MAG Interactive AB (publ)

Welcome to the walkthrough of MAG's Q3 report. So here today to talk you through it is me, Daniel Hasselberg. I'm the CEO of MAG. And me, Magnus Wiklander, the CFO of MAG. And yeah, we're going to take a few minutes to just talk through what the highlights are of the report. And then, as usual, at the end, there's going to be an opportunity for a Q&A. And throughout the day, we'll also look at our Twitter feed and see if we can get any questions there. We're going to go through and answer everything as best we can. But let's start taking a look at the highlights of the report. So we're talking about March, April and May, which is our Q3. So we were seeing revenues coming in at a record level. So a year ago, as we noted in the report, we had a one-time revenue coming in at 14.7 million SEK, was a transfer bonus when we moved to a new ad mediation layer. But adjusted for that, we grew 60% and coming in at the highest Q3 revenue we've ever seen as a company.

Yeah, and we will see how higher profitability margins come back after a period with higher user acquisition levels. Good, so starting off with our audience KPIs, our DAO is coming in down from last year, but it's flat or stable on a sequential basis, which is important. We will have a look at that in the next page in more detail. And our ARP DAO is up by 22% on the back of user acquisition and both DAO and ARP DAO is strongly connected to our fewer but higher quality users coming in from the user acquisition activities. Notably, our in-app sales is up by 37% and affecting ARP DAO mostly. And UA is slightly down to 19 million. And again, we will have a look at the sequential effect here, which is important to understand where we're heading.

Yeah, let's check that out first in terms of the DAU. We see that it's basically been around 1.3 million daily active players for the last four quarters. So it looks like a pretty stable situation. Here we also map out the ARPDAU in the same picture. So you can basically see what is driving the revenue development of the business. It's the improvement we see in ARPDAU. also since there are effects like the Swedish Krona is going a bit up and down but ARPDAU we always measure that in US dollars so this kind of a more constant in a way so this is really showing the ARPDAU is going up across our portfolio and as you mentioned a lot of it's driven by user acquisition having these kind of hitting these high value players that have a bigger propensity to spend in the games But a stable DEU situation and improved ARPDAU. That's the short version of this slide.

And a closer look at our financial KPIs as always. We have a boost from user acquisition in both adjusted net sales and ARPDAU with sales up 16% and ARPDAU again up 22%. We also have a strong US dollar behind the net sales this quarter. And again, we have a strong connection to WordC where the user acquisition, which has mostly been focused on WordC in the last period, is driving up in-app sales and affecting both sales and ARPDAU. And contribution, as always defined by our net sales minus platform fees to Apple and Google and minus our user acquisition costs, is coming in at a historically high 57 million, leaving a strong EBIT and the cash generation behind. We're ending our quarter with 110 million SEK in cash, which is again good for future growth opportunities.

Yeah, and again, taking a sequential look here at the user acquisition. So this is if you follow us for the last few quarters, you know, it's been we're talking about kind of an open window for growth opportunities. And that's what you see here. We basically make investment decisions on a daily basis when it comes to user acquisition. We're looking at what do our prediction models say about the results of last day's investments? And if it looks good, we double down. If it looks bad, we need to back down. And that basically drives these volumes. And so we had a few quarters with really great opportunities to invest in user acquisition. Q3, that's slowed down a bit. So we're now more close to the levels we had like a year ago. And the good news, we see that in Q4, we started seeing it pick up a bit again. So hopefully we can kind of get this up to a higher volume again. But this is kind of a pattern we've seen throughout many years, like it opens up and it closes and it opens up and so on. So it's a big picture we need to look at. So we're going to take a look at that in a couple of minutes as well. But this is important to understand in terms of how the business changes from quarter to quarter. As we see in this picture, it has an instant effect. When we invest more in user acquisition, revenues respond, of course, but also the profit margins get a pressure downwards because you need to take all that cost immediately, even though we know the revenues are going to come back for multiple years. So if we look at both user acquisition and the profit margin in the same picture, you can see that it's a very, very strong correlation. So we had margins being around 20% EBITDA margin for several quarters. Then this growth window opened. We invested more in user acquisition. Margins went all the way down to 0% in Q1. And now we're back at 26%, but with a higher revenue base. So this is important to understand. I mean, I think we can also mention the Medium blog that you wrote a few weeks ago. So if you're really interested in understanding these dynamics, it's a good read. It's kind of long, but I think it's good. This dynamic is not complicated, but it's slightly counterintuitive. So I think it's worth kind of looking into to understand kind of why revenues and profitability move the way it does. Okay.

Yeah. And our product mix slide on the right hand side, we have our LiveOps games and our other catalog games. LiveOps, that's our higher revenue, long tail, flat and stable games with high profitability and run by relatively small and efficient team. And we're turning around around roughly 100 million sec per year on a stable basis from that part of the portfolio.

Yeah. And then on the left side, we basically have like that's where we expect future growth to come from. We have bigger teams. We invest in user acquisition more on those games. So in particular words, when it comes to user acquisition driven growth in the last year. So what we see here, if you compare to just the previous quarter, sequentially again, with the revenues are down a bit in the growth segment, and this is because we slow down user acquisition investments, and then you get this dynamic, like revenues will adjust down a bit. So that's what happened in that segment. Also a lot of interesting product development going on. So we mentioned that partly in the report as well with a new progression system that we're testing in WordC that looks really exciting. So we've run quite big A-B tests there and it looks really good. Also in Tile Mansion, we've seen some product development that strengthens retention, which is the most important thing for us in terms of building a good kind of long-term business. Also in the new games part, we now have two games that we kind of refer to as soft launch candidates internally. So these are games where the game is well defined. We have a team in place that will be able to build the soft launch version of the game and the early metrics look promising. So we're continuing the process here. So kind of slightly more advanced than we've talked about this previously. And we hope like in the next few months, we get it to a place where we can really see those metrics materialize that we hope for. So that's very exciting. And always a good reminder of like what's driving Mag's business. So these are our three engines for creating growth. So the first one is this building new games, trying to expand the portfolio and also look at kind of now with this strong cash position as well, looking at M&A opportunities combined with trying to develop new games.

Yeah, and fairly obvious after a period of higher spend, UA is a key growth factor for a company like MAG. So UA will continue to be part of that going forward.

And then of course the improvement of lifetime value across all the games that are already live, these kind of 1.3 million daily active players. Anything we can do to make their experience better and increase the propensity of them to kind of watch ads or spend money in the games and so on is hugely profitable because they're already here. So that's the biggest focus of the company. That's where we have the most development focus is to improve our live games. very exciting when we see kind of really big needle movers in those games. I also want to take the opportunity to look at kind of longer term view, especially since we had these sequential views of DAUs and user acquisition, and it gives a kind of Up and down movement between quarters is just part of how this business works if you're really data-driven in your kind of growth activities. But if you just expand, here we have 19 or 20 quarters, so a number of years, then you see more of a trend line. So quarters go a bit up and down. That's probably going to be the same thing in the future. But the long-term trend of us more than doubling the business the last few years, I think, is pretty clear in this picture. And we also have some mentions of the financial goals in the quarterly report. They haven't changed. We want to grow faster than the market. We want to show get to a place where we can grow fast and have a 20% EBIT margin. So we developed that discussion slightly more in today's report in terms of when we model the business, when can we see this 20% EBIT margin appear? So roughly 125 million per quarter in revenues, that's when we see the 20% margin become a reality. And it, of course, depends that we continue with the same kind of profitability profile on user acquisition and so on. That's how we model this. So we have a bit of growth to do. But if we can continue this four-year trend for a little while more, we can definitely see this become a pretty exciting reality. Okay, so wrapping it up, looking a bit into the future. So we are already four weeks into the next quarter. And as I mentioned, we have a bunch of interesting development going on in our game. So... The word progression system is really interesting. It's going to roll out now in the summer. And Quiz Dual is also adding a new progression system that's also coming live very shortly, as well as the most kind of appreciated event in the game called Question Streak is now being permanent and into a league system. So you can basically play this all the time and progress into different leagues and so on. We think this is going to be super appreciated by the players and we know that it also has a good effect on kind of product KPIs. So that's really exciting to see.

Yeah, and we continue to look forward to strong margins at the current run rates of business and UA going forward.

Yeah. And then finally, the new games, of course, I think both we internally and people externally are really interested in what's going on with new games. When can we see them go into soft launch? And that's, as we've seen with words in new quiz tool, when we get a new game out, it can have a really huge impact on multiple years into the future. So, of course, this is... This is really important to us, and we're very excited to see these games develop. So over the next few months, we'll learn much more about how strong are these products. We will see the metrics we need to go further and so on. Okie doke. So I think this kind of takes us to the end of the actual report. And we'll check for some questions now. And then also, as I mentioned throughout the day, answer more questions if there are any. So we're going to pull up on the computer here a few questions. Okay. So we have, first of all, a few questions, I think, best answered by you, Magnus.

Exactly. We can maybe pull off question one and two here in one. First, relating to Both are comment on the external cost being positively affected by rent discount for office rent and connected to it the leasing debt which is down year over year. So we wanted to just comment on the difference in other external costs and that it had one reason and we have a resigned lease for the office in Stockholm. And in the beginning of that lease contract, we have a discount that affects our running costs for a few months. So we have this quarter and we have one month in the next quarter being affected by that sort of discount. And it will show up again a little bit in the next quarter. We just wanted to make clear that that was the effect year over year.

So it's basically a negotiation we had end of last year before the renewal of this contract. Exactly.

And the leasing debt down from 43 to 31, that's basically right off this IFRS accounting rules, right off of the leasing connected to the office rent, as well as re-evaluation when we sign a new contract. So that's what that is. And you have a corresponding post also in that side of the balance sheet. Good. Third question. I'm sorry. Yeah, third, same questioner. How have you invested a large cash balance? What is a reasonable level of revenue? on this going forward, I guess, return. So the cash balance is in the bank, not invested per se. It's in Swedish kronor and US dollar with an interest on that as expected. So slightly higher on the US dollar and expected levels on the Swedish kronor part of it.

So this is something we can quantify or what's a reasonable return on this position? So it's a few percentage points.

It's a few. I mean, it follows the interest rates we have. So around 3% on the Swedish and 1 or 2% more on the US dollar part. So a few million a year.

Okay. At what point do you see growth return to the general mobile gaming market? Okay. So I think like a lot of the The shrinking of the mobile games market that you saw in 2022 was also related to the increase of the kind of COVID bump in 2020, 2021. So kind of a longer term adjustment, you see that it's a bit of returning to the mean, I think, but it's not growing as quickly as it did five, six years ago. So I'm not sure we're going to see those kind of growth numbers again, because it's been partly the distribution of smartphones across the world. It's also been kind of the maturing of e-commerce, like people's comfort with making purchases on mobile. That's going up, but like slower than the rollout of smartphones to the world during the last decade. We don't see ourselves as restricted at all by the market size, given that like the games market is like 150-200 billion dollars and the mobile games market is more than 100 billion. So it's more we want to grow in our segments of these casual gamers and it's much more about being efficient in user acquisitions with the kind of ad creatives and how we can bid and what's the lifetime value of our products compared to the other products that are being promoted to the audience. So I don't think that has a huge impact on us if the games market grows by two or 10%. it's an interesting question in general i guess but i i think it's think of the games market is much more mature now than five six years ago and it's not it's not a quickly growing market any time soon as i think would management be open to selling the company so that's a pretty big question i'm definitely not interested in selling a single share of the company at this price that's not a discussion that we're having we We really want to get to our financial goals with a 20% EBIT margin and grow into a radically bigger size as a company and hope that the market will recognize what we're doing. So that's where our focus is. How sustainable is a long-term value creation of MAG if MAUs and DUs keep declining at such pace? I think this is a really, really important question. Like every other report or so, we've addressed this in terms of Why are DU declining? So it's basically like when you invest in marketing, say you invest $1,000 and you get 1,000 new players or you invest $1,000 and get 100 new players, it's going to have a huge impact over time on your daily active users. But if those players generate a lifetime value of $50 or $1.5, it's still not going to impact the business overall. We've discussed how relevant DAUs are as a measure when the user acquisition climate is shifting so dramatically as it's done the last five years. I talked to someone else recently about this. It's basically saying that you're selling X number of Skodas every year and then all of a sudden you start selling Porsches instead. The number of cars is not really relevant when you have shifted to a different segment. And I think that's a fairly good metaphor for what's going on in the user acquisition market. You're going from one segment to a more premium segment. Then you're going to have fewer customers, but they also provide more value. So, yeah, I don't think like maybe if one of our games take off in a kind of a second tier market, so to speak, so where everything is lower priced, lower LTVs, but lower CPIs, you're going to see the DEUs go up quite dramatically. But we're only going to do that if we can see that that's a profitable way of growing the business. So DEUs as such is not a target. And there's no like I said, the only problem if you become too small is for a multiplayer game, if matchmaking starts kind of deteriorating because you don't have critical mass of players and we're way, way, way above those numbers. So it's this is not a concern to me, but I can see the optics are a bit weird when you see the use going down. But I'd say no need to worry about that. OK. You mentioned potential for acquisition in your report today. What kind of company game category would be a good fit for you? So this is something I think it's good to try to find new. If you look at kind of like in financial terms, you talk about M&A targets, but this is more finding partners to work with. So I think it's a lot about People who make games for this similar audience, you can have a good understanding of how good is this company at making games, how good are their products. We can have a good understanding, like benchmarking metrics and also finding people you want to work with for a long period of time, because you can do a lot of M&A that's not going to be great for you in a short while when you realize you don't work together very well. So we're kind of thoughtful here in terms of finding people we really want to work with, as well as games we feel we have a good understanding of. So I think fairly small, profitable studios making casual games. And we talk about that for practical reasons, probably within six time zones, west or east, so you can work together a few hours every day. But it's still a pretty broad lens we look through. There's a lot of studios that do casual games and a lot of really great founding teams around the world. Okay, how will you be able to reach your goal of 20% EBIT mark? I think this is a combination of things. It's doing user acquisition the way we do right now, having very strict requirements on profitability profiles. Again, going to the article you posted, you need to have a certain payback time to get to sustainable profitability. Then it's, of course, also kind of cost control. You can't grow your fixed costs at a high pace. I mean, you're never going to catch up. So I think what we see, I think this year compared to a year ago, our cost in terms of staff and so on is basically completely flat. But the business... The top line is 16% higher. So, like, we need to continue that trend to be efficient. And, I mean, a great thing with mobile games is that, like, if we have twice as many players playing, we don't need to have twice as many people being at the game. There's very weak correlation between that. So I think we have... people we need to build new games and we have a great kind of user acquisition team and good tools. So we don't need to grow the cost side a lot. So I think that's how we get there. Okay. Have layoffs ever been upon discussion to achieve more efficient and lean organization? No. So that's again like we've been building this organization very thoughtfully so we don't over hire to see maybe in the future something amazing is going to happen and then we get value from these people who work here. We only hire people when we do have a need for that kind of thing to be made in the company no matter what the function is. And the business has never been bigger than it is right now. And we have new games and developments. So we definitely have a good need for everyone who works here. So we'd not look to cut down. And I think, again, if you look to the four year graph that we've shown a few minutes ago, we're on a trajectory to do something really great here. So we don't have a problem to fix. We'd need to do more of what we've already been doing and continue this path. That's when we get to the 20% EBIT margin. Okay, what would speak against potential obstacles to reach 125 million second quarterly turnover in the future? Yeah, what do you say? I guess the UA climate is a huge part here. Could be, yeah.

But it goes back to what you said a minute ago. Again, we're going to continue to do what we do and we focus on our growth pillars that we have. deliver on one or more of those.

So I said obstacles is like the inability to invest in user acquisition would hold us back and that in turn is both how's competition developing but mainly what we can impact here as a company is that we need to continue continuously improve the games we have live so they are competitive in the market I think we're doing a great job there, but we need to continue to do that. Otherwise, we're getting in trouble. I also believe we need a new game out in the market to kind of build on top of the current portfolio to get to those 125 million SEC. So if we don't ship new games in the coming years, we're not going to get to 125 probably. So new games out, super important. That's why we invest so much time and effort and money in creating new games, because we need it to get to where we want to go. It's great to see you delivered good profitability this quarter. A good share of the growth comes from IAP, so in-purchases. Do you consider this a one-time effect or have you found a formula which can be replicated? That's the signal start of a strong trend of IAP versus advertising. I think in terms of in-app purchases, it's a combination of us becoming better and better at building games where people want to spend money because it's fun. So building a fun game where part of it gets even more fun when you spend money, I think that's something we continuously improve at. But as you mentioned, these kind of 37% growth of in-app purchases is tightly correlated with user acquisition. So again, why is DEU not growing or why is it declining? It's because user acquisition algorithms tend to favor people who spend money in games and that drives up in-app purchases. On the question, is this a long-term trend? It's a bit dependent on how the user acquisition networks operate. If they continue to be very focused on targeting payers, this trend, I guess, is likely to continue. There is another discussion out there that goes in waves in terms of how much will the Apple and Google tax decline over time. So, of course, they now take 30% of those in-app revenues. So we would really appreciate if that goes down to 20 or 15 or someone argued last week for five. It's like they don't have that much value to add nowadays compared to five, six years ago. So it's more of a... just you download games from that platform and I don't think it's reasonable to charge 30% anymore, but we'll see how that develops. Okay, we got a lot of questions this time. So I think we're running out of time for this stream, but we'll get back to everything we couldn't address right now on Twitter throughout the day. So thank you so much for watching and asking a lot of really good questions.

Yeah, thank you.