G5 Entertainment AB (publ)

Morning, everyone, and welcome to the Q1 26 earnings call for G5. Whilst we're waiting for people to log in, I just remind everyone that you will be in listen and view only mode during the presentation. And then... After the presentation, you can ask questions by raising your hand and we can allow you to speak and ask your questions verbally. You can also during the presentation post questions in the Q&A box and we will answer those in the Q&A section in the end as well. Yeah, with that said, I will hand over to Vlad Suglov, our CEO.

Good morning, everyone. Welcome to our quarterly call. And let's start with addressing the change that you have seen in the report and that we informed you about in the previous quarterly report. We have from the first quarter started to report in USD currency. Previously, we reported in Swedish Krona, obviously. As you know, we are primarily a USD operation with more than 60% of our revenue coming from the US and the majority of the costs are being eliminated in the US as well. We believe that this change will provide a better understanding of our performance over time and will allow us to comment on the underlying performance of the business without using a large number of comparison numbers in different currencies. We understand that this might take some effort to get used to for some investors, but on the other hand, this better represents the business and arguably also makes it easier to understand for a wider audience of investors worldwide. And the second thing that I'd like to address before we dive into the numbers is the press release that we issued this morning. As outlined in that press release, we have stated that what we call a right sizing is going to happen, a program to reduce the staff to approximately 635 employees, more in line with the current size of the operations. It was a difficult but necessary decision for the long-term financial health and focus of the company. We expect that the program will create savings of about USD 6.2 million over the following 12 months when it is finalized. And it is important to keep in mind that such savings will primarily offset the revenue decline as well as an increase in UA investments that we want to have. Now, let's review the performance in the quarter. Revenue was 21.7 million in USD. a decrease of 11% year-over-year and 8% sequentially, or minus 5.5% sequentially adjusted for the number of days in the quarter. We saw a sequential decline across all three main pillars of revenue, Sherlock, Hidden City, and Jewels, Family of Games. This was largely driven by being partly priced out of the highly competitive EUA market during the high season from around mid-October to mid-January, when costs per install, also known as CPI, spiked. At the same time, we continued to see promising signs in the third-party publishing that started to gain momentum in the quarter, both in terms of revenue, the number of games published, and also the number of new games being signed. On the topic of the G5 store, we have reached a new all-time high gross margin of 72.7%, up from 69.7% last year, thanks to the positive development of our direct-to-consumer channel, as well as our webshop for the players on mobile devices. Monthly average gross revenue per paying user hit a new record of 76 USD, a 16% year-over-year increase, reflecting the high quality of our loyal audience. UA was 19% of gross revenue, up from 15% a year ago. We have an ambition to increase UA spend to support our games, specifically outside of the high season in October-January. At the end of the quarter, our cash positions stood at a strong 26.6 million USD up from the fourth quarter, thanks to positive working capital fluctuations. We remain debt-free and continue to have a strong balance sheet, which gives us strategic flexibility. Now let's move on to the next slide, please. Let's talk a bit more about the G5 store and our D2C strategy. The G5 store remains our standout success story and the primary engine of our margin expansion. The G5 store is now our largest source of net revenue if broken down by distribution channel, surpassing both iOS and Google Play. The low single digit processing fees continue to be a key driver for our margin performance, given that third-party app stores typically charge between 12 and 30%. This cost efficiency directly contributes to our improved profitability and the expansion of our gross margin. While third-party mobile store sales declined for G5, G5 store grew 1.3% sequentially in the quarter and 19% year over year. It now accounts for 22.6% of total group revenue. And if we look at net revenue, it's over 25% of that, which is net revenues after the commissions. We have also doubled the share of payments processed from the players on mobile devices directly compared to previous quarter. Such revenue percentage reaching 11% in the first quarter, up from 5.4%. in Q4, and this further reduces our platform fee dependency. We are expanding G5 Store as a distribution platform for third party games. During and after the quarter, we have launched five more games and have signed at least four more games during the quarter. and more games are in the negotiation. So we have really, at this point, a pipeline of games already being released, third-party games already being released in G5 Store, and the pipeline of games being signed up and in preparations for new game releases on G5 Store. Revenue from third party games is already growing steadily and we are on track to make this a significant fourth revenue pillar of revenue if the current trends continue. Let's move on to the next slide. Now let's look a bit more in detail on the development during the quarter. While Hidden City remained resilient down only 5% year over year and 5% sequentially, Sherlock unfortunately saw a 7% decline year over year and a 9% sequential decline. The performance of Jewels games remains a challenge with a 23% decline year over year. And we are implementing changes to address historical game design debt, as we said before, and we expect to make a definitive decision on the future of the Jewels games in the second quarter. As mentioned, our gross margin reached record high of 72.7%, primarily due to the continued growth of the G5 store and direct to consumer payment processing channels. Monthly average gross revenue per paying user reached a new all-time high of 76 USD, 16% year-over-year growth. This reflects the continued trend for the improvement of the underlying quality of the audience G5 store is a key factor, but it's generally higher paying players. Let's move on to the next slide, please. Let's now look at our operating profit for the quarter. Operating profit for the period came in at 0.9 million USD compared to exactly 1 million USD last year. This resulted in an EBIT margin of 4% compared to 4.1% last year. The lower EBIT was positively impacted by foreign exchange revaluations, adjusting for the revaluations. The EBIT margin would be minus 1.2% compared to 9.7% last year. And UA increased from 15% in the previous year to 19% in this quarter. The increased UA budget has a significant negative impact on the EBIT margin, the resulting EBIT margin. and is an important factor to stabilize the performance of our active games in the portfolio. During the quarter, the net capitalization impact on earnings was 0.3 USD, 0.3 million USD, sorry, compared to minus 0.3 million USD last year. Now let's talk about our cash position. We remain debt-free with a strong cash flow Ivan Medennikov – SRA22 Panellist – position of 26.6 million USD, providing flexibility to fund new game development and marketing from our operations and from this cash position that we have. Cash flow was positively impacted by movements in working capital amounting to 3.4 million USD. compared to 1.4 million USD a year ago. Capitalization impact on cashflow was minus 2.7 million USD compared to minus 2.2 million last year. Total cashflow during the first quarter was 3.8 million USD compared to 3.1 million USD last year. Now that's it with the numbers and let's talk about the thoughts for the rest of the year. As we move through the year, our focus is rather clear. First, it's completing the organizational changes to save around USD 6.2 million annually while maintaining product momentum. Continuing to sign and launch high-quality third-party titles on G5 Store to solidify the store as our fourth revenue pillar. Increasing UA investments throughout the year to turn around the top line trend for our main revenue pillars. And moving forward with our two new games in the pipeline towards potential global launch, hopefully before the end of the year or cancellation, depending on the results of the soft launch as it happens. And utilizing agile teams for continuous innovation. That's our new approach with creating smaller teams that come up with new innovative game ideas and test them much faster in the market. We remain committed to financial discipline and generating long-term shareholder returns through dividends and buybacks. I'd like to thank the whole G5 team for their resilience in these circumstances and our shareholders for their trust. This concludes our presentation and I'd like to open the call for questions.

Yes, and as I said, you can ask questions in the Q&A box, or you can raise your hand. We have two here. So I will start with Simon Jensen from ABG. If you unmute yourself, I think you're good to go.

All right, I hope that works. Thank you. And good morning, guys. Hope you can hear me. First of all, could you maybe expand a bit on how much of the savings that you expect to reinvest in higher UAE spending? So basically, what do you expect the sort of net effect to be on an annualized basis?

I can give you a general framework. We are trying to spend outside of October to January time the money that we should have spent during that period of time. So we're going to take the revenue, sorry, the UA levels that we had in the first quarter And we'll try to do more to compensate for underfunding our titles during the high season. So it's going to go up from there. So to give you more specifics, I would say the higher bracket of the previously indicated range between 17 and 22%. So the higher bracket of 22% would not be unreasonable. But then it depends on how i mean whether we're going to be able to deploy these amounts so um ideally we would go to uh the high the high bracket of that range in reality we'll see uh where it lands but we will be trying to to deploy more outside of the high season that's that's the idea all right and yeah Yeah, and so basically we are taking these cost cutting measures in a situation where we've already lost a little bit more revenue compared to Q4. So what we're trying to say is that we are doing this obviously to save money, but already on a lower revenue with the necessity to spend more in user acquisition Basically, we're saying it's probably not going to be all profits. This amount might not be essentially an additional profit margin.

Yeah, I understand. But should we think that when you say that you hope to be at the high end, that depends on on the UAE range, it depends on new games coming out, or can you also be on the high end?

Yeah, I'm talking only about the existing games. So we would have to go higher from where we are. And then in case we actually start globally launching new games, then obviously, it's going to be a change, a fundamental change, we'll probably say something about it, like, send down the press release and say, Hey, there's this new game we just launched that's really growing, so we're going to spend even more money on user acquisition. I'm saying we're going to have to go to the higher end of that bracket just to try and stabilize the existing portfolio.

All right. It also sounded like in the press release this morning that you were open to potentially more rightsizing in the future, depending on outcomes of certain things. If that's a correct understanding, how and when could that be determined by you, you think?

Yeah. So I tried to say it in Q2, we We aim to make a decision on Jewels of Rome and other Jewels games in terms of whether we want to continue to have a large team try to get the game back to the ability to grow, or we want to do what we call harvesting the game where the team on the game would be minimized to do the basic updates and content updates, but we will give up the plans to revamp the game, renew it, and try to rebuild it in order to get it back to growth. So right now, the team on these games is rather large. And in Q2, we aim to decide which way we're going to go with this game. And same applies to Sherlock. Well, the game is much more stable, even despite this little hiccup. I think fundamentally, Sherlock is in a much stronger position. I really hope that the decline that we've seen in Q1 is temporary, and we're going to get back to higher levels through the end of the year. But also, if that doesn't happen, then we will start questioning whether we have such a large team on Sherlock. And when it comes to two new games that we have, the same thing. As we progress, As we go forward through the stages of the soft launch, we will make the decision to either release the game or if we make a decision to cancel it, then maybe we don't need this many people to work on this particular game. And then the question is, how many new games do we want to work on? at the same time. And all these decisions are in front of us, and they are an opportunity to further optimize the team for the size of the operations, is what I'm saying. But we still want to continue making new games, obviously. And we'll just need to find a way to do it you know, in a smarter way with more compact teams, maybe fewer attempts at the time, or maybe like in our, in this other teams that we're building, whether it's those micro teams that are pursuing certain opportunity for a limited amount of time and then switching off to another idea. So we'll have to reimagine potentially how we think about developing new games. And that all creates opportunities to further optimize the stuff. I mean, we still have quite a lot of people, not to mention the ongoing automation with AI. So that's what I was trying to say.

Yeah. All right. You mentioned AI there as well. Is there a case of efficiency issues? gains you have made also before here that you you think you have better resources to produce or is this mainly you know taking away teams from games that aren't performing well it's it's it's both like for example we wouldn't be able to write the ESG report without the AI this year and

But jokes aside, it's both. It's both not having to have as many people to produce the same amount of content, but it's also an ability to iterate faster and in the end have higher quality of work. So, I mean, examples would be numerous, but especially with the advancements this year, I think it is a real opportunity for us to continue rethinking how we approach developing new games and integrating more of these tools.

All right. A final one from me on G5 Store and the third-party releases. Can you share a bit more on how the economics of that works. And, you know, it sounds like you are putting some marketing efforts in there as well. Like if there's any kind of positive net contribution from that yet, or if you have some revenue, but also some costs associated to it.

We, we have, I would say limited costs associated with it. We do invest in marketing. but we invest to a certain point. So from the very beginning, it's already profitable, essentially. The dynamic is good. It's all incremental value. We analyze how the audience behaves and we like what we see. The audience appreciates new games, the ability to play these new games. The developers see that our audience is really high quality audience. but then we're also able to acquire users from outside into these games. And this has all the signs of a very healthy ecosystem that we can build out here with more game releases. So we are rather satisfied with how it began. We're not talking about growth rates because they're kind of meaningless at this point, because we just launched the first couple of games late in the fourth quarter. But maybe quarter two from now, when we understand where this dynamic sort of lands, we're going to start communicating exactly how the growth looks like quarter to quarter. And with new games being released and more games being marketed, we expect that this will be quite a nice dynamic based on what we see right now.

All right. Thank you for that. That's all for me.

Thank you, Simon. Thank you, Simon. And then we have Hjalmar Arberg from Redeye. You can go ahead.

Thank you. Just a question on, I mean, you comment a bit here on the key franchises, Hidden City sounds like it's doing, I mean, it's so soft, but it seems like it's doing okay. Sherlock, you still have some hope to turn that around again. But can you give some update on Jewels, which I think you said you're trying to do some changes in these games in Q4. Any signs that that is working? Or is it more likely that these games will be more like harvest games in the future?

Yes. So you're right. Hidden City has actually been growing through the second half of last year as we were increasing marketing again and the game responded. Sheryl, we had these improvements that we did last year and that sort of fueled the increase in revenue through the end of the year. But then unfortunately we have this decline, which I think and I hope is temporary. Jewels of Rome has been on decline for a while. And at this point, we're not acquiring users in the game anymore. And to put it like we use this formula, like a game design that basically match three games in the market, the ones that make a lot of money, they sort of moved in a certain direction. And we have to decide whether or not we're going to try and chase them. And that would be quite a few changes to Jewels of Rome to sort of catch up with the trend in the market. And right now, we are working on a number of things that are designed to move Jewels of Rome towards that new game design. And this is a lengthy process, but it's split in stages. So we are getting close to completing stage one. and seeing the results of that, the preliminary results, whether the players are responding in the right way, whether the new players responding in the right way. And so based on that information, we'll be making the decision. And we haven't gotten to that point yet, but towards sometime during Q2, we'll have that information and we'll make a decision. It's hard to say. I really want the team to do their best to try their best. They know it's a difficult task, but I want them to stay motivated and try to do that because I know they love the game. But Sherlock is the most difficult case of these three. Oh, I'm sorry, not Sherlock, but Jewel's family of games is the most difficult case of all three. So that's the situation. We will find out soon enough what we decide.

All right. And regarding the cost savings here, I think you mentioned that the I mean, it doesn't impact the pipeline in the near term. But with the cost savings you're doing here, do you think it will be, I mean, longer term, you've talked about the one to two games globally per year? Will it be a lower level of this cost savings?

I hope not. I think of it as I think that we will find a way to continue trying to achieve the same thing. We would still want to try one or two new games a year. Maybe we will be even more selective. Maybe we will prioritize even more. But if we are, for a few years, trying to have several teams making new games all at once, and we keep receiving games that are not really scalable in the present market environment, I think the decision is to sort of slim down, slow down, and really think harder about what do we need to do in order to achieve that scalability. So I would say it will be probably like a narrower funnel of games, but aiming to have the same result out of this funnel. I hope it makes sense.

Understood. And then, I mean, if you look at the kind of, if you want to look, we're able to turn around growth from here. I mean, you know, have a pretty good pipeline of third-party games. Do you think that, I mean, what will be most important, would you say, to see this turnaround? Will it be the new third-party games or in-house games or a turnaround of existing games?

Yeah, well, I think it's all of that, right? Because we have still quite substantial revenue from existing games. So I think it's really important that we continue to work with Hidden City, hopefully continue finding ways to grow revenue there. it's important that we continue to work with Sherlock, figure out what happened and just go back to the levels, which we were able to have just a few months ago. And it's a very solid game with evergreen IP in it. Jewels, a bit more difficult case, like worst case here is that we will decide to harvest the game and it will be gradually declining from here on. It will be, doing it profitably, we will be essentially cashing out of the game, but we will sort of admit to ourselves that this is a declining revenue stream that we'll be gradually losing for many years, but it will be a declining one. It's still rather large revenue stream month to month. And then replacing that revenue that we In the worst case, we'll be losing. And if it stabilizes, then it's not a big problem then. But to replace that, we would need success with the G5 store third-party distribution. And I think we will have this success. We are having this success as we speak. But the dynamic of the growth of third-party distribution Um, you know, we have some optimistic expectations based on the beginning that we've had, uh, but we have to observe it for a couple more quarters to be more certain in what kind of dynamic we're going to have there. And is it going to be enough to turn around the top line? And then we, as I said, we have two new games. Um, one is actually going into scalability testing, uh, revel relatively soon. We are. Cautiously optimistic, cautiously because we've shut down many a game in recent years. But this one is really showing good promise in terms of the metrics, in terms of early metrics at least. And it's very different from the games that we were making before. So we'll see soon enough. In a couple of months, we'll have much better understanding of the potential of that game. And obviously, a new game is always a potential. always has a potential to change the situation. And then the other game that we have, the other new game that we have, which also looks pretty good, that's probably going to happen more in Q3 when we will come to understanding whether it's good enough or not to be globally launched. And then we have a couple more strategic initiatives that we will be testing around Q2, Q3. It's a little bit too early to talk about that, but we have a couple of more ideas on what other things we can do to sort of revive growth in the company. And it's a combination of all these things, and not to mention the continued work on direct-to-consumer channels, which saves us a ton of money. So the combination of all these things hopefully produces the turnaround in the top line, except it's hard to say when exactly. When we have an idea of when this can happen, we'll probably share it

Right. Interesting. And also, I think you mentioned that you saw some indication that the E5 store can result in roughly 50% of the revenue that the mobile game has in other stores. Does that mean that if you find a game that has $10 million of revenue per year in Apple store, you see that it could do $1.5 million in E5 store? Is that the way to understand that metric? Yeah.

Yes, that's exactly the way to understand it. And we've started with games that are smaller, but we are seeing that 15% is very realistic to generate on G5 Store from their mobile sales. And we can certainly deliver that to the developers. And that's why we see that developers are interested in trying putting their games on G5 Store. The only limitation to that would be that if, as you say, the game is making $10 million, then it will probably take us a few months to get to 15%. And so it is kind of in relation to the size of G5 Store, right? So we're currently not trying, essentially, we're not even trying to get $10 million games into G5 Store. We're thinking of kind of smaller games because it makes more sense. But I hope that as we show positive results with the current caliber of games, we will switch to larger ones. And it's already happening. We are signing up games that are much larger than the ones we have started with. And so we will continue these experiments. with how much incremental revenue we can generate for these games. But for the caliber of games that we are signing up now, we are quite sure that we can deliver 15%. But we'll be testing it from game to game.

Okay, understood. And then just a final one. I mean, you commented that, of course, that, I mean, you have a decline in revenue, you do some cost savings, but you want to add the UA spend as well. And you said that profit margin will be challenging. I mean, can you add some color on that? Do you still think you'll be able to have a positive EBIT and the positive cashflow? If you could add some color, that would be helpful.

Yeah, well, we certainly don't want to be... cashflow negative or unprofitable, unless we are in a situation where we have a new game that performs so well that we just decide to go all in on it for a couple of quarters. So you can certainly believe that we will do everything necessary to continue to be not unprofitable month to month on average. But we feel that I mean, our models are telling us that we have to spend more on user acquisition if we want to stabilize the games. And the other challenge is that while we see that, for example, investing in more user acquisition on G5 store makes a lot of sense on mobile platforms, for example, on iOS, sometimes it doesn't make a lot of sense. So underneath the hood for one particular game, there's also a continued sort of transfer of revenue, so to speak, happening, or rather the change of the mix of revenue happening where mobile platforms continue to shrink and personal computers continue to go up because fundamentally it's more profitable to acquire on personal computer platforms. And this situation is very specific to our specific games because these are games of specific genre and they're quite all games as well. But overall, if you look at the overall models that we're looking at, we have to be spending more. And if you compare even ours to some peers of ours, you can see that companies that are able to maintain their revenue tend to spend more in user acquisition than we do. And it's another confirmation that we have to be spending more. So that's our logic. We think we can still be profitable. at these levels of spending. But we have to, as we said, we're going to be taking these decisions about further optimizing the company through the rest of the year, depending on the outcome of our current efforts with the new games with Jewels of Rome and even with Sherlock.

OK, I got it. Thank you very much.

Thank you, Kilmar.

Thank you. And then we have Erik Larsson from SCB. You're good to go.

There we go. Maybe you can hear me now.

Now we can. Okay.

Sorry about that. Morning. I just have one follow-up question here on the most recent one. I mean, the current backdrop a bit... call it the turnaround scenario. How do you think about capital allocation? You have a very strong balance sheet. Are you more inclined to preserve cash or do you still see deploying cash? Would it be buybacks, et cetera? Just some reasoning there would be interesting to hear.

Yeah. Well, I mean, we do intend to continue buybacks. Otherwise, I view our current reserve as... as an important reserve in the face of a little bit of uncertainty. On one hand, we have all these interesting things happening with the third-party distribution in G5 Store. On the other hand, we have these issues with the declining revenue on older games, and we also have to fund new games that seem to be showing great signs of potential success. But obviously, track record in the last few years makes us only cautiously optimistic about that. And the most important thing for which I think it is very important to have a reserve is that if you look at what's happening with new companies when they stumble upon a successful game that they need to scale, well, they really need money to do it. That's the reality of today's market. And I think our reserve is our chance that if we have a really successful and scalable game, and really it doesn't even matter if it's in third-party distribution in G5 store or it's an original game coming out of G5 and we have to scale it in the market, we have to have that dry powder in order to be able to fund that success to where it can be. And that is the... That is very, very important in my view. So we'll keep this dry powder and a large part of it we're going to just keep and we'll make sure we add to it a little bit every now and then. But we will also think about buybacks because that's what we do. And we will obviously continue paying the dividend. That's the plan, basically.

Okay. Thank you very much.

Thank you, Erik.

Thank you, Erik. We have no questions in the Q&A box, and I can't see that anyone has raised their hand either. So nothing seems to happen there. Well, then Vlad, final remarks?

Well, thank you for your attention. to our quarterly results and I hope you have a good day and yeah, this concludes our call. Thank you everyone.