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Edited Transcript of G5EN.ST earnings conference call or presentation 27-Jul-17 10:59am GMT

Q2 2017 G5 Entertainment AB (publ) Earnings Call

Jan 9, 2020 (Thomson StreetEvents) -- Edited Transcript of G5 Entertainment AB (publ) earnings conference call or presentation Thursday, July 27, 2017 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Vladislav Suglobov

G5 Entertainment AB (publ) - Co-Founder, CEO & Director

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Conference Call Participants

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* Stefan Knutsson;Remium AB;Analyst

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Presentation

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Vladislav Suglobov, G5 Entertainment AB (publ) - Co-Founder, CEO & Director [1]

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Hello. My name is Vlad Suglobov. I'm the CEO of the -- of G5 Entertainment. Thank you for dialing in today for our second quarter earnings call. And let's begin the presentation.

So let's move on to Slide 2 or the one with the Hidden City picture anyway. So we had really good revenue growth year-on-year, 164%, and a little bit slower sequential growth compared to the first quarter. It was 18%, a little bit below last quarters. Very strong development in audience metrics year-over-year; monthly active users, up 120%; monthly paying users, up 140%. Then we had about 11% increase in the gross average revenue per paying user year-over-year.

Hidden City, the licensed game in our portfolio, continued to be #1 by revenue and also led in terms of growth. But our own games kept about the same pace of growth. So we were just adding revenue pretty much across the board in the portfolio. And our user acquisition team did a great job with spending even more on user acquisition, in line with our strategy to continue growing, and in combination with the improvements to the games and releasing new updates, that's what has driven the growth during the quarter.

Let's move to the next slide, financial summary. The revenue was about SEK 276 million in the quarter. Once again, it's Hidden City that was leading the growth. And in terms of own games, we would highlight Mahjong Journey, Supermarket Mania Journey and Survivors.

We have higher revenue percentage coming from Asia compared to a year ago, about 23% of total revenue compared to 10% a year ago. When I say Asia, the biggest contributor there is actually Japan, disproportionately so, but we're also looking to increase revenue in China and South Korea, where we think the game has -- our games have a lot of potential.

There is -- that's a continuing trend, a higher revenue share coming from smaller -- small-screen devices, phones and phablets compared to tablets than a year ago, and that's in line with the trends in the market that the sales of the tablets are stagnating and sales of phones are going up, and the larger phones and phablets are cannibalizing sales of tablets. So we see more and more players being comfortable playing on their larger-screen phones, and that's what's driving this change, I think.

But another way to put it is that as manufacturers increase the sizes of the screens on the phones, they open up a larger market for our games because our games are better played on large-screen devices. So the bigger the screen, the better it is for us. So the bigger the screens of the phones are, the better it is for us, and people everywhere are gradually upgrading to larger phones and that basically increases our potential market with hidden object games and other games that we have.

Operating profit was SEK 32.1 million. EBIT margin was 11.6%. It was -- EBIT was heavily impacted by user acquisition costs, which were all-time high and were about 26% of the gross revenue in the quarter. I think that's about the same that we had in the first quarter, and that's about -- that's the level of aggressive user acquisition spending, where we are trying to keep the growth going basically.

As you can see, it increased about 300-plus percent year-on-year and about 18%, in line with the revenue quarter-to-quarter. This stark difference with the level of spending compared to last year is explained by the fact that last year, at about the same time, the growth in the company was about 0. So that's why there's disproportionate change. We basically put user acquisition spending on a much higher level as a percentage of revenue compared to last year. And then on top of that, we had much higher revenue. So that's why there's such a big difference.

Then we certainly had increases in the costs. We kept adding staff and development capacity. We have opened a new office in Lviv, Ukraine that also affected the net result. And another thing was our corporate event in Malta, where we bring people from different offices for a few days of meetings and discussions and team building. And that is an event that we have every second and fourth quarter. And we started it last year. We see very good practical results from it and better communication between the offices. So we will continue doing that, but in this case, it hit the Q2 a little bit. Then there is the positive effect from capitalized development costs that we had during this quarter as we've gone through some major development milestones, and capitalization was higher than amortization in the quarter.

And another boost that we had with the EBIT margin this quarter is the currency exchange rate effects. Swedish krona strengthened during the second quarter, and in a reversal from a year ago, we've had a positive contribution from that to our earnings this quarter, which basically reverses the effect from a year ago. Whenever krona strengthens, we have this boosted earnings. Whenever it weakens, we have extra expenses in our earnings because of the intra-group loans. This is not a cash expense or income, it's more of a -- it's just an accounting thing.

Cash flow was SEK 0.4 million in the quarter, kind of low, but you have to keep in mind that we paid a dividend during this quarter, and we also paid quite a big amount of taxes during the quarter, part of which is going to come back to us later in the year. But if you adjust for that, and we had a really positive and healthy cash flow.

Let's move on to the next page and talk about -- in more detail about our revenue share in Asia. So as you can see on the chart here, over the last 2 years, the situation with our revenue distribution by geography has changed a little bit. The U.S. was the dominant market for us at about 65% 2 years ago, now it's down to 50% or something. In percentage terms, in absolute terms, it kept growing over the last 2 years. But you can see we've had a disproportionate growth in our sales in Asia. So year-over-year, it stands at about 500% growth right now and accounts for 23% compared to 10% just a year ago.

There was a little bit of growth in percentage of the rest of the world. And Europe was actually shrinking a little bit, but again, growing in absolute terms. So this continues to be very exciting for us, I mean, the fact that Asia keeps growing not only in absolute terms but also as a percentage of our total revenues. And it makes our revenue mix by geography much more healthy because we were overly dependent on U.S. and now less so.

With that, let's move on to the next slide, revenue. So all the same points we've discussed already. But worth saying that if we take away on unlockable games and look at free-to-play games only, that year-on-year growth is not about 164%, it's 182%. And the unlockable games are now down to 2% of our total sales. And again, you can see that the sequential growth is going down just a little bit in this quarter compared to the last -- to the previous quarter.

Then on to the next slide, operational costs. Admin costs are going up gradually as we are increasing our organization. As I mentioned, we have been adding more people into the team in order to have enough project development teams to take care of all the projects that we are actively developing, and that means that we are actively supporting them, making updates or developing and we haven't yet released them.

So basically, every time we start a new project in the company, if we don't shut down a project or our support for a project, we have to add a new team to the company. So that drives our expansion in terms of the development team and development costs. Admin costs were also impacted by these events in Malta that I have mentioned.

Research and development. Amortization was about the same because no new games have exited the soft launch period. And we have increased costs for hosting a server capacity, not a major part of it but still a contributor. User acquisition, once again, was at 26% of sales compared to 20% a year ago as we are still in the mold where we are spending aggressively on user acquisition, driving growth in the future. And if we exclude user acquisition expenses, there were only slight increases in sales and marketing costs.

So overall, if you look at the growth of our costs, it's much -- the rate of growth is much lower than the rate of growth of our revenue, but it's unavoidable that costs are going up gradually. What's important is that they're growing much slower than our revenue and than our earnings.

Let's move on to the next slide, EBIT and EBIT margin. So you can see the profit margin is going up sequentially. Once again, there is a number of different factors here, and it was affected positively by the currency exchange effects. At the same time, there were also negative effects like that Malta event and expenses associated with opening a new office in Lviv, Ukraine.

Then UA was basically the same as last quarter. So compared to the situation in the last quarter, it didn't really -- it doesn't affect the result positively or negatively. So we can talk about some margin expansion here. But probably, if you take away all the specific things in the quarter with currency exchange and capitalization and not so regular events like Malta, there will still be profit margin expansion, but it would be not as dramatic as what we see here according to the accounting rules.

Let's move on to the next slide, net capitalization. You can see the net capitalization has actually increased compared to the last quarter, the Q1, and that is because we have passed through some large milestones on the upcoming games that we are about to release, which I have mentioned in the quarterly report. And amortization only slightly have changed. As I can see, we had 1 game exit the soft launch mode. So there wasn't a lot of change there.

In terms of our games portfolio and its value on the balance sheet, the value associated with unlockable games that are not yet released went down all the way to 0. We have SEK 0.7 million attached to the unlockable games that have been released, and as I mentioned, the revenue from unlockable games is only 2% now. So there is a probability that we will stop talking about unlockable games altogether very soon as soon as it drops below 1%. So it's insignificant at this point.

There is a larger amount associated with released free-to-play games compared to last year. That's because we have released many games that we've been working on. The amount associated with the games that we have not released accordingly has decreased. It doesn't mean we are not starting new games, but we are definitely more -- we're definitely smarter about how much money we're spending when developing new games. So the difference here doesn't really reflect the difference in the number of games, but certainly, the difference in how much we are willing to spend to get the game to the market before we're able to put it in the market and see some results and see some data and how people are using it.

Let's move to the next slide, and that is cash flow. So cash flow before changes in working capital was at SEK 30 million and from operating activities, SEK 26 million. And after financing activities -- but with -- basically with all -- with everything, it was only SEK 400,000. But again, keep in mind that we've paid taxes of about SEK 8.3 million, of which SEK 1.4 million, we're going to be getting back. And then we've also paid a dividend of about SEK 6.6 million in this quarter. So these items have certainly negatively affected the cash flow.

So if you take that into account, you can see that the business is cash flow positive and it produces very healthy cash flow and very healthy free cash flow as well. But with these 2 items, we are down to a small cash flow for the quarter.

Nevertheless, I think it's a very good situation where we're able to grow really fast and finance all aspects of the company development from the cash flow, and we can end up the quarter with positive cash flow after paying all the taxes for the year and paying the dividends as well. So to me, that's a good situation.

All right. With that, we move on to the next slide, questions and answers. So if you have questions, please go ahead and ask them.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And there are no questions in queue. (Operator Instructions) And we have a question coming in from the line of Stefan Knutsson with Remium.

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Stefan Knutsson;Remium AB;Analyst, [2]

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Vlad, congratulations to a good report. I have one question regarding the Malta development office. How much cost did you have in the quarter for that?

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Vladislav Suglobov, G5 Entertainment AB (publ) - Co-Founder, CEO & Director [3]

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Well, thank you, Stefan. Thanks for the question. I don't have a number in my head, but basically, the cost for Malta office are rather reasonable. The -- it's the salaries of people working there, and those are employees that we would have even if we didn't have Maltese operation. So some of them have moved from Moscow office, and additional admin staff that we have there is really minimal. The extra -- our extra expense just because we have a separate office there is really nothing to talk about. And rent is reasonable, et cetera.

So in terms of even the salary levels of this -- the employees there, but Malta is quite a -- but it creates -- Malta creates certain incentives for people to come and live to Malta. And I would say they have very good conditions there in terms of their personal situation, and that helps us maintain reasonable salaries for the staff in the office. And we have actually like a line of people willing to relocate to Malta for the weather. And that also helps keep it very reasonable. So I'm very certain that the net effect of having a Malta office is very, very positive, and it's actually growing along with the growth of the company.

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Operator [4]

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Thank you. And no further questions in queue. And with that, I would like to return the conference call to the speakers.

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Vladislav Suglobov, G5 Entertainment AB (publ) - Co-Founder, CEO & Director [5]

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All right. Thank you for dialing in. That's the end of our call for today. Thank you.