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 comment 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 operation attraction. And we're confident in our full year guidance for both sales and operating margin. We reported sales of 1.4 billion kroner 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 the 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 kroner 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 therefore are 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 type 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 have 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 is also why we are 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 were down year over year in the other studios. We also had tough comps 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 have seen our results being negatively affected by currency as the Swedish Krona 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 sequential basis. And this is a very encouraging development and reflect the positive momentum that we are seeing especially in our localised 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 sequential basis. The growth for both comparison periods reflected the outstanding performance of our game Warhammer 40K Tacticus which continues to deliver an all time high revenues in players numbers. Snowpint 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 Tacticus with in-game events and content and a new playable faction. Fortran Vampire did have top comps 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 the last quarter Inno Games launched a new guild raid feature with the 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 traction on these features. So while Q3 for Fortran Vampire 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 Fortran Vampire 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 hatch 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 the team looking into these games and start 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, BTD6 continue to be our flagship title and have received three updates during the third quarter. This includes 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 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 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. Well, then 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's some histories, which is the latest title from Inno Games, 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 Inno Games previous launches if you 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 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 Nindip Kiwi and Snowprint. 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 word games. Our ARPDAU 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 US 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 inner games. It's also worth mentioning that our UA spend in the quarter was backloaded, 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 spend 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 a 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 -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 congregate 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 the final and seasonally most important quarter of the year. While our sales in Q3 were slightly lower -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 live-op 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 -by-back 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 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Simon Johnson from ABG Sundial 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 for PlaySimple 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? I would say that the increase was more for the UA than 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 Tatkos 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 onwards even further, so that's exciting. And I would say PlaySimple, 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 has the sequential sales development for PlaySimple statistically been during the quarter, and how has October been since you said that you're not seeing a positive trend?

Yeah, I think if you look at PlaySimple in general, of course the revenue trend also fell to some degree, the UA 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 into Q4. Can you maybe give us some indication of the size of that?

No, we usually don't, but I mean if we were completely immaterial, we wouldn't have mentioned it. So of course it made a difference. We're 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 happen. 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 raw 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 and hope you can hear me. Just a follow up there on UA. I remember early in the year you anticipated UA to be a bit more back and loaded this year relative to last year. Now UA 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.

Okay, great. And just a follow up on that. I mean 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 raw us 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 trajectory 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 QV 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 the target of -60% is valid. But can you add some flavour on when we should expect the next kind of cat-back cycle to start?

That is a good question. I think just to clarify, I do believe we come in higher for this year than the 50-60%. So it's more the long term that I do believe is correct. And it depends on partially the 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've 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 Kevlar. Please go ahead. Hi,

not sure what's going on there. I almost forgot my question. Yes. Play simple. Do you feel that you are back to growing that business now? When, you know, you could 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, no, it's good question. I think when we when we announced the Google changes and the impact with others, 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 US 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 going with, you know, very strong momentum, I guess in the first half there as well.

Yes, Snowprint has had an amazing performance. As we said when we acquired them a year ago that that acquiring Snowprint and Warhammer IP with Tacticals, 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 EBITDAI creative. It's going to be growth creative for us as a group. And I think now it's sort of 12 months down the road, we can clearly see that it has been growth creative. 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 success with the 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.

It's a bit difficult to grasp fully, but it looks as though Inno Games 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?

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 and Q3. Remembering Q2 was all-time low, to be fair, in Inno Games. And in Q3, we actually managed to increase it by quite a bit, which means we go into Q4 both with a higher DAOs in Forge of Emplacement. So we had some good compires, 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 a good feeling as we look into Q4, which is for Inno Games 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?

We would like to continue to invest in UA because we know that that drives 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 we're just going to, 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 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're working 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.