Enad Global 7 AB (publ)

Good morning and welcome to this Q3 earnings call with ED7. My name is Ludvig Andersson, and I will be your moderator during this call. With me to present, we have the company's acting CEO, Yi Han, and deputy CEO and CFO, Fredrik Rudén. After the presentation, we will have a short Q&A session, so please feel free to email your questions to the company's Investor Relations email. But now, without any further ado, over to you, Yi.

Thanks, Ludvig. Good morning, everyone. Thank you for joining us. Let's go to the next slide. For third quarter 2023, some key performance figures here. Net revenues came in at 517 million SEC, which represented 16% growth from the same period last year. Strong profitability with adjusted EBITDA of 141 million, representing 27% margin and also almost 25% growth from the same period last year. and cash balance with strong liquidity of 473 million SAC, an increase of 22 million SAC from Q2 levels. Next slide, please. Key highlights for the group during the quarter included the Capital Markets Day, which we hosted on September 20th, where we presented our updated business strategy and plan. We also announced the Shareholder Capital Return Program, where we would be providing for dividends as well as possibility of shared buyback And we are working towards uplisting to the main exchange with target of 2024 uplisting. Publishing deal that we signed with Cold Iron, main part of our long-term plan in the middle market publishing, a new multiplayer shooter based on a major global IP that's targeted for release in 2025. And this is meant to be the founding or the initiating title to kick off the middle market publishing business. Alongside that MacWarrior 5 plans announcement, Exciting new entry for Mac Warrior franchise, which we also do want to include as our long-term franchise and middle market publishing business target release for the second half of 2024. And then it intended to be another one of our portfolio of core franchises going forward. Next slide, please. Update on the business unit level. Big blue bubble leading the charge, another great quarter. My Singing Monster trending down, having said that, continuing to perform at an elevated level, 157% higher in net revenue compared to third quarter of 2022 and trending nicely. Daybreak, on the other hand, a little softer than expected so far this year, performing at about 15% lower year-to-date net revenue basis compared to last year. DCUO and Lord of the Rings Online have been performing a little under expectations. But we have plans already going, efforts to stabilize and reverse trends. DCUO is ready for the latest generation console coming out sometime in December. And Lord of the Rings Online just released its expansion pack, which has been performing well. And the EverQuest and Magic the Gathering Online, great performance here today. And exciting plans for EverQuest franchise with EverQuest and EverQuest 2s. 25th and 20th anniversary celebrations coming up in 2024. Next slide, please. Piranha has been a great performer so far this year. Solid performance with MechWarrior 5 DLCs delivering great results. DLC 5 just released in September, and we have two more planned for next year. And work for hire contract is nicely profitable. but it's been ramping up a little slower than we had anticipated, but we expect to get to full ramp over the next coming months and get to the full contract value. Toadman is rampant, and it's continuing to inch towards profitability with cold iron contract also contributing nicely, and we expect to be breakeven before the year end this year and crossing over to profitability and building upon that in 2024. Next slide, please. Fireshine Games, a nice volume of physical releases for third quarter with a great performance. Some of the highlight of titles that came out include Lies of P, Warhammer 40K, Darktide, as well as F1 Manager. On the digital publishing front, we have Core Keeper and also Shadows of Doubt having released some great content for this quarter that's been driving nice performance. Petro, on the other hand, has had a soft year so far. a little more challenging this year compared to the prior years. But nonetheless, still the premier go-to shop for a number of the AAA premier titles, including Call of Duty franchise, Diablo, and announcement for Star Wars Outlaws this year, and key titles, Remnant 2 and Rise of Pi, also this third quarter. Overall, lower volume this year, which is contributing to lower revenues as well as impacting its profitability, but we do expect the business to stabilize with a nice outlook for 2024. Next slide, please.

Okay, over to you, Fraser. Thank you, Yi. Next slide, please. 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 Q3, LTN net revenue amounted to 2,131,000,000 Swedish kronor, corresponding to an increase of 18%. This growth is driven mainly by strong operational performance. LTM adjusted EBITDA margin came in at 29% for the second quarter in a row. This is higher than the 23 to 25% guided for the full year 2023 and is explained by higher margin revenue mix. Net revenue in Q3 was 517 million Swedish kronor, which is a growth of 16%, and an FX, a neutral organic growth of 14%. And that 14% was 1% in Q2, with an EBITDA margin of 27%, which is 4% higher than previous quarter. Our live games portfolio, representing a more predictable and sustainable part of our business, generated 302 million Swedish kronor, which is 58% of total net revenue in the third quarter. Over the last 12 months, net revenue from these assets amounted to 1.4 billion, corresponding to 66% of the total net revenue. Next slide, please. As you may have noticed, we have changed our segments in this report to better reflect our different business units. Daybreak is the largest contributor to the group revenue and the largest contributor to our more predictable revenue base, generating 101 million in net revenue and 34 million in adjusted EBITDA, corresponding to a 90% adjusted EBITDA margin. My Singing Monsters continues to perform well. While gamers activities peaked in December last year, we continue to see levels above the pre-peak. BigBlueBubble contributed with $123 million in net revenue and $88 million in adjusted EBITDA, corresponding to a record strong 71% margin. There has been a bonus accrual adjustment to Big Blue Bubble, which increased the margin in the quarter by approximately 10%. There is no reason to assume that the operating margin seen over the past 12 months should be higher going forward. Next slide, please. There is a solid and loyal, even if limited, gaming community around McWarrior. Piranha has successfully kept the audience interested with several DLCs and upgrades in McWarrior 5. Piranha contributed with net revenue of $28 million and adjusted EBITDA of $8 million, corresponding to a 30% adjusted EBITDA margin. Toadman's net revenue came in at $14 million. representing 162% growth year over year. Adjusted EBITDA came in at minus 5.5. TotalMAC continues to successfully ramp up its work for higher business and is targeting break-even profitability by end of 2023. We did increasing profitability throughout 2024. The short also include a positive tax refund relating to the close down of anti-matter games. This has a positive contribution to adjusted EBITDA with 3.1. Next slide, please. The old service segment, Petrol and Fireshine, as shown in the charts and also pointed out several times, both these companies are more volatile than their businesses connected to the live games portfolio. Fireshine had a strong quarter, mainly attributable to number of successful physical releases. The company generated 120 million in net revenue and 90 million in adjusted EBITDA. Despite that the physical games are attached with generally lower margin and due to high volumes, adjusted EBITDA margin came in higher than past four quarters at 16%. Despite being a softer year for petrol, they had several successful campaigns and generated 51 million in net revenue and returned to profitability. Next slide, please. Over the past quarters, we have improved our operating cash generation significantly, mainly by reducing the overall risk and by increasing the business predictability. Based on what we previously have communicated, we have now also started to invest in adding new growth opportunities to the company. Net cash is 473 million Swedish kronor, excluding the Piranha earnout, IFRS 16 leasing and some smaller items. And if we deduct those, then the net cash is 358 million. Cash flow from operations amounted to 112 million. The cash flow was negatively affected by 83 million of investment activities, of which 50 refer to the Cold Iron publishing deal, 17 refers to various publishing deals in Fireshine, and 19 refers to capitalized development expenses. Financing activities is minus seven, and that's mainly leasing. Furthermore, we have earmarked 500 million to be invested over 2023 and 2024 in new growth opportunities. We do have an unutilized 400 million rolling credit facility, which we plan to renew, but our new growth plan is independent of this facility. We also plan to distribute the minimum of 40 million in dividend for expected full year performance of 2023. All in all, our balance sheet is and will remain solid. Next slide, please. We have delivered LTM growth from one consecutive quarter to the other over the past five quarters and more. In Q3, the LTM growth is 18%. Most part of it is organic and way over the market growth. Based on the recent operational trends and our own project timelines, we do not expect to deliver organic growth way over market growth in 2024 before our new growth initiatives start to kick in in 2025 and on. We expect to come in around our full year guidance for 2023. Over to you, Ji.

Thanks, Frederick. Next slide, please. We're very happy once again to have delivered a nice and solid profitability and growth again this quarter. We continue to focus on maximizing our cash flows with our existing business. As communicated during the Capital Markets Day, our intention is to maximize and optimize cash flows from our existing businesses to be able to invest in some of the exciting long-term growth prospects and selectively investing in middle market franchise-based publishing investments going forward, which we expect to drive significant revenue and profitability growth with a target of $3 billion SEC of net revenue in 2026 with $1 billion of adjusted EBITDA for the same period. Extra general meeting is currently being scheduled for target December this year to obtain the approval for both shareholder capital return program for dividends as well as potential shared buyback. And we are executing against a full steam ahead up listing to the main market targeted for 2024. Thank you all for joining us for our earnings release. That concludes our presentation and we will now switch over to Q&A.

Thank you very much, G and Fredrik. A first question from Rasmus at Handelsbanken. Are you surprised by the stickiness of My Singing Monsters?

We are very pleasantly surprised with this continuing strong performance. And the team is continuing to work very hard to provide nice content updates for existing players as well as attracting new players. September also benefited from My Singing Monsters anniversary celebration, and Q4 is a good quarter for all of our titles, including My Singing Monsters. So we remain optimistic of its continuing strength in 2023 fourth quarter, as well as going into 2024. Thank you very much.

Another question here from Rasmus at Tannesbanken. Besides the SEAC 500 million in new game investments, should you model some maintenance capex for the existing business?

Yeah, you should. The 500 million, they are earmarked for the new growth initiatives. We have so far this year capitalized 140 million for the first nine months. of which part of that is connected to the clone game that will be released during next year. So after that, we do not expect the same level in capitalized R&D for next year. However, we have not done the budget for next year already, but you can assume that it will be around that level or under that level.

Thank you very much. A bundle question from Hans-Maurits at DNB and Hjalmarit Räddai. Could you elaborate on your expectations for 2023 and going forward?

Yeah, for 2023, we are continuing to progress towards our guidance. And for 2024, typically we would provide our guidance along with our queue for earnings release which will happen sometime mid-February. So at that time, we'll be able to provide more information regarding that. As for our longer-term targets, during the capital markets day, we provided our 2026 targets with net revenue of 3 billion SEK and adjusted EBITDA of 1 billion.

Thank you very much. A question from Lucas. Could you elaborate around the accrued bonus adjustment in BigBlueBubble?

Yep, so one time adjustment for this year or this quarter related to realignment of the incentive compensation for Big Blue Bubble staff based on a significant change in size of the organization prior to the viral peak compared to where we are now. So in order to realign the size of the compensation levels, we made an adjustment which resulted in the one-time change to the bonus accrual. In the third quarter, we do not expect such changes going forward. It is one time in nature, and now we are realigned for the right size for the business and the incentive compensation going forward.

Thank you very much. And question from Yalmar at Redeye. What drives the lower project volume for petrol during the year?

Yeah, so petrol has continued to attract and work with some of the biggest AAA clients, but there's been some slowdown in the volume of releases that petrol has been a part of for this particular year. So not really predictable, unfortunately. Petrol has had some great years and sometimes, you know, depending on the volume from its client base where some of the projects may get delayed, it does impact petrol downstream. So that's what we see as the primary reason behind a lower volume and also lower revenue for this year for petrol. But we expect that they should be able to get back on track for 2024. Thank you.

A question from Simon at AVG. Can you please give some more color on EverQuest and Magic Online's performance in the quarter?

Yeah, Magic the Gathering Online, you know, has been a very steady performer since we brought it on board. So, you know, it's not really just this quarter, but throughout this entire year. And same thing for EverQuest. It's a perennial, the most consistent and the most profitable game that we have within Daybreak's portfolio, even after its 24-year run. So we're looking forward to a great performance for 2024 where we get to celebrate its quarter century mark in 2024 with lots of great events and celebration and additional content that we're going to be celebrating together with our, you know, very dedicated player base. So the comment relating to both really was more related to their consistent performance in contrast to some of the other games that may be more volatile within our portfolio.

Thank you very much. A question from both ABG, Simon, and Yalmar Threadai. Can you elaborate further on the expectation for DCUO and LOTRO? When do you expect DCUO to be available on the new generation of platforms?

Yeah, so we are targeting December for DCUO to be available on the latest generation PS5 as well as Xbox X. And along with that availability, it's another channel that we're opening up for new user acquisition. So we're looking forward to being able to track and bring the game to additional potential player base by bringing it to the current gen consoles, along with that, you know, more content updates that we plan for 2024 that we expect to have a positive impact on DCU's stabilization as well as growth. And the, you know, similarly for Lord of the Rings Online, we do expect stability for the title along with the new expansion pack coming out. And we are switching to a larger content model for the game going forward, where we will have a big expansion pack on an annual basis versus what we've done historically, which has been one big expansion followed by a smaller one. And going back to a big one, we will be switching now to be able to provide big content updates on an annual basis. And with that additional content uptake in player activity.

Thank you very much. That was all the questions that we have. So thank you so much to you and Frederick, and thank you everyone for tuning in. From our side, we wish you a great day. Thank you very much. Great. Thank you. Thank you, everyone.