G5 Entertainment AB (publ)

while we wait for the attendee list to fill up and people connecting, I'll give you the basics of it. So we'll start out with the presentation from Vlad. Your mics will be disabled, so you can't speak during that period of time. And then we'll go into a Q&A session where you can either raise your hand and you can ask your questions verbally. Or you can also type the questions in the Q&A box and we'll answer those at the end of the call as well. And with that said, I think we can start. And I will hand over to our CEO, Vlad Suglovov.

Hello, everyone. Thank you for joining our call today or this morning. I don't have a lot of voice today, so I apologize in advance if it's painful to listen, but I'll try to do my best. So we'll start with a brief overview of this morning's report. Revenue in the quarter was 200 million Swedish kronor, which was 12% lower than last year in Swedish kronor and 13% lower in USD terms. Year-over-year, our actively managed portfolio of games fell about 10% in USD terms, and sequentially it showed a slight decrease of 5% in USD terms. The Juggles family of games now makes up 31% of total net revenue. ShareLook is also showing strong performance and accounts for 27% of total net revenue. And together with Juggles family of games, it continues to be a core of our game portfolio. Monthly average gross revenue per paying user was a new record of 65.4 USD, which was up 3% compared to previous year. User acquisition in the quarter was 15% of revenue, down from 17% last year and slightly lower than our communicated long-term range. As I mentioned in the report, we intend to go back to our indicated range of 17% to 22% in the coming quarters. G5 Store continues to show strong growth and now makes up 21% of our revenue versus 13% a year ago. And thanks to continued success of G5 Store, our gross margin reached record 69.8%. And that's up from 68.1% last year. We had a strong start of the year. Our cash position reached a record 295 million SEC. That's up from 256 million SEC last year. We remain debt-free and continue to have strong, solid cash flow, which is a major point of pride for us. During the quarter, we had also a one-time expense on legal causes of 1.3 million SEC. which is related to the M&A deal, which didn't go through that we mentioned in the previous report. And this negatively affected our profitability. EPS for the quarter was 1.53 SEC, a decrease from 4.76 last year. And the decline is primarily due to the impact of effects related to the weakening of USDT. Now let's move on to the next slide and talk more about G5 Store, which has shown remarkable growth. So G5 Store is now our third largest source of revenue and accounts, as I mentioned, for 21% of total net revenue, up from 13.5% last year, and it represents a 39% year-over-year growth in SEC and 35% in USD. We also saw sequential growth of 5% in USD quarter-to-quarter, which demonstrates the continued momentum of the platform. As you all know, one of the key advantages of G5 Store is its lower processing fees, which are in the low single digits. This is in stark contrast to the 12% to 30% fees typically charged by third-party application stores. This cost efficiency directly contributes to our improved profitability. In addition to the G5 store itself, we've also seen solid growth in our webshop for making payments, which now accounts for 3% of total net revenue from mobile platforms. What this webshop does is it allows players from mobile platforms where the store fees are very high to make payments through their browser, which effectively bypasses the store fee. And recent legal developments make us more optimistic about how high this percentage can go in the coming years. So this is another source of increase in our profitability going forward. Looking at G5 Store as a distribution channel, we see a significant opportunity to scale its revenue. By now, the G5 Store has gotten so big that successful games can make very substantial revenue from it compared to their sales on mobile platforms. So this is when it becomes interesting to other developers because there's an opportunity to make additional revenue by distributing their mobile games on G5 Store. And so by licensing and distributing third-party games that are or were successful on mobile platforms, we can bring much desired extra revenue to mobile game developers while further expanding our reach and scale of G5 Store operations. We have a number of willing developers who would like to try, and we aim to release the first third party game on G5 Store before the end of the year. And as we continue to diversify our revenue streams, the growing contribution from G5 Store and its web shop will not only eventually improve our top line, but also help boost our gross margins going forward. So let's move on to the next slide and let's look in a bit more detail on the quarter leading up to a record gross margin. Own games accounted for over 71% of net revenue and active own games accounted for 61% of total net revenue, up from 59% last year, reflecting strong performance from our in-house titles. To be noted is that Mahjong Journey was put into harvest mode during the first quarter and is therefore excluded from the numbers for the active games. Our gross margin reached a record 69.8%, up from 68.1% a year ago, primarily driven by the rapid growth of the G5 store. Monthly average gross revenue per paying user was 65.4 USD, a solid result in the new record compared to last year's figure of 63.5. Now let's look at the operating profit for the quarter. So the operating profit for the period came in at 10.7 million SEC compared to 39 million SEC last year, which resulted in the EBIT margin of only 4.1% down from last year's level. but this is mostly due to the one-off factors. So the biggest factor was exchange rate revaluations, specifically related to the SEC USD fluctuations, which amounted to minus 14.6 million SEC in this quarter, compared to plus 9.4 million SEC in the previous year. As we have said before, we are primarily a USD business, Most of the revenue comes from the United States. Most of the spending also happens in USD because it's connected to the user acquisition, which is nominated in USD. But we report in SEC. And being a USD operation means that we have the majority of our balance sheet in USD, which then needs to be revaluated to SEC upon reporting. Therefore, when the SEC USD rate moves fast, it causes these other operating income and expenses to And so if we adjust for the negative impact from other income and expenses and the one-time legal fee that we mentioned, our EBIT margin would actually have been 10.2%, which is slightly higher than last year's adjusted margin of 10%, showing that excluding these one-off factors, our underlying business remains strong and stable. At the same time, the net capitalization impact on earnings was minus 3.6 million SEC compared to minus 11 million SEC last year. Now let's turn to talk about our cash position. Capitalization impact on cash flow was minus 23.4 million SEC, slightly less than minus 25.7 million last year. The movement of working capital was 15 million SEC compared to 30 million SEC last year. Total cash flow for the period was 33 million SEC, down from 71 million last year. While cash flow was lower compared to the previous year period, we still generated solid positive cash flow. And at the end of the period, we had a record strong cash position, 295 million SEC, compared to 256 million SEC last year. So with that, let's start to wrap it up and with some final thoughts for 2025. So looking ahead, we continue to maintain healthy profitability and sustainable growth in important parts of our business. As demonstrated in the first quarter, we will continue to implement diligent cost control, continue strengthening our business model. During the quarter, we made 14 iterations on new games, of which one game, Twilight Land, is expected to launch globally later this year, which will help drive future growth. We've made strategic new hires to strengthen our capabilities in product development, business expansion, and product marketing. These hires are key to ensuring we stay on track with our long-term growth goals. Our focus on operational efficiencies remains a priority. We continue to make improvements in our development funnel and our game evolution processes with the aim of releasing one to two games globally per year. A key driver of our future growth is the rapid expansion of G5 Store. As we grow the G5 webshop and leverage scalable distribution opportunities in G5 Store, we expect a positive impact on both our top line and gross margin. In terms of user acquisition, we are taking a disciplined approach. We expect to return to the 17% to 22% range for UA as a percentage of revenue in the coming quarters, which will help us continue optimizing growth while maintaining profitability. Throughout all of this, we maintain strong financial discipline, generating cash flow, solid cash flow, and we are proud of our strong net cash position, which gives us the flexibility to execute on strategic initiatives. This concludes my presentation, and let's open the call for questions.

Yes. And as I said, you can either raise your hand to ask questions or you can type them in the Q&A box. We currently have none. So please go ahead. And I'll start here with Hjalmar Ahlberg from Red Eye. I think we can hear you now if you unmute yourself. Yes.

Okay, thank you. So yeah, that's the first question on, I mean, looking to Q4, I think you saw kind of a small kind of growth momentum, maybe. It looks like it slowed down a bit this quarter. I guess UA was a bit lower, but do you have any kind of elaborate kind of, if you see a slowdown compared to Q4 or anything you can add there?

Yeah. Yeah. Well, we certainly see a slowdown compared to Q4 in the revenue generation. We've certainly made improvements to the games in Q4 and that powered the fourth quarter, and we had some successful improvements that led to it. I don't think user acquisition has a lot to do with it because it's more of a delayed thing. It's more about, I think, the way that players behave, how they react to the features in our games. You know, we continue to deploy new features that improve the metrics of the games. And we still see that, for example, Sherlock, even in Q2, you know, the part of Q2 that we see in Q1, it has shown year-over-year growth in some of the months. So, if we look at the situation by game, we seem to see improvements in games where we focus the most, and we aim through that to achieve improvements in the game performance. and hopefully we can turn this around for existing games, at least for the actively managed portfolio. The harvest part, the discontinued games where we don't have active improvement going on, they will probably continue to fade away gradually, but we would like to at least stabilize the actively managed portfolio And like I said, with Sherlock, for example, in some months, we see an improvement of year-over-year dynamic compared to a year ago. It hasn't made its way through all the way to the quarterly results this quarter, unfortunately. Last quarter, it was noticeable. This quarter, not so much. But under the hood, these improvements are gradually happening.

And if you look at the kind of overall growth, I mean, from existing portfolio and potential new global launch, do you think that would be enough to kind of create overall growth in the coming years or in the coming one to two years? Of course, dependent on how the global launch of the new game is, I guess.

Exactly. It really depends how scalable the game is going to be. It will need to be quite a substantial success, I think, in order for just one game to turn it around. But on the other hand, if we are successful, I don't think there are reasons to believe we're not going to be successful with the continued improvement of G5 Store. If we can bring third-party titles into G5 store and maybe even increase the growth there. And if we have one game that is scalable in the market, I think the combination and plus the stabilization of revenue in our actively managed portfolio, I think all these things together can bring about that turnaround in the top line dynamic. So the question is how big they're going to be, right? And how much of a decline we have to offset with that. We'll see. But we are focused on exactly the things that can turn around the situation with the top line.

And a question on the external games. Will you have games that are in the same genre as you have? Or do you think that we compete with your own games? Or how do you view that?

I think they will complement rather than compete with our games. We've been a publisher of a large portfolio of games over many years. And what we've seen is that if you have a better choice of games, then your portfolio as a publisher benefits. All of these games are benefiting from having more games and more choice for the player. And that's because you have only a small number of players actually paying in the game. And then the rest of these players, they're still looking for the game that they would engage so much that they would actually monetize. And so what we saw is that if you are smart about cross-selling, cross-promoting games and having more games in your portfolio actually improves revenue that you can derive from one user. And then you're talking not about the a player LTV, but more of a portfolio LTV, which is higher. So we're not afraid that we're going to cannibalize it. We can be smart about cross-selling and not disturb the players who are really engaged with one game and paying their way through. So we could manage it the same way we manage a large portfolio of games in our portfolio currently. And the idea is that we could bring in the games that appeal to the same demographic that we have. And that will benefit all the games in the portfolio. And we can share the revenue with the developer. And that will still be enough for both of us because we also avoid... the store fee, which is a huge chunk of the price that the players pay. And there's no store fee in G5 store. So essentially, it's a great deal for developers because their effective share of the price under this revenue share would be pretty similar to what they would have if they went through the store with 30% fee. So basically, I think We're also in the situation where a lot of developers are looking for additional revenue to make, because many games are kind of in a slightly declining dynamic, and everyone's looking for extra revenue to generate. And I think we are at the point where one game can generate a very substantial amount on G5 Store per month. And I think this is a key thing for developers to consider supporting another store. So we have a number of developers who are interested in it. The cost of doing so is not very high for them. And it's very interesting for us to try this based on our experience. This can really work.

Right, got it. And maybe a final question for me. I mean, you touched on it a bit, but the UA, what was, I mean, lower than normal this quarter? Any specific reason you can hide it there again? And why do you see it coming back to normal level in Q2?

Yeah, well, it does fluctuate, usually. And we try to keep it within a range. This quarter, unfortunately, it was slightly below. It had to do with... but the disruptions in some of the channels that we were using for user acquisition. And the plan is to bring these channels back, figure out what was not working, relaunch them. And from what I know, the efforts to relaunch them are underway. And with that, we should be able to get back to the normal user acquisition range. So that's, in essence, the situation.

Okay, thank you.

Thank you. Thank you, Hjalmar. And then we have Erik Larsson from SCB. Yes, there you go.

There we go. I think you can hear me now. We can. Great. Now, I just have a follow-up on this G5 webshop. If you could just briefly go through when you started this initiative, because my interpretation of... Your comment here is that it appears to approach some type of inflection point or you're more starting to push it yourselves. And then I'm also curious how you would go about finding partners to grow this. If it's you going outbound or you more receiving inbound interests, so to say.

Okay, so let me first start by separating two things. A G5 store has a game distribution channel. and G5 WebShop, which is a part of G5 Store, but it's a separate part. It's basically a payment interface, which can be accessed through the web. So leaving G5 Store, the distribution channel aside for a moment, The G5 web shop, what we use it for is to give the ability to the players who downloaded our game on mobile stores where store fees are 30%, Google or Apple stores. We give them a choice to not use Google's or Apple's payment system where we would have to give the platforms 30% of the price pay but to go into our web shop and to process their transaction there. It takes a few more clicks, but once they've stored their data, they can then make these payments way easier going forward. Not as easy as with the native checkout on Google or Apple, but absolutely safe, like on any e-commerce website. And this way, we don't have to share 30% with these platforms because obviously 30% is a crazy price to pay for simple payment processing. So if we can convince mobile players to go to our own web shop and spend money there, if we can let them know that this web shop exists, which Apple and Google like to prohibit just letting them know through the game, then we can have some of these players monetized through our webshop. So we are free to communicate to our players outside of games about this option, and we do. And so we launched these initiatives late last year, and during the first few months, we managed to monetize about 3% of all the mobile revenue that we're getting from these stores through this webshop. And I think we can continue to increase this percentage. This is basically about processing payments directly and processing payments directly, not only from players who play in G5 store, but also from players who play on Google or Apple. And if you follow the news, there was recently a decision in the US by the judge who said that Apple cannot prevent developers from linking to their own checkout. That's my understanding from the game or from the application. And so Some applications already went through the Apple review process with much more explicit mention, if not the link, of the fact that there exists an alternative payment processing that they're free to use. So we haven't done it yet. We're looking at what exactly happened legally. But it looks like we are allowed now to do this. So I think this will be a boost to the percentage of mobile revenue that we can process directly on Apple's platform. So this should also improve our profitability. Now back to the G5 store as a distribution platform. So how would we go about this? Well, we reached out to the developers that we know. to a limited number of these developers, which we know have games that perform or performed really well on mobile that were able to scale on mobile back in the day or even now. So the beauty of G5 Store is that the metrics of the players are substantially higher than the metrics of the players that we see in mobile stores. So if the game is scalable on mobile or was scalable on mobile, Based on our experience with our portfolio, there's a very good chance it will be scalable on G5 Store. So we are willing to license their games for distribution, not exclusively. I mean, exclusively for G5 Store, but not exclusively on the PC platform. and do marketing around acquiring their games and test this idea that games can be scalable. So this will be kind of a mix of distribution and marketing. But fundamentally, we try to make the terms and technical integration really easy for the developers so that it's not a burden on them. And so that it's no more difficult than making a game version for Steam platform, for example. And I think the advantage of G5 Store is that we have just the demographic for this type of casual games. And we'll see. It's a thesis. I mean, it worked with our games, certainly worked with our games. Our games that no longer perform well on mobile have a second life on G5 Store, and they seem to be scalable there. So by the same logic, if we distribute a high-quality mobile game that may be struggling now in the mobile ecosystem because of all these high store fees and the outbroken system of acquiring new users, And we can maybe still have success with scaling it on PC. It works for our games, might work for the games of other developers as well. So we're going to do a limited launch of this with some games of the studios that we know well and that are open to trying this with us. And if we get successful with the first few games, we'll probably go a bit more forward. try a bit massive approach and be more proactive in reaching out to other developers. And then we'll see, while we were publishing a lot of games from other developers, we didn't have to reach out that much. Developers were coming our way and suggesting their games. But there's many ways that we can do it. We can also just scan... the space of games. Just look at the analytics and see which games we would want to see on G5 Store that fit the demographic profile that we believe could be scalable then and reach out proactively and try to get developers to agree. But the situation right now is that pretty much every developer out there smaller and medium-sized, they're looking for extra revenue streams. So they are very responsive to our efforts in this regard. I hope this answers.

Yeah, yeah. Thank you very much for that clarification. I don't really have any more questions. It feels like this, especially on the payment side, it's a lot of things happening and several things you're doing now wasn't really possible a couple of years back. Oh, yeah. Much more difficult, at least. Thank you.

Thank you.

Great. Thanks, Eric. We have one question in the chat, which is about if we're already using AI and if we are, if we're able to evaluate the gains from that use.

So, yes, we are using AI. No, we are not able to evaluate games with AI.

Not games, games. Sorry, maybe I misspoke.

It was evaluate the games, not games. The games? Oh, evaluate the games from using AI. Yes. Well, we do have internal evaluation of the savings that we have achieved. And you can see over the years, over the last few years, our expenses on outsourcing went down dramatically. So a lot of the tasks, kind of repetitive artwork tasks that we used to outsource, we are now doing in-house with the use of AI. We've... You know, our localization work is more or less, is done by AI right now. And that was another big part of our outsourcing. So, and we continue to move on to more advanced usages of the AI. Where, let's put it this way, where we automate, we use AI in the game design tools. and just shorten the time that the game designers need to gather new scenes, new content for the games. There are some very interesting and impressive initiatives that I've seen internally. And so AI becomes, in my view, in the future, AI will become a part of the tool set around our technology and engine and around specific tools to design content for the games. So it's quite exciting. It does provide certain savings, which we internally see are real savings. And it's part of the reason we were able to reduce the headcount over the last few years and reduce our expenses quite substantially as well. It helps us protect our profitability, essentially.

All right, then we have no further questions in the Q&A box and no one has raised their hand. So I think that concludes the Q&A part of this presentation. So then I will just hand it back to you, Vlad, for final remarks.

Yeah, well, thank you for joining us this morning. Thank you for following G5. We appreciate it and have a good day.