Modern Times Group MTG AB (publ)

Good afternoon everyone and welcome to the live stream and teleconference to present MTG's results for the fourth quarter and full year 2022. Thank you for joining our first ever live video stream for our results. The event is hosted by MTG's President and CEO Maria Redin and CFO Lasse Pilgaard. There will be an opportunity to ask questions after the presentation, and you will be able to use the questionnaire feature in the video stream or follow the operator's instructions if you are dialing in by phone. I will now hand the call over to our CEO, Maria Redin. Maria, over to you.

Thank you, Anton, and hello everyone, and thank you for joining us today to discuss our Q4 and fall year results. For us, 2022 was a transformative year in so many ways. The sale of ESL Gaming in April has enabled us to become a focused pure play mobile gaming group. We have a clear vision, strategy and one of the strongest portfolios in the industry out there. The sale allowed us to return over 4 billion krona to our shareholders, whilst also retaining a strong balance sheet that enabled us to do further M&A when we see the right opportunities. And when I look back for the year, I'm also proud to report that we finished the year by delivering on our outlook for 2022. MTG reported revenues within the range that we provided, and our performance sales were up by 5% for the full year. We also ended the year with a slightly higher profitability than we expected in our outlook. We had an adjusted EBITDA margin of 25%. Our growth highlights the importance of premium, high quality and evergreen IPs, and also a portfolio that covers both casual and mid-core segments across various popular genres and franchises. However, the mobile gaming industry is currently also facing its first ever global downturn. The trend that we saw in the market during the third quarter continued into the end of the year. The fourth quarter was marked by continued low visibility, and the data that we've seen indicates that the in-app purchase market was down nearly 10% year-over-year, both in the fourth quarter and for the full year. The weak market has affected some of our franchises more than others. Our analysis of the data from Sensor Tower indicates that the mid-core segment, which is the home of our strategy and simulation franchise, was particularly impacted. We also saw the weak environment offset some of the normal upswings that we historically have seen in the Q4. On the other hand, the market and the marketing environment for casual games overall seems to be much more positive. And if you look in the bigger picture, despite the challenging market, MTG outperformed the industry by a significant margin, both in the fourth quarter and for the full year 2022. So let's now look into the sales, and I want to give you some brief comments before we go deeper into our different franchises. We deliver 9% reported growth in Q4, and this is primarily due to strong positive currency effects. Our organic sales when adjusting for currency declined to 4% year-over-year in the quarter and it showed a 3% decline from the third quarter in constant currencies. However, we did see a sequential growth when we were adjusting for the ad platform incentive bonus that we had reported in the third quarter. So by now, it's clear that the market in the fourth quarter has been challenging. And as I mentioned, our market is expected to have declined by just under 10% year over year, both in Q4, but also for the full year. Further, the low visibility that we've been observing in Q2 and Q3 of last year continued. And we also saw the market in Q4 to be nearly flat sequentially. We reported 5% performer growth year over year in 2022. And this was primarily driven by Play Simple, Ninja Kiwi and Hutch. And all the three companies also reported growth in Q4. When we then look at things from a gaming franchise point of view, word game continues to be our largest contributor to our revenues. This partially reflected the fact that the marketing environment seemed to favor casual games, as well as the very active work that we are doing with the live ops and the continued evolution of our games. Franchise revenues grew by 5% year on year at constant currencies, and it was up 10% on an underlying basis from Q3. In reported number, word game revenues were down 5% from the third quarter, and this primarily reflected the platform incentive that PlaySimple received in Q3. Our main titles in the franchise, Word Trip and Word Jam, both grew by double digits sequentially, and this is thanks to ramp up in user acquisition spending and also the content updates I mentioned. And thanks to the increased levels of marketing, the franchise reached a new all-time high level of daily active users in December. The Anagram games continue to be the central drivers of growth for the franchise and revenues from both WordTrip and WordGem specifically. And I'm happy also when I look at it because both WordTrip and WordGem peaked at number one on the World Games chart in December on different points. When we then look at new games, we have also successfully continued to scale crossword, sort of crossword subgenre and crossword explorer specifically, and the game has grown over 80% in 2022. Based on the current performance, we believe that crossword explorer can be a major growth driver for the franchise in the future. We also took the first step towards a localized expansion of our daily theme crossword in the UK, focusing on the games community and the key players. Strategy and simulation, our second largest franchise, had a challenging time. As I mentioned, the mid-core segment that strategy and simulation is a part of faced significant headwinds in the quarter. We do see two main factors here. The first one is, of course, the broader consumer spending. And the second one is the changes that Apple made with IDFA, which do continue to restrict our ability to do effective marketing. We had a healthy pipeline of content updates and live ops planned in the quarter, but that has not been enough to mitigate the downward pressure and the rising CPI levels that we've been seeing. We also saw that some of the content that we released that were designed to improve retention and monetization did not perform in line with our expectations. However, while I think that we have a lot of things to improve, I think it's important to also remember that we do continue to see established players enjoy our strategy simulation games and spend time and money within our titles. However, the challenges as we see it now lies in onboarding new players. Despite the short-term performance issues, we do continue to believe in the quality of the games in this franchise. We did launch a browser version as in-season pass mechanics were added to the Ryzark culture, and this helped drive both revenue growth for the game and player engagement. But this was not enough to offset the revenue decline from the more mature titles. Going forward, we are of course fully focused to ensure that our strategy and simulation franchise return to growth. Our main priority right now is to drive installs, and then of course improve the retention of players, and we are looking actively at all parts of the player journey. We do know that we have a strong portfolio of franchise games, but we also have more work to do to turn this around. So, let's now move to our racing and our tower defence franchise. Both of them grew year over year in the quarter. When it comes to racing, both Formula 1 Clash and Top Drives had had a busy year with some major updates and also well-received game updates driving growth. Franchise revenues increased by 9% year over year at constant currencies, but we were also down 11% from the third quarter. When looking at the sequential decline, that primarily reflects the normal seasonal pattern that we do have in our Formula One Clash, as that is closely following the Formula One season. We continued to work with LiveOps during the quarter, and the two games that benefited from a strong Black Week sales were both Top Drives and Formula One Clash, and having also on top of that seasonal offers. If we look back, top drives have had a tough few quarters, but that turned the trend around now in the second half of the year on back of the improvements that the team has put in place. This together with major updates and changes to the game economy has clearly had a positive impact. Our tower defense franchise continued to showcase the incredible power of the Bloons IP and the passion that the player community has around the game. The franchise had another strong quarter and it benefited from the Steam sale along with a strong performance on Apple Arcade. In addition, the games in this franchise has historically relied on organic and community-driven growth and that continues to benefit the game in the current marketing environment. Bloons BTD6 received another major update in the quarter, and that was with a new boss and other content for the community, all being greatly appreciated. We are also very excited to announce that we're working on the future launch of Bloons TD6 to come on Netflix, and that will be a development that will update you gradually through the year. When they look at Kongigate, they continue to focus on its NFT gaming agenda, and they launched two new games in the quarter, and that was within the Bitverse franchise. The company also had several NFT drops in the quarter, and that generated nearly a million dollars in revenues, despite the negative sentiment around the NFTs and blockchain market that we do see around us. So looking forward then into 2023 and beyond, we feel that we have a very exciting pipeline of new games and updates that we look forward to bring to the market. If we're starting with, we're excited that Bloons TD6 will launch on Netflix. And as I said before, we will come back with you with more information as we have it and when the timing is right. Turning the eyes to Hutch, they are also getting closer to launching two new games. Both games draw on the studio's genre-leading expertise in racing and racing-thin games, and both games are also connected to major global racing IPs. Ninja Kiwi, on their hand, they're working on three new titles and we're hoping to introduce to you them back in 2024. So you'll have to wait a little bit longer to get some data on back on those games. They still have in Bloons Battle 2, which the team continue to work on and doing ongoing improvements. Right now, we are not investing in UA, but hopefully we'll come back to that later in this year. And then we're having InnoGames. They will continue to scale the two live games, Rise of Culture and Sunrise Village, and they do have an active pipeline of both content and updates for both games. We do still believe in the potential of those two games and the development pipeline, but I think it's fair to say that we're not happy with the sequential performance that we saw for Q4 in these games. And then last but not least, Cognitive is also working on a new game, and that game will draw upon a well-known global IP. This is a traditional game, so that is not within their NFT space, and we hope to be able to tell you more as well about that towards the end of this year. If we then look into our daily active users, our total number of daily active users grew by 1%, while monthly active users remain flat on a sequential basis. The performance reflected the growing number of players in our word games franchises, which just about offset the decline in our strategy and simulation franchise. Our average revenue per daily after users increased sequentially by around 1% in constant currencies. And this was primarily improved by the monetization from our tower defense game, as well as our word games and casual games portfolio. Forge of Empire, World Trip and World Jam continue to be our top three performing titles. And these games, if you take it together, represented 44% of our revenues in the quarter. And this can be compared then with 40% as it's set in Q3. The difference between Q3 and Q4 is primarily driven by the platform incentive that PlaySimple received in Q3. I will now hand over to our CFO Lasse who will then walk us through the profitability and the financial dynamics.

Thanks a lot, Marie. So if we turn our eyes to profitability first, we delivered 22% adjusted EBDA margin in the quarter, which took the full year to 25%. This means that we delivered profitability above the updated guidance that we provided in Q3 and basically landed above the 23% to 24% that we guided. Overall, we're happy to have delivered a strong margin in a year with a difficult market condition, as Marie has mentioned a couple of times. The high margin was achieved through a combination of two things primarily. One was that we had lower UA spend as a result of a continued diligent focus on returns where we chose to not scale investments in instance where we basically saw that the threshold for our return was not met. We also achieved this through a strong focus on cost in general. And of course, in a market that is developing as it is, we have also had to be more diligent to ensure that cost is where it should be. When we look at simple cash flow metric, our adjusted EBITDA less CAPEX, we landed at 17% as we maintained similar CAPEX levels as we had in previous quarters. We have, however, started to see slightly higher levels due to increased game development efforts in especially Hodge, as Maria mentioned, in InnoGames, and especially the live games, and in Kongregate on multiple new titles. Just looking at the bridge between EBDA and adjusted EBDA, the two main items that is worth mentioning this quarter was 9 million in M&A costs, which cost is related to multiple different smaller processes, as well as 16 million SEC, bonus in place symbol which stays back to the transaction that we had when we acquired them and basically this bonus will last until 2024 as I mentioned a couple of times. So until then it will be sitting on a liability on our balance sheet and be released after that as the bonus is being paid out. So looking more into UA, we managed to increase our UA investments in the quarter to 559 million sec, corresponding to 40% of revenue. PlaySimple in particular increased their marketing significantly and managed to scale their marketing efforts on the backside of new game launches especially. We had initially expected even higher spend for the quarter, but the challenging market environment for especially InnoGames meant that they chose not to scale their marketing to the planned level, we do continue to see the impact from IDFA, especially in the mid core part of our gaming portfolio, as it is more difficult to find that next download of the next paying players, given that we have less abilities to really target the advertisement versus what we had before. This in result drives higher CPI, so cost per install, and forces us to lower our marketing spend to basically protect the return on our marketing spend, also called the ROAS. So to mitigate this, we are working with the games to change our early game onboarding, the communication in the early part of the game. However, we haven't been fully successful in this yet to fully mitigate the impact. And of course, we are continuing to work on this, but it will be a continued development effort that we need to achieve over the months, quarters, and probably years to come given this regulation. Although we do see an overall negative impact from IDFA on our abilities to scale marketing, we're also really happy to see that the diversified portfolio we have is really coming to its rights. So especially in the Kiwi that is not relying on classical marketing, had a strong quarter and have had multiple strong quarters. You're also seeing that Play Simple that has a more casual portfolio with a broader appeal, so less need for targeted segmentation, is also doing very well in this environment. So turning to cash flow and cash conversion, in Q4 we generated 81 million SEC in free cash flow, which corresponds to 27% cash conversion. The relative low cash conversion in the quarter was primarily driven by the negative impact from net working capital in the quarter, where some of our larger marketing partners, we changed the payment schedules to them. This basically created this one of negative net working capital, And hence, it's not expected to go forward. We are not fully certain either whether the amount is going to be fully reversed, but it's definitely not going to continue as a negative. This means for the full year, we delivered a cash conversion of 46%, slightly below the target of 50 to 60. But again, very much driven by the net working capital for the full year. And given that we don't expect that going forward, we do feel comfortable in the target we've set because if you reverse that total networking capital, we would actually have been at 60%. So again, defending a bit why that seems to be the right target. On cash, we ended up the period is slightly less than 5 billion SEC in cash and cash equivalents and we still have no financial debt outstanding. This creates a continuous strong balance sheet to enable our organic and inorganic investment strategy and to continue to pay off or fund our earn out liabilities. Just on the earn out liabilities, we did a slight increase in the quarter as a result of a very strong Q4 Ninja Kiwi, continued high growth for Play Simple and a strong game pipeline for Hodge.