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, we have the company's CEO, G. Hamm, 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 G. Thanks, Ludvig.

Thank you all for joining. Good morning. Let's go to the first slide. Q4 key performance figures here. We had a nice quarter to finish out the year. Best quarter for 2024. Net revenues came in at 513 million SEC and adjusted EBITDA at 129 million SEC. Favorable comparison against 2023 same period. Net revenue grew by 8.4%. Adjusted EBITDA was up by 31% and adjusted EBITDA margin at 25% compared to 21% last year. Operating cash flow for the quarter came in at $196 million compared to $101 million comparable period. And we ended the year with strong liquidity position with $322 million of cash. Next slide, please. Key drivers for the quarter was led by MechWarrior 5 Clans release mid Q4. Fireshine also delivered a solid result with Core Keeper continuing to show strength in Q4 after its version 1.0 release in Q3. Daybreak contributed with its batch of annual expansion packs for EverQuest, EverQuest 2, and LOTRO. My Singing Monster from BigBlueBubble is continuing to stabilize at a nice level. and finished out the year with a strong and highly engaged performance with content releases coming out throughout the quarter. Overall, Q4 results were expected to be a higher result with Q4 adjusted EBITDA representing about 40% of the four-year total. And typically, Q4 results are our peak order because of the seasonality. But this year, further accentuated with a new pipeline of games coming out of Fireshine as well as NetWarrior by Clans, which boosted our results in Q4.

Next slide, please.

For the full year, net revenues came in at 1.7 billion, adjusted EBITDA 326 million. Year over year, revenue did decline at 16.2%. Adjusted EBITDA margin came in for the full year at 19%.

Next slide, please. Full year results did come in below our expectations.

We have targeted 1.8 billion SEC, of net revenue for the year, 1.7 being 4.8% below that target. Adjusted EBITDA margin also came in slightly below at 19% versus what we had updated for the target for the full year at 20%. with the certain underperformance from a couple of our titles. So MechWarrior 5 was the primary reason behind us falling short of our expectations for the full year. The game did deliver higher quality than we expected, but performance was below. Delay from August 2024 originally targeted to a later time in October, which is a highly competitive release window, hurt the sales. A negative impact from the prolonged market downturn also is continuing to impact two of our service businesses. Petrol revenue down about 20% from normalized level prior to this downturn, which resulted in an annual net loss for the business. And Toadman has failed to gain traction with work for hire efforts, you know, along with the market downturn. And along with that, we ended up proceeding with certain restructure to bring in additional cost reduction. Next slide, please. Additional business optimization, we effectuated right after the quarter end to begin 2025. Approximately 191 million sec of total cost was restructured out of our business throughout 2024. Of this total, approximately 88 million SAC is the changes that were made with the beginning part of 2025. Piranha organizational downsizing, we reduced costs by 26 billion there and optimized to produce profits at this lower revenue level than we had expected for McRory 5 plans. Petrol business rebound has been insufficient, reduced annual cost by 15 million SEC there, and positioning the business to be able to generate a profit at this lower revenue level going forward. Toadman, on the other hand, worked for higher effort that we've been trying to get the organization to grow, but ultimately, given the market climate, this prolonged downturn over the last 20 and a half year has been very difficult for this type of service business. As a result, we did decide to wind down this business fully. Along with that, reduced annual cost by approximately 47 million SAC. So we proceeded with these decisive actions to account for the missed in terms of our net revenue, as well as profitability targets for 2024. And this should be positioning our business strong or stronger for 2025 to be able to target better profitability for the year.

Next slide, please. Next slide, please.

Thank you. Frederick, over to you. Yeah, thank you, Gene. So the net revenue in the fourth quarter increased to 530 million Swedish kronor. And adjusted EBITDA was 26% higher than previous quarter and 32% higher than the comparable period last year. And amounted to 129 million, representing a solid 25% adjusted EBITDA margin. Over the last 12 months, net revenue amounted to 1,730,000,000, with an adjusted EVTA margin of 19%. Next slide, please. We have a foundation of more predictable revenues and cash flows. Combining Daybreak, BigBlueBubble and Purana, EG7 operates several long life cycle IPs, where most are live service games. Net revenue from this portfolio in Q4 was 344 million, corresponding to 67% of net revenue for the group. Of the last 12 months, net revenue amounted to, as I said, 1,713,000, of which 1,181,000 derives from this more predictable revenue base. That portion of revenues has been around 64 to 74% in the past four quarters. Next slide, please. Daybreak is the largest contributor to the net revenue and to the more predictable revenue base, generating 199 million in net revenue. This includes 18 and a half from the newly acquired Singularity VI, The adjusted EBITDA came in at 27 million Swedish kronor, corresponding to 13% EBITDA margin. Big Blue Bubble generated 81 million in net revenue and is our largest contributor to the adjusted EBITDA with 49 million Swedish kronor, corresponding to a strong 61% adjusted EBITDA margin. Both the anniversary campaign in September and Christmas campaign in this quarter fuel the gaming activity in My Singing Monsters. Next slide, please. As Ji mentioned, Piranha launched MechWarrior Clans in October. As communicated, the game reached above our expectations on quality and critics, but did not meet our commercial expectations. Piranha delivered a net revenue of 70 million Swedish kronor and adjusted EBITDA was 32 million, corresponding to 46% margin. Following the lower-than-expected performance, management initiated these cost-savings measures, which on an annual basis amounts to 25.8 million. With regards to Turma, we initiated a full operation of WineDime, in the first week of 2025. This is expected to deliver 46.5 million in annual savings, together with the cost reductions in 2024. The total cost reduction in Toadman is approximately 100 million, to be recognized in full second half of 2025. Next slide, please. Following an active release pipeline, Fireshine delivered its strongest quarter for the year with 124 million in net revenue, the second largest adjusted EBTA contribution of 35 million, corresponding to a solid 28% adjusted EBTA margin. And petrol is highly dependent on third parties game releases and marketing budgets, which continue to be negatively impacted by today's game industry challenges. They generated 35 million in net revenue. But based on the business optimization that Yi mentioned and the commercial prospects, petrol is expected to deliver profitability over 2025. Next slide, please. During 2024, our investments in new growth initiatives, Clons, Pelia and Cold Iron peaked at 238 million. They are expected to be around half of that in 2025. The recovery of the cash balance in the fourth quarter up to 322 million is reflective of higher sales following the launch of Clons, a strong release pipeline from Fireshine and a generally strong operational cash generation. We have been requested by some investors to communicate around the KPI EBITDA, which is EBITDA with an ad back of capitalized R&D, giving a KPI closer to the operational cash generation. So the EBITDA margin over the past two years has been above 17%. Meanwhile, over 27% in the more predictable revenue base, Piranha, Big Bubble and Daybreak. Given that the more predictable revenue base was 69% of the net revenues in 2024, the cash generation in these assets was around 310 to 330 million during 2024. Given the recent close to 200 million cost reductions and the release pipeline over 2025, the cash generation in the group is expected to improve. Our highly cash generative assets require fairly low maintenance investments and for the full year they amounted to 22 million, which can be seen to the right in this chart. That's all from my side, so over to you to conclude, Gene.

Thanks, Frederick. All right, next slide, please.

So looking ahead for 2025, so performance expectation for the year, we are expecting to return to growth. 2024 was a transition year, as we had communicated previously. Heavier investment in new products that we intended to grow with as presented during the Capital Markets Day in the fall of 2023. Some of those investments that we're making, we expect to see returns from them in 2025. Paleo from Singularity 6 is targeted for release during the second quarter of this year, and Cold Iron's new game is targeted for second half of the year. So along with those releases, BigBlueBubble and Daybreak, our live service portfolio is continuing to perform well. We expect them to provide a nice foundation of strong cash flows. A lot of the other business units that along with the rationalization that we were able to conduct throughout the last 12 months, we expect them to all be profitable for 2025. We are not providing guidance for this year. However, there's significant variability expected depending on the timing, exact timing, as well as range of potential outcomes with new products that are coming out. While we have good predictability with our existing live service portfolio, the new titles that are coming out, there could be a wide range of possible outcomes there. While we expect positive returns, being able to narrow that into something that's more predictable for us to be able to guide to will be difficult for 2025. As a result, we're not providing guidance, but the expectation, once again, is that we are returning to growth and we are optimistic that 2025 could be a great year for us. And we want to be able to demonstrate that performance and along with the performance that we're delivering, be able to drive and create shareholder value for our investors. So that concludes the fourth quarter earnings and full year results presentation. And I think now we have Q&A session with Ludwig moderating.

Thank you very much, G and Frederick. First question from Mr. Caro. In the report, you state that you are evaluating additional financing to create further flexibility in meeting potential business opportunity in the continued turmoil gaming market. Could you please give some color on this?

Yeah, so last year we ended up Finding a very attractive opportunity with Singularity 6, which was born out of the market situation where there's been a significant correction in the marketplace and capital has dried up quite a bit, whether it's from publishers or investors going into games. as well as other opportunities within the industry. We are seeing more opportunities of similar nature. And historically, we have been very successful in identifying special situations where we're able to apply our operational expertise as well as our game development expertise. We want to be ready with additional financing available to be able to transact if we're able to find opportunities that may be coming up over the next 12 to 18 months, given where we are with this cycle. While the market is rebounding, we do expect additional opportunities that may come to fruition over the next 12 months, and we do want to be ready for those opportunities. As a result, we are looking for additional financing. Currently, our balance sheet is very stable, significant liquidity, no debt. We would be looking for opportunities on financing side that helps to optimize our overall capitalization. And once again, to have additional conservative liquidity cushion as well as looking for opportunities for accelerating growth.

Thank you very much, Jim. Another question here from Yalmat Radai. Could you add some color on the performance in Daybreak? How did Palia perform? How should we view profitability for the segment looking forward? Is there upside potential when Palia launch? Would you expect a faster revenue ramp up in Palia when it is released on console?

Yeah, that's the expectation. Palia is performing according to our underwriting. But our emphasis and focus has been investing to complete the game, along with the completion of additional features that would make the content a lot more robust, along with the additional engagement and retention systems going in, and being able to release the title broadly through Gen 9 consoles, including PlayStation and Xbox, and significant content update that's being prepared for the existing audience that we have in Nintendo Switch. as well as on Steam, we're looking for a nice upside for 2025 from Palia.

Thank you very much. Another question from Hjalmar. What is the state of the Colaron game? Is it close to the finish line?

Yes, we're getting closer. We continue to make great progress on the project. We're excited for being able to bring the product out to the marketplace later this year. You know, we can't narrow the exact release date yet as we're working towards finalizing and improving the quality of the game, but we're making great progress and we look forward to being able to bring the game out to market later this year.

Thank you very much. A question here from Jax. Can we assume from the write-down in Piranha that you now do not expect MechWarrior clans to fully recover the investment made in the game?

No, no, we do expect to generate a positive return on it. You know, along with the initial release, the numbers were below what we expected, but similar to how MechWarrior 5 Mercenaries performed, we do expect continuing revenues from it, from not only the base title, but also with DLC plan for the content over the next number of years. So along with DLC sales and additional content that's going out, we do expect to monetize the game and generate a positive return on the title, even if it's going to be a little lower than what we expected.

Maybe to add to that also is that the goodwill that we wrote down and also the remaining purchase consideration that we took out refers to the original acquisition of Piranha and not the investments done in Clans. So that was the correction that we did based on the original kind of purchase price for the company.

Thank you very much. Continue on that line. A question from Ilya. Are the revenues increased in Q4 2024 to 150 million for the year compared to 15 last year? Could you provide more details on what contributed to this substantial increase?

Fredrik, do you want to take that one, please? Sorry, I missed the question. Can you repeat it?

Yeah, sure. Other revenues increased in Q4 2024 to 155 million compared to 50 million in the previous year. Could you provide more details on what contributes to this substantial increase?

I need to come back to that, Ludvig. If you can note who it is, then we'll come back.

Yeah, sure. In that case, we continue with a question from Johan. What is the plan for capital allocation going forward? Dividend buybacks, acquisition, external financing with debt, etc.

Yeah, I think for this year, so once again, 2025 is a quite important year for the group. We have a couple bigger investments that we're planning on realizing returns on with both Singularity 6 as well as Cold Iron's title, alongside that there's multiple titles that will be coming to market from Fireshine in the digital publishing. So it's an exciting year. But at the same time, you know, along with those products coming out, there will be increase in use of cash for marketing, publishing, et cetera. So we do have to see it is going to be sequenced where Paleo does come out to market first. Along with that performance, we could adjust up or down. But as of today, we're heavily focused on being able to deliver great products and returns. And along with that and how those perform, we could determine what we could do in terms of whether it's dividends or buybacks, other uses of cash for the shareholders.

Thank you very much. And other question here from Yalmar. Any update on your long-term pipeline? What's in the progress for H1Z1 and EverQuest?

Yeah, so I think we mentioned this with the last quarterly result as well. But we ended up investing in Singularity 6, which wasn't necessarily planned. It was an opportunistic transaction that we felt was very compelling. And we expect the payback and the return from that investment to be relatively quick. As we closed on the transaction summer of last year, we were able to bring the game to a broader audience sometime late spring this year. Having said that, that is uses of cash on an acquisition and also finishing up the game. And what we want to be able to do is, given the market climate, be quite intentional in terms of how we're deploying cash, where we do not put the company at any type of liquidity or any kind of risk. So we're taking it one step at a time. Yes, there are efforts going on in terms of what we want to do with H1Z1 in particular. But with that said, we do want to see how Paleo performs. After that, we'll see how Cold Iron's title performs. And there's a number of titles coming out this year where we expect 2025 to be a good year. And once again, returning to growth from 2024 levels. And along with those sequences of additional products coming out and based on their performance, we would be evaluating how we could deploy capital for additional products that we're going to bring out to market in the future.

Thank you very much, Ji. A question here from Joakim. How does the content release plan for Palia compare to what's available today?

So there's significant content, new content that's being developed for the existing audience as well as for Gen 9 release. So content update now, there's a monthly patch, but at the same time, the team has been heavily focused more so on developing the larger content for Gen 9 console release. So in terms of playable engagement content over the last Six months since the acquisition, it's been fairly light, but that's intentional. The plan is to be able to bring out sizable content that a lot of the existing players would really enjoy, as well as provide us with an opportunity to reactivate some of the lapsed players who really enjoy the game, but due to limited content, they have moved on. But this will give us a nice opportunity to not only satisfy the existing audience, but to be able to try to reactivate lapsed audience who are big fans of the game and introducing the game to a lot of new players that haven't had access to the title with PlayStation and Xbox release.

Thank you very much. Another question from Joakim. What's your view on the release of your CMD goals today post the MacWarrior release?

You know, we're striving for it still. That is what we are striving for as an organization. 2025 will be a significant step towards that with a robust pipeline of games coming out. We are also looking and evaluating opportunities to accelerate growth beyond just organic, as we talked about earlier. There are interesting opportunities coming about because of where the market has been over the last two and a half years. It's shifted significantly from what used to be a seller's market three years ago to a buyer's market. And I think there's some really good examples of deals that are getting done in the marketplace that the investor base in Sweden may be aware of. Modern client groups, acquisition, Plarium's a great one. Great business, great IP. a transaction was priced at 4.5 times EBITDA, which you wouldn't have seen three years ago. So quality assets that attract evaluation. And because of the dearth of capital that's available in the marketplace, we do believe there could be interesting opportunities to accelerate growth beyond just organic. And combination of both organic as well as strategic M&A for opportunistic situation is how we do want to get to our stated goals for 2026 and beyond.

Thank you very much, G and Frederik. I think that was the last question we had. So to all of you that have tuned in and listened to this presentation, thank you very much, and we wish you a great day. Thank you very much.

Great, thank you.

Thank you.