up as high and that means Q4 compared to previous to Q4. Those are unchanged. But if they end up in being unchanged for the full quarter, that is actually a fantastic marketing quarter than for Q4 [Technical Difficulty] revenue coming from Play Simple. And then we do expect, as we come closer to Christmas that we will see an uplift in our IP revenue in those games. But again, there's seasonality in each of the games because [Technical Difficulty]

[Operator]

[Operator Instructions]. Ladies and gentlemen, there are no further questions. I will now give back the floor to Mr. Anton. Please go ahead.

[Anton Gourman, executive]

Hi, everyone. Before we close on the call, we have 3 questions through the web chat. They come from Martin Arnell at DNB Markets. So let us start with. So why do you think that the mobile market is deteriorating so rapidly right now? How resilient do you think it can be in a recession? And can you help us understand why MTG should outperform the market in Q4 and 2023?

[Maria Redin, executive]

Thank you, Martin, for your question. It's a good one. And I think there are many factors that is impacting the current gaming environment. That doesn't mean that we are not formative in long term. So you need to depict the different pieces of what they are. So you have both a post-covid new sort of engagement norms. I would probably call it, you have the IDFA that has also impacted how we can do marketing. And I think that's why we come out in a good way on our end that we have strong systems, and we can also collaborate as a group. And of course, now you're also getting the macro into the mix. So if you take those together, I think that is probably what is driving the development this year because you come from really elevated levels in the last 2 years before that.

Then, of course, the question is, of course, what's the new norm? And I think that if you look forward in the midterm, I think that you have amazing drivers to really argue for the long-term sustainable growth within mobile game. And I mentioned it, there are 3 billion gamers out there. And there's a whole new generation of gamers coming out that will spend money. Those games that are in there, 50% of them actually game regularly and they spend money in the games. So we do believe that this is one of the most relevant entertainment tools out there. It doesn't matter whether you look at your kids, [indiscernible], or you sit on the bus and you see sort of the 50-year-old man playing sort of games on his mobile phone. It is there, and I don't think it's going to go away.

Then you, of course, can discuss how is gaming faring in a recession. And in all honestly, gaming in its current shape perform has never gone through a recession. But when we look at it, -- there are several factors actually talking for mobile gaming. I do believe, and that's where we're very humble that I mean, the macro environment is where it is. It's going to cause many of our customers to have less disposable income, which is something that is mindful about. And we also need to serve their airtime and the dollars spent.

But if you take that aside, I mean, the entertainment that we are providing is actually relatively inexpensive entertainment readily available. And often what you see in a recession is that you actually spend more time at home, and then we can actually offer entertainment on any device you want in that essence in a relatively inexpensive way. And some of our games is actually 100% ad-funded, which means that as long as you're happy to see our fantastic ads, then you can actually have a fully free entertainment. So I do believe compared to many other industries that gaming is actually quite well situated going into this, of course, being humble about the market environment in its totality.

[Anton Gourman, executive]

Thank you, Maria. So following up then the next question also from Martin was what was the main drivers of Kongregate and Hutch returning to organic growth? And how sustainable do you think the turnaround is in Hutch in particular?

[Lasse Pilgaard, executive]

So I think the difference is somewhat different between the 2. So let's start with Hutch. Hutch always have strong quarters in Q2 and Q3. And if you look at them sequentially, they have done very well between Q2 and Q3, but also if you look at the scaling of the games versus last year, especially Formula 1 has done very well. That's not the same as saying that every quarter is going to be the same kind of growth going forward because of the seasonality and the fact that Q4 and Q1 is the slower quarters for them. We believe a lot in the games that is there, we believe in Formula 1 and the update that then will happen next year and the fact that, that will grow again. Quite structural things are being done and has been done to top drives to get that back, but that's probably the one where it has been dragging for the year. And given that, that's now more stable, we still need to make sure that we see real growth for that because we believe the potential is significantly bigger than where we are now.

And then I think most importantly, if you look at the pipeline of new games that Maria was also mentioning and commenting on, I think the most significant one that we have today also backed up by some very interesting partnership and licenses is in Hutch, and that means for the long term, we really believe that HOT will grow and deliver the expectations that we had initially.

So that was Hutch. On InnoGames, it's also very much due to the year-over-year for them to be fully transparent. If you look at it from a sequential point of view, they are flattish between those 2 quarters. And hence, here, I think we more need to look at when is the next level of UA spend and features coming into the new games to drive that growth because we have Forge of Empires, which is the majority of the revenue still. We are doing a lot of structural things there to especially improve early monetization, so we can get more customers and more paying players into it. But Forge of Empires will not be a growth driver. The new games will be. And hence, with the browser versions of the games coming up, quite deeper monetization features and generally more investments into those games as we look ahead. We believe also that you could say, organic or reported however you define it for InnoGames will be realizable and realistic for the years to come. Thank you, Lasse.

[Anton Gourman, executive]

Now moving over to PlaySimple, and we have several questions that I will collate. So what about the outlook for PlaySimple? Can you explain how you think about PlaySimple for 2023, given some tough comps in 2022 versus 2021. So how should we think about next year? And how much can PlaySimple help carry the overall group in terms of organic growth?

[Maria Redin, executive]

Yes. No, it's a great question. And I think also it's fair to say if you look at our 9% sort of year-to-date growth, a lot of that comes from PlaySimple and also aided by Ninja Kiwi. So Ninja Kiwi have had an amazing growth, but it's also had a very strong growth on back of having really good underground franchise, in particular, but also having the crossword franchise. So even though we don't expect, if we look forward, I think it's unreasonable to expect the same growth levels in absolute numbers, but the fact that PlaySimple is going to continue to be a growth driver for the group.

I think that is fair to say. The one thing that is, of course, outside a little bit our control is how will the CPMs for next year develop. I mean long term, we feel very confident about the growth within the advertising market online. But the short term, there is limited visibility. But it is simply an amazing company. We are really impressed by the team. They are extremely data-driven in the way that they are enhancing their franchises and extending them, and they also have a very interesting pipeline of new games, which I mentioned on the games update. So we both believe there is growth in the existing live franchises, but we also look forward to see them putting more of their titles into soft launch and hopefully, over time, also into full commercial launch.

[Anton Gourman, executive]

Thank you, Maria. So a question from Simon Jönsson. Of the parts that have had over the parts of the business that have had lackluster organic growth in 2022, can you maybe comment on which of those parts you have the most visibility on improving for 2023. So which parts of the business had performed maybe slightly less. What's the visibility for 2023? Comment on why you have that visibility and what specifically has been done in 2022 to improve performance? And if you see any signs already in Q3 and into Q4 on sequential improvement.

[Lasse Pilgaard, executive]

Yes. So of course, it's a difficult question because what you're basically asking is, for the games that hasn't been performing well in terms of contributing to growth this year, where do we feel comfortable that there will be growth next year. And I think I probably commented on hot. We haven't been satisfied with the overall growth for 2022. So I would put them in that bucket, but we have a, I believe, fairly strong road map for next year and especially the year after, if you look at the launch date that we expect and the subsequent revenue that, that will drive.

I think it's the same also, again, the answer for InnoGames also become relevant again because here, we would also have liked to see higher year-over-year growth from InnoGames and it's also one of the reasons that we are now coming out with an outlook of 5 to 6 versus 10. But a lot of the potential and the scaling of their new games, we still believe are intact. They needed more features before we really put the monetization behind it, and those will be delivered end of this year, beginning of next, and that allows us further scaling from there.

I think we've been really happy with Ninja Kiwi, especially also with the profitability. They have a good road map next year. And I would also argue, yes, well, Maria commented on PlaySimple in how we are seeing that.

And then lastly, if you look at congregate, of course, given the idle decline that happened this year, and there's Gamechanger, there's also a fairly significant road map of new games to ensure that they do well next year.

[Anton Gourman, executive]

Thank you, Lasse. Now next question comes from Rasmus Engberg at Handelsbanken. So how do you see 2022 compared to other years. We started the year with a very ambitious UA spend, which didn't really materialize. Is this rather a normal or stable margin level?

[Lasse Pilgaard, executive]

So I think it's not correct to say that it didn't realize because if you look at what we've done year-to-date and with the guidance that we gave in terms of UA spend for Q4, we could still land in the interval that was provided as part of the Capital Markets Day. We will likely be in the low end of that interval. If you look at the full year, not towards the higher, but it's still within that.

So and again, with that plan, our margins would also very much live up to where we expect it to be when we started and guided for the full year. There's a lot of other things that hasn't panned out as we expected, especially when it comes to the software market. And if you look at the absolute amount, we'll spend, it will be lower because we have made adjustments because revenue is lower. So I think in general, margins are fairly representative for what we also would believe in the long run and hence, also within their long-term guided margin levels that we have provided.

[Anton Gourman, executive]

Thank you. Then we have 2 follow-up questions from Parson. So first, following up on Hutch, what kind of growth do you expect for 2023? Is it more in the range of 0% to 5% or more to 10% to 15%. Is there anything you can comment on that?

[Lasse Pilgaard, executive]

No. So we haven't guided yet for 2023, and we will not guide per company.

[Anton Gourman, executive]

Perfect. And then the second follow-up question is the cost gain for InnoGames. How do you see that developing in 2023 versus 2022 given that they have had slower growth than expected? Can that cost be optimized? Or are you okay if they grow that cost base?

[Lasse Pilgaard, executive]

So again, I think we're not commenting on how they will look next year and the investments that we will do in terms of the cost base. So we're always looking at what are the games that are profitable and then, of course, we are aligning the organization to them.

[Anton Gourman, executive]

Now moving on to a question from Tom Singlehurst at Citi. Can you talk a little bit about the potential for M&A? Are you seeing multiples for private companies coming down now that access to capital is more scarce?

[Maria Redin, executive]

Yes. No, I would say it's a fair thing to say the multiples are coming down, but it's always a question for which leverage do they come down from. So whilst we are actually entertaining a lot of discussions and speaking to interesting parties in the market, it is, as I said, it's a timing game. So whenever we look at transactions, it needs to fit both operational sense, strategic sense and then financial sense.

And I would say even though the multiples on the private market has come down, I don't think they come down to the same levels that the public has been. So of course, there's discrepancy there. And for us, our job is to drive shareholder value creation, and that goes for short term and long term. So that is, of course, difficult discussions that you're having. So therefore, as we said, we continue to believe M&A is an important part of our strategy, and we will continue to execute on that, but we're going to be very rigid to do that and remain the same focus as we've always done, and we are not in a rush. So when the time is right, you will see us hopefully to deliver on a value-accretive acquisition. But the time needs to be right.

[Anton Gourman, executive]

Thank you, Maria. And then we have the last question. So given that your own stock is so cheap and you have a very -- and you have a few very high-quality assets that you know better than any target you could look at as an acquisition. How do you view buying back your own stock versus buying a very high-quality asset from maybe 10 to 13x EBITDA that may be before that was even more expensive.

[Maria Redin, executive]

No. I mean, I think I just touched upon that. We are sort of launching our third share buyback program for the year, which is a way that we want to give value back to our shareholders in a direct means. So we're doing yet another SEK 400 million share buyback and the limitation that we're having is the 10% of our own shares that we can hold in treasury. So that's a very simple math provides a SEK 400 million number. So that we are mindful about and I think that we're executing on that part. And -- but when it comes to M&A, I think it's important to note this, but you never start and stop M&A.

If you want to be active in the market, you need to be out there, you need to meet companies. You need to learn about companies, and you need to continue to expand your own strategy. So we are doing that in parallel. But you should hopefully feel good that we will always make sure that we have a very rigid approach to M&A. And as I said, each and every targets need to meet our criteria when it comes to operations, strategic and financial sense to drive value creation.

[Anton Gourman, executive]

Thank you very much, Maria. So we have no further questions. I would like to thank everyone participating and the team helping us do the call, and we will close down for today. Thank you very much.