G5 Entertainment AB (publ)

in the Q&A box that you have in Zoom, or you can raise your hand and ask your questions verbally. If you type in your questions during the call, we'll see them when we get to the Q&A session. So please do ahead of us getting there if you want to ask a question. I think the attendee list is done and everyone's connected. So with that, I will then hand over to our CEO, Vlad Suglubov.

Good morning, everyone, and welcome to our third quarter results call. And we obviously have also Stefan, our CFO with us today. And let's begin by giving you a brief overview of this morning's report. We are pleased with the quarter's overall performance. In USD, revenue increased 0.2% sequentially in comparison to Q2. It's been a while since it happened when we had sequential revenue growth. The change of the trend is attributed to product improvements that we made in Q1 and Q2 and the gradual expansion of user acquisition spend, which was made possible thanks to these improvements in our products, namely in Sherlock. And Sherlock was the highlight of the quarter, achieving 5.6% growth sequentially in USD terms. Year over year, over the last three quarters, it went from minus 7.3% in Q1 to minus 3.5% in Q2, and then to plus 7.9, almost 8% in Q3 in USD terms. So with the positive changes that we've made to the game in Q1 and Q2, we were able to increase profitable user acquisition spend and our new management and marketing helped bring energy to this process. And now the game seems to be on the trajectory for at least moderate growth. And the game accounts for about 29% of our net revenue. It's one of our three pillars of our revenue generation. So this is a welcome change that should help our top line dynamic. And if we look at the other two pillars of our portfolio and revenue generation, Jewel's family of games had a stable performance quarter to quarter, but it declined year over year. And Hidden City was down 5.2% sequentially in the quarter and down 14.1% year over year. So not as good performance as Sherlock, but again, we did the... the changes, successful changes on Sherlock. And so we were able to expand user acquisition there and the dynamic of the game has changed. And now we have to work on the other two pillars of our revenue generation. to try to achieve the same. So our actively managed portfolio games together increased 2.6 sequentially in USD terms. So this positive dynamic of Sherlock, which is quite strong, actually shines through a more mediocre performance of the rest of the portfolio. And now that we have made these improvements to Sherlock, we will, of course, turn our attention to Jules' family of games and Hidden City to try and use the lessons that we've learned on Sherlock to try and improve the dynamic of these two other games. And hopefully it will help us turn around the trend in our top line. In other news, monthly average gross revenue per paying user was at a new record of 70.8 USD. And Again, during the quarter, one of the tools that we used to turn around the performance of the top line is user acquisition. And we increased UA spend in the quarter to 21% compared to 19% in the previous quarter and also 19% a year ago in Q3. And if you look at how our user acquisition spend was evolving over the last few quarters, we kind of hit... A minimum outside of our or very close to the bottom bracket of the range we previously communicated. And from there, with the help of the changes and the new management and the marketing and adding new advertising channels, we started increasing the spend. And we went all the way up to 21%, which is very close to the upper bracket of the previously communicated range, 17% to 22%. And during the fourth quarter, we think that we will have to go outside of that range, but probably not higher than 25% of revenue. Most likely not higher than 25% of revenue. And so our goal is to continue this momentum and expand user acquisition to invest profitably in the growth of the portfolio revenue through growth. existing in new games, and primarily Sherlock, in order to turn around the top-line dynamic. The gross margin reached a record 71.2% in the quarter, up from 68.8% last year, thanks to the continued success of G5 Store. And we remain debt-free and continue to have strong, solid cash flow, and something we are very proud of. Now let's take a closer look at G5 Store, which continues to show remarkable growth. As you know, one of the key advantages of G5 Store is lower payment processing fees, which are in the low single digits. That's quite a contrast to the 12% to 30% fees typically charged by third-party application stores. The cost efficiency directly contributes to our improved profitability and the expansion of our gross margin. G5 Store is our third largest source of revenue. And during the quarter, it accounted for 24.7%, so almost a quarter of total net revenue of the company, up significantly from 17.1% last year. And, you know, it's a great milestone for us when we launched G5 store some five years ago, I don't think we really thought it will be responsible for the quarter of all revenue generation in the company. And yet here we are, and it continues to grow quite substantially. Gross revenue growth in USD terms was 30% year over year in G5 store and 6% sequentially. In addition to the G5 store, We've also seen steady growth in our web shop. And web shop is a module that allows our players on mobile platforms to pay directly to G5 through their browser, through our payment processing, which obviously dramatically lowers the payment processing fee because mobile application stores, they charge the highest processing fees. And during the quarter, the revenue flowing through WebShop accounted for 3% of total net revenue from mobile platforms, an improvement compared to 2.6% in Q2. And we believe and we are optimistic that this percentage can continue to increase in the coming quarter, boosting our gross margin further, in addition to the effect that we're getting from G5 Store. And last quarter, we mentioned that G5 Store will start to scale its revenue by licensing and distributing third-party games that were successful on mobile platforms. We have signed a few of these deals and we aim to release the first game from other developers on G5 Store before the end of the year. This will bring much desired incremental revenue to mobile game developers while further expanding the reach and scale of G5 Store operations. And now... G5 Store is 25% of our business. It is at a size where its strong continued growth may start positively affecting the overall top-line dynamic and help us with the plan to turn the situation over to growth, obviously. Now let's look in a bit more detail on the quarter leading up to a record gross margin. Owned games accounted for over 73% of net revenue, and active owned games accounted for 66% of total net revenue, up from 63% last year. Gross margin reached a record high of 71.2% up from 68.8% a year ago, primarily, as we discussed, due to the continued growth of G5 Store. And with some help from the G5 webshop, monthly average gross revenue per paying user reached a new all-time high of 70.8 USD. This is compared to the last year's figure of 64.9 USD. So this continued growth of this particular key metric reflects the continued trend for the improvement of the underlying quality of the audience. We are in a situation where a relatively small number of high paying users by paying players in key countries drives a substantial part of the revenue, while acquiring other types of players in other countries is not economically justified. And so the overall player numbers therefore decline. but as long as that gold cohort remains with us, as long as we can refill it with user acquisition and retain them for a long enough period of time, the fundamentals of the company will be healthy. So in the future, you may see a situation where There is actually growth in revenue, but the audience metrics are still trending down. That would not be something abnormal. And G5 Store is another factor which affects these numbers because generally in G5 Store, we have higher paying players compared to mobile and overall smaller player numbers than on mobile to generate the same amount of revenue. So as G5 Store continues to become larger and larger, part of our revenue, the overall user numbers shrink. But that, again, this really doesn't mean that there is anything wrong as long as we have our golden cohort of users and we know how to find them and we know how to retain them and we know how to monetize them. As you remember in free-to-play games, there's only a small number of people that actually play for the experience. So now let's look at the operating profit for the quarter on the next slide. And operating profit for the period came in at 12.6 million SEC compared to 22.9 million SEC last year. And this resulted in an EBIT margin of 5.5% down from last year. The lower EBIT was only marginally impacted by foreign exchange revaluations. More importantly, we have deployed more capital into user acquisition during the quarter, which increased, as I mentioned, two percentage points compared to both previous quarter and as well as compared to last year. And this obviously had a negative impact on EBIT. However, as mentioned before, the positive changes we've made to Sherlock have made it possible to expand profitable user acquisition from lower levels and turn around the game's revenue performance. The long-term vision here is that as long as we can continue to acquire users profitably and increase the acquisition of users profitably, it does make sense for us, obviously, to do that. And we will grow back gradually to a higher profitability through that, through increasing our top line, but also with the trends in the G5 store and G5 web shop, we'll also see in the future the expansion of the gross margin. It's been happening very reliably over the quarters, which will also help us restore profitability eventually once we have fixed the top line trend situation. During the quarter, the net capitalization impact on earnings was 0.6 million SEC compared to minus 5.4 million SEC last year. Now let's turn to talk about our cash position. Capitalization impact on cash flow was minus 23.2 million SEC, less than 25.5 million SEC last year. The movement of working capital was negative 1.7 million SEC compared to positive 27.2 million SEC last year. And total cash flow during the third quarter was 10.4 million SEC, down from 53.3 million SEC last year. Total cash at the end of the period stood at a strong 247 million SEC, despite the buybacks of 8.4 million SEC that we made during the quarter. All right, let's move on to the final slide and discuss some final thoughts on the outlook. So we will continue to implement our core strategy of improving the metrics of our active games, of our existing revenue pillars, which will make expanding profitable UA possible in order to turn around the trend of the revenue of these games. pillar games, and through that, our portfolio. We also see positive momentum going into the seasonally strong Q4 and Q1, so hopefully we'll have some help from that. In Q4, because of this, we may go as high as 25% of UA reinvestment from gross revenue. the increase will help us optimize for growth while maintaining profitability. That's the aim. And as we've said before, we will notify the market when we venture out of the range of 17% to 22% of UAE to gross revenue, which is what we now plan on doing. And that's why we are communicating it clearly. During the quarter, We made 14 iterations on several games in our new game pipeline. Among notable developments, there was a discontinuation of one game after it failed to reach sufficient metrics, while another game passed early soft launch with promising metrics. This new game is moving forward to more advanced stages in the funnel, and we look forward to seeing further development of this concept in the next quarter. Twilight Land is now in the late-stage soft launch phase, and we have achieved very good early metrics and good midterm metrics in this game, but we need more work on the long-term metrics, and we need more observation of these long-term metrics and a few more tests and tests um at this stage of soft launch take a little bit more time because you have to wait for the players to get to the point where which you're trying to measure so we expect that over the next several months we will gradually increase user acquisition on twilight land while still doing some more tests and doing some iterations on the game um then And this increase in Twilight Land is another reason why we think we will go to a higher level of user acquisition expenses in the Q4. And through our recent initiative to expand the G5 Store with the distribution of third-party games on the platform, we have made agreements to bring third-party games to G5 Store. The teams are actively working on preparing their games for release on G5 Store. And the first release, as I mentioned, is set to happen before the end of the year. And as I mentioned, again, both the size of G5 store and its speed of expansion will continue to have a positive effect on our top line dynamic. And now the store is much bigger, so it will be much easier for this effect to shine through the overall revenue mix to the top line dynamic. The G5 store growth and also growth of the flow of payments from mobile users through G5 webshop will continue to help us boost our gross margin. And we will, of course, continue to focus on operational efficiencies in development and marketing, including continued integration of generative AI where it makes sense. And it actually makes sense. Tools are getting better. Throughout all of this, we maintain strong financial discipline. We continue to generate solid cash flow and maintain a strong net cash position, which gives us the flexibility to execute on strategic initiatives that will strengthen the foundation for future growth. I'd like to end the presentation by thanking you for following G5 and also thanking the whole G5 team for their outstanding efforts in delivering this quarter's result. This concludes our presentation, and let's open the call for questions, which I think we already have.

Yes, and I will just repeat, if you want to raise a question verbally, you raise your hand. We have two already. I will get back to that in a minute. You can also ask questions in the Q&A box that Ulla has also done already. We'll get back to that one as well. But I will start by inviting Simon Jönsson from ABG to ask his question. Simon, go ahead.