Enad Global 7 AB (publ)

Good morning and welcome to this Q4 earnings call with EG7. My name is Ludvig Andersson and I will be your moderator during this call. Together with me to present, I have the company's acting CEO, Yi Ham, and deputy CEO and CFO, Fred Gruden. After the presentation, we'll 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 Ji.

Thanks, Ludvig. Good morning and thank you for joining us this morning for our presentation. Ludwig, let's go to the next slide, please. Here's the list of main topics we'll cover today. We'll start off with our Q4 2023 and four-year results. And after that, we will cover some of the key objectives that we were able to achieve for this year in the year of review. Industry backdrop, you know, I think it's very relevant for our performance in 2023 as well as our approach to 2024. So we do want to talk about the current market conditions that we're operating under and how that has impacted our 2023 results. and our approach strategy and the outlook for 2024. Thereafter, we'll quickly go over our medium to long-term outlook, which we already talked about at the Capital Markets Day, and Frederick will cover in more detail our financial performance for fourth quarter and the full year, and then we'll wrap that up with a summary and Q&A thereafter. Next slide, please. So it's another record year, 2023 Q4 results. Very happy to report that it's another great year for Q4. Group delivered net revenues of 473 million SEC. Adjusted EBITDA came in at 98 million. For the full year, net revenues came in at a little over 2 billion SEC and adjusted EBITDA of 542 million. Net revenue for the year did fall short of our four year target of 2.2 billion by 7%, but adjusted EBITDA came in at the high end of the range with stronger margins. Net revenue shortfall largely driven by the overall industry weakness for the year, which negatively impacted our business units, in particular units that are providing third-party services such as Petro and Fireshine. All in all, the group delivered solid results for the year. 10% annual growth outperformed the overall industry, which was largely flat this year with 0.6% growth according to Newzoo. Next slide, please. So year in review, we did achieve a lot of the key goals that we had set forth for the year. Some of the key objectives that we had for the year included continuing to driving solid revenue and profit growth, deliver 10% net revenue growth, 27% adjusted EBITDA margin, and 438 million of operating cash flows. Another important aspect that we focused on was continuing to improve the risk profile and really improving our balance sheet and improving our business foundation we fully paid down the debt this year built up significant cash reserve ending the year with 481 million a sec of cash on the balance sheet and we shut down underperforming projects and businesses And we refocused our strategy and communicated our long-term vision. Our first capital markets day that we hosted in September communicated our vision of becoming a leader in the mid-market publishing segment and communicated our medium-term financial goals. targeting $3 billion SEC of net revenues and $1 billion SEC of adjusted EBITDA by 2026. We began investing selectively in opportunities according to our long-term vision. MEC Warrior 5 plans development is underway. Publishing deal for cold iron second title was signed. We initiated concept exploration for H1Z1. We accomplished most of what we set out to achieve for the year successfully. While many of our peers are dealing with the fallout from aggressive and risky decisions of the past, we get to focus on our future without distractions. As a result, we are starting out 2024 on a very solid footing. Next slide, please. Some charts here, industry backdrop is not so great. Industry performance for 2023 was largely muted. Now it's going on over two years of weakness. After declining 5% in 2022, industry eked out again, 0.6% growth for 2023. Even though the industry may have avoided a down year nominally, the underlying dynamics tell a different story. Many developers and publishers, big and small, Lots of headlines, recalibrating, canceling or delaying many projects, and meaningfully cutting back on staffing. Big guys are doing it to improve profitability. They're not in trouble. They're trying to become more profitable. Little guys, on the other hand, had no option but to cut back in order to survive in many cases. The industry has been setting some unwanted records this year. Over the last couple of years, actually, 2022, 8,500 job cuts. That was the record for the industry in its history. And 2023 clips that with 10,500 job cuts. And so far in 2024, January alone, we saw 6,200 job losses, which unfortunately could mean we could likely set another record for job losses this year. So are we almost out of the tunnel? Not so sure, but we probably don't think it's the case. Big guys may be largely done, but likely there's more pain to come for the smaller guys. The reason the industry finds itself in this situation is because of too much supply while demand hasn't kept up. Basically, it was irrational exuberance. Since the pandemic, big guys with franchises will be fine. Little guys who jumped on the bandwagon won't be. We have to give it time for the market to ultimately rebalance itself out. Next slide, please. Industry impact. So how are we impacted? We manage relatively well compared to others, but no one is fully immune. Work for hire business this year has faced challenges. Ramp has been slower for Toadman. Piranha, as we just reported, work for hire contract. was just canceled to start this year they did realize 40 of the work for contract but 60 that we were counting on for this year are no longer able to achieve that as that contract was canceled third party service volume was also down as a marketing service business petrol had a difficult year as marketing is typically one of the very first line items to be reduced in a market downturn. FireShine's physical distribution volume, also dependent on third party, also went down with product delays. On the live service side, there was general pressure all around, you know, declining engagement as well as increasing costs. Daybreak's performance was negatively impacted. Big blue bubble bugged the trend, but likely would have performed even better in a favorable market climate. But despite this challenging industry backdrop, the group still delivered 10% organic net revenue growth. And we believe that's pretty good compared to the overall industry, which was essentially flat. 2024 is likely another challenging year for the industry. As a result, we believe that we must maintain conservative approach and focus. Next slide, please. 2024 approach and strategy. Our main approach is to keep it simple. Not the time to take big risks. At the top of the list is to stay conservative and actively manage risk. No big bets, maintain ample liquidity, control costs aggressively. We'll continue to execute against our long-term strategy. Fortunately, no near-term distress or risks for the company. With our solid foundation, we get to focus on our future versus worrying about keeping our lights on today. Also, we will stay opportunistic and target special situations. Industry distress could yield very attractive unique opportunities. We have thrived in driving exceptional results in such situations historically. We will remain ready to pursue opportunities where we can leverage our track record and expertise for outsized returns from distress situations. Next slide, please. 2024 outlook is expected to be a little softer due to the combination of three main reasons. Continuing overall industry weakness as we talked about, as we just covered, you know, this could keep the pressure on our service businesses, which depend on third party marketing spend. and pipeline of games. Beyond the service business, the overall portfolio of live service games could also feel some pressure. My Singing Monsters performance level will also be lower this year as we communicated previously. 2023 was a phenomenal year. We expected to normalize at a lower level than that. However, it still should be normalizing at a meaningfully higher level compared to pre-uptick level back in 2022. Returns from also our new product investments won't be yielding meaningful returns until latter half of 2024 when MacWarrior 5 plans releases. Key highlights for the year, MacWarrior 5 plans releasing in the second half. Core Deeper coming out of early access on PC and releasing across consoles in the second half. Full year of celebration for EverQuest franchise hitting major milestone. EverQuest is turning 25 and EverQuest 2 is turning 20. We have lots of great content, special events planned for these big milestones, which should result in nice performance for the franchises as well as Daybreak. Evo versus Evo is finally releasing. We just announced this last week on February 8th, releasing latter part of second quarter. Excited to finally get this game out. It is one of our legacy titles, but it's a nice little game and glad to have an opportunity to release and generate returns on the investment already made. We have written most of this down already. So regardless of the level of performance, it's all upside, which is great. And based on the confluence of these factors, we are expecting 2024 to be a softer year. Net revenue target at 1.8 billion SEC, adjusted EBITDA margin level, 22 to 25% range. It's tough out there with the industry. We're well positioned to weather the storm. Still expect to deliver solid profitability and cash flows for the year, which given the market circumstance would be a nice outcome. Next slide, please. Medium to long-term outlook here, similar chart to what we shared at the Capital Markets Day. No real change here. We are reiterating maintaining our goals communicated at the Capital Markets Day for 2026, 3 billion SEC of net revenues and 1 billion SEC of adjusted EBITDA targets. We are continuing to take steps to building our mid-market publishing business with core franchises, focused product pipeline, Mac Warrior 5 plans in 2024, CodeLiners New Game in 2025, H1Z1 targeted for 2026, and we're exploring additional mid-market publishing opportunities for 2026 and beyond, including some of the special situations that we're starting to see. Given our solid foundation, rather than having to spend a lot of energy restructuring and trying to survive, uh like some of our peers fortunately were able to focus on executing against their business plan without distraction now we will go into some detailed financial update uh frederick please next thank you next slide please

Yes so the net revenue in Q4 was 473 million corresponding to a decline of 15% with an EBITDA margin of 21 but the full year net revenue amounted to 2 billion 45 million corresponding to a growth of 10% driven by operational performance The full year adjusted EBITDA came in at 542 million, with a strong margin of 27%. This means, which GE pointed out, that we EBITDA wise came in within the upper span of our full year guidance, looking at EBITDA, despite lower than guided for net revenue. Our live games portfolio representing a more sustainable part of our business generated 273 million, corresponding to 57% of the total in the fourth quarter and 1.3 billion for the full year, which is 64% of the total in 2023. Maybe also worth pointing out is that we have generated a positive net profit for the first time since the transformation period started. Next slide, please. DABIC is the largest contributor to regroup net revenue and the largest contributor to our more predictable revenue base, generating 182 million in net revenue and 29 million in adjusted EBITDA, which correspond to a soft adjusted EBITDA margin of 16%. My Singing Monsters continue to perform well While gamers activity peaked in December last year, we continue to see levels above the pre-peak performance. And Big Blue Bubble contributed with 86 million in net revenue and 49 million in adjusted EBITDA, which correspond to 57% adjusted EBITDA margin. Next slide, please. So this slide visualized further how Meisingen Monster have been performing with a peaking activity in December 22 and the slowdown to level still way over the pre-peak levels. And we will need another couple of quarters to determine the new normalized level for the game. Next slide, please. Piranha continues to successfully release new relevant content to the MechWarrior franchise. Piranha contributed with a net revenue of 30 million and adjusted EBTA of 11, which correspond to 37% adjusted EBTA margin. Toadman's net revenue came in at 19, which correspond to over 200% growth year over year. And just that EBITDA came in at minus 5 million. So Toedman continues to ramp up its work for hire business and is getting closer to profitability, even in this continued transition to work for hire phase with reduced capitalized R&D levels. Next slide, please. As shown in this chart and also pointed out several times, both these companies are fairly volatile. Fireshine had a solid quarter with a strong sales from the back catalog. The company generated 107 million in net revenue and 11 million in adjusted EBITDA. And the back catalog is attached with generally lower margin. And the adjusted EBITDA margin was 11% in Fireshine. And despite being a softer year, Petrol had several successful campaigns in the quarter. and generated 50 million in net revenue with stable profitability next slide please the cash box has constantly increased up to 481 million over each consecutive quarter the past year and this is achieved by improved operational cash flow and despite investing 170 million in new growth initiatives those that we highlighted in the capital markets day according to our updated forecast we expect to invest another 200 million in those initiatives in 2024. and to look at the further details you can go to page 11 in the report where all those investments are listed and with the sale of a non-core ip in q1 2024 we further strengthened our cash position with 5.9 million us dollar in q4 the operational cash flow was 101 million And the cash flow was negatively affected by 63 million of investment activities, of which 41 refers to Cold Iron publishing deal. And 4.6 refers to various publishing deals in Fireshine. And 21.9 million is related to capitalized development expenses and mainly the Piranhas project, the Clans project that they have. In first half of 24, EG7 will execute its first ever dividend distributing 45 öre per share, which correspond in total to 39.9 million. All in all, the balance sheet remains solid. Next slide, please. The net revenue in 2023 amounted to 2 billion 45 million, corresponding to an increase of 10% driven by organic performance. The full year adjusted EBITDA came in at 542 million, corresponding to a strong 27% margin, despite 72 million lower capitalized R&D than a comparable figure last year. As Yi already mentioned, the market declined in 2022 and remained challenging over 2023. In light of that, the 10% growth is a market gain. Between 2023 and 2026, the market is expected to grow around 3% per year. Meanwhile, according to our targets, EG7 is expected to deliver 16% CAGR up to a net revenue of 3 billion and 1 billion in EBITDA in 2026. So we anticipate to continue to gain market shares even if 2024 which started with several industry layoffs is for us expected to be a transition year with 1.8 billion in net revenue and margins around 22 to 25%. And that concludes my part. So over to you again, G. Thanks, Fredrik.

All right. To summarize, let's go to the last slide. We are a stronger company today compared to where we were over the last couple of years. The overall gaming sector is under quite a bit of pressure due to a lot of poor decisions throughout the industry over the last few years. Thankfully, we made prudent decisions early on, so now we get to stay out of the fray and focus on just running our business. As a result, irrespective of the market volatility, we have been true to our plans and continue to deliver results successfully. Ultimately, our priority is delivering solid shareholder returns, and we believe the best way to do that is by staying the course and continue executing against our long-term vision. In the meantime, we are initiating, as Frederick mentioned, our dividend policy, and we'll begin distribution starting in Q1, as previously promised. So that concludes the presentation, and Ludwig, we can start the Q&A.

Thank you, G and Fredrik. First question here that's been asked by a few investors, among them Ilya Ivanov. Could you provide more comprehensive details regarding the IP that was sold in Daybreak and the strategic reasoning behind it?

Yeah. We are limited in our ability to disclose too much details regarding that particular transaction as the confidentiality agreement with our counterparty. But having said that, the asset that we sold is a non-core IP that in terms of our long-term plans and what we plan to invest in, it's one of the IPs that we do not plan to invest in. So we were able to secure an attractive a transaction that yielded 5.9 million US of gross proceeds, which is meaningfully profitable given the book value of that particular asset on our books. So a good result for us. Once again, does not impact our business today, nor the long-term strategy, given that it's a non-core asset.

Thank you, Gene. A question from Hjalmar at RedEye. What are the plans for Piranha considering the loss of the work for hire contract? Do you expect other work for hire contracts or how will the resources be utilized?

Yeah, you know, we are beginning additional conversations. It's a tough market out there on the work for hire side as well. But having said that, With so many layoffs that's happening around the industry, there are certain publishers that are looking to actually utilize work for hire as an extension of their resources more rather than utilizing their in-house staff, which they've been pulling back on. So it is something that we're evaluating. But having said that, it just happened just over the last few weeks that we got notified. The staff that's currently working on that particular contract, they're weaning off over the next couple of months. And as they're weaning off, we will be looking for additional opportunities, but challenging environments. So we do have to see what's out there before we could comment further.

Just one more comment from my side. So it's also so that that contract includes some new hires. So it's not that we do have all those employees in-house already. So it doesn't, and obviously it will not affect those people that we aim to hire for executing on that project during the year.

Thank you. A question from Niklas Westlund. Could you elaborate on the expectations for Evil vs. Evil?

You know, so Evil vs. Evil is an interesting game. It's a game that we, obviously a legacy game that Tottenham has developed. And, you know, it is a game that we do not consider to be a core to what we're trying to do as we're getting away from original IP-based titles and focusing on more core franchise-based titles. Having said that, the investment's already been made, and the team has done a great job of delivering a good product. We've conducted multiple third-party mock reviews. Results from those mock reviews, all very, very positive for the investment that we made and the type of game it is. So we are looking forward to its performance, but the reason why we did not really include it as our long-term plan nor really our guidance for this year is partly because at the end of the day, it's something that we've already written down. We're looking for any upside from it versus putting significant expectations on it. So we do want to see how it does. It's very difficult to, you know, at this point, provide a range of what it might do. But from a performance and P&L perspective, because we have written it down, almost any result would result in a positive outcome for the company.

Thank you very much. A bundle question from a few investors, among them Niklas Westlund and Hjalmar Röddai, regarding My Single Monsters. Any specific reason to the significant drop quarter-on-quarter revenues for Big Blue Bubble? And can you elaborate on expectations for My Single Monsters when it will stabilize in first half this year?

Yeah, I think we've been quite consistent in terms of our communication around My Singing Monsters. 2023 was a phenomenal year, and it's taken a lengthy period for it to slide down to where it is today. But nonetheless, even at today's level for Q1, it's operating at over 200% of the level from a year before that. So from a performance perspective, we're still very happy about where it's settling down, And as to our Q4 overall performance, and I think, you know, I've seen some notes about, you know, my singing monster contributing to our Q4 numbers being softer, but my singing monsters actually performed to our expectations. So level that it performed is not lower. Where we are struggling with this really the service segment where number of projects that were delayed or pushed back earlier part of this year, we expected that those pipeline of possibilities could be coming back around in the Q4. But unfortunately, due to the overall environment in the gaming industry, some of those projects didn't come back and they're getting pushed into 2024. And there's delays, cancellation, et cetera, that, you know, our service units are having to deal with. So with that said, my singing monsters, we do expect, you know, based on the trends that we're seeing, you know, monthly active users, daily active users, how people are engaging we do expect that trend to really stabilize over the next couple quarters. So by second quarter, mid 2024, we should have a pretty good feel for where that game could normalize with the inflow and outflow of players that are engaging with the game, largely finding equilibrium.

Thank you very much for that answer, G. Question from Hjalmar at Redeye. Are the investments of 264 million for 24 total expected investments or do you see other investments in addition to that? And this is the investments into our new growth initiatives that he's asking about.

Yeah, you know, that's what we have budgeted. But with that said, you know, I think one of the three main sort of prong strategy and approach that we want to take for 2024 is to be opportunistic where opportunities present themselves. You know, I think this ongoing distress in the marketplace, especially on the small to mid-market size, developers as well as publishers will yield. some interesting opportunities for, I think, organizations that have dry powder. So for us, we have significant liquidity on the balance sheet. We have great track record of delivering against opportunities like that special situations distress where we could roll up our sleeves, go in and fix and really create lopsided positive outcomes. And that's how we built up, whether it's Daybreak or Standing Stone or cold iron originally. A number of these transactions as well, we know how to do really well. So based on where the market is, we do expect that type of situation to become available. And if there is an opportunity where we could really see a meaningful upside with limited capital exposure as well as risk, those are the type of situations that we would look to transact on going forward. So as to what size, how much capital, we have no idea at this point. We will be opportunistic, but nonetheless, you know, we've done this a few times successfully, so we're pretty confident we would be able to repeat that type of outcome.

Thank you very much. A question here from Markus Andersson. Could you elaborate on the uplifting process and can we expect any repurchase of shares to happen this year?

Frederick, maybe you could provide some additional details, but maybe I'll start. So uplisting process, I mean, it's an ongoing process. It's not a matter of if, it's a matter of when, meaning we're working with advisors to continue down that path. So we're making great progress. We can't opine on the timing yet, but once again, you know, we communicated that we expect to get that done in 2024 and we're on track for that. And along with that, that's the very first step before we could buy back shares. In order to be able to do so, we have to get up on the main exchange. And along with getting on the main exchange sometime later this year, we would be seeking approval from the shareholders at an AGM or EGM to be able to transact with shared buyback program. I don't know if there's anything else you want to add, Frederick.

No, I know that some companies are doing this also on First North, but if you're aiming for an up list to Nasdaq main list, that could be a potential issue. So that's why we, based on the advice from our advisors, refrain to do buyback before we are actually listed in a place where it's not restricted to do buybacks and as she said I mean the IPO project it continues according to plan so we will be up listed during this year and then we will evaluate the situation from there

Thank you very much, Gi and Frederik. A bundle question here from a few investors, among them Simon at Carnegie. Could you elaborate a bit on Daybreak and the overall MMO landscape?

Yeah, you know, I think I would actually encourage a lot of investors to read this research that recently came out from a gentleman named Matthew Ball. It's a lengthy one, about 50 pages long, but he does a really good analysis of the market industry as we stand here today, reviewing how things have been and where we're headed. So similar theme as he covers, essentially, you know, not just Daybreak, but a lot of the other live service game companies are dealing with, you know, lower engagement overall since obviously the pandemic. But even after the pandemic, engagement has been going down to a certain extent. On top of that, you have, you know, inflation rising costs that a lot of the companies are having to deal with. with their staffing, etc. So it has caused some additional pressure on our margins and performance. The only way to really combat that is through additional content. We are looking at a great year ahead of us with 2024 being big milestone for EverQuest and EverQuest 2, turning 25 and 20 years old respectively. We will engage and we will be investing additional great content as well as a lot of events for players to participate and re-engage with. Same thing for My Singing Monster, our key live service games. It's all about delivering quality content, We have a great track record of delivering great content that people really enjoy. Of course, there could be some hits and misses as well. But for 2024, a great roadmap ahead for all of our titles. So we're looking forward to being able to deliver against that.

Thank you very much. I think that was all we had from all the questions that we had. So, yeah, thank you very much, everyone, for tuning in to this call. And we wish you a great day. Thank you very much. Great. Thank you. Thank you. All right. Goodbye.