Modern Times Group MTG AB (publ)

Good afternoon everyone and welcome to the conference call to present MTG's results for the third quarter of 2022. The call is hosted by MTG's President and CEO Maria Redin and CFO Lasse Pilgaard. There will be an opportunity to ask questions after the end of the presentation. Please use the questionnaire feature in the video stream or follow the telephone operator instructions if you are dialing in by phone. I now hand the word over to our CEO Maria.

Thank you, Anton, and welcome everyone. Looking into Q3, we're very happy to see that MTG returned to organic growth in the second half of the year. Organic sales were up 4% year-over-year in Q3, and this is thanks to the continued focus in LiveOps in our franchises and efficient marketing, and this combined with our ongoing work on scaling new titles. Even though we're happy to deliver organic growth, our overall sales increase in Q3 was lower than what we initially expected in the beginning of the year. And this reflects the continued low visibility on the market, along with the wider economic uncertainty that we see around us. If you're looking at the growth expectations throughout this year, it's really come down as we gradually progressed. And most recently, in September, Sensatower revised the forecast for the fall year 2022 from plus 5% growth to a year-on-year decline of 2%. Well, of course, this isn't what we would have wanted. And our growth continues to demonstrate the quality of our games and our ability to take market share in the current market, which really again, highlights the strength of our portfolio and the people that we have within the group. Further in the quarter, with the strengthening of the dollar versus the Swedish kronor, we have benefited significantly from a positive current effect. This primarily because of the revaluation of our cash deposits, which are reported in krona but sit in our accounts in dollars. We delivered high profitability in the quarter with an adjusted EBITDA margin of 27%. This was a tangible increase from the levels we saw in Q2 and is driven by the underlying organic growth in our business, along with our strict focus on profitable marketing investments. Our balance sheet continues to be in a very strong position and of course it's boosted further by the realized and unrealized currency exchange in the quarter. And on back of this, the board yesterday announced a new 400 million krona share buyback program. The program is planned to run until the AGM next year and we will begin buying shares already tomorrow. We now enter the Q4, which is for the gaming industry the most important quarter for the year. We have an exciting pipeline of new content updates and in-game events ahead of us. Our plan is to continue to invest in marketing and to ramp up the investment levels if we see the potential to do so in an efficient way with a good return potential, which is the policy and a rigid approach that we've done throughout the year. If we then turn to the next level, I think it's fair to say that the market conditions has changed, but we are very proud and we feel that we delivered a solid quarter in a market with low visibility. Our performance sales were up 6% year-over-year in Q3 and reported sales up 31%, boosted on top of the reported growth by positive currency effects. Starting from August, all of our companies are now part of the organic growth revenues. The underlying performance was mainly driven in the quarter by IndieGames and Hutch returning to organic growth in Q3, as well as the continued high growth levels from PlaySimple. On an annualized basis, our performance revenues were up 9% year-over-year, driven primarily by the strong performance by PlaySimple and IndieKiwi, both acquired in 2021. And then when including the foreign exchange gains that we've had and looking at our reported sales, sales were up 65% year-over-year for the same period. Organic growth was up 4% year-over-year in the quarter, and we do expect to have grown our overall share in the declining market. If we then move to the next page and look deeper into our key franchises. At the Capital Markets Day, we introduced a new reporting structure, which we updated in June, and now report our franchise revenues on a quarterly basis. And when you look at the number you see on this slide, you should know that they're calculated in constant currencies and a pro forma basis in order to give you a fair picture on how we actually develop within our franchises. And if we then look at the different franchises, the word game continues to be our largest franchise after taking over the strategy and simulation genre during the first quarter of this year. Our revenues from this franchise grew significantly in the quarter and year over year compared to Q2 and is really driven by successful user acquisition investments in the quarter, as well as a lot of new features within the different games and anagrams in particular. The Stratian Simulation franchise is our most mature gaming property, and it continues to deliver steady performance. Forge of Empires, which is our largest individual title, launched several in-game events during the quarter, but growth was somewhat dampened by the structured decline on the browser gaming side. It is important to note, however, despite the longer-term dynamics of browser as a platform, this continues to be a preferred way of playing for many of our dedicated long-term players. And we do see a big value in the opportunity to have a cross-platform play for them. And because of this, we are also planning to launch a browser version for Rise of Culture now in the fourth quarter. Further in InnoGames, we also continue to invest in the scaling of Rise of Culture and Sunrise Village during the quarter. And even though some in-game events and updates didn't perform as expected towards the end of the quarter, the games overall progress well in the quarter. Q3 was also a good quarter for our racing franchise, and this can mainly be attributed to two things. First and foremost, a combination of successful and well received updates for the Formula One Clash and also top drives that drive further customer engagement and monetization. And on top of that, we also improved our marketing efficiency through the work that the marketing team at Hutch had done together with our central team within MTG. I will come to the Flow Platform later in this presentation, but it's really great to see the Flow Platform come to life at Hutch as they're adopting several of the cloud-based systems that we're now offering in our service on the cloud. Finally, on the franchises, the Tower Defense franchise, it continues to be one of our strongest and most recognized global IP. Franchises revenues were flat year over year and down slightly versus Q2, and this mainly because of a very successful steam sale last year in the same quarter. And with Steer, we're expecting to hold the same sale now in end of October. If you look at the Blue and CD6 players, they were also treated to significant content update during the quarter and on back of this Ninja Kiwi also raised the prices for the game to actually reflect the enhanced content and the richness of the game. If we then drill further down and looking at our games IP, our gaming portfolio today contains a very healthy mix of well-established and fast-growing games. While the vast majority of our revenues come today from our 50 plus live titles, we are committed to both launching more new games across our franchises over time, as well as scaling our current games to bring in players who are more engaged over the long term. We continued to invest in our five soft launch and full commercial launch IPs during the quarter, with Rise of Culture and Crossword Explorer being a full commercial launch and thus being the most significant growth drivers of our new games. We reported sequential growth for all our five new games in the quarter, but a small month-on-month decline in September in a market where we did have low visibility and we also been more cautiously driving new investments in marketing. But also a small part of the performance was also driven that we found a bug in one of the most recent updates in Rasa Culture, which the team now have addressed, but it gave a short-term decline in revenue. As to the other three games, Battles 2, Sunrise Village and Lost Survivors, the marketing has been scaled down and the team is rather focusing on improving the gameplay and the player experience in order to boost the game's key performance and monetization metrics. Positive is, in all three games we really enjoy strong retention data which is the most important fundamental to any new game. In addition to the games we're scaling, our students are working hard to make sure we have a healthy new games pipeline to enter the soft launches. And we do expect some exciting updates and launches to come in the next three to six months. And these include, for example, a browser version, as I just mentioned, of Rise of Culture, and that should come towards the end of this year. And Play Simple, who has already Crossword Explorer in commercial launch. They will also have up to three new titles moving into soft launch. And Concrete is also set to expand their NFT initiative by launching two new games in the Bitware universe, as well as Blood Vessels, which is examples of our early testings going into the NFT universe and seeing how that can over time play an important part in gaming. But that's not all. If we then extend the timeline, our studios also have some very exciting games in the pipeline. There are tides on the horizon from Hutch and Konged for both next year, and then in the key, we started several developments of games that will go live in 2024, which means that we have very healthy balance between games in live mode, early rows, and also in development. And on top of this, of course, a relentless focus on live ops and existing IPs and franchises continues. Turning on to the next page, I'm really happy to see the progress on our build up on our flow platform and operating model. In the environment that we're currently experiencing, having strong franchises that you can build upon is critical. And it also enables us to double down on live ops in games with established player bases. We are really focused on building a global village for game makers that shares a common belief on driving growth and also therefore show a shared common layer of capabilities which will help all our game makers to accelerate their growth and evolution. We call this common layer the Flow Platform, and I previously mentioned it talking about Hutch. And there are four key areas that we want to drive progress across our different gaming studios. And these are the BI and analytics, marketing and user acquisition, cross promotion and ad monetization. The Flow Platform itself was only announced in June this year, but I'm proud to report that we are really making significant progress. Our CMO, Christian Pern, who was appointed earlier this year, has been moving really fast and he already has a small team in place and now in the second quarter. And this team has been working very closely with the market team at Hutch, as I mentioned, to help the studio to accelerate the execution on its user acquisition initiatives. And the team has also been executed on the wider flow platform roadmap and has achieved several important tangible milestones for us. One of the most important part, which is the foundation for a lot of things that we want to do, is to launch a central business intelligence framework. And we have almost finished the onboarding of all our students onto that. And by having this, it really enables us to have a common approach to data, which over time will enable faster and more efficient resource allocation and decision making across a group. Our marketing efficiency tools that we developed also at InnoGames have now also been redeployed into the clouds and onboarding of our companies is also on progressed in this part. And I would say, even though we're doing great progress, this is still only the beginning for the platform, but we're seeing the clear benefits of having this common layer and we will continue to develop this initiative across all our four pillars as we progress going forward. We're then moving into looking into our MAU and the DAO and the diversification. As we talked about before, our acquisition of PlaySimple last year has really enabled us to achieve two things. The first one is to diversify our revenue mix. And the second one is to provide our gaming studios with access to world leading in-app advertising expertise. The more diverse that revenue makes is fantastic because it does provide us with increased resilience in the current uncertain market environment. And it also offers us opportunities to implement incremental revenue streams in our games, which we see now in the recent game launches for InnoGames as an example. And looking then in our revenue mix in the quarter, it has been relatively stable this year. We had 61% of the revenues from in-app purchases in the quarter compared to 28% from advertising and 11% from third-party platforms. If you then look at user developments, our monthly and daily active users have declined slightly from the second and first quarter this year, which to some extent is part of the normal seasonality pattern. Above and beyond this normal seasonality pattern, there are two other drivers that I just want to highlight. We did see in the beginning of the year a temporary boost in usage, primarily from Battles 2 and Rise of Cultures, which has some high promotions and early hype. And this has now been staggered down and normalized from the normal customers that we see on a long-term retention basis. And also when you take this combined with Kongate that has started to actually scale down and closing down some of the legacy games portfolio, meaning also that is negatively impacting our daily and monthly active users. So overall, while we're not happy to see the down decline outside the normal seasonality, the bigger part of the decline is actually representing lower value customers. But having said that, we are of course monitoring the overall install trend and paying customer conversion to make sure that we're adapting and seeing if there are any changes to the normal pattern of our customers in the market that we see around us. So with that said, I would like to hand over to Lasse who now will comment on our profitability, user acquisition and financial position.

Thank you, Maria. And as you can hear from Maria, the fairly strong commercial performance that we've had, both sequentially and year over year, has enabled us to deliver a strong quarter when it comes to adjusted EBITDA, in total 374 million SEC and a margin of 27%. That's approximately one percentage point higher than last quarter, which is enabled by a strong FX. but also keeping UA and other OPEX items fairly constant between the two quarters. If you look at then the growth rate in that adjusted EBITDA, it corresponds to a 10% year-over-year increase, so a little bit more than we've done on revenue. And on a sequential basis, it's 5%. As you can see here on the slide, we've also started to report on simple cash flow metric, which is adjusted EBITDA minus CAPEX. So the margin you have here, we believe this is a strong indicator of profitability in the group. And with 23% delivered in Q3, and as you can see on the previous quarters around the same level, we are demonstrating a very high degree of operational cash flow from the business. And that is even remaining at a 35% UA spend as percentage of our revenue. We believe that these results reflect a strong performance across the portfolio, where focus on profitability keeps being important in an environment with less visibility. As a good example, and we've discussed this before, Ninja Kiwi maintained a very high EBITDA margin again this quarter, and year-to-date they are now a little bit above 60% for the full year. commenting a bit on the right hand side of this slide on the differences between reported and adjusted dbda for the quarter there's two corrections or items that i would like to just call out the first one is the 29 million which is the non-recurrent bonus structure so as part of finalizing the full equity bridge and closing the the last items of the play simple transaction we did a correction of additional 10 million sec which is basically reflecting an under accrual of the bonus program Referring back to this liability of 200 million SEK that we took over as part of the acquisition. In the previous quarter, we had 15 million here. We also have about 15 million every quarter going forward for the year 2022, 2023 and 2024. That's the only real item we're not adjusting for when it comes to LTIP. We've also done a reversal of a capitalized expense in InnoGames. This is basically due to the fact that we chose to discontinue development of a fairly early game as it was not showing sufficient operational metrics to allow long-term scaling monetization. This is of course also in a combination with the other games and the strong portfolio that they have. So turning towards UA and deep diving a bit more on that, we were able to do another 35% of revenue. So in total, we landed at 499 million sec for the quarter, maintaining very high levels as we've done in the previous quarters as well for this year. And just to recap a bit, at the Capital Markets Day, we guided a long-term spend level between 39% and 42%, although with variations in the quarters, which is really what we're seeing now. We do expect to increase investment significantly into Q4 this year. However, given the low short-term visibility that do exist in the market, there's some uncertainty on whether we actually can reach that high level that we originally planned while maintaining the profitability requirement that we have. But I would say even with this uncertainty taken into account, we do in all scenarios expect that Q4 will be the strongest quarter when it comes to investments, also beating the levels that we saw in Q1. We have mentioned this a couple of times in terms of the visibility. So I think I just wanted to highlight a couple of more insights on what is actually the uncertainty that we're seeing in the market when it comes to UA and how we're navigating it. Because we do actually see relatively low CPMs right now. going into Q4 historically and normally Q4 is a very strong month and that means advertisement is more expensive to buy. That's a positive for revenue coming in through IAA but also of course making it more expensive to acquire new customers. We are not seeing that uptick yet, which of course is creating the same dynamic in our portfolio, some very interesting potential marketing opportunities that, coupled with new smartphone releases and also new game updates that we have, it potentially from that angle can look like a very interesting quarter when it comes to investments. And that's also why we have a plan to invest quite significantly in the quarter. But of course, the other side of the equation is looking at what's the lifetime value of the customers that we are getting in. And that's probably where the uncertainty is higher and where we are more, I would say, cautious and aware on what is happening day to day. We are always adjusting our models. So whatever marketing we are spending now is based on what we've observed in the market the last three to four months. But of course, we don't know what the future brings in terms of potential recession and how that further could hit the numbers. And that's, of course, why we are being even stricter on the profitability requirements to make sure that we have some buffer in the way that we spend our money. So I would say on top of this, Maria already mentioned the Flow Platform as an important tool, and especially when it comes to UA investments and capital allocations, it is really extremely important. It enables us to do effective allocation between the games, between the companies in the group. which is in this environment extremely important, but it also enables us to across the games look at trends that are changing so that we can quickly react to basically changes in patterns when it comes to monetization opportunities. So jumping to cash flow from operations, we again have had a really strong quarter when it comes to that. So cash flow from continued operations before taxes and changes in working capital accounted to 445 million sec for Q3 and now 1.132 billion sec year to date. The change in working capital in the quarter is mainly related to the one-off payment in Place Simple dating back to Q2, and hence you should not expect further impact from this going forward, given that Q3 was the last quarter that we saw revenue recognition from this bonus. Free cash flow before earn-out payments ended at 134 million SEK for the quarter and 500 million SEK year-to-date, reflecting a 53% cash conversion for the first nine months. Year-to-date, the group has used 317 million SEK to fund earn-out payment and hence delivered a free cash flow after earn-out payment of 253 million SEK. At the end of the period, we had 4.695 billion SEC in cash in MTG. And on top of that, we have 407 million SEC sitting in long-term bank deposits. So a total of 5.1 billion SEC. We're currently carrying no debt other than earn-out liability, which totals almost 2.6 billion SEC as per the end of the quarter. And as you know, we've included a table in the document where you can see this. Just one note on the earn out debt, because it has increased due to revaluation of the FX as majority of the liabilities are sitting in dollar or currencies highly correlated with dollar. This effect is approximately 138 million, so an increase of liabilities on that. That's something we do every quarter. But of course, this quarter, given the SEC to US dollar movement, it has been bigger. However, in the quarter, we further had a number of positive FX effects as the proceeds from the ESL divestment is sitting in US dollars in our bank accounts. So specifically, we saw on unrealized FX effects, 269 million SEC. And if you then net out the 138 on the earn out liabilities, you get to a 131 million positive contribution. On top of that, we also had a realized FX difference of 95 million sec, which is boosting the cash flow from operations further. So that's why if you compare the 445, well, we actually report in our report, you would get to a higher number. But here we are showing it without that swap. But of course, if you were to add that swap in, our cash conversion, or sorry, the FX difference in our cash conversion for the quarter would become 61%. And year to date, it would become 62%. so in totality for the quarter just to finalize on the fx effect from deposits if you look at it from a net net point of view we have basically increased our net cash position with 230 million sec and again i think one of the questions that could come is how much dollar versus sector we have and we are carrying majority of the cash position that i just mentioned is sitting in dollar the only thing that we've sold is to cover our share buyback program that was initiated communicated yesterday and to be initiated tomorrow. So given the strong cash position and the committed undrawn RCF of one billion SEC, we are in a really strong position to do further M&A and at the same time allow further distribution to shareholders as we communicated last night. And of course, we're really happy to see that. So I think with that, I'll give it back to you, Maria, to comment a bit on the outlook.