Enad Global 7 AB (publ)

Good morning and welcome to this Q3 earnings call 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 CEO, Yi Han, and Deputy CEO and CFO, Fredrik Ruden. 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 Yi Ji.

Thanks, Ludvig. Good morning. Thank you for joining us. Let's go to the next slide, and we'll start with the key performance figures. Q3 was a solid quarter, had a meaningful rebound from Q2 lows. Net revenues came in at 466 million SAC, and adjusted EBITDA at 102 million SAC. On a sequential basis, a nice rebound. Q2 was the low for the year, while Q2 is typically a seasonal low. This year, more accentuated weakness due to heavier back loaded contents late. As a result, Q2 to Q3 sequential growth was robust. Net revenue increased by 32% and adjusted EBITDA grew by over 200%. Liquidity wise, the group ended the quarter with $219 million in stack of cash with no material debt. Next slide, please. Q3 adjusted EBITDA contribution by business unit was as follows. Games business units led the way with 97 million SEC of adjusted EBITDA contribution represented about 87% of total before holdings costs. Big blue bubbles, My Singing Monsters contributed 42 million ZEC. Decline is expected from the peak levels in 2023. However, a nice growth, 13% sequentially from Q2. Q4 is expected to be near Q2 levels, as Q3 is typically My Singing Monsters peak quarter. Daybreak had a solid quarter, contributing 52 million ZEC, led by Lord of the Rings Online's new content release for the period. EverQuest continues to perform well with this 25th anniversary content. A quieter quarter for Piranha leading up to its new game release, which came out shortly after the quarter, contributing 3 million SEC for the period from its existing game titles. Service segment remains under pressure. 14 million SEC of adjusted EBITDA contribution for the period, representing 13% of total before holdings cost. Fireshine had a nice quarter with their release contributing 16 million SAC. Core Keeper's version 1.0 digital release, which came out on PC as well as all the consoles, was the primary driver for the period for Fireshine. Physical distribution remains a little soft, but expecting a nice rebound next year with the late releases coming to market in 2025. Petrol and Toadman's performance remains lower due to softer market conditions. Petrol was break-even for the quarter, Toadman a loss of 2 million SAC. With the completion of cost cuts, Toadman is operating at break-even now on a run rate basis. Market could remain weak for the next few quarters. During this period, we expect Petrol and Toadman's performance to remain muted. Other notable highlights for the period included successful closing and integration of Singularity VI, completion of Toad and cost reduction, resulting in about $100 million in annual savings, and shortly after the quarter end, MechWarrior Clan successfully released. Next slide, please. Clans released on October 17th across Steam, PlayStation, Xbox, and Game Pass. Solid quality release. Metacritic reached $80, but recently sits at $79. Player reception also quite positive, 77% rating on Steam, and it's trending up towards 80. We're confident of Clans' expected performance over its life. MechWarrior Mercenaries, the prior entry, generated about 300 million SEC of net revenues live today. Expectations for Clans is to do better than that. Should result in a nice return against the 110 million SEC of project investment. However, the initial investment or release window performance was a little softer than expected due to its delayed release. The game came out nine days prior to Call of Duty. As a result, the initial runway for the game's release was shortened. However, with this DLC plans, we expect plans to deliver long tail sales in light with Mercenaries' performance going forward. All in all, a nice first entry for a middle market publishing strategy, a solid quality AA release, a recognized IP-based game with dedicated fan base and more predictable returns as a follow-up entry to a successful existing title. We expect this to generate a nice return for the group going forward. Next up are two major releases in 2025. Singularity 6 is Palia coming to PlayStation and Xbox. and cold iron deep tidal based on the major motion picture IP also on track for the year in 2025. As a result, we do look forward to 2025 being an exciting year for the group. Next over to Frederick.

Yeah, thank you. Next slide, please. So net revenue in Q3 amounted to 466 million, an increase of 113 from previous quarter. Adjusted EBITDA amounted to 102 million, the strongest quarter so far this year. In the comparable Q3 last year, Meisinger Monster was still performing at elevated levels. This quarter, Big Blue Bubble delivered 84 million in net revenue, a reduction by 39 from the 123 in Q3 previous year. Following that the game has stabilized, we judge that it will be easier comparable figures going forward. Over the last 12 months, net revenue amounted to 1,673,000,000 with an adjusted EBITDA margin of 18%. Both these KPIs are expected to improve following our release pipeline over 2025. Next slide, please. We have a foundation of more predictable revenues and cash flows. Combining Daybreak, BigBlueBubble and Piranha, EG7 operates several long life cycle IPs where most are live service games. Net revenue from this portfolio in Q3 amounted to 305 million, corresponding to 65% of net revenue for the group. And over the past 12 months, net revenue amounted to 1,673,000,000, of which 1,108,000,000 derives from the more predictable revenue base. That portion of our revenues has been trending around 66 to 63% over the past five LTM quarters. Next slide, please. Daybreak is the largest contributor to the net revenue and to the more predictable revenue base, generating 212 million in net revenue. This includes 27 million contribution from the newly acquired Singularity 6. But even excluding that acquisition, Daybreak delivers an organic growth. The adjusted EBITDA came in at 52 million, corresponding to the highest margin so far this year of 25%. So a solid quarter for Daybreak. Big Blue Bubble generated 84 million in net revenue and an adjusted EBITDA of 42, which is a 50% adjusted EBITDA margin. And as said, my singing monster has stabilized. And the anniversary campaign in September increased the activity from previous quarter. Next slide, please. So as Yi mentioned, Piranha has been focusing on completing Macquarie Clans for launch in October and has had no other releases during the quarter. Piranha delivered a net revenue of 60 million with a positive margin. Looking at Toadman, an annual 63 million cost savings effort has been executed during the first three quarters. This has affected 100 people previously engaged in Toadman. Toadman generated 9 million in net revenue with a small loss. And there is a restructuring reserve amounted to 70 million accounted for under adjusted EBITDA in the P&L. Next slide, please. Faishan had an active release schedule for the quarter and generated 110 million in net revenue and an adjusted EBITDA of 16. Looking at petrol it's highly dependent on third parties game releases and marketing budgets which continue to be negatively impacted by today's game industry challenges. Petrol generated 35 million in net revenue and stayed on break even due to previously executed cost reductions. Next slide, please. We have accelerated our investment over the past quarters. This quarter, they amounted to 119 million. All those investments are in line with the strategy we communicated one year back. And together, they have the potential to significantly move the needle for us. Q3 investments are 50 million in net effect from the acquisition of Singularity VI. And 45 million is the net investment in various publishing deals, of which Cold Iron is 32. And 21 million is capex for finalizing clones. But even after this investment, we're still at the net cash situation. We had 290 million in cash and no debt. Cash flow from operations was negatively affected by 36 million of accrued revenue in Fiesha, which will be paid to us in Q4. Adjusted for that, operating cash would have been 71 instead of the 35 shown in the cash flow statement. Next slide, please. Thank you. The net revenue over the last 12 months has been trending down due to the decline in My Singing Monster from last year's elevated levels and recorded 1,673,000,000. Given our release pipeline, this is expected to reach around 1.8 billion in the full year 24. And we have lowered our expectation for the full year adjusted EBITDA margin down to 20% based on lower expectations from CLANs following the delayed release from the original plan. We have so far this year seen as many as 13,000 game industry layoffs. indicating a remaining higher risk level in the industry. At the same time, the market is expected to grow CAGR 3% up to 2026. We have, over the past couple of years, prepared our business to be operated more conservatively and sound. This includes backward-leaning measures around cost control and closing down of certain activities, and forward-leaning to add initiatives within the framework of our acceptable risk level. All in all, we are better suited than ever to reach the strategic target to become a leading middle market publisher. So that's all for me. Over to you, Yi. Thanks, Fredrik.

Let's go to the last slide. Thank you. All right, well, so Q3 demonstrated a nice rebound from Q2 lows. As communicated previously, 2024 performance more back-ended than typical. Q3's big sequential growth was nice from Q2 levels, reflecting this. And Q4 should be another good quarter with Clans released during this period, DLC releases for a number of our other games, and the usual year-end holiday boost that we see with our portfolio. Overall, market is still under pressure. Big guys are largely doing fine, although you're seeing headlines about optimization moves being made by even the biggest guys. But unlike the big guys, many of the indie and small to medium guys, unfortunately, do not have the luxury of the balance and flexibility to handle this market issue. As a result, over 13,000 job cuts as we talked about through the end of Q3, likely more cuts coming over the next couple quarters. However, EG7 remains quite solid with the benefit of our portfolio with recurring cash flows and also stable balance sheet. This allows us to be able to stay focused on our business plan without getting distracted. Primary focus remains on organic growth with new products such as clans and new titles that we have slated for next year we're very excited about. Secondarily, our focus is opportunistic M&A. Singularity VI, a great example of where the combination of the attractive deal terms, our strategic fit with our vision and strategy, and the upside potential made a lot of sense. We are continuing to look for opportunities similar to this that could provide a highly favorable risk-reward balance for continuing to fuel our growth, but only if it makes sense. So we're excited for 2025 coming up. And Q3 and Q4 should be showing nice trend leading into 2025 with Q2 behind us having been the trough for the year and along our transition from investment to producing nice return for the shareholders. So that concludes our Q3 earnings presentation. And now back over to Ludwig for the Q&A session. Thank you.

Thank you very much, Gi and Fredrik. A first question here from Andreas at A-Invest. When will we see the full impact from the cost-saving plans? And an add-on to that is larger investments 2024 compared to 2023. Can you elaborate on this?

Yeah, so as to the cost-cutting measures taken for Toadman, all the changes have been completed as of the end of October, so we are already experiencing and seeing the benefit of that in Q4. As to the larger investment in 2024 compared to 2023, it is as we outlined in our Capital Markets Day presentation about a year ago in terms of investing in the middle market, publishing efforts with the title from Cold Iron, as well as Clans, primary key drivers for the bigger investments this year, alongside Fireshines also building out their portfolio of investment in their publishing efforts on the digital side. And along with these investments being made, the returns expectation for Clan, we remain quite confident that ultimately it would yield better results than MechWarrior 5 Mercenaries. which produced over 300 million sec of net revenue over its life. And Cold Iron's title, as well as the investment at Telia from Singularity 6, we remain quite excited for, and returns from those titles expected in 2025.

Thank you very much, Ji. A question from Carol. CoreKeeper 1.0 launch has been a viral success. What are EG7's long-term plans to capitalize on this momentum and also regarding CoreKeeper? CoreKeeper will release on mobile in China. What impact does this have for EG7 and FireShine as a publisher?

yeah we're very excited core keeper has been a you know resounding success uh you know over three million units shipped across pc and consoles as previously announced uh and uh 85 metacritic score it's it's beloved by a lot of the fans that are enjoying the game and we think there's a long runway for that particular title to continue to contribute in terms of sales and growth Some people compare the game to other successful title like Stardew Valley, which has been a huge success. We're very excited for its long-term future collaboration with other local publishers for mobile as well with Fireshine having the global publishing right across all the platforms. Very excited. Great start as a version 1.0 and more to come.

Thank you very much, G. So a few questions regarding Macquarie clans. So the first one is from Jack the Rocks. After successful release of Macquarie 5 clans, does this might have any impact for EG7's capability to retain the IP from Microsoft?

We have a good long-term relations with Microsoft. Piranha has been developing and also servicing MacWarrior IP based titles for some time. The latest iteration, obviously, quite well done quality-wise, achieving that higher Metacritic score. And team and the fan and all the community really seems to love the game. So more to come on that front. Not much to say as to what additional developments there may be. But our core strategy is to double down on franchises that work. And NetWarrior franchise has been that for us. So we would love to be able to do more there. And then we'll continue that dialogue with Microsoft going forward.

Thank you very much, Ji. Continue on the MacWarrior 5 Clans questionnaire here. Can you elaborate on the delayed release and also the rationale on releasing it on Game Pass?

Yeah, so... The rationale for the delay is usually because of the quality. The team was working hard towards completing the game and trying to achieve a certain level of quality. And we opted to delay the title in order for the team to be able to achieve that. And the result is, you know, 79, 80 metacritic level of quality. The player base also enjoying it very much, which bodes well for the long-term success for the title. As to the Game Pass, it is the IP itself that's owned by Microsoft. So when we do work on MacWarrior IP-based games, Game Pass is a requirement along with the license terms with Microsoft.

Thank you very much. Can you say anything about the plans and pipeline regarding DLCs for clans?

You know, it's going to be similar to what we did with NetWarrior 5 Mercenaries. So, you know, we expect multiple DLCs, robust DLCs over the next coming years. and Mac Warrior 5 Mercenaries released in 2019, and then it's still generating nice revenues through not only the base game sales, but with DLCs that subsequently released. So we expect to follow a similar type of content model for Mac Warrior 5 plans to be able to bring great content and continue to expand the content base for the first

Thank you very much. Could you give a quick update regarding Daybreak's portfolio and expectations going forward?

Yeah, you know, we're quite happy with the results for the third quarter, and we are seeing nice performance out of some of our titles. Lord of the Rings Online once again contributed nicely for Q3, released a new content through a legendary server, which is an additional revenue vector for the studio and the team. And the idea is to be able to do more of those going forward and capitalize on the success of that. And Lotro's prospects look quite nicely because of that additional potential revenue vector. DCUO, which had some issues over the last 18 months or so, Trending nicely, stabilized with the new leadership team that we were able to bring on. And the new leadership team that we brought on, I think I may have commented on this last time, but just to reiterate, veterans from Cryptic that worked on Star Trek Online. So significant knowledge and expertise around being able to operate live service title of similar nature. And along with that team getting onboarded now, you know, fully onboarded, being able to take on the reins of DC Universal Online and being able to really come up with an exciting plan for the title. We're seeing the results of some of the changes that they're already making. We do remain excited for what they could achieve in 2025, potentially better than what they've done in 2024. Magic Online is doing great. Magic, obviously, one of the biggest CCG IP in the world. And then we get the benefit of operating what we consider to be truly more of a simulation of the tabletop card game versus other formats that are out there. Magic Online team has been growing, dedicating additional resources to catch up on some of the content that we've been behind on. And their performance has been nice since we took that project on growing annually each year. And we expect that trend to continue. So overall, some of these titles are doing great. And of course, there are other titles that are aging where there's some declines. But net-net, we expect Daybreak Portfolio to perform nicely going into 2025.

Thank you very much, G. Continue on Daybreak with a question regarding Palia and what is needed to get to the commercial launch and what will the monetization look like for the game? And what will be the capitalization phase going forward up until launch?

Yeah, look, I think Paleo we're quite excited about. You know, it's a could be a genre defining game. It's modeled after other very successful titles like Animal Crossing as well as Starry Valley. But none of those games are really live service titles. So, Palia represents a potential live service, free-to-play version of those successful titles with AAA quality. Still in open data, so there's more work to be done, but based on how far they've gotten to prior to our acquisition, along with the roadmap for them to be able to get to Gen 9 console sometime next year. We have conviction around what they could achieve. It's already generating nice revenues on PC. We expect the revenue to grow with PlayStation and Xbox availability and distribution broadly next year, and some of the plans they have for additional content, as well as continuing, I would say tuning, of the overall experience along with the open data data that they're collecting. We do expect more optimized and more compelling experience from the moment that you log in for new players as well as long-term players who have been playing the game hundreds of hours for them to be excited for what's coming along with Gen 9 release in 2025. Modernization-wise, it's a free-to-play game, so there's always ideas around what can we do, and there's ideas, compelling ideas that are being considered. But I would say in terms of where we're headed, it's not going to depart too significantly from where they've been in terms of how they have developed the modernization and overall economy that's embedded with the game already.

Thank you very much, Jim. A question from Rasmus at Kepler and Mattias Ekström. Have H1Z1 still in pre-production? Can you elaborate on the timing for the game?

Yeah, so H1Z1 is in pre-production still. And timing-wise, what we have decided to do is we have a number of Bigger investments going out. Clans obviously now producing returns with its release, but we have cold iron title next year as well as paleo, which we originally did not account for. Opportunistically, we were able to secure that transaction just beginning of third quarter, so there's investment going into it. You know, I think we already communicated this upfront investment of 5 million US and then there's additional investment of up to $10 million that we're investing in order to get the game out. on Gen9 consoles. So based on the additional investments that's coming up in front of H1Z1, what we don't want to do is, as an organization, operate our business too aggressively. uh we're given the current market conditions put the business at risk in any way we've been very good about managing our risk very proactively and we want to continue to do that so we are going to manage the timing of our investment uh conservatively uh what what does that mean well we want to make sure that paleo goes out successfully along with that cold iron skin goes out successfully thereafter and and and then along with that uh sequence and generation of returns from the investments that we're making be able to ramp up on investments like H1Z1 in order to manage our cash flows and being able to live within the confines of what's available to us from our balance sheet as well as our cash flows from our business. So that's what we're intending to do. Does that mean that H1Z1 potentially could be delayed? Maybe yes, but no determination as to when exactly and how far, but we're trying to be prudent given the market conditions to be able to manage our investment timing accordingly. Thank you very much, Steve.

A question from Jalmat Reda. Any signs of improvement in the work for higher market?

None. So, I mean, I'll be very blunt. I think the work for hire market is not doing well. And I think, you know, 13,000 jobs lost, right? So, and then just over the last couple of weeks, we heard there are more headlines about, you know, studio shutdowns and job losses. So, market seems to be, I mean, in terms of, I think, job reduction, it is slowing down. But at the same time, it's not done yet. So I think until market correction is completed, I think the certain segments within the gaming industry, such as work for hire and, you know, services, businesses like petrol will continue to feel the pressure.

Thank you very much. Another question from Yalmat Reday. Can you elaborate on the capital allocation, M&A, dividend buyback?

Yeah, I think... Happy relocation. We are prioritizing investment for growth. But once again, we're trying to be conservative and smart about it so that we're not finding ourselves in similar situation as number of our peers in the market that have had to deal with cash flow issues or financing issues, etc. So good news is that I think we've done that fairly well. And we'll continue to maintain that. And, you know, we haven't dialed in in terms of what the allocation should be amongst those list of options that the question included. But I will say at the top of the list is really finding compelling opportunities for investment where we already know what the plans are, right? So these are identified projects already in our plans in terms of organic growth in your projects. M&A opportunistic. We're not out there hunting for big deals. We're looking for deals similar to what a Singularity VI type of deal might be. There's good level of market distress. And we have done interesting deals throughout our history in situations of that nature. And we think there will be more opportunities that we could capitalize on over the next 12 months or so as market comes out of this current correction. So eyes wide open, evaluating opportunities as they come up, proactively looking for them as well. But at the same time, we will live within our means. We're not going to, I would say, overextend ourselves in trying to put capital to work for the sake of growth. We will manage our business conservatively as to the dividends and share buyback our cash balance at the end of third quarter was 219 million SAC. We expect that number to be higher with the back-ended performance for 2024, bringing additional cash flows in for the second half of the year. So good news is that we'll have more cash as to how we're going to utilize it on share buybacks and, you know, potential dividends to be determined as we weigh some of these other options that we're looking at on opportunistic side.

Thank you very much, Chi. I think that's all we had for today. So everyone who listened in, thank you very much for your time. And we wish you a great day from our side. Thank you. Great. Thank you.