Enad Global 7 AB (publ)

Hello and thank you for tuning in to this live Q3 earnings report presentation with EG7. My name is Joakim Båge and I am your moderator today. With us from the U.S., we have Acting CEO G. Hamm. I'm going to hand it over to you, G, shortly, and then I'll be back after the presentation to moderate the Q&A session. If you have any questions for G during the presentation, you can email them to the Investor Relations inbox by clicking on the email icon, and I will get to as many of them as possible afterwards. So with no further ado, please go ahead, G.

Good morning and thank you for joining us for the Q3 earnings presentation today. You know, real quickly on the agenda side of things, I will be stepping through really three groups of information, first of which is a quick overview of EG7 as we are today. And then we'll get into a Q3 financial performance and then looking forward what the future for EG7 is. Next slide, please. So this is the snapshot of where we are today as EG7. You know, 21 live service titles based on globally recognized IP, first party and third party brands. You know, we are one of the largest service provider for live service games in North America, as well as Europe. Over the last 12 months, significant acquisitions, four major ones that really completely transformed EG7 into what we are today. fully featured development and publishing PC console games globally. Currently, we have seven business units across PC console mobile games as a service, and our capabilities extend from digital physical publishing as well as distribution and marketing. Currently, we have 16 offices across North America and Europe, you know, 880 plus employees. And our main markets are North America, Europe and Russia, CIS. Next slide, please. This chart illustrates really the true transformation that has happened for the company over the last 12 months. Once again, four large acquisitions that's happened. And stepping from the left to right, we have business unit that expanded from three to seven. Employee count going from 178 to 880 people. And the product pipeline expanding by two times from five to 10. And live games, you know, we had no live games just third quarter of last year. Here we are today with 21, all performing nicely. And then net revenues having grown from 152 million SAC in 2019 to 1.3 billion SAC for the LTM period ending Q3. So I do want to really stress that, hey, the business that we used to be just 12 months ago, very different today. And this, you know, illustration is meant to highlight that, that we are completely transformed and poised for strong growth going forward. Next slide, please. Business segment-wise, we operate in two segments, games and services. Game segment is led by Daybreak, a fully featured global development and publishing company based in the U.S., acquired in December 2020. Big Blue Bubble, mobile PC and console game developer and publisher. And you have Piranha and Toadman, both a talented group of developers making PC console premium and live service titles. On the right side services, we have Innova, which recently joined us beginning of second quarter in a leading platform based in Russia for releasing and operating PC online games for that marketplace. And they are experts in live service games, similar to what Daybreak does in the West, and sold out a premium console game publisher and distributor across North America and Europe. And Petrol, one of the leading creative branding and marketing agency globally, specializing in games and creative endeavor around that. Next slide, please. So EG7 today really has evolved into becoming a full stack end-to-end development, live service and publishing organization. We look at Daybreak as being really central to this. With this 24-year history, our capabilities at Daybreak extends very wide and deep, along with these yellow highlighted circles. These are all the capabilities that Daybreak has built up over the last 24 years. And when we look at EG7 as a group, utilizing Daybreak as the central piece and the foundation, a lot of the other business units are really building on top and expanding and extending the capabilities that we have. For example, PC console game development. Daybreak makes games, PC and console games. On top of that now we have Piranha, BigBlueBubble, ToadNet adding to that capability. Daybreak has not had mobile game development capability. Now with big blue bubble plugging that gap, allowing us to be expanding beyond just PC console into mobile as well. Creative marketing agency, physical distribution, two areas that Daybreak lacked before. Same thing, patch one sold out, plugging those gaps. So along with these combination, even though we are operating at a decentralized basis, you know, EG7 as an organization, once again, utilizing Daybreak as the foundation has become a fully featured end-to-end development live service and publishing organization and helps us to be poised for significant growth going forward in the gaming industry. Next slide, please. So these are the games and brands that it's one of the key differentiations for EG7. And some of these assets and IP access to these IP, it's something that's very unique to Daybreak, both original as well as third party. Added to that from Daybreak, also big blue bubble of contributing My Singing Monsters. And Innova also has a number of third party IP that they're publishing across Russia CIS and also expanding to Europe. So these assets that we have in terms of IP is what allows EG7 to really differentiate for the games that we currently operate, as well as being able to exploit these IPs for new games, as well as adding additional content to the existing games that we will continue to run. Next slide, please. Actually going to slide eight. Now we'll get into a Q3 financial discussion. So Q3 2021 highlights. So the first thing I want to highlight is the completion of a successful recalibration. As everyone is aware, Q3 was a period of transition for EG7. Last 12 months, once again, full transformation of the business from a smaller service-oriented business now into a highly diversified developer and publisher with 21 live games. In order to really take advantage of where we are as an organization today, we felt that it's important to make certain changes with transition and leadership and also reorganizing our business to become decentralized to really leverage the capabilities that each business has. So along with that transition, obviously, it did create some friction and some disruption. But nonetheless, we're very happy with the results. We have completed the transition in Q3, and now we're looking forward to really leveraging what we've done to be able to continue to drive our business forward. In terms of our performance numbers, Q3, net revenue of $409 million, 409%. year-over-year growth which is significant and we're very proud of this performance and it's in line with what we have guided. Adjusted EBITDA of 89 million SEC that represents 22 percent margin. We do add that certain adjustments that are non-recurring as well as out of period, including 5.5 million SEC related to the restructure that I just discussed, as well as some M&A related transaction fees and financing fees of 2.3 million SEC and 2.7 million SEC related to prior periods capitalized cost adjustment. So when we add those back in order to get the comparability, we get to 89 million SEC, really highlighting our performance for this particular quarter. in line once again with the third quarter guidance that we provided. Some of the business unit level highlights for the performance. Overall, we performed nicely for the quarter. September 2021 was the biggest grossing month for My Singing Monster in the last five years, along with their celebration for their anniversary. Sold Out and Petrol continue to perform well. They're rebounding from where they were first quarter of this year, where they had certain delays with the physical and also marketing business being delayed along with the pandemic. But now they're getting back to normalized levels and they contributed 104 million sec of net revenues for the quarter compared to 90 million sec in first quarter. Once again, indicating their nice rebound from where they were and getting to a normalized level. Daybreak and Innova continue to perform very well. Q3 and the summer periods tend to be a seasonal low for live service games. So while they're performing really well, numbers will compare softer to Q4 or earlier part of the year due to seasonality. And that's something that I really do want to educate the investor base that there is ebbs and flows in live service games as well, especially based on seasonality as well as when the content is coming out. So in the summer, not a lot of content comes out for games like this, given that it's a slower period. A lot of content is back ended in the year in Q4, along with the holidays and et cetera. In Q4, we have expansion packs and other holiday promotions that we're going to be running that helps drive Q4 numbers to be the peak quarter for the entire year for live service games. One softer side of the business in Q3 really was Piranha. They released MechWarrior 5 on Steam and Xbox. in the second quarter and had nice results from that. But in the third quarter, they took the game to PlayStation, but it did underperform. And that underperformance is what's partially offsetting the overall strength of the rest of our business. And our underwriting behind that, based on what we've analyzed, is that at the end of the day, MacWarrior 5, great IP, there's a core audience there, but there is some limited depth and breadth globally in terms of that audience base. And along with the release on Xbox, Steam, and Epic, we believe that we sold through, largely through the core audience. And by the time it got to PlayStation, we no longer had the market depth to really drive sales there. But this is okay. We're very excited to be now pivoting the team to a number of the projects that we have as an organization. There's multiple projects that need additional staffing. And with the experience and expertise that Piranha has, we're looking to really leverage their talent to be able to drive acceleration into some of the projects that we currently are working on. Next slide, please. Net revenues and adjusted EBITDA. These show the quarterly trends as well as the LTM trends. As these illustrate, our quarterly transfer net revenue continues to be very strong, growing from 81 million second third quarter 2020 to $409 million SEC in third quarter. And LTN-based, the same thing. It's illustrating that our continued steady growth And we continue to expect this type of performance going forward with Q4 guidance that we provided. And we're excited to also talk about the future beyond that in the latter part of this presentation. On EBITDA basis, you do see a little bit of a dip for third quarter 2021. Once again, this is natural given the seasonality for live service games in third quarter. Additionally, you know, What's impacting our second quarter to third quarter sequential EBITDA decline is MacWarrior 5. MacWarrior 5 released on Steam and Xbox in Q2, and we benefited from their performance then. In the third quarter, we did not. Additionally, there were certain marketing expenses for MacWarrior 5 for Q2 that got recognized in Q3 impacting our profitability from Q3. But overall, we're very happy with this outcome. It's in line with what we have guided to just two months ago. And then you know we expect to see an uplift from these levels for Q4 which is typically our strongest quarter. Next slide please. Net revenue by segment. You know this illustrates really the change in our business. So for Q3 2021 250 million SEC out of the 409 million SEC of net revenue came from games business. representing the majority of 61%. On LTM basis, very similar, you know, 55% of our net revenue on a last 12-month basis is coming from games business in contrast to where we were just third quarter of 2020, where 98% of revenues came from a service business where we had almost no games segment revenues at all. So we're very happy with this change. We expect this transition to continue as games business continues to ramp along with transactions that we may be doing and new products that we would be releasing. We expect that games revenue will continue to maintain, likely actually grow even further in terms of contributing more to the overall revenue mix, while service business, nice steady business generating steady growth. at a lower pace, though, compared to games and producing a predictable and consistent cash flows going forward. Next slide, please. This shows the adjusted EBITDA by segment. You know, in terms of EBITDA for third quarter 2021, 66 million SAC came from games. Once again, majority of our EBITDA is coming from games and service business, 31 million SAC. and Holdings is contributing 8 million negative necessary costs for a public company that's held in that Holdings business unit. So you see the trend here. One thing to highlight, similar to what I already disclosed, when you look at the EBITDA level for games, for first quarter to third quarter, you do see a decline. First quarter 2021, Daybreak had significant content releases. DCUO, which is Daybreak's one of its biggest games, had its 10-year anniversary in January of 2021. So we benefited greatly from that celebration, along with large content update for DCUO, as well as EverQuest anniversary, which led to second quarter numbers being lower compared to those content updates in first quarter. Additionally, second quarter had NetWarrior 5, release on Steam and Xbox, which contributed to a higher level compared to third quarter 2021. On the game side and added to that is the seasonality that we have seasonal declines in our numbers for live service games in third quarter. So we have a lower overall performance generally in that season. But we expect this number to rebound meaningfully for the fourth quarter with large content updates coming out. for EverQuest, EverQuest 2, Lord of the Rings Online. All three have expansion packs that are coming out in fourth quarter, as well as a number of promotions that will be running throughout the holiday season for all business units. On an LTM-adjusted EBITDA basis, it's the same story there. A large chunk of or biggest chunk of our EBITDA comes from games, and this trend will continue going forward. Next slide, please. So this is a new level of detail and transparency that we are providing along with the third quarter earnings announcement. Historically, we have not provided details at business unit level, but we made a commitment along with the transition and reorganization to provide additional details about our business so that the investor base can gain better understanding of our business and the overall performance, what the underlying performance would be. So starting with the game segment, net revenues, Daybreak represents the biggest contributor here with 68% of games total. Piranha contributed 19%, and this is driven by MechWarrior 5. Even though numbers did come in softer, nonetheless, a nice revenue boost with 19% of sales. And BigBlueBubble contributing 13% and Toadman the rest. On an adjusted EBITDA basis, similar to net revenues, Daybreak is contributing the largest share with 62 million SEC. Big Blue Bubble, 18 million SEC, which indicates really their higher profitability compared to the other business units with their 32 million, against their 32 million of net revenues, generating 18 million of adjusted EBITDA. Parana is noted earlier, underperformed. You know, while largely breakeven for the quarter based on the performance for the quarter, Piranha was burdened with the second quarter marketing expense that hit this quarter. And as a result, that tracked on the results ending in negative eight million of adjusted EBITDA for Piranha. You know, going forward, we are very excited once again to leverage their talent. We will pivot them to focusing on supporting and driving results for a number of our projects across the board. You know, nowadays, I think you'll see this with any other competitors in the industry. It's very difficult to find great resources. There's significant scarcity in resources. But the fact that we have Piranha available to be able to start driving results for a number of our production and development is super critical in our ability to follow through on our plans going forward. So we're very excited about that. Toadman also produced a loss. Not all expenses can be capitalized and hence the reason for the loss here, but the team is making great progress for our 2022 slate and beyond, which we'll cover later in this deck. Next slide, please. On the service segment, you know, service business is back to steady performance at this point. A nice boost from Innova with Innova joining in the second quarter and Soldout had a great quarter delivering 69 million stack of net revenues. Innova was the second largest contributor with 55 million SAC, and Petro rounding it out with 35 million SAC. On adjusted EBITDA, Innova is the largest contributor here with 18 million SAC. Innova operates with stronger margins than the others in the service segment as they operate live service portfolio. So in many ways, very similar to Daybreak in terms of how we operate our live service portfolio, which generate that larger EBITDA margin. Sold out contributed 11 million SEC and petrol the remainder. Both businesses are doing great and back to normalized levels, but they tend to operate at the lower margin as service businesses. Next slide, please. On a cash flow basis for the quarter, a very strong outcome here, you know, 85 million SEC of operating cash flows for the quarter. We have great liquidity position with $442 million SEC of cash at the end of Q3. And a couple of notable cash flow items here, once again, $85 million of positive operating cash flow, which is great, as well as there's $100 million SEC of debt pay down that happened in the third quarter where we reduced Swedbank loan from $500 million SEC to $400 million SEC. We ended the quarter with 442 million sec of cash and net debt of 35 million sec, negative 35 million sec, putting us in a really good liquidity position going forward. Now going on to more forward-looking and our business plan and slate of products, if you could go to slide 16, please. So we are reiterating our Q4 2021 outlook. In line with the guidance that we provided just two months ago, we are targeting and tracking against the $450 million SEC to $500 million SEC of net revenue. Adjusted EBITDA of $95 to $110. And full year 2021, we're on track for producing net revenues of $1.55 or $1.56 billion SEC. of net revenues and adjusted EBITDA of 374 to 389 million range. And this fourth quarter performance will be largely driven by a number of the large content updates that are coming out. All of these have been announced and they've already gone through pre-sales and we will be releasing these shortly. EverQuest, EverQuest 2, as well as Lord of the Rings Online. Lord of the Rings Online in particular, the expansion pack has performed extremely well. You know, they go through a cycle of small content or expansion pack one year, followed by a large one. And then they go through that small to large cycle. This year is a larger one. As a result, we saw significant uplift in their performance in terms of user count as well as revenues. And then the expansion pack is monetizing very nicely. So we're very excited about that. Additionally, we have holiday promotions, Thanksgiving weekend in the U.S. this week. along with the Christmas holidays coming up, there's significant uplift through promotions and a number of events that we run with all the live service games, as well as service business also benefit greatly as there's additional units that get pushed through during this time of the year. So based on these seasonal as well as new content updates that are going out, we expect fourth quarter to be a nice quarter. And we are confident of being able to achieve the guided ranges that we provided. Next slide. Our product slate for 2022 and beyond, you know, we are very excited of our product slate. And I think we do have something that's very diverse. It's not about volume from our perspective. It's more quality. Each year we have something that we are very excited about over the next number of years. But starting with Q4, we do have a couple titles going out, smaller ones. My Singing Monsters Playground, an extension of My Singing Monsters brand beyond just mobile now going to console and PC. It's a Mario party-like casual family party game. It's not meant to be a large blockbuster type of title. It's a smaller budget. a fast turnaround title that, you know, Big Blue Bubble team was able to develop for under a million dollar budget. And it was opportunistic experimental, but this is meant to really start expanding My Singing Monsters brand beyond just mobile so that we could capitalize its brand awareness in multiple platforms going forward. And we have Power Chord, another smaller budget experimental title that's going out as an early access by Big Blue Bubble. It's a roguelike Card game similar to Slay the Spire, which did extremely well. But early access title that's going out on Steam in December and then broader release plan for 2022. Similar to My Singing Monsters Playground, not meant to be a huge, huge revenue driver, but nonetheless, a nimble, quick turnaround under million dollar budget title that Big Blue Bubble was able to develop this year and something that they could continue to build on. And Big Blue Bubble is doing a great job and they're running their studio like a business which is hey let's utilize all the resources that we have and try to generate profits where we can. And they continue to do that very smartly. And additionally things like this are very beneficial from a culture and overall game studio as the creative endeavor like these smaller projects that really keeps all the talent all the employees really excited about what they're doing continuing to make great products. For 2022 we have a couple products that we've been working on very, very hard and very excited to be getting these games out. We're on track. The first of which would be Block and Load 2. It's a five versus five PVP multiplayer first person shooter. It's a very unique type of game. And we're looking forward to being able to showcase this game in the next couple of months. with some teaser trailers and gameplay information that we're going to be providing to the community as well as the markets. It's voxel-based, destructible world, something that's very unique. There's Minecraft-iness to it as well as Fortnite-iness to it. It's a highly dynamic combat that does not exist in any other game. It's a great blend of casual yet highly engaging gameplay, and we are actually taking this game out as closed alpha. on Innova's four-game platform in December, and we'll start getting, you know, real user feedback and continue to tune and finish. And we look forward to getting this game out as a free-to-play title, latter part of 2022. And next game is Evil vs. Evil, multiplayer PvE co-op, first-person shooter, supernatural vampire fantasy setting. You know, an easy comparison would be Underworld films, vampire power fantasy that we utilized to create this experience. The gameplay itself is very much comparable to titles like Killing Floor 2, Warhammer Vermintide 2, super fast-paced combat with unique blend of supernatural abilities and highly satisfying gunplay. It's a deep market. It's competitive, but nonetheless, these titles have done extremely well. And it's a unique take on the genre. And we're looking forward to bringing this game out latter half of 2022 as well. And both games are tracking extremely well. And we expect good upside from both. For the medium term, some big investments going in in a number of Daybreak titles. Lord of the Rings Online. This is perennially ranked as one of the top 10 MMOs. And it's the biggest and the truest simulation of Tolkien's Middle Earth, nothing else like it in the world online. And along with the Amazon's big investment that's been highly publicized, where they're making a streaming series to compete against the likes and then to replicate the similar types of success that Game of Thrones has had, Amazon's making a significant investment with Lord of the Rings IP. We've seen success. when studios and IP owners invest heavily into their IP and how that impacts game revenues and throughput, especially with DC Universe Online, which we still benefit greatly from Warner Brothers continually investing in their DC comic book IP with movies and TV shows. So we expect the same here. So we want to take advantage of that. Along with the Amazon's TV show, we are revamping Lord of the Rings Online significantly. We want to take the visuals next level, modernize the experience, and bring the game to consoles as well as PC. And we're looking forward to doing this in the medium term. It's a big project, but we expect significant upside from here. As we've seen with games like New World that Amazon released, there's an appetite and demand for MMOs, as there has been a lot of Western developed and then most that's come out recently. And New World really demonstrated that there's a market hunger for that. And we want to be able to satisfy that with this high-quality game that we've been operating for the last 14 years. And along with the upgrade, we expect great things from it. DC Universe Online, similar strategy here. It is one of the biggest games that Daybreak continues to operate. It celebrated its 10-year anniversary beginning part of this year. And it's performing at its peak historical annual revenues at this point. So based on the continuous strength, obviously we're aided by what Warner Brothers continues to do with big movies and big TV shows they continue to release. And then we leverage that. And then we have significant inflow of new players that continue to come in. And with great content that we continue to produce, we get to monetize and continue to grow this business and this game. And the idea is to be able to invest further so that we could modernize this game, upgrade the graphics, and really focus on investing in significant content where we want to release the biggest expansion content ever for this title in its history in 2023. Minimal Effect is a game that Toadman is developing. It's a premium single-player sci-fi first-person shooter. It's a parody-based satire on sci-fi games and films like Star Trek and Mass Effect. It's a very unique art style. It's going to be a niche title, but nonetheless, it satisfied that niche in terms of There's the audience that love this style of gameplay, style of art, and along with the progress that they're making, we expect to be able to get this game out sometime in the medium term, in 2003 timeframe. Longer term, there's two titles that Antimatter Games, our studio based in England, is currently developing. Both are making great progress, IGI Origin, a single-player tactical first-person shooter. It's a very unique gameplay. I think the Closest comparison likely is Metal Gear Solid, which is obviously one of the most iconic espionage, stealth type of experience, but more arcadey. But IGI is meant to be more simulation, more tactical compared to something like Metal Gear Solid. The team continues to make great progress. It's going to be multi-platform release across PC and console. And, you know, the team that's making this game, their credibility, their experience speaks for itself with highly critically acclaimed as well as commercially successful game series Rising Storm that Anti-Matter Games was responsible for. So we expect a great outcome from that title. And next one is 83. Same thing, Anti-Matter Games continue to develop this game. It's also... very much based in more reality, historically accurate, authentic Cold War era battle experience with weapons and vehicles and characters that are meant to really be historically accurate. And there's this audience that loves that, as we've seen. And this game is meant to be a large multiplayer combat, combined arms, first-person tactical military shooter with over 80 players. And this is The game that would follow IGI once Anti-Matter releases that game. Thereafter, shortly, 83 will be coming out. This is longer term, 2023-2024 timeframe, but nonetheless, teams are making great progress there. Lastly, unannounced MMORPG. We have alluded to this in the past. We've disclosed that we have the Marvel IP licenses. And we have this license to make a massively multiplayer online game. Super excited. Marvel, clearly the number one IP in the world. And we have access to this because of our capability as being the most prolific MMO game developer in history, given how many MMOs that Daybreak has developed historically. And along with the talent that we've been able to assemble at Dimensional Inc. At Daybreak, you know, led by Jack Gemmert, you know, he's the designer and former CEO of Cryptic, making a game called City of Heroes, very successful superhero-based MMO. So utilizing his experience, he will be building this game with his team based in Austin, Texas. Super excited about it, but this is longer term. But nonetheless, it's a longer term, our largest project that we have, most exciting project out of the pipeline that we currently have. Next slide, please. So this slide is meant to elaborate further on our communication regarding our desire to really rebalance our growth strategy. You know, when you look at this illustration, when you look at the left side of it, early stage, we've grown from a small consultancy studio at Toadman to where we are today. fully feature end-to-end and game developer and publisher globally. But all of that was driven 100% by M&A. And M&A, obviously, we've been very successful at that. And it's a very important continuing strategy for what we do. But we believe that it is important to be able to diversify and rebalance our growth beyond just M&A to include organic. And good news is that we have built up significant foundation and assets and ingredients and the talent to be able to really leverage what we have to drive a predictable and consistent earnings growth with the organic product releases, et cetera. And this is really meant to capitalize on the core strengths that we have been able to assemble to drive this growth. So going forward, we're going to continue to target specific M&A that really aids and helps accomplish our goals and vision for what we're trying to achieve and continuing to build this live games portfolio and powerhouse of games as a service. On top of that, we're going to invest heavily into our existing games. This is what we consider to be lower risk, no-brainer type of investment where we have existing games that are very successful with captive audience and significant number of players that have come through the door and played these games by being able to upgrade, by being able to add significant content to these games. We believe that there's significant upside here that we could drive with very much a moderated risk profile because we know that these games are proven. Additionally, we're going to be making new games, obviously. We have a number of new games already under development, and we do want to expand that pipeline further through smart investments, as well as looking at the existing portfolio of IP and games that we have and looking at extensions of those to drive additional product-based organic growth going forward. Next slide, please. This illustrates really our process, organic growth process. On the right, the foundation for our business Once again, it's live games. Live games generating significant cash flows, very consistent performer on the revenue side. And along with the live games generating cash flows, we get to leverage that and utilize that to be able to fund projects. Additionally, the world-class IP portfolio, we truly believe that it is one of the most unique portfolios in the industry. There's not a lot of companies, probably none, that actually have access to both DC and Marvel IP, number one and number two, superhero-based IP in the world, alongside that number of other mass market brands like Lord of the Rings Online and Dungeons and Dragons, et cetera, and our own IP, EverQuest H1Z1, as well as PlanetSide and My Singing Monster. So having these access to these IP allows us to be able to exploit them further. And it's a key ingredient for what we could do in order to expand and continue to drive organic growth for our business going forward. And then we have assembled a really talented group of employees across both development, publishing, marketing, distribution, live operation, the list goes on. The business units that we have been able to assemble extends our capability broadly, and we want to be able to leverage this talent to be able to harness what our IP portfolio as well as as well as live games are providing to create new games, to create additional large content updates and continue to drive our live games to be successful. And that success feeds back into live games. And the idea is to be able to grow that bottom block of live games to be a bigger block. As that grows, we'll continue to drive significant sustainable organic value creation for the overall organization. Next slide, please. In summary, I think, once again, we covered all these points here, but I'll go through these quickly. Q3 was a transition period, and I think it was very important and it was very necessary for us to make these changes. As with any type of change, change is not typically easy. On paper, they may seem very straightforward, but nonetheless, there's always some level of friction. But nonetheless, we're very happy to have successfully transitioned. We're back on solid footing. Q3 performed to guidance. We're very happy with the outcome. And Q4 is on track and shaping up to be a great quarter. And we have a great solid mix of assets and capability. And I think that's super important to highlight because at the end of the day, what we have achieved in the last 12 months to build this foundation, I think it's very important as that is what lays the foundation as is the baseline for what we could achieve going forward from organic growth perspective, continuing to really go to that next stage of growth beyond just early stage going from a small work for hire studio into this diversified, you know, live service, games of service business that we are today. It's going to be a springboard for what we could achieve going forward. M&A will continue to be a huge part of our strategy. We continue to explore a number of opportunities, and we hope to have some additional news on that front very shortly and further focus on sustainable long-term growth organically, as we talked about, and along with all these ingredients that we have, the momentum that we have with the transition that we were able to successfully make. We're very excited to build on that success and really looking forward to demonstrating what we're capable of in 2022 and beyond. So that's the the end of the presentation, and I'll hand it back to Joakim for the Q&A session.

All right. Thank you, G, for that presentation. It seems like you have a very exciting pipeline coming up with this Marvel IP, which I understand is the largest project. in the works right now and a lot of other things as well. So yes, we're now moving into the Q&A part of the report presentation. I'm going to start it off by asking Yuji, the strategic overhaul that you mentioned to a more decentralized approach is of course in focus this quarter. How has this new strategy been received in your perception by group management?

You know, the group management really embraced change. I think, you know, at the end of the day, even though we are decentralized or part of the same organization and we're going to be looking for opportunities to collaborate where it makes sense. And I think that's the key word, where it makes sense. Rather than forcing a situation where business units have to work together, it's got to make commercial sense. And that's what the business unit leadership also believes in as well. So they really welcomed it. It's been great getting to, obviously, I got onboarded over the last couple of months, getting to know the business unit leadership. And we're working closely on a number of fronts. One great example is Piranha, working very closely with Russ, the CEO of Piranha, to get their assistance in a number of the projects that we have. That's where the collaboration really makes sense because they have great talent. They could bring great value to what we're trying to achieve with a lot of the pipeline of products that we talked about that we're very excited about. And, you know, finding great talent nowadays is super difficult. And to have Piranha ready to go and available to really drive that outcome on the overall groups we have is a great example of what the collaboration is supposed to be like.

Okay. And when it comes to group level management, you have recruited Fredrik Rudén as the deputy CEO and CFO is coming on board now. Are you happy now with the senior management on a group level?

Absolutely. You know, I think Fredrik's official start date is next week. So very happy, very excited to welcome on board. You know, good news is that Frederick has been already very much plugged in helping where he can. But having him full time officially starting next week, I think we'll be able to continue to improve upon what we do. You know, there's additional, you know, I think areas that we are looking to recruit on, including investor relations that we've talked about in the past. We have some great candidates that we're interviewing. We're hoping to bring that person on very shortly, along with Frederick's help, and then continuing to round out our capability to grow our business and aid all the decentralized business units to be able to perform at their best. So very happy with where we are, but we'll continue to make improvements going forward.

Okay. And of course, we are getting a few questions in about M&A strategy and so on. You mentioned in the report that the market conditions for M&A have changed and that you are now seeking a more tailored strategy going forward. Can you perhaps elaborate a little bit on what that means?

Yeah, I think, you know, when early stage of, you know, EG7 and Toteman's life, you know, a lot of the transactions that the company was able to, you know, bring in were largely opportunistic. And that was okay because there wasn't a lot here yet. So along with that, by bringing in additional business units with multiple capabilities, we were successful in building out this business today where we are very well-rounded. with capabilities across the entire value chain. Now that we have such capabilities, it's very important for us to target what we want to do. There are certain areas that can show significant growth beyond others. Namely, we still believe that games live service area is where we should focus on. So any acquisition M&A that we would seek to target largely would be in that area. but doesn't have to be always live service. Premium games are okay too, as long as there's that franchise model where that allows you to repeat success going forward. But in all cases, really building out our pipeline, building out additional live service capabilities and cash flow assets and IP that could feed into that chart that I showed, building up the live service foundation even greater. So that's going to be the main focus. And along with that, being able to leverage that to grow the overall business.

Okay. So speaking about IP, we got a question about this new Marvel IP that you're developing. How far along is that? I mean, when are we going to see a release in the future?

Yeah, so there's not a lot that we could disclose at this point. It is in the earlier stage at this point, but nonetheless, we are entrusting that game development with one of the best MMO game developers, Jack Emmer and his team. And Jack is the one that made City of Heroes in the first place, and he currently operates DC Universe Online. So utilizing his expertise, we're really excited about the direction that he's taking with the Marvel game. And more news will come. But at this juncture, other than disclosing that we are developing a Marvel-based IP game, That's going to be an NMO. Not a lot more that we could share at the moment.

All right. A question on seasonality. You mentioned that too. Could you perhaps elaborate a little bit? Q4 is a strong one based on seasonality. Does that mean that Q1 next year is going to be less strong for live games?

Yeah, so typically for live games, Q4 is the peak of the year. So you see Q4 as the peak and the summer months are usually the trough. And first and second quarter, it does fluctuate somewhat based on content cadence. This year, first quarter, we benefited greatly from DCU's 10-year anniversary celebration. along with EverQuest has its annual celebration for its anniversary also in March. So those two alongside that, TCO also had a large content update late in the spring. So all of those factors contributed to a great first quarter. And those are the type of successes that we like to model our live game content pipeline around. Not to say that it's something that we could replicate year over year, because it does have to make sense. We have to have the right sort of content plan for the entire year without really front-loading it too much. We've got to balance that. So with that said, seasonality is quite prevalent in live service games. So Q4, the highest Q1 typically sees a little bit of a decline from, uh, from Q4 and Q2, depending on content updates, et cetera, uh, sees a little bit of a rebound. And then you see Q3 go down along with the summertime where a lot of the, uh, our, our audience are on vacation too. So, so along with that, you see softer numbers and then you see a meaningful inflection in Q4 again.

Right. So also on the guidance that you gave for Q3, you came in and delivered on that guidance, a question here on the Q4 guidance. What's your confidence level on that?

Yeah, we feel very confident for our Q4 guidance. Once again, I think even Q3, we did come in not as high as we had hoped, right? So the reality is we expected to perform a lot better, but unpredictability alongside a game release like Piranha's Game, MechWarrior 5 on PlayStation, contributed to that lower performance, as well as out-of-period marketing expense for Piranha You know, money that we spent actually in Q2 got booked in Q3 because of invoicing, timing, et cetera. So that impacted our, you know, profitability for the quarter. Without that, we ended up in the high 90s, a million sec for third quarter. So once again, we feel very good about that outcome for third quarter and fourth quarter, along with the seasonal upward trend. For a number of our larger businesses, we feel very good about being able to achieve those goals.

Okay. Question on Big Blue Bubble. It seems like it's more profitable than other group companies. Why is that?

Yeah, no, we love Big Blue Bubble. I mean, they continue to do extremely well with My Singing Monsters, which, as I mentioned in the presentation, they had their best month in five years in September. With game being nine years old, that's phenomenal. So we expect great things from Big Blue Bubble continuing to do so. But the reason for their large profitability is driven by You know, My Singing Monster continuing to perform extremely well. On top of that, their location and their cost base is quite low. They're based in London, Ontario, tends to be a lower cost center compared to a number of other areas in Canada, as well as North America and the U.S. So lower cost, a great product that's generating great revenues. And the team continuing to experiment and put out products Even if they're not big products, products that actually make money, continuing to offset any cost they may have in cases where they have some downtime with their development team, they're utilizing those resources very smartly. And that's all contributing to them being able to produce a smart and highly profitable result consistently.

Okay. Another question here. What is your view on VR, virtual reality games, going forward?

Yeah, I mean, it's interesting. That's an interesting question. Yeah, I think we saw the significant inflow of investment in VR maybe three years ago. And I think a lot of that went away fairly quickly with that not going mass market. I think there's some phenomenal VR products that are out there. But nonetheless, I think until they solve the problem of having this big headset, which not a lot of people like to utilize, I don't think that VR market's going to become mass market. So we do think it's a niche product and opportunity. And unless we could partner with somebody that wants to license some of our IP to make VR games, it's unlikely that EG7 and our development studio would invest heavily into making VR games.

Okay. We also received some questions to the investor relations inbox about what's going on with particularly loved IPs such as H1Z1. Do you have any updates on H1Z1?

Yeah, so H1Z1, it is one of our most important and valuable IPs that we have. Obviously, we've had some significant success. There's a huge fan base out there. with over 40 million people that have come enjoy the game. Clearly, it's no longer where it used to be, and we're not happy about that. I know the community is not happy about that. We do have certain challenges with the IP itself or the game itself. It was developed utilizing our old deprecated engine and code base, and a lot of the people that actually know that code base and have worked on the game are no longer here. So we have challenges of being able to really do a whole lot with the game as it is today. But we do believe that it's one of the most important IP that we want to invest in to try to see what we could do. And I think one thing that I would love to be able to do is engage with the community to find out what they really love about the game, because H1Z1 has an interesting history, went out originally as a survival game. Just Survive renamed to be Just Survive. And then we had the Battle Royale mode, which also did extremely well. But we do get a lot of questions about Just Survive more than H1Z1, the Battle Royale game. So I think being able to engage with the community of why they love Just Survive so much, that'll help us at least start formulating what we could do with the IP, because the intention is that, hey, this is one of the most important IPs that we have. We want to exploit better and be able to create a great product And having said all that, even though our desire is to be able to provide the community with a great experience for that, we just haven't been in a position to do that with just the people that know that code base no longer being here and that code base being quite broken. And then I think we're reticent to put out a game product where certain community base want the game really badly and we want them to enjoy it. But at the same time, without us being able to provide the proper support, I think that experience wouldn't be a good one. And I think a lot of people would be disappointed by the brokenness of it. And then we do want to shy away from providing products that are subpar experience, even if it's something that the community really wants. So it's something that we have to figure out. You know, I think it's not that desire isn't there. I think it's really figuring out how we resource it. And then, you know, what's the path that we need to take with that title going forward to really satisfy what the community wants versus just putting something in front of them they may enjoy for a split second, but be quite upset about the state that the game is in, which is not good for anyone.

Okay, so it seems like you're open to continuing to have a dialogue then with gamers about what you can do there to satisfy the big interest that's in that game. Is that correct?

Absolutely. I mean, to be completely honest and be frank about this, I am probably one of the biggest fans of H1Z1 at Daybreak. So I've always been trying to figure out what can we do. But, you know, I do also want to be practical about not putting out broken products that the community may be very upset about. And until we can solve that problem, I think, you know, we'd have a difficult time really providing something that the community will really appreciate.

Okay. Well, I'm afraid that's all the time we have today. If you are watching this and if you have any further questions, you can always email them into the investor relations inbox on the website. Thank you, G, very much for participating in this call today. And thank you, everyone, for tuning in. Have a nice rest of the day. Thank you, everyone.