Enad Global 7 AB (publ)

Good morning and warm welcome to this Q2 presentation with EG7. My name is Ludvig Andersson, and I will be your moderator during this call. Together with me to present, we have the company's acting CEO, Yihan, and deputy CEO and CFO, Fredrik Rudén. After the presentation, we will have a short Q&A session, so please feel free to send in your questions to the company's Investor Relations email.

but now without any further ado over to you thanks ludwig good morning welcome thank you all for joining us this morning let's go to the next slide we had another great quarter another solid quarter with great results for the second quarter key financial highlights here with net revenues coming in at 483 million for the period representing 4.3% annual growth. One thing to note, however, is that sequentially from Q1 to Q2, you will notice that our results are lower. but that is ordinary course as our company does operate with seasonality and our second quarter tends to be our lowest period as a result you'll see that sequential q1 to q2 decline in revenues however looking at it year over year once again we're performing nicely with this 4.3 percent growth that we have been able to generate adjusted ebitda on the profitability side 113 million of EBITDA representing 24% margin and a healthy 34% growth, and the group generated operating cash flow of $54 million. As we announced during the second quarter, we had intended to close down anti-matter games, and then we were able to complete that beginning part of July. As a result, we do expect to generate approximately $50 million of annual savings going forward along with that closure. Now, along with the solid results that we are delivering for the second quarter, now it's representing a seventh consecutive quarter of solid growth and profitability, which the group is quite proud of. Next slide, please. Big Blue Bubble continues to be a key driver for our business. Second quarter is no different with strong results with $144 million of net revenues and $86 million of adjusted EBITDA for the period. That's a 59% margin. And when you look at the chart below at the bottom, you'll see that continuing building of momentum over the last several quarters, with the last 12 months ending in the second quarter, the blue bubble contributing and delivering 647 million of net revenues and 389 million of adjusted EBITDA at the 60% margin level. We do not yet know whether this normalized level is where that's going to be settling down. We do want to be observing over the next number of quarters, but nonetheless, we continue to maintain our confidence that the new normal level for Big Blue Bubble with My Singing Monster would be substantially higher versus pre-uptake period, as you can see here during the second and third quarter of 2022. Next slide, please. In terms of the player engagement and player inflow, you'll notice that there's a flattening of decline curve here. As you can see, fourth quarter 2022, significant inflow of new users with 11 million players coming in. In first quarter, 7 million. And second quarter 2023 at 5.9 million. So while fourth quarter to first quarter significant drop, first quarter to second quarter smaller drop. And we do see this as an encouraging sign that additional stability for the player base in terms of inflow as well as engagement should be sometime in the near future. And average daily active user base for the second quarter for the game was 1.1 million average throughout the quarter. And My Singing Monsters, with the team continuing to deliver great content, including the 11th year anniversary that's coming up at the end of September, with additional content, the team intends to drive higher engagement, as well as potentially impacting the overall trend curve in a positive way. Next slide, please. Gaming segment operational highlights for the quarter. Net revenue for the segment came in at $369 million SEC, representing a significant growth of 37%. Also on an organic basis, 33%, which was quite nice. Adjusted EBITDA, $127 million. That represented 78% growth. and solid margin of 34%. As noted, My Singing Monster is continuing to be a key driver. Big Blue Bubble is contributing 39% and 67% of net revenues and adjusted EBITDA on a respected basis, and My Singing Monster continues to be our biggest title, and we expect it to remain that way for the foreseeable future. Daybreak's live games are predictable as they have been, continuing to be quite stable, and performance trends are quite predictable here. Of course, there's ups and downs with content cadence for the titles that we manage, but for the second quarter, net revenues came in at 190 million sec and adjusted EBITDA margin at 25%. Piranha is continuing to work hard to deliver additional content for MechWarrior 5. Four DLCs have shipped to date, with the fifth DLC coming at the end of September. And additionally, Piranha's work for hire and code development efforts are gaining steam, where Piranha was able to finally announce their joint co-development partnership with Genvid Entertainment, who's developing an interactive streaming series called DC Heroes Online, or United, which was announced at San Diego Comic-Con recently. And Piranha has been ramping toward this co-development project, and they continue to be active with this project that should be contributing significantly to their bottom line over the next year and a half. Toadman is continuing to ramp up. with nice momentum around this work for hire business. For the second quarter, delivered approximately 11 million of net revenue for work for hire, compared to 5.5 million for the prior quarter, representing almost 100% growth in terms of their work for hire bookings. And we do see additional opportunities ahead of us with total and continuing to evaluate various opportunities. And we do see that momentum continuing to build. Next slide, please. On the service segment, net revenues did come in a little lower than expected, with net revenue of $114 million, representing a decline of 41% from last year. Adjusted EBITDA was a loss for this quarter, with negative $6 million. Overall softer results. And there's really two primary reasons for this decline compared to last year. Third-party product pipeline, where this second quarter did not have a major product release from Fireshine. Third-party products such as Sniper Elite 5, which came out in the second quarter of 2022 and contributed significantly to last year's performance. And on the digital publishing side, CoreKeeper was a big title for Fireshines Digital Publishing last year. But this year, while they had nice success, nonetheless, commercial success in terms of overall size of outcome, less than what CoreKeeper was last year. having said that fireshine is continuing to build a nice momentum around that successful indie publishing released a game called shadows of doubt in the second quarter on steam early access and that game shipped with 90 plus percent positive reviews on steam which is a nice follow-up to core keeper last year which also had 90 plus percent positive reviews so consecutive releases of this type of high review score as well as positive reception. We do look at that as a nice momentum for fireshine building and also demonstrating their ability to identify great potential games, as well as being able to perform nicely with those results. At the end of June also, Fireshine released a game called Little Friends Puppy Island that was released on Nintendo Switch, notable for the fact that this game is the first meaningful collaboration amongst two business units within the group, Fireshine working closely with Big Blue Bubble as the developer and Fireshine publishing and distributing it. Smaller investment and then nice profitability from the title. We do expect this game to continue to contribute profits over the number of years coming up as a long tail type of product that's targeted towards that younger demographics. Petro's performance was a little lower than expected. They had a couple of projects that were unexpectedly delayed for the quarter, unfortunately. We do believe that this is more timing more than anything else, and we do expect those projects to be back in the pipeline in the near future. But nonetheless, the delays did impact Petro negatively for the quarter. as they are working hard, continuing to work with notable titles and campaigns for the second quarter. Some of the titles that Tetral contributed to significantly included Dead Island 2, Black Cell for Call of Duty, and also working closely with Ubisoft on the announcement for Star Wars Outlaws announcement. So next slide, please.

Frederick. Thank you. Next slide, please. Net revenue in Q2 was then 483 million, which is a growth, as G mentioned, of 4.3%. And if we adjust for organic and for FX, it's 1% growth that we see. The net revenue and EBITDA over the last 12 months continue to show a constant increase from one consecutive quarter to the other. By end of Q2, LTM net revenue amounted to 2.1 billion from 1.7 billion, corresponding to an increase of 20%, driven mainly by strong operation and performance and FX. And the LTM adjusted EBITDA margin came in at 29%. Next slide, please. Net revenue of the last 12 months in the game segment came at 1.6 billion from 1 billion, corresponding to a growth of 55%. Also explained by the same thing, Big Blue Bubble is performing really strong and we also have an FX tailwind. In this segment, we have our live games portfolio, which is the foundation for the more predictable net revenue and cash flow. Net revenue from these assets amounted to 321 million, which correspond to 67% of the total net revenue. And over the last 12 months, these assets have generated 1.4 billion, which also correspond to 67% of total net revenue. In the last 12 months, net revenue from the service segment amounted to 496 from 708 million Swedish kronor, which is then a decline. And it's mainly explained by the second quarter, where petrol is facing some project delays, as Ji mentioned, and from external clients. Meanwhile, Fireshine had some physical and digital successes in the first half of last year. Next slide, please. The game segment continues to perform above our expectations, despite trading down from the revenues that we saw in Q1 and Q4. And again, explained by Meising & Monsters. Daybreak is the largest contributor to the net revenue and the largest contributor to our more predictable revenue base, generating 190 million in net revenue and 48 million in adjusted EBITDA, which then correspond to 21% adjusted EBITDA margin. Big Blue Bubble generated $144 million in net revenue and $86 million in adjusted EBITDA, corresponding to a strong margin of 59%. Piranha contributed with $24 million in net revenue and adjusted EBITDA of $6 million. Torment Studios and Antimatter Games is included in this segment. And as you know, Antimatter was successfully closed down in Q3. And this, before this, they generated eight or nine million in adjusted EBITDA minus in the quarter. And the close down generate approximately 50 million in annual cost savings. And the restructuring reserve of 20 million is not included in these figures. So Tollman almost doubled its work for higher revenues up to 10.8 from previous quarter. and are getting closer to a break-even situation. A side note to this is that we are happy to see that most of the old Antimatic Games employees have found other engagements. Next slide, please. The service segment is more volatile, as you probably know by now, and to some extent, hit-driven. First half of last year, this segment had strong momentum coming out from the pandemic delays, flavored with successful releases. Faishan had a stable quarter mainly attributable to continued indie digital publishing success. The company generated 78 million in net revenue and 3 million in adjusted EBITDA, which correspond to a lower margin than normal of 4% for this business unit. The net revenue delta between quarters is rather revenue recognition timing question than a momentum issue. Fireshine continues to add to their strong pipeline of digital and physical titles. Despite the successful digital release of Shadow Doubt, we anticipate Fireshine to mainly be dominated by lower margin physical releases in the second half of the year, which has previously been communicated also in last report. Petrol had the challenging quarter where expected projects were stopped or delayed by the clients. And they generated 36 million in net revenue and an adjusted EBITDA margin at minus nine for the period. Next slide, please. Fueled by strong performance, improved operational cash flow, and lower investment than previous year, ED7 has had a net cash position over the past four quarters. Net cash is 450 million, excluding the Pirana earn-out, IFRS leasing, and some smaller items. And if we include that, the net cash is 361 million, and that is what you see in this slide. Cash flow from operations amounted to 53.8 from 63.5 million previous year. The lower operational cash flow compared with last year is mainly explained by 63 million in difference in working capital movements compared with last year. And this is something that will balance out over time. And it's rather so that last year was a bit different from normal status due to that we had a couple of very successful games by end of June last year, which gave a strong contribution to this change in working capital. The cash flow was negatively affected by 68 million in investment activities, of which 31.4 refers to a potential future project. 23 million refers to capitalized development expenses, and 20.9 million were paid to the sellers of Daybreak, connected to a positive tax effect deriving from the acquisition of Daybreak. So this was something that was included in the SBA from day one when Daybreak was acquired. The remaining net positive amount was 8 million. It refers to smaller items. We also have some small negative effect in financing referring to leasing. And then we had a 22 million positive FX effect in liquid funds. So a strong balance sheet with plenty of opportunities for the use of cash. And we will come back with that topic on the Capital Markets Day, September 20. Next slide, please. We had a strong performance from the service segment last year and the decline from that segment is more than well covered by the strong performance from the game segments. All in all, we have had a year-to-date growth of 22% and a year-to-date FX adjusted organic growth of 15%. Based on the continued trends, we repeat our guidance from last report to reach 2.2 billion in net revenue for the full year 23, with margins for the full year in the range of 23 to 25%. And that concludes my part of this presentation. So I hand it over back to you, Yi.

Thanks, Frederik. Next slide, please. To summarize, another great quarter for the business where we delivered solid growth and profitability. And I think the key theme here is that over the last seven quarters that the group has been quite successful delivering consistency. to our shareholders and we expect to continue to do so. My Singing Monsters is performing at a level above and beyond what our expectations have been and it's going to continue to do so and it's going to be a significant contributor that contributes to our revenues and profit growth. And as we go forward, now we have this capital market state that we have scheduled for September 20, where we are excited to spend time with our investor base to be able to share more details about our business, as well as our long-term vision, strategy, and plan. and have a discussion around that. And along with that, we'll talk about how we intend to build our business going forward to drive significant long-term sustainable growth and shareholder value creation. So we look forward to meeting with a lot of you in Stockholm in about a month. And that concludes this portion of the investor presentation for our quarterly earnings release. And I'll pass it over to Ludvig for the Q&A session.

Thank you very much, Ji and Fredrik. A first question here from Mr. Pano regarding My Singing Monsters. With the high popularity of My Singing Monsters IP, do you have any plans to leverage the IP beyond digital?

Yeah, we would love to. And it's something that we think about as well as continue to evaluate multiple conversations with potential opportunities. But at the same time, nothing of substance that we could report at the moment. But I would say that we are very much interested in exploring opportunities along those lines.

Thank you very much. Question here from, or it's, it's a bundle question from Rasmus at Handelsbanken, Simon at ABGN, Erik Hansen. Can you please give some more colour to the 31 million potential future project with Coldiron?

Yeah, so at the moment, we are not able to disclose too much information around it relating to some confidentiality related to parties that are involved. But nonetheless, it is a investment in a new project that we are excited about that, you know, as ordinary course of what we do as a video game company, exploring opportunities across multiple genres of games. And that's another opportunities that we're exploring.

Thank you very much. Another question here regarding my singing monsters from Hjalmar at Red Eye and Simon at ABGIA. What are your expectations for my singing monsters from here on? And how was the sequential development through Q2?

Yeah, as we noted, we're quite happy with its continuing momentum. You know, we did expect that the title would reduce its performance or decline from the peak in December. And as we demonstrated, as we illustrated in the chart in the presentation, that has happened. But nonetheless, we do think that the decline curve is flattening with the new user base continuing to be quite strong coming into the game, as well as the retention and engagement metrics. So, you know, we do need to look at, however, a few more quarters to be able to really determine without a lot of volatility and movement to be able to say with more confidence level of what the potential new normal could be. But we do reiterate that our expectation is that the new normal level should be substantially higher versus pre-uptick in the first half of 2022.

Thank you. Again, here from Hjalmar at RedEye. When do you expect Toleman to achieve break-even EBITDA?

You know, they're making great progress. So, you know, I think along with first quarter and second quarter momentum for this year, they're continuing to evaluate and attracting additional opportunities. So we do expect them to be able to get there quite shortly over the next coming quarters. But we can't specify exactly when at this moment it is subject to them being able to secure a couple more contracts that they're currently, you know, aiming to sign up.

Thank you. From Mattias here at Kepler, could you please explain what drove the negative working capital movement in the quarter? Fredrik, do you want to take that one, please?

Yeah, so as I mentioned, it's rather explained by something that happened last year, where we had short-term liabilities deriving from a couple of games that Fireshand released, and they released it with a great success also. So the volumes were quite high. So it's rather a situation where that impacted than anything else. So in a longer perspective, looking at normalized release pipeline also, This should balance out. Last year in Fireshine, they also followed this up in Q3 with a continued success. So it's a situation that where the comparable figures is where we need to find the explanation than what we see in this year. So I hope that is a good answer for you. Thank you, Fredrik.

From Hjalmar here at RedEye again. Will petrol see an accelerated revenue as delayed products are completed during H2 this year?

Yeah, so in terms of the timing of when some of the delayed projects would resume, we can't confirm whether that would be the second half. It may be something that's delayed further, so it's an unknown at the moment. But having said that, second half tends to be a bigger pipeline of games that are coming out that Petro is involved in, including the new Call of Duty. So they should be driving better results for the second half compared to the first.

Thank you. From Simon at ABRIGI again. Seems like mainly petrol missed the expectations in Q2, but how should we look at Fireshine and the success with Shadows of Doubt and the profitability of the game?

Yeah, it's a nice success for Fireshine. It's not at the same level of commercial success as CoreKeeper, but in terms of the reception. with the player base really enjoying it and that 90 plus percent positive rating on Steam. It's an early access title, so it's still a work in progress. Fireshine is working closely with the developer in order to finish and eventually release that as a full release on PC and consoles. So it'll take time, but we do have high hopes for the game, given the positive reception that we've seen and the nice momentum that it has generated. But as compared to Core Keeper, we will say the performance would be lower compared to that.

Thank you, Yi. Again, here from Hjalmar at Redeye. Do you see more opportunities of collaborations like Lotro and Mavic's Gathering Online between games in Daybreak?

That was a unique situation that we did benefit nicely from. We would love to look for opportunities that are similar, but at the moment, we do not have anything on the horizon that we could point to.

Thank you very much, G. Let's see here. Here we have a last question. Which studios is developing the games you balance development costs for right now? Can you say anything about that?

I'm sorry. I didn't quite understand the question. What was the question, Ludvig?

Which studio is developing games that you can see on the balance sheet right now?

It varies. We have development across multiple studios, including Piranha, which is continuing to deliver nice content for MechWarrior 5 with DLCs coming out. And also a number of the studios at daybreak have smaller projects as well as continuing investment and reinvestment in some of the existing products. So I would say it's across the board. There isn't one particular studio that is really concentrated at the moment.

Thank you very much, Yi and Frederik. That was all the questions that we received today. So thank you everyone for tuning in today. And we wish you a great day. Thank you very much.

Thank you, everyone.