G5 Entertainment AB (publ)

Morning, everyone. We'll give it a few seconds to have the attendee list loading up. So we'll start in just a few seconds, a minute or so. All right, two minutes passed. I see the attendee list has stopped counting. So let's get this show on the road. I hand over to Vlad Suglobov.

Good morning, everyone. Welcome to the Q1 2024 presentation of G5 Entertainment. I'm Vlad Suglobov, as Stefan mentioned, the CEO of the company. And we have also Stefan, the CFO, with us. So we're going to go through the presentation for about 15 minutes and then we'll open the line for questions. So I'll start with a brief overview of this morning's report. Revenue was 298 million SEK, which was 14% lower than last year in Swedish kronor and in USD terms as well. We saw stable performance in our actively managed portfolio, which are all of G5's games which receive regular updates, as opposed to the games that we call in harvest mode. The active games fell 3% sequentially in USD terms, with, on the other hand, audience metrics improving sequentially for the first time in a long while. Monthly average gross revenue per paying user was continuously strong at 63.5 USD, and G5's store continued to show strong growth and now makes up 13.5% of total net revenue. This is compared to 7.9% a year ago, so close to doubling its revenue share in a year. As you know, G5 Store has lower processing fees than alternatives. They are low single digits compared to the 12% to 30% third-party application store fees. Growth for G5 store was 55% year over year in both tech and USD. And it was up 2% sequentially in Swedish kronor and 5% sequentially in USD terms. User acquisition expenses were at 17% versus 18% last year. Our gross margin came back to record levels from the third quarter at 68.1% versus 67.4% last year. We had a strong start of the year, which led to a record cash position of 256 million kroner, up from 205 million kroner last year. And I believe this is the record amount of cash we've ever had at the end of the period. We have zero debt and a solid cash flow, something we are very proud of. And in the first quarter, our earnings per share were 4.76 SEC compared to 5.85 last year. We also repurchased 101,000 shares for 13 million Swedish kronor in the quarter. So now let's move on to the next slide. And I'd like to talk about the strong gross margin and stable performance in Q1. Our own games made up about 71% of net revenue during the quarter on the same level as the first quarter of 2023. G5's active games were responsible for 63% of the quarter's revenue in line with the 62% last year. Gross margin came in at 68.1%, rising slightly from the 67.4% a year before, mainly increasing thanks to the fast growth of G5 Store, which continues to be a welcome development for us. Monthly average gross revenue per paying user was strong at 63.5 USD versus $61.8 in Q1 2023. Let's continue on the next slide with G5's operating margin during the quarter. We see a strong EBIT margin during the first three months of the year. Our operating profit or EBIT was 39.2 million Swedish kronor versus 39.8 million a year before. This gave us a strong EBIT margin of 13.2% in Q1. During the first quarter, the EBIT got a boost from revaluations related to currency effects, primarily from SEC-USD pair. When we adjust for that positive income, the EBIT margin would be 10% versus 11.2% a year prior. So even with FX taken out, we still had a very healthy EBIT margin in the first quarter. At the same time, net capitalization impacted earnings with 11.1 million kroner negatively compared to 8.8 million negatively last year. Now let's talk about our cash position. Again, we pride ourselves on being financially strong, and this quarter was no exception. We had record cash in Q1. Our capitalization impact on cash flow was 25.7 million kroner versus 28.3 million last year. Cash flow before financing activities was 84.7 million SEC compared to 40.3 million last year. Cash flow was impacted significantly by working capital, which added 30 million almost, 30 million SEC in Q1 2024 compared to negative effect of about 12 million SEC in previous year. As a consequence, total cash flow during the first quarter was 71.4 million SEC compared to 26.3 million last year. And this was after repurchases of SEC 13 million versus 14 million last year. As I said, this was a record cash position for us in the history of the company. We had 256 million kroner up from 205 million kroner a year before. So let's start to wrap it up. With some final thoughts, and let's shift focus to the rest of 2024. We started the year with stable revenue generation of the games in our actively managed portfolio. As has been demonstrated during the first quarter, we continue to maintain a disciplined approach to costs. Our growth and gross margins and profitability will continue to get a nice boost from the success of our G5 store. New games are key to success, and executing on the new development funnel process will continue to strengthen our teams and build a promising pipeline of future games. This means we are on track to release one to two games globally in 2024, and we will continue to keep our UA spend at a sustainable range of between 17% and 22%. With new games in the pipeline, G5 Store doing well in the disciplined approach to costs, we expect a strong balance sheet through robust cash generation. I would like to end by thanking you for following G5, but also thanking the whole G5 team for their outstanding efforts. So this concludes our presentation, and I'd like to open the line for questions.

Okay, and you can either ask questions by raising your hand, and you can ask the questions by voice, or you can type the questions in the Q&A box that you have available as well. We start here with Hjalmar Ahlberg. Hjalmar, I think we should be able to hear you very well.

Yes, thank you. Maybe first a question on the games pipeline. You said that you still expect one or two games this year. Do you have a good idea of which games or are you still working on which potential games it could be?

Well, I have my I have my thoughts on what's more probable than less probable. But in the end, it's a decision that we make based on the metrics. And all the other games that have the potential to be globally launched this year, they're still in the soft launch phase. So it will be a little too early for me to say. But I do think we have games to launch globally this year, more games. I don't think it's going to happen in Q2, but in the second half of the year, I do think we have great candidates.

Right. And coming to the Twilightland, which was released now in Q4, you have seen good initial progress and you're working on monetization. Is that according to plan or is it slower than expected in terms of monetization?

So we've made an exception for Twilight Land because we were so optimistic about it. And we like the engagement metrics so much. So we sort of skipped the last stage of the soft launch, which we now made mandatory. And that was the stage where we would spend a little bit extra time fine-tuning the monetization. And so... Unfortunately, it means we're going to have to do some iterations while already in global launch. For the other upcoming games, I don't think we will skip this step. And so our ambition is to, with the following games, to come out with the global launch with a game that's much more ready to be scaled in the market.

Okay, got it. And you mentioned some seasonal challenges in Q2 and Q3. Is that more than normal? And why is that? And how do you think about UA investments in terms of that challenges?

Well, it's just historically, we seem to have certain metrics kind of on the lower side during Q2 and Q3. So that's just acknowledging that fact. It doesn't really affect our decisions with regard to the user acquisition. They work on the predicted return of advertising spend and whatever it is. I mean, they chase a certain goal with regard to that. And then depending on the situation in the market, we end up being in a certain range of spend. So I don't think these are necessarily connected. I was merely saying that, you know, it's actually a first thing. It's the first time that our user metrics have improved sequentially in, I think, seven or eight quarters. So that was my comment with regard to Q2 and Q3 was just to highlight that I sort of view it a little bit with caution. We'll see what happens in the next few quarters. But it was an interesting quarter in the sense that our user metrics have improved.

Okay, good. And maybe a final question. You talked about improvements in your R&D department, so to say. Could you elaborate a bit more? Is that kind of a lowering cost for that or more efficient in the game funnel or games coming into the game funnel?

It's everything. We are still working out the process, you know, with all the stages from working on the idea to refining the idea to doing the pre-production on the idea to actually working on creating the soft launch build and doing all the tests that we need to do with all the iterations before we go to the global launch. And we are realigning all the processes in the company completely. for that funnel to improve the quality of the decisions that we make on each stage you know with hundreds of people it takes some time and obviously we started it a while ago but while we started doing it we were finding new ways and new ways of thinking about things and making decisions and new things that we wanted to improve. So it's sort of an ongoing process where we are committed to fine-tuning and calibrating this funnel as much as possible. We do see progress, certainly. So one of the latest games that we brought to the soft launch and did the first iteration It actually showed the best engagement metrics of all the games that we have tested after we've switched to the new funnel. So we clearly see that teams start to understand that they're focusing on specific metrics they have to achieve, and then they kind of build their processes. Off of that and off of finding the best possible solutions for all the creative tasks and creative problems when building a game. So we see progress happening. That's good news. On the other hand, just the development times, you know, it takes months to get a game done. from the idea to a soft launch build. And then we go into the soft launch and it can take months to be in that soft launch period. So the quality is improving. I'm quite certain we're doing the right thing. Question is when we will see something tangible that graduates into the global launch at scale substantially, right? And I think we'll have to wait a few quarters before that happens, honestly. But I think we're on the right way.

Okay. Thank you very much.

Thank you. Hold on.

So if you want to raise your hand, please do. We can take a question from the Q&A box. In the meantime, we've got one here. What are the consequences of AI for your company?

Oh, yeah. Well, so far, they've been positive. We were able to reduce certain costs in our development processes, mostly sort of routine work with data, which was labor intensive, but could be relatively easily automated with AI. But we also see, I mean, we certainly use AI in kind of tackling creative problems. problems and issues. And it's great for creating concept art, even when you're playing with ideas and trying to be creative. So it helps in a number of interesting ways when working on games. So I think generally it was positive. I think we even said we even tried to put an estimate on how many people I mean, by how much we were able to reduce our staff count due to AI. So that's a good thing.

All right. Now we have Rasmus Engbe from Handelsbanken. Unmute yourself. You should be able to ask your question. There you go.

Hi, good morning. I just wanted to pick your brain on the market situation. It seems that many companies in the mobile space have a hard time finding success with new launches, in particular since the pandemic. Would you sort of agree with that? And do you think that is, if that is the case, is it that the games aren't really good enough or is it a crowded market or what kind of explanations are there for such things?

It does seem so, Rasmus. Thank you for bringing that up. But also we're looking at the analytics on the market and we can see that there are new successful games that are able to deliver scalability and they just come to the market with a great idea. And obviously there's some money probably put into the marketing But you cannot really say that there are no breakthroughs among games in the market. Maybe there are fewer, but there are still new successful games happening. So perhaps there has been a little bit overinvestment. Perhaps the mobile market, for the first time in many years, did not grow for a couple of years at least. and perhaps marketing became a little bit more difficult. And so all of this together probably raises the benchmark of quality or the efficiency of the operations that companies have. And so that's why we see all the difficulties that some companies are going through. And it's an interesting, I mean, obviously we're not performing in line with the market right now. On the other hand, I can see plenty of companies that are performing even worse than we do. So yeah, it's quite a different performance in different corners of the market. So we're just really focused on our strategy, on our users, on our genres, but also maybe thinking of other genres as well. We have some of those ideas in the pipeline. And I'm just really committed to... um, being very optimal financially, fiscally in terms of decision-making and, you know, keep going through game ideas, keep going through games, keep coming up with great game ideas. Um, I mean, what else, what else can you do in this market? Um,

You certainly have brought your costs a lot lower than I think people anticipated already in this quarter. Is this a continuous trend going forward or is it kind of low because it's a Q1 or how do you see the year progressing on your cost side?

Yeah, no, I think in terms of costs in Q1, this should be the new normal. We went through the reductions already. at the end of last year. So with Q1, we have the full effect. But the work on integrating AI into our processes is ongoing. We have certain estimates on how much we can save from using AI through the end of the year. Those are some interesting numbers. I think we can also be more focused, to be honest. And... so maybe there is maybe there is an opportunity to, um, to be even more optimal. I mean, if you think about it, we have 830 or 840 people. That's still a lot for the company of this size. Um, if you compare us to other companies of this size, they usually have fewer, uh, employees. So we know, we know why we have so many, but maybe there's, there's opportunity to do things more efficiently. Um, and, um, Yeah, I think we'll continue adjusting and we'll continue to have strong cost discipline, right? Because we have to get through this. We have to stabilize the revenue and we have to release new games that will make a difference. And we'll have to make sure we get there and we want to be profitable, cashflow positive. And I would say very conservatively, fiscally managed through this process.

So thanks a lot. Thanks a lot. Good luck going forward. Thank you, Rasmus.

Thank you.

There's a question from Ule, which is how many employees do you have right now? And I think I just answered it. We have, I believe, 840 or so at the end of Q1. There's another question. Are Hidden Frontier and Quantum Secrets, which seem to be the subject of soft launch in the UK, candidates for a global launch? Yeah, well, every game that we soft launch is a candidate for a global launch. But these are two of the recent games we have soft launched. And as such, they are candidates for a global launch. Yes.

All right. If you want to ask a question, either please raise your hand or type it in the Q&A box. We'll give it a few seconds to see if someone else has anything to raise. Seems like that's a no. All right. A lot of final remarks.

Well, thank you everyone for participating in the call. Thank you for joining us. Thank you for following G5. Have a good day.