Modern Times Group MTG AB (publ)

Good afternoon, everyone, and thank you for joining MTG's live stream and teleconference for our third quarter results. This event is hosted by our group president and CEO, Maria Redin, and our new CFO, Nils Möskow. After the end of the presentation, there will be an opportunity to ask questions. If you're watching the live stream, please use the questionnaire feature in the video stream to submit your questions. If you're dialing in by phone, please follow the operator's instructions. I now hand over the call to Maria.

Thank you, Anton. And hello, everyone, and thank you for joining our Q3 results. Before I get into the numbers, I just want to start with a big welcome to Nils. This is his first results call with MTG, and I'm really glad to have you on board. Having noted that, let's get into the business. I'm really happy to report a strong Q3. We deliver both record sales and record profit. These results came on back of the great operational momentum that we've been gathering since the end of Q1 this year. And as you can see, in Q3, we've done a lot of things. We continue building our gaming village. During the quarter, we successfully tested a new game in the racing franchise and announced two exciting additional future titles. At the end of the quarter, we announced the acquisition of Snowprint Studios and the first addition to our gaming village since 2021. We also launched a 300 million kronor share buyback program in August, and we are doing M&A, therefore, and balancing with shareholder returns. So as you can see, we've been a really busy quarter with executing our strategy and delivering on our commitments to the market. So let's now start looking at the quarter and the milestone that we delivered in Q3. We reported a record sales of almost 1.5 billion krona. That is representing 6% year-over-year growth in the quarter. And I'm also really proud to say that we delivered 1% organic growth year-over-year and 2% sequentially when you exclude the currency effect. This result means that we have delivered on the commitment that we made in Q1 to grow sequentially in each quarter of the year. And it's worth remembering that the underlying growth was even stronger when you exclude the effects from the platform incentive payments that we received from Play Simple during the first three quarters of last year. Lugnete IBTA, we further delivered a record adjusted IBTA of SEAC 449 million kronor with a very strong 30% margin. This is an outstanding performance and it was driven by the strong growth in our word games and tower defense franchise and the fantastic execution from the Forge of Empires team that again delivered a strong quarter with live ops and events which also reactivated old players and engaged existing players. The strong performance that we saw in the quarter leads us to reiterate our revenue outlook for the full year. We continue to expect full year sales to be in the range of negative 3% to plus 2%. And when it comes to our margin, we're also upgrading our full year outlook. And we now expect a full year adjusted EBITDA margin of 25% to 27%, which is up from the previous range of 23% to 25%. Before we dive into the nitty gritty of our operational performance, let us spend some time on the newest member of our gaming village, Snowprint Studios. Just a few weeks ago, we acquired 70% of Snowprint Studios. They are a Swedish developer of mobile tactic games with offices here in Stockholm and Berlin, and they're the studio behind the Warhammer 40K Tacticus. This is a new turn-based tactics game set in the Warhammer 40K universe. The game itself was launched Q3 last year by Snowprint, and it has already grown to become one of the leaders in its genre. Tacticals is still a new game and it's in the early stage of the development and we are really excited about the fantastic journey we have and we look forward to helping the Snowprint team to help them grow through their own journey and accelerate it by our Flow platform. Having Snowprint in the family as well in our village adds another team of industry veterans to our gaming village. And the member of the leadership team within Snowprint all have over 15 years of experience each. And what was also important when we look at the acquisition is that we feel there's a high level of alignment between our company cultures and the Snowprints. And that's why we look forward even more so to work with all the Snowprinters. Moving forward then in looking at our sales, we reported a strong third quarter with both record sales on reported and organic basis in Q3. Sales reported to CEC 1.5 billion in Q3 and that corresponds to 6% year-over-year growth in reported rates and 1% organic growth when adjusted with foreign currency. Our sales were also up 2% from the second quarter of this year, which means that we have been able to deliver on our promise to grow our organic sales sequentially each quarter this year. Moving then to the franchises and looking more detailed into our portfolio. Nearly all our franchises contributed to our growth in Q3 on a sequential basis, despite Q3 actually being a seasonally weaker quarter. Our word game franchise continued to be the main driver of growth. Franchise revenues were up 15% year-over-year and it was up 1% sequentially in constant currencies. The performance we reported also included the challenging comms last year due to the platform incentive payment that we got Q3 and also the first quarter of the year. Our new game within the portfolio, Word Search, continued to be our most impressive growth driver. Sales were up almost 50% quarter over quarter. And PlaySimple continued to focus on live ops in the other games and adding more content, especially in Word Trip and Crossword Jam that continued to have a strong quarter. Tower Defense franchise revenues were up 24% year-over-year and up 6% from Q2 in constant FX. The driver of this growth was again Bloons' TD6, which delivered a combination of strong content updates and continued to successfully execute on its multiplatform strategy. The game has continued to generate strong revenues from Apple Arcade, and we saw good results from the first period of sales on Xbox. Franchise sales were also positively affected from a one-off payment from a partner that is exploring to bring our Bloons TD6 to the Chinese market. Again, it's too early to say about the specifics, but of course we're excited about the potential as the Chinese market is a massive market. The team further launched an update in BTD6 in early October. It's part of their ongoing plan, but this update was one of the larger ones, and it was the anticipated map editor feature. The early data that we've seen as a map editor is possibly driving engagement in the game, which also means that customers who have never before engaged in in-app purchases are now actually also paying in the game, which we see very positive. Our strategy in simulation franchise sales were down 5% year-over-year in constant currencies, but they grew 3% sequentially. And this is positive momentum that we've seen through the year. And now in Q3, we continue to reflect the fantastic work, especially the Force of Empires team has been doing. The game itself, which is over 11 years old, grew both year-over-year and sequentially, which really shows the strength and the longevity of the popular mid-core games. And this growth, again, was driven by very strong execution on LiveOps and events in the quarter, which in particular, successfully drove player engagement and monetization. During the quarter, we also continued to see the shift on revenues, more skewed towards browser gameplay. The franchise revenue overall, though, declined in the quarter and it remains challenging to onboard new customers in the mid-core market, which is one of the drivers and also reduces our DAO in these games. When it comes to the other games in the strategy and simulation franchise, Indie Games continued to work on Rise of Culture and Sunrise Village to improve the performance. Both games had an active pipeline of content in the quarter, and Sunrise Village grew slightly year over year. As we mentioned before, the team is working on a revamp of Rise of Culture, which comes back in a better shape and form next year, and therefore we are not seeing any results really this year of the game performance. Moving on to the racing franchise. Revenues were down year over year, and it was flat versus Q2. Both Top Drive and Formula One Crash continued to perform below our expectations, and the game teams are working on the roadmap to improve the performance of these titles. As I mentioned before, Hutch had an exciting quarter from a new game perspective, and they launched a new title, Forza Customs, globally. They are now preparing for the full commercial launch of the games, which we expect later this year. Hatch also announced a new partnership with NASCAR and will develop a new game under the NASCAR brand, and this title is expected in 2024. If we then are looking into the new games, we are executing on an active new games pipeline, and I think it's really exciting to see that we had a busy quarter with several exciting developments, especially Hutch, which I just mentioned, a completed market test for the new games Forza Custom, and then now having the game globally available. The commercial launch will take place now in Q4, and the team is getting ready on the marketing side. Further, they also announced a partnership with NASCAR to develop a new game. And of course, this is also building on the expertise from the Formula One Clash. Our other games pipeline of new games remains strong. IndieKiwi is working on three new titles and they unveiled the new game Bloons Cardstorm. It will be a collectible card game to be launched during next year. Within Play Simple, they remain very busy. We are testing several new games and we are looking to see if we can scale them during the next quarter and next year. And above that, we're having several titles of other games and projects that are in the early phase across the group, which we hope to come back with updates in the quarters to come. Moving on to our DAO, our total number of monthly active users were up slightly in Q3 on a sequential basis, while the total number of daily users went down slightly. The stable performance mainly reflected the dynamics of the growing base in our world games, offset by the lower number of players in our mid-core games, as user acquisition continues to remain challenging. Our average revenue per daily active usage was up slightly from Q2 this year and from Q3 last year. This mainly reflected the improvements in the successful monetization of all the players in our strategy and simulation franchise that I just talked about earlier. Having gone through the DAO now, I will hand over to Nils, who will then talk us through our profitability, UA dynamics, and financials.

Thank you, Maria, and hello, everyone. It's a pleasure to report a great performance during my first quarter with increasing profits and margin despite higher UA spend. We reported an all-time high adjusted EBITDA in Q3 of S$449 million, which represented a 20% year-on-year increase. And the growth on an underlying basis would have been up significantly if we were to adjust for the platform incentives received by PlaySimple in quarter three last year. Our EBITDA was also up 13% sequentially, even though Q3 normally is a seasonally weaker quarter. This performance enabled us to deliver an outstanding margin of 30% in Q3, significantly higher than last year. What I would like to point out, though, is us growing the company and expanding the margin and that despite a higher year-on-year marketing spend. There are several reasons behind our margin performance. Firstly, we increased revenues at Ninja Kiwi and Play Simple, with the latter also scaling further. Secondly, InnoGames, following their reorganization during spring, a renewed focus on creating engaging content and events that led to a higher spending of their customers, especially in Forge of Empires. The content the team has been putting out led to players coming back to the game, as Maria talked about earlier, and these players have no acquisition cost, play mostly in the browser version, and hence the platform fees are lower, which has a positive impact on our margin. Additionally, we see also lower UA spend, mainly due to lower spend on their new games, and a lower OPEX run rate post the reorganization during the spring. which all contributed to the positive margin development. It's worth mentioning that our profitability was also positively impacted by several smaller one-off items on the revenue and on the cost side. Individually, each of those would have been immaterial, but together they gave us a tailwind to our margin. The strong quarter has now led us to upgrade our profitability outlook for the year to a range of 25 to 27%. And please note that Snowprint is not included in the guidance. Let's look at the UA spend. We invested 37% of our revenues in UA compared to 35% in Q3 last year. This represents an increase of around 55 million SEC or a 6% increase year on year at constant FX. As you know, this spend is not evenly distributed across our portfolio, with Ninja Kiwi spending almost no marketing at all and PlaySimple being above the average and the other three studios somewhere in between. PlaySimple's spending reflects the continued momentum in their established portfolio as well as their ongoing scaling of their new games. And it's worth keeping in mind that they invested a lot in marketing in Q4 last year. Since then, we have been working on distributing marketing spend more evenly throughout the year. InnoGames and Hutch invested proportionally less in UA, in line with the raw threshold and discipline that we have within the group. These reduced investments reflect the challenging user acquisition environment, which we continue to see in the mid-core segment. Let's look at the cash flow. Finally, we delivered very strong cash flows in Q3, and this was mainly due to three factors. And the first one, of course, is the result generating strong operational cash flows in this quarter. The second one is a positive working capital effects, where negative effects in Q2 had an adverse effect in Q3. But as said before, over time we should hoover around zero on working capital, but there will be slight swings to either side during quarters. And the third reason is our lower capex in the quarter. This is driven by timing effects on where we are in projects and how much we capitalise on those. For the full year, though, we are at the 4% of revenue as guided earlier. Due to all these tailwinds, we had a fantastic cash conversion of 69% in the quarter. And we have said before to expect our cash conversion levels to be between 50% to 60% long term. And we do not see any reason to change that. We also have a strong clean balance sheet with a net cash position. We have roughly around 4 billion SEC in cash. Most of it held as deposits in US dollars. And we have roughly 2 billion SEC of earn-out liabilities, most of them in US dollars. And this provides us with a natural hedge. But it also leaves us with a net cash possession of around 2 billion SEC at the end of the quarter, which means that we can continue to look for value, creating growth opportunities as well as using our balance sheet to create shareholder value more directly. It is worth noting, though, that the acquisition of Snowprint will be paid in cash, which will take down the cash position accordingly.