Enad Global 7 AB (publ)

Welcome everyone to EG7's third quarter earnings release. My name is Fredrik Rudén. I'm deputy CEO and CFO and with me in this call I have my colleague and the company CEO Yi Han. We will start with the presentation and then end with the Q&A session. I hand it over to you Yi.

Thanks Fredrik. Thank you for all joining us. Let's go to the first slide. For Q3, net revenue came in at $355 million a sec, with adjusted EBITDA coming in at $63 million, representing 18% margin. Year-over-year net revenue declined by 24%. Without the adverse FX effect, year-over-year decline was lower at 16%. Currency movement has been exaggerating the decline throughout this year, unfortunately, because of the significant volatility with the exchange rate over the last 12 months. Next slide, please. Some notable business unit updates here, starting with BigBlueBubble. Results came in below expectations, a tough quarter for them. Net revenue declined by 27% in local currency and 34% in SEC. Reasons for the decline was primarily driven by anniversary content for this year performing worse than last year. Active player base declined with lower user engagement and acquisition for the quarter, with the anniversary content underperforming. Core in-game KPIs continue to remain steady and healthy. However, the underperformance appears to be limited to the user acquisition funnel. The team is actively working to improve user acquisition to return to prior higher levels. As for Daybreak, net revenue declined by 7% in local currency and 15% in sector. For accounting and reporting, net revenue shows a decline, but sales actually demonstrated growth. We tracked another KPI called gross revenue in local currency, which actually increased year over year. Gross revenue is before platform fees and excluding revenue deferral counting. It is more of a cash basis number for sales, but that number at the top line demonstrated growth for the quarter. The main growth drivers for the period for Daybreak included, Palea, Lord of the Rings Online, Dungeons & Dragons Online, and DC Universe Online, all of which are performing nicely with revenue increases and strong profitability. Titles that are performing softer than expected include EverQuest and EverQuest 2, down from the big anniversary year in 2024, where EverQuest turned 25 and EverQuest 2 turned 20 years old. Also, EverQuest was negatively impacted by the Hero's Journey, and unauthorized title that was out for a number of months, which for now has been successfully closed down. So that's no longer an issue, but nonetheless, it did impact EverQuest negatively throughout the year until it's closing down. Match the Gathering Online card sets this year have been generally underperforming, contributing to low results there. Overall, on a consolidated basis, Daybreak is demonstrating growth at the top-line gross revenue level, which we are happy with. Piranha also delivered a solid quarter. Net revenue grew by 112% in local currency and 93% in SAC. MacWarrior 5 Mercenaries DLC7 performed better than we expected. It's on trend to be the best performing DLC out of the seven. A nice outcome for a DLC for a six-year-old title. Next up now is DLC 2 for Clans in December. Overall, Piranha is performing at a steady and profitable level, and we expect them to continue at that level for the foreseeable future. Next slide, please. Now on the product front, a couple updates starting with Palia. Palia was one of the main highlights for Q3. Fall seasonal content release went out with a nice success. Animal husbandry feature, which is a major system and feature for the title, shipped with the update and reached peak engagement levels along with that update seen back in May along with the console release, which was nice. Game is trending well with improvements across all the core KPIs. MAU increased by 77% when comparing September number to April right before console release. Monthly average revenue per user also increased 141%, and payer conversion rate increasing 99%. We're quite happy with the performance today, excited for its long-term future. We believe it has a real shot at becoming one of the leading cozy life sim games in the industry, with the key differentiation being it's the only large multiplayer online game that's serviced as a live service title in the cozy life sim genre. We expect it to continue to perform nicely going forward. Now for Coldiron, we have decided to delay this title. New target release window now is Q3, 2026. Team has made good progress but requires more time to finalize content as well as to achieve higher quality. Ultimately, decision here is to prioritize quality and invest the additional time and resources accordingly. Additional investment is expected to be approximately 7.7 million total. Daybreak plans to invest 6.5 billion of this. and cold iron shareholders coin vesting 1.2 million. We continue to remain bullish in the project potential and expect returns in excess of our minimum target returns. Next slide, please. Redrick, over to you.

Thank you, Ji. Next slide, please. Third quarter was compared with last year relatively quiet and with few smaller content releases generating a net revenue of 355 million representing 16% FX neutral decline. The lower net revenue is mainly explained by 35% negative FX movements. One successful title release in Q3 last year from Fireshine generating 54 million Big blue bubble trending down, as she mentioned. Strong anniversary campaign in every quest in Q3 last year, including a fairly strong revenue recognition rollover effect from Q2 2024. Adjusted EBITDA was 63 million, which gave an 18% adjusted EBITDA margin. LTM net revenue was 1 billion 702 million with the LTM adjusted EBITDA margin at 18% which is in line with a historic average. Next slide please. As earlier pointed out we have a foundation of more predictable revenues and cash flows. More predictable revenue comes from the live service and back catalog titles Net revenue from this portfolio was 311 million in the quarter, corresponding to 88% of net revenue for the group in the quarter. Of the last 12 months, net revenue amounted to 1,702,000,000, of which 1,258,000,000 derives from the more predictable revenue base. LTM more predictable net revenue has varied less than plus minus two percent in the past five quarters following that stability the portion of revenue that portion of revenue has been stable at 70 to 74 percent next slide please Daybreak is the largest contributor to the net revenue generating 180 million This corresponds to a decline from Q3 last year. The decline is attributable to challenging comparable figures following the successful anniversary campaign in EverQuest last year and 18 million in unfavorable currency movements. And as he already pointed out, the underlying gross revenue or total bookings, what the customer actually bought from us, has increased Q3 to Q3. But we do recognize net revenue over the period when the customer is using what is acquired from us, which means that we now and then have this rollover effect between quarters. The adjusted EBITDA came in at 35 million, corresponding to 19% EBITDA margin. Big Blue Bubble delivered net revenue of 55 million, corresponding to a 34% decline. Currency fluctuations negatively impacted net revenue by 6 million and adjusted EBITDA amounted to 25, representing a 45.6% margin. And Big Blue Bubble had lower than expected new customer intake, We are evaluating various mitigating actions to increase that KPI going forward. Next slide, please. Faishan had, as expected, a fairly quiet third quarter, specifically compared to the third quarter last year when the company successfully published one digital title generating 53 million. And net revenue in Faishan was 59 million in the quarter and adjusted EBITDA was 1 million. Petrol has been stable following the reach out to new business areas and the cost optimization from the beginning of the year. Petrol generated 30 million with a 5% adjusted EBITDA margin. Next slide, please. Piranha delivered a net revenue of 30 million with an adjusted EBITDA of 10 million, corresponding to 33% margin. The cost savings measures executed in the beginning of the year together with the successful launch of the seventh DLC for Macquarie Merchants are the two major contributors to the strong performance. The 7th DLC is, as Yi mentioned, is becoming one of the best-selling DLCs for mercenaries. Next slide, please. Our financial situation remains solid. We invested 91 million, of which 51 million in Palia and Choliron. And that is what we could define as new growth initiatives going forward. The level of investments in the more predictable revenue base remain low. Operational cash flow increased to 51 million. This figure was negatively impacted by a non-recurring payment of 8 million. So if we would adjust for that, the operational cash would have been similar to 60 million. And by end of the quarter, we had a net cash position and 396 million in cash. We also successfully signed a new revolving credit facility of 100 million, which is unutilized by end of the quarter. I hand it back to you, Eugene.

Thanks, Frederick. All right, let's go to the summary slide. Next one, please. Okay. So in summary, Q3 was a down quarter with some hits and misses for us. Palea is performing well, and we're looking forward to its continued growth. Cold iron game delay is a disappointment. It's not going to be contributing to our 2025 performance, but we expect it's going to provide a nice boost for 2026. We believe providing with additional time is the right decision to maximize returns for the project. On the industry front, the market still remains challenging for small to medium-sized publishers, and we intend to continue to operate cautiously because of that. We will be patient and highly selective in deploying capital to maintain solid balance sheet during this time. So that concludes our earnings presentation, and now we will transition to Q&A.

Thank you Ji. So the first question I have here is from Ilya Ivanov. What are the key reasons to delay the game to Q3 2026 and to increase the investment with another 6.5 million USD? To what extent is this driven by expanded scope, licensor requirements or earlier planning assumptions?

Yeah, I think that's a great question. I would say it's a combination of several things. Ultimately, the content development for a video game, whether it's this game or many other games that are out there, takes time. And in order to achieve quality, initial estimate versus actual execution could differ, right? So in this case, some of that has happened where there's good progress being made throughout the development across the board, but at the same time, in order to finalize, get those features and content to finalization at the quality level that we seek for commercial success is what's going to be requiring additional time for. So we estimate that that requires us to be able to push this game out to third quarter 2026. And the investment that we're making is...

I think we lost you there. So I will go to next question. Yeah, it's a question from Cara, Cara Ducky, and Yama from red eye. What is the total investment so far in cold iron? And how come the investment goes down in q3? I'll try to answer this. So the first decision that we had was to invest 23.1 million US dollar in first quarter this year. We decided to increase that with another 6.5 million US dollar. So in total, 29.6 before the press release yesterday. And That was all settled in October. So from there and on we will start to invest on this new decision. So adding another 6.5 to that the total investment is planned to be 36.1. it's booked in us dollar and it's revalued to seek in the balance sheet in the group because our presentation currency is swedish crown that's why you it looks like it has gone down but the us dollar amount remains so the question is is he back in the call now yeah i'm here yeah all right i think we lost you there for a second so Here is another question also from Ilya Ivanov. Is Cold Iron's US dollar 1.2 million co-investment new equity from its shareholders or reinvested profits from ED7?

Yeah, that's investment from the shareholders. It's not from ED7.

The commercial terms for which have been adopted in accordance, how have the commercial terms and recoup structure changed as a result of the increased budget? And how does this affect the allocation of risk and return between the parties?

Yeah, I think from the beginning, the deal structure was meant to provide risk management or lower risk and capital preservation priority for the publisher. So investment that Daybreak is making has priority over investment that Cold Iron shareholders have made. So this additional investment that's going in would be also recoupable at the top of the waterfall after the license fees. And then thereafter is when any profit split would happen. So from a risk allocation perspective, we're going to maintain the same structure that we've utilized to date, where Daybreak has protection over capital that's junior to it from the shareholders of Coldiron.

Here's a question from Yalmar on Redeye. Big Blue Bubble, how should the soft player intake in My Single Monster be seen? Is there a risk of faster revenue decline going forward?

Yeah, I would say it's too early to say. The lower user acquisition number was a surprise, given that the game has been performing quite steadily over the last 18 months. So over the last quarter, there was a bigger drop than we expected. That doesn't seem normal in terms of what the trends look like. So we are investigating that as to what caused that lower position at the top of the funnel. with platforms like YouTube and TikTok and Instagram. So along with that investigation and evaluation, we are devising coming up with ideas and strategies of trying to shore that back up to the prior levels. Subject to how those perform, we would be able to know more as to whether this means a new trend line versus a temporary blip where we could recover back to prior levels that we've seen over a prolonged period last year.

Another question from Hjalmar. What was behind the strong profitability in Daybreak? Is it sustainable going forward? And I assume that this question comes also from the lower profitability that we had in Q2 from Daybreak in conjunction to the release of Palia.

Yeah, so there's a number of titles that are performing well. So Palia is at the top of the list given that acquisition happened last summer and along with the console release and continuing addition of new compelling content. We expect that that'll continue to build in terms of population and revenues and et cetera. So third quarter was a good one. And we expect Q4 to be a nice quarter for the title. And 2026, we're very excited for Paleo with additional content and big features that we're planning for. Additionally, some of our, you know, Titles including Lord of the Rings Online, Dungeons and Dragons Online, and DC Universe Online are all performing quite well. Revenue engagement from players and the overall conversion for monetization for those three titles. The teams have done an excellent job with great additional content this year with new server. Also improving customer experience with new server updates that help with the overall experience. That also was a nice contributor to their better performance. These Universal Online metrics are up across the board in terms of all the core KPIs, and we expect that momentum to continue for the near term. So those three titles are doing really well. There are softer spots, as we mentioned. EverQuest, EverQuest 2. Comparison not great compared to 2024 when it was big anniversary for both titles. And the hero's journey for EverQuest was a distraction for the title, which resulted in a lower performance for EverQuest in particular this year. But we expect those titles to stabilize and turn the corner as we're going to 2026. Magic the Gathering Online, highly dependent on how Magic the Gathering, the IP and their card set, content cadence, etc. This year, a little softer than what we expected. But nonetheless, highly dedicated player base that continue to come and enjoy the title. Highly profitable, so we're happy with that. And lastly, PlanetSide 2, we didn't mention it, but that title has continued to decline after we sold the IP a few years back. And we're continuing to support that, but the numbers have become less significant for the overall portfolio. But when you look at the overall Daybreak portfolio, we remain quite optimistic for 2026 with number of titles that are doing well, and that we expect that momentum to carry into 2026. And stability as well as potential growth there as well.

A question on Palia. What will drive Palia's growth going forward, content and or monetization?

I think it's both. So we have a pretty compelling content roadmap that we have communicated where we are doing monthly updates, smaller updates, but we have three larger quarterly seasonal updates and one big annual update. So those updates will bring new systems and features to continue to take the game towards 1.0. And along with that, we expect to improve core metrics that are really important for us to be able to grow a lot of the engagement and retention metrics and then monetization on top of that. So user acquisition, being able to bring in more players. This game has a great organic word of mouth. user acquisition that's been very successful. On top of that, there's plans to be able to invest in user acquisition spend as well as we shore up the retention metrics even further from their level now, which has improved quite significantly from last year. But as we continue to make progress there, increasing user acquisition and being able to grow the player base, we have about 9 million registered users live today. When you look at what we consider to be competitive titles or aspirational titles, games like Stardew Valley and Animal Crossing and The Sims from EA, you're looking at population for each game in excess of, like Stardew Valley, over 30 million, Animal Crossing, which had sold over 47 million, and you have The Sims, which had over 70 million registered users as of a couple of years back. So we do think the genre and the market's quite deep. And with only 9 million players so far that have come to play and enjoy Palia, we expect that there's significant more depth for us to continue to grow this game over the next number of years.

I have a combination of a few different questions here. How confident are you in the Q3 release window? What is the risk of additional capital requirements for the Cold Iron game from here? And then is Q3 next year really an attractive release window, given that GTA will come out in November 2021? And there is some discussions about call of duty to be moved to Q3 next year.

Yeah, you know, based on everything that we know, with a lot of the detailed planning that went into arriving at the new schedule, we have high confidence today. So that's the reason why we were able to provide a narrower window for the target, rather than saying second half or 2026, we're able to guide towards that Q3. As for potential impact from GTA 6, The title has now been delayed a couple of times. Now, I guess the specular or they've announced that November is when they would expect to release the title. It's really hard to say and hard to plan or release around November. a GTA 6 release date, although I would say Q3, depending on what part of Q3, if GTA 6 is coming out in November, it does give us enough buffer to be able to get the game out initially successfully. And this is a premium title, not meant to be a live service title. And as a premium title, we expect significant portion of our revenues to come in the first two to three months upon release. So we do think Q3 still makes sense there. Now, as to whether other big AAA titles would move out of the way, with GTA 6 being pushed into November, that may or may not happen. It's speculation at this point. But if it does happen, and if there is a Call of Duty that's moving into Q3, then we would need to adjust accordingly at that time as we find out more. But for now, based on information that we know, we do believe that Q3 would be a great time for this game to come out.

Then I think we'll take the last question from Hjalmar at Redeye. What is holding back M&A? Is it price of potential targets, a risk profile of the targets? Can you give some more details?

Yeah, you know, we are quite actively looking at opportunities. And I think at this point, we passed on a lot of opportunities. And as I think everyone knows, The market has seen quite a lot of distrust over the last couple of years, and this year is less. But nonetheless, there's still a lot of headlines about studios shutting down, the last of which is NetEase just shut down three or four of their studios over the last two months. So there's more special situation opportunities that are out in the marketplace. We are looking at a lot of them. But at the end of the day, we're being very cautious. We are trying to find situations similar to Singularity 6. where there isn't a significant capital outlay up front. And that, you know, based on what we're able to contribute, based on our expertise, that we're able to create an underwrite and an upside scenario that we have real confidence in. So along with the criteria that we're putting on, and we're being quite strict about it, we passed on most of them. But at the same time, there's still some pipeline of transactions that we're evaluating, you know, now and we're hoping over the next 12 months that we would be able to close on some additional transactions similar to Singularity 6. But at the same time, it is opportunistic and based on whether we're able to ultimately find the right fit is what will dictate whether we're able to close on some of these transactions or not. I will say pricing is probably not one of the things that are driving us away from transactions. I think pricing for transactions are quite reasonable in this marketplace. So we're active and then we hope to be able to transact. But once again, we're being cautious and highly selective.

And with that answer, we would like to conclude the Q&A session. And if you have any further questions or if it's something that we haven't answered, just reach out to us and we will reply to that. in accordance and with that we would like to thank you for listening in today and have a good day great thank you everyone