Modern Times Group MTG AB (publ)

And thank you for joining the live stream for our third quarter results. My name is Anton Gorman and I'm the VP of Investor Relations at MTG. With me and hosting this call is our President and CEO, Maria Redin. After the presentation, there will be an opportunity to ask questions. And if you're calling in by phone, please follow the operator's instructions when it's time. Otherwise, please feel free to use the comments section in the webinar. And with that, I now hand over to our CEO, Maria. Please go ahead.

Thank you, Anton, and hello, everyone, and thank you for joining us. We had an active Q3 with good momentum and increasing marketing spend, and that's thanks to a busy schedule of live ops and new game initiatives. I'm also excited that we launched our new strategy and character collection game, Heroes of History, in September. And also, going into Q4, we continue to build on the operational traction, and we're confident in our full-year guidance for both sales and operating margin. We reported sales of 1.4 billion kronor in Q3, which in constant currency was up 1% increase versus the second quarter this year, but it was a 2% decline year over year. Our game, Warhammer 40k Tacticus, continued to deliver record sales, and our localized word games gained traction in the quarter. The overall markets environment has remained challenging, we've been discussing it previously throughout the year, although we have seen a clear improvement this quarter in our UA levels compared to the all-time low levels we had in Q2 this year. We also continue to see lower CPM levels year-over-year in our ad-driven business, but this trend is increasingly improving as we now move into the seasonally strong Q4. This all coming together means that of course we have to stay focused when it comes to operation efficiency, cost control and marketing discipline. But also that we now more than ever have to focus on making sure that we bring our players content that they love and give them ample reasons to continue to stay with our games for the long term. We reported 390 million kroner in adjusted EBITDA in Q3, and that comes with a 27% operating margin. If we compare year over year, our EBITDA was down 13%, and this was mainly due to that we had three strong events last year, driving browser revenues, as well as some one-off effects that last year, and that combined with a third-party revenue booking that got delayed. We anticipate to see it in Q3 this year, but it slipped into Q4. On a positive note, however, we saw, as I said, strong traction for our user acquisition in the quarter. And I'm glad that we can now again invest more in our future, which will help us to come back to organic growth in Q4 and onwards into 2025. We also continue to deliver a strong free cash flow of 334 million kronor in the quarter. This meant that we delivered a 70% cash conversion for the last 12 months period. These are of course higher level than what we've guided and I would say these high levels shouldn't be seen as a new baseline, but it does reflect where we currently are in our operational business and development cycle and also timing of certain payment flows. As I said, the 70% cash conversion is higher than our long term outlook of 50 to 60% for the group, but we do believe this guidance for the long term is still the right one as we look forward, but we will see the short term fluctuations as we move forward. If we then look to our momentum in Q3, it puts us on track to deliver on our full-year commitments. We're therefore happy to reiterate our full-year outlook as reported currency adjusted sales growth between 1 to 5%. We also continue to expect to deliver an adjusted operating margin between 26 and 29%. As we have noted before, both in these types of calls and other settings, we do have a healthy optionality in our business model. This means that we will deliver higher margins when we see less opportunities to invest in future growth. But that also means that our ambition remains to pursue growth, and that is what we have in focus. We've always said that we would be happy to invest if we see these tractions in our marketing. And on a good note, this quarter we were able to do exactly that. And that's also why we're really happy to see our business starting on a good momentum also in Q4. So if we then look to see our sales, our revenues were down 2% year over year in Q3, but importantly, they were up 1% sequentially versus Q2. Our portfolio of live games currently comprise of 39 live games, with two more games due to be launched before the end of the year. The decline of our Q3 sales reflected a mix of factors. Snowprint, on a good note, continues to deliver very strong growth, with sales going down year-to-year in the other studios. We also had tough comms from last year, mainly due to the highly successful events we saw in Forge of Empires. I already mentioned that before. And this is also the first quarter in a while, actually, where we've seen our results being negatively affected by currency, as the Swedish krona has strengthened throughout Q3. If we then drill further down, we have a look at the performance of our different franchises. Sales for the word game franchise were down 6% year-over-year in constant currencies, and this primarily reflected the weaker ECPM levels that we are seeing this year after the Google switch to real-time bidding earlier this year. Franchise revenues were, however, up 1% on a sequential basis, and this is a very encouraging development and reflects the positive momentum that we're seeing, especially in our localized word games. Now we have WordTour, Crossword Jam, and Word Search, all available in up to 28 languages, even though German, Spanish, and Portuguese are still the most important non-English language titles for our games. Sales for strategy and simulation franchise were up 21% year over year, and it was up 4% on a sequential basis. The growth for both comparison periods reflected the outstanding performance of our game Warhammer 40k Tacticus, which continues to deliver on all-time high revenues and players' numbers. Snowpit has continued to deliver a strong pipeline of updates to the game and content. In Q3, this included the celebration of a two-year anniversary of the Tacticus with in-game events and content and a new playable faction. Fortum Empire did have top comms due to the three very successful events in Q3 that I mentioned, while none of these events this year in Q3, even though we had two, managed to generate comparable levels of uplift. At the end of last quarter, InnoGames launched a new gil rate feature with a goal to try to even out the in-game revenues and engagement between the events. This is something the team has continued to calibrate also in Q3 to make sure the two features work well together, and I do believe that we continue to see improved tractions on these features. So while Q3 for Forge of Empires was somewhat weaker than what we wanted, I'm happy to say that Q4 has kicked off with a very strong event. The first of October was the second strongest day of the year for Forge of Empires, and that was also the first day of the fall event. If you look into the racing franchise, revenues were down 4% in constant currencies, both year over year and sequentially. The 2024 season reset of Formula One Clash was launched in May and performed well in the quarter. We've seen a very clear positive impact on the average spending per player, and I'm happy to see the improved momentum in our most important racing games. We've also talked about the new games that the Hutch has launched. Unfortunately, neither Forza Customs or NASCAR manager has so far delivered in line with our expectations, which means that we are now together with a team looking into these games and started to examine the future option for the two games. Moving then to the tower defense franchise, revenues were down 4% year-over-year, and it was sequentially down 2% from Q2. Blues, PTD6, continued to be our flagship title, and it received three updates during the third quarter. This included a new hero, a new tower, and a second team event. And the exciting part is now the team is working on a major update that will go live during the second half of Q4. And this update has been designed to significantly extend the game content for players and to offer established players increased opportunity to engage differently with the game. So as you can see, as we walk through our different studios, we have a high level of activity across all of them. We have a very attractive IPs that continue to engage players and ambitious plan for the future. And as we now look to what we do with established games, I want to bring you then forward to what are we doing with the new and the early scaling titles. Today, we have 18 games in our early scaling and new games pipeline. More than half of these titles are fully available today on all platforms and some are more to come. And together, they represent 16% of our total revenues in Q3 as we continue to develop them and deploy selective UA to increase scaling. Of course, as always, when you launch them, you need to assess the UA performance before we move on to full commercial launch. As I mentioned earlier, here are some histories, which is the latest title from InnoGames, which launched globally in September. It's clearly very early days, but the game's early reception has been really great. It's also outperforming InnoGames' previous launches if we compare on a like-for-like basis. We're also about to shortly enjoy the global launch of Bloons Cardstorm. This is coming out from Ninja Kiwi and the launch comes about a month and a half after a very successful alpha test which received positive feedback from both players and the gaming media community. We then continue to expect a soft launch of yet another unannounced title from Ninja Kiwi at the end of the year. And to add to the news, also yesterday, Ninja Kiwi announced that they're currently also developing the next game in the successful SAS Zombie Assault franchise. So it's a busy day within our Ninja Kiwi studio. PlaySimple continues to involve several new titles, and they soft-launched a brand new title called Cryptogram on Android in the quarter. It's still very early days for this title, but we do expect it to launch on iOS in due time. Further, PlaySimple also continue to evolve their soft launch titles, adding content, localized languages, and live ops in the quarter. I also mentioned earlier that neither Forza Customs nor NASCAR, unfortunately, has been able to perform in line with our expectations. And therefore, the team at Hutch is now deciding on how to bring these games forward. And last but not least, our Warhammer 40K Tacticus continues to shine. The game just celebrated its second year anniversary, and I'm very excited to see that Snowprint has delivered revenues and operation KPIs that were better than what we anticipated each month in the quarter was an all time high. So we now look forward and we look at our performance indicators in Q3. We generated 62% of our revenues from in-app purchases and 32% from in-app advertising. The in-app advertising revenues as a proportion of our total revenues has come down year-over-year, which reflects Google's shift to real-time bidding and the ecosystem of the start of the year. Our revenue streams were stable quarter-on-quarter. Our daily active users were down year-over-year, but up sequentially. The year-over-year decline mainly reflected the sale of Kongigate in Q1 this year, and it was up slightly on an underlying basis. The sequential increase in DAO was driven by healthy player intake from, in particular, Play Simple, thanks to the localized version of the key games, and also higher sequential DAO in Indie Kiwi and Snow Prince. Average revenue per daily user, or ARPDAU, was up slightly year over year, which also reflected the increasing ARPDAU in our racing and tower defense franchise, and continued healthy levels in the strategy and simulation segment, being offset by lower ARPDAU in our award games. Our ARPDA was slightly down from Q2 this year, and this was driven by lower payment levels per player in our localized word games, which was almost offset by the higher levels that we saw in the strategy simulation and racing, where the season reset of Formula One Clash continued to improve the average revenues per player. Now it's time to take a look at our US spend, profitability, and financials, and I will let Anton take us through this.

Thank you very much, Maria. So, we spent just under 550 million krona on user acquisition in Q3 and over 1.5 billion for the first nine months of the year. This represented 38% of our total revenues in the quarter and was up slightly from 37% in the third quarter of last year. We spent 36% of our revenues on user acquisition in the first nine months of the year compared to 39% last year. Our UA spend was up by 17% in constant currencies from the second quarter, which reflected continued high levels of UA in Snowprint, increased marketing from PlaySimple on the back of their successfully localized word games, and higher UA in InnoGames. It's also worth mentioning that our UA spend in the quarter was back-loaded, which means that we expect to see the growth benefits of these investments in Q4 and beyond. We continue to have a disciplined approach to marketing that focuses on profitable user acquisition, and we're happy to see that the traction we observed at the end of Q2 continued throughout Q3. While total UA spent for the quarter was somewhat higher than we initially anticipated, this is well aligned with our ambition to drive organic growth. These investments in future growth also set us up to deliver on our Q4 plans and on our full year guidance, as Maria noted. So we reported an adjusted EBITDA of 390 million krona in Q3, which was down from 449 million krona in Q3 last year. The decline mainly reflected tough comps, as Maria mentioned, due to very successful events in Forge of Empires, which drove high margin browser revenues last year, and some one-off effects in Q3 last year. We delivered strong operating margin of 27% in the quarter. And as Maria also mentioned earlier, our Q3 profits were somewhat lower than expected due to the shift of a booking of third-party income from the third into the fourth quarter this year. This has no effect on our performance for the full year, but does mean that our fourth quarter will be slightly stronger than initially planned. We continued to have strong cash generation and cash conversion levels in the quarter and reported free cash flow of 334 million krona in Q3. This enabled us to deliver a high cash conversion of 70% in the quarter, above our guided long-term range of 50-60%. We also had positive working capital in Q3, which reflected a bit higher than normal operational movements in the quarter in both payables and receivables. This will fluctuate between quarters, as you know, and we expect this to be negative in Q4. Our capex was significantly reduced year-on-year in the quarter, as you can see, which follows the trend we have demonstrated in each quarter of 2024 so far. This reflects where we are in our overall development cycle as more of our developed games go into soft launch, but also the divestment of Kongregate in Q1 this year, which has significantly reduced our overall capex levels. That's all from me. I'll now hand it back over to Maria for a summary and then some questions. Thank you.

Thank you, Anton. So before we move over to our Q&A session, I would like to summarize where we are today as we enter also now the final and seasonally most important quarter of the year. While our sales in Q3 were slightly lower year over year, our sequential performance shows that our momentum is improving. We continue to deliver strong margins while increasing our investment in user acquisition to drive future growth. I'm also happy to see that we can continue to deliver on our LiveOps pipeline for our established games while also launching new exciting titles across our studio. At the same time, we are delivering still a 27% operating margin, which shows the quality and the health of our business. And as we mentioned earlier, our profits in Q3 were also affected by the move of a third-party revenue booking into Q4. This doesn't change anything when it comes to the full year, as it's purely a timing issue. We reiterate our outlook, and we are confident about delivering it for the full year. That means that you should expect us to deliver organic growth in Q4. We continue to deliver on our plans and our strategy, and our share buyback program is running until our next AGM, as you know. So with that, we thank you and we are now ready to take your questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Simon Johnson from ABG Sundal Collier. Please go ahead.

Good morning, Maria Anton. First, a question on the UA spending. Can you maybe walk us through in a bit more detail how the increase was distributed in the quarter? You said that UA spending was backloaded and that UA was higher in September. Was that a majority of the increase, the PlaySimple increase in September, or was it broader? And within PlaySimple, where have you deployed the increased UA, new games or existing games?

Yeah. Hi, Simon. Thanks for the question. So on a good note, the UA increase was in particular split between Snowprint and Play Simple, but also InnoGames ramped up their UA spend, not year over year, but sequentially. They were on very low levels in Q2, so we're really happy to see that they have gradually during Q3 been able to ramp up their UA, in particular then, of course, for Forge of Empires, but also towards the end of the quarter, also for the newly launched game Heroes of History. I would say Snowprint with Tacticus has been on a high level throughout Q3. And I think as they launched the submarine events and had their two year anniversary, they ramped up from August and onwards even further. So that's exciting. And I would say Play Simple, to your point, we saw the biggest increase in September. And exciting for PlaySimple, yes, it's a lot about the new localized games, but they're also scaling up their existing titles. So it's a combination. So it's not just one thing driving the UA momentum. It's actually broader, which gives me also a good momentum into Q4 overall.

Excellent. Thank you. And on the back of that UA increase, how is the sequential sales development for PlaySimple statistics? How has October been since you said that you're not seeing a positive trend?

No, but I think if you look at PlaySimple in general, of course, the revenue trend also follows to some degree the UAE spend, even though there's a lag to recoup the full amount, of course. And as we now move into Q4, we are moving into seasonally strong CPM levels as well. So towards the end of October, we start to see that improvement as well. So I would say in general, we have a very good start in Q4 and also PlaySimple is seeing a better traction also in October. But I think November and December, as you know, are the two key months when it comes to CPM levels.

Yeah, got it. And you talked about the shift of a third party revenue booking from Q3 to Q4. Can you maybe give us some indication of the size of that?

No, we usually don't. But I mean, if we would complete the immaterial, we wouldn't have mentioned it. So, of course, it made a difference where sort of compared to where we expected to land and where we land. But on a good note, it's purely money that came in just after quarter end versus just before quarter end. Those things happens. So at the end of the day, that means that our Q4 will look a little bit stronger and Q3 then looked a little bit weaker.

Okay, got it. And just one last from me. On UA in Q4, I understand, of course, that it depends on new releases and so on, but do you expect that you can deploy significantly more than last year, or more in line with last year? What do you see?

Yeah, but I think we are coming in with a good momentum and a good spend levels. Then, of course, as you move into November, December, also the cost goes up as such. So I think what we did last year was to try to balance it a little bit more even than what we've done the years before. And I think you're probably seeing a similar trend this year, but we would like to scale as much as we can see the strong ROAS that we've seen sort of in September. And then we will continue on the same good and positive trajectory. So that's our ambition level.

The next question comes from Jacob Edler from Danske Bank. Please go ahead.

Hi Maria and Anton, I hope you can hear me. Just to follow up there on UAE, I remember earlier in the year you anticipated UAE to be a bit more back and loaded this year relative to last year. Now UAE was probably a bit higher than you anticipated here in Q3. So are you saying now that we should expect a bit more kind of evenly spread Q4, Q3. I mean, maybe some growth sequentially, but not as much as you anticipated early in the year. Is that correct?

I would say that we were able to scale up a bit more in the end of Q3 than what we anticipated, which is great, but then we should hopefully be able to continue on that momentum during Q4. But it also depends on what we're seeing on the CPIs and so forth. But I think it's correct that you should expect us to continue to scale up.

Great. And just a follow-up on that. Historically, elections have kind of inflated UA prices. Will this impact your UA strategy this year, or what do you say on that point?

That's one of the factors that may impact CPIs, and that's again why it's very difficult to say exactly where we will land on UA, because we are extremely rigid on making sure we see the ROAs come through as we would like to see them. So again, we may have an ambition on what we want to do, but it also needs to work in practice when we are seeing the CPIs compared to our LTVs. So we don't know yet how the election will impact the pricing, but normally, to your point, it does impact the pricing because you see more increased competition during that period of time. But on a good note, we can also hopefully see a good projection than in our eCPMs.

Yes. Okay, good. Another question on the pipeline. I mean, Heroes has launched and now Cardstorms in a week's time. Do you still expect the undisclosed Ninja Kiwi title to release in Q4?

Yes, I do, but I don't believe it will bring any meaningful revenues. So that's more of a 2025 sort of impact. But we would like to see if we can get it through over the finishing line before we go for Christmas break.

Great. And then just a question on coming back to cash conversion where we started. Obviously you're at 70% now. You still think that the target of 50% to 60% is valid. But can you add some flavor on when we should expect the next kind of capping?

Yeah, that is a good question. I think just to clarify, I do believe we come in higher for this year than the 50 to 60. So it's more the long term that I do believe is correct. And a little bit depends on partially CapEx level, but also in general, the larger payment flows. So I do believe starting hopefully already next year, we can see a beginning of a new CapEx cycle. We now got many games out of soft launch and full commercial launch. And I think that's also when we should start to see new initiatives based on some of the discussions we're having internally.

Perfect. I think those were all my questions for now. Thank you.

Thank you.

The next question comes from Rasmus from Kepler. Please go ahead.

Hi. Not sure what's going on there. Almost forgot my question. Yes. Play simple. Do you feel that you are back to growing that business now? You can think of it as price and volume, and you have a reset in pricing that you will carry with you. But are you already back to growth, or does that take until maybe Q1?

Yeah, that's a good question. I think when we announced the Google changes and the impact, we said there's two ways that we can bring the business back to growth again. One part is, of course, to bring back the competitive advantage we've been having on the pricing level. And that will take longer time. And the other part is to increase our reach. I think on a good note, which you saw now on the very strong intake of DAOs that we've seen in territories outside the U.S. and English-speaking markets, we are really increasing our DAOs. And the ambition is now during Q4 is also to monetize these DAOs. And that is, of course, one of the drivers to the overall business, as I said, that should return to organic growth in Q4.

Wonderful. And so that looks good for next year then, obviously. And then the other thing that... I'm thinking is that Snowprint comes out of this year on a different and much higher level than it ended last year. So we're coming with very strong momentum, I guess, in the first half there as well. Is that correct?

Yes, Snowprint has had an amazing performance. As we said when we acquired them a year ago, that acquiring Snowprint and Warhammer IP with Tacticus, even though the title at that point in time was quite limited in revenue contribution, we saw its potential and we said this is not going to be EBITDA accretive, it's going to be growth accretive for us as a group. And I think now sort of 12 months down the road, we can clearly see that it has been growth accretive. and it's going out on a very strong momentum. But this is also a mid-core game, which we need to remember, and the longevity of the cores are extremely strong. And as you successfully then scale a mid-core game like Snowprint has done, the longevity and the monetization of these cores are extremely long, which means that I do believe they have a very exciting 2025 ahead of them as well.

And the only, you know, just only the thing, quickly on the numbers, difficult to grasp fully but it looks as though InnoGames is kind of sliding sequentially and that comes into the year on a lower level or is it in fact stable? It's so difficult to see from the outside and you say that it was a particularly strong Q3 last year obviously but do you think it's fairly stable or is it still sliding?

No, I would say that it's probably fair to say we would have liked to see better performance in Q3 in isolation. I think one of the drivers was also us calibrating the guild features versus the event. And you only had two events also in Q3 versus three last year. So there are several reasons to its underlying performance. And it had really tough comps. I think as we look forward, which is the exciting part, is we were able to scale up UA in Q3. Remember, Q2 was all-time low, to be fair, in InnoGames. And in Q3, we actually managed to increase it by quite a bit, which means we go into Q4 both with a higher DAO in Forge of Empires, but also we found a better balance between the new guild features and the events. And the fall event that started had actually one of the best performing day of the year, which gives me good... Good feeling as we look into Q4, which is for Indogames always a very strong quarter.

Just one more question. If we do reach organic growth next year, I assume that we will have higher UA, so we continue to drive growth. It's not kind of a one-off to capitalize next year. That's correct, right?

No, I mean, we would like to continue to invest in UA because we know that that drives sort of our cohorts and our organic growth, not just for 2025, but also in 2025 and onwards. And that's our ambition. And I think we should have a healthy pipeline and also balance between existing games and new games.

All right, thanks. There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Hi, thank you very much. So we have two questions on the chat that we're going to take. The first one is more technical. So when will Snowprint enter the organic growth calculation? The answer is that is for the whole of Q4 because we acquired them very early in Q4 and that's when they were consolidated. And then a question to Maria. So can you please give more detail on the sudden departure of Niels? What was behind this and who's going to replace him?

Yes. So we're currently running a search. And as we find the right candidate, we will then close that position. So you will know as we have to issue a press release when we sign that contract. And as it always is, I mean, when you work in management team, sometimes things work out and sometimes it doesn't. And I think in this one, we mutually agreed to part ways. So there's no drama about it. He's a great person. We wish him all the best. But I think we both agree that that was the best way forward.

Thank you. So we have no further questions at this stage. I would like to thank Maria. I'd like to thank all our listeners for today. You know where to find us. Follow us for more news as we go into Q4 and beyond. And thank you very much.