Earnings Transcript for G5EN.ST - Q4 Fiscal Year 2023

Stefan Wikstrand: So welcome to our year-end report presentation. You will be in listen-only mode only at the beginning of the call. [Operator Instructions] And we'll also open up for verbal questions after the presentation, of course. With those words, I will hand over to our CEO, Vlad Suglobov.

Vlad Suglobov: Good morning, everyone. Welcome to our Q4 and Financial Year 2023 Results Call. We will take around 15 minutes to run through the presentation of the results, and then as usual, we will open the line for questions -- sorry. I'm not going to be able to participate through the video today. So starting with the results, the brief overview of this morning's report. Revenue was SEK 317 million, which is 13% lower than last year in Swedish krona and 12% lower in USD terms. Revenue in USD was also down 2% sequentially from Q3. We saw a stable performance in our active part of the portfolio, among both our own and licensed games. Active games are the ones that we are actively evolving with updates and live ops. We call other discontinued games we were cashing out of harvest games, and this part of our portfolio declined in Q4. If we look at active games in more detail. G5's own games were down 2% sequentially in USD, but our licensed games were actually up 2% sequentially. Monthly average gross revenue per paying user was continuously strong at $63.2, with audience metrics comparable to Q3. Our highlight continues to be the G5 Store, which now stands for 13.2% of total net revenue compared to some 6% a year ago. And as you know, the G5 Store has lower processing fees than the alternatives. We are talking about low single-digits compared to 12% to 30% third-party application store fees. Growth for G5 Store was 87% year-over-year and 88% in USD terms. Sequentially, growth was 6% in USD terms. This favorable platform mix with an increasing share of sales from G5 Store continued to help raise the gross margin to a strong 67.6% compared to 67.1% a year ago. We have been very prudent with costs and optimized our staffing. This has led to a reduction of our staff from approximately 930 at the end of Q3 to 870 now. The cost savings impact will be seen from the current quarter. Also, we repurchased 73,624 shares for a total of SEK 11.4 million in the quarter. Now let's turn to the next slide and look at the full-year results. So looking back on the year 2023

A - Stefan Wikstrand: [Operator Instructions] I can see we have a question here from Hjalmar Ahlberg. There you go. Now you are allowed to speak.

Hjalmar Ahlberg: Maybe first question, on the decline in your inactive games, so to say. If you compare the kind of drop in active users to the drop in revenue from old games, is that the kind of same drop? Or is that impacting users even more? If you can give some input on that maybe...

Vlad Suglobov: Well, we see the development -- well, if we look at the active user base and we look at the Q3 to Q4 dynamic, it's not very different, so we certainly expect that we will sort of bottom out when it comes to the audience. When we compare year-to-year, year-over-year, last year was still influenced substantially by the boost that we did for Sherlock, which affected other products as well. And that generated actually a very substantial amount of users that were not necessarily all highly paying users, but that certainly inflated our audience metrics in the quarters when that boost was happening. And that was Q2 and Q3 in 2022 but also still in Q4. And we're comparing Q4 '23, a year later, with that effect of the boost a year ago, so year-over-year, it looks a little bit scarier, but that is in large part because of the boost. But that certainly also effects from the fact that we haven't had a new game in quite a long time; and the fact that obviously there's macroeconomic considerations that, I think are felt across the industry.

Hjalmar Ahlberg: All right. And I look into 2024 just a bit, like kind of two-in-one question, but if you look at your active portfolio, I mean, you have Twilight now coming from -- for small levels but looks to be getting some traction and stable performance from Sherlock and Jewels. And at least if you look at the industry outlooks, it looks like the market could potentially improve a bit in '24. Do you think -- do you have any expectations on what will drive growth in your portfolio? Will it be the kind of big existing games or from Twilight and potentially the one to two new games coming?

Vlad Suglobov: Yes, we're hoping for all of these things to work better. We are not giving up improving Sherlock and the Jewels family of games and other games. And we have a number of improvements for our existing games in the works. We are constantly working on improving our marketing efforts as well, and we also have new games coming to the market. And Twilight Land already released and sort of going through the optimizations and maybe going into more active phase of scaling later in the year. So I think the only way we get through this and go towards a different dynamic for the top line is through releasing new games. That said, the, I think stabilizing existing games or achieving slight growth in existing games is an important base that we have to build upon, so that has to be done as well. And of course, if we can see overall improvement of the situation from the macroeconomic perspective on the -- for the games industry, that will be a welcome support in achieving these goals.

Hjalmar Ahlberg: Got it. Just a final question

Vlad Suglobov: I would say I need more convincing that the new rules are good for us or anyone. So we're still scratching our head and rereading the rules, so it's just a little bit early, but I don't think it's a no-brainer. And as I said, I need more convincing. And I think a lot of developers feel like they need a lot more convincing that these new rules are good for them. And I would just say maybe it's by design, yes.

Hjalmar Ahlberg: Correct, thank you very much.

Vlad Suglobov: Thank you.

Stefan Wikstrand: Thank you, Hjalmar. We also have seen Simon Jonsson from ABG.

Simon Jonsson: Thank you and good morning. I wonder if you could maybe share a bit more information about Twilight Land, as the user acquisition cost was down sequentially, it looks like. And yes, it doesn't seem like you have pushed it that much, so yes, maybe a comment on that; and also if you can say anything about the timeline for when we could see a bigger push for this game.

Vlad Suglobov: Yes. Thank you for the question. So the game came out and we immediately saw that the audience receives it really well. So they certainly want to play this kind of game. And we have good metrics out of the gate when it comes to a number of parameters in the game. At the same time, with the new funnel process, we launched the game globally with a limited amount of content, so now we are on a content treadmill where we are releasing new content, putting together things that are mandatory for good monetization like events, offers and whatnot. And we are working on putting that all together and fine-tuning it for monetization. So I think the launch really improved the company's morale and the team's morale in the sense that we saw that the early results of our testing with the audience really did show up in the demand that we saw for the game. And now we have to work on delivering that LTV that will allow us to continue scaling the game throughout the year, so we are -- and the good news there is that, this game, if you look at it closely, you'll see that it's not very much different, in terms of its engine in terms of its monetization mechanics, to what we know well how to do, so it's more of a question of time and putting everything together. There shouldn't be big risks when it comes to, like the game underperforming in terms of monetization because it's very similar to our existing games. And we know how to do that, how to achieve full potential. So with that optimism, or should I say cautious optimism, I think the game is going to be profitable. The question is how far and how soon it will scale. And we have our internal benchmarks for this game. We have our internal expectations for how far it should go in terms of the revenue per month. We don't see red flags right now. We see mostly green flags and certain areas where it needs to be improved, but we think it's achievable. And we'll work through the rest of the year to see whether we can achieve the goals that we set for the game. And this will also be a test for our funnel approach because it's only the first game coming out of the funnel. There may be that it needs a little bit more calibration when it comes to expectations, but like I said, we are optimistic with regard to this game. And we have more games coming to the market that are showing good results early on. And that -- what creates my cautious optimism for this year, that with the growth of G5 Store, maybe the improvement of the overall situation in the industry and with these new releases, maybe we can turn-around the dynamic at some point.

Simon Jonsson: All right. Thanks. That's very clear. And just one more for me. So you talked about the staff reductions. And just to make clear

Vlad Suglobov: From staff reductions...

Simon Jonsson: Yes.

Vlad Suglobov: We have seen a little bit of that, but it was mostly done during Q4 and I think mostly towards the end of the year, if I'm not mistaken.

Simon Jonsson: All right, thank you. That's all for me. Thanks.

Vlad Suglobov: Thank you.

Stefan Wikstrand: Thank you, Simon. And then we have Rasmus Engberg from Handelsbanken. Let's see if we can get it to work, yes, very good. Rasmus, now we hear you.

Rasmus Engberg: Good morning. I wanted to ask you if you could be more elaborate on what you think about these changes in -- you're saying it's kind of a mixed picture when you talk about the regulatory changes in Europe with regards to app stores. Can you sort of elaborate a little bit on what you mean with that?

Vlad Suglobov: I'm not an expert, not going to pretend to be an expert on regulatory changes in Europe and like whatever laws were put in place. I really don't know about that. What I'm looking at is the terms that Apple offers to the developers because I have to make a decision. Do we go with the new terms? Do we attempt to do direct transactions or not? And like I said, I look at the financial impact of these, of going this route, either direct transactions or -- in U.S. or in EU, the visibility to be able to apply to create your own store and process transactions directly; and it's just hard to see financial upside for that. It seems to be very punishing. I can point you at one specific thing, which is a platform fee, and that is €0.5 per install per year. So it's not even per install. It's per install per year, if I'm not mistaken. So this is unprecedented, all right? So there's not a single operating system which ever charged developers for a user downloading an application. Like if you think about it, it's unprecedented. It's a little bit crazy, to be honest, and that has very strong financial implications on any math that a developer does. As you know, 90% of our players don't pay, right? And it's not like -- so we would have to pay to get these users, but in the return, they will not pay anything. And that sort of increases your risk. And then if you think about hypercasual developers -- and we're not hypercasual developers. Like we're casual developers, now hypercasual developers, they tend to generate way more downloads. And for them, this math is not going to work. It's even worse than for us. So I can imagine scenarios where the -- where there is upside from doing it, but the question -- maybe if we were a developer who has a large chunk of their revenue or maybe majority of the revenue coming from iOS, that would be interesting. But in our case, we have G5 Store growing successfully. We are going to be continuing to make it easy for players who play our games to go and pay directly to G5, and this is not against any platform terms. They're -- if they're willing to do so, they can go to a convenient website, make a purchase return to the game and get their goods. This is already available. We see that mobile players do migrate to open platforms and are willingly playing on larger screens. So I think our emphasis will continue to be on G5 Store and on the platforms where it is possible to have one on Android; or Mac; of course, on Windows. And we'll see how the situation with Apple evolves, but as of right now I can't tell you that I'm excited or that I'm convinced that we need to change the deal terms with Apple.

Rasmus Engberg: That's very clear and very helpful. One more thing, this new game that you launched. Is that multi-platform? Like it's both PC or browser and mobile or...

Vlad Suglobov: Not necessarily browser, but yes, we launch our games across all platforms and you can play and continue playing on any -- you can switch between platforms. You can pick up your progress on any other platform at any moment in time. And so this game is already available on G5 Store as well as on Android and iOS, and I believe on Windows as well. If not, it will shortly be. And I think they already launched on Amazon, so -- and in any case, intention is, of course, to have this game available of all the platforms, which we usually support.

Rasmus Engberg: But are you scaling that game now, I mean, or investing way more than revenues or -- because coming back to the earlier question about the fairly low UA spend in the quarter?

Vlad Suglobov: Yes. We did -- we usually do some spending out of the gate. That is needed to sort of go through the learning process for the user acquisition channels, but we haven't done anything super aggressive. And right now we are focusing on fine-tuning game and bringing more content into the game. We have attracted an audience that we can build upon, and we will do it in a more gradual way during the course of the year. If we see something very optimistic, we may scale up the spend and then you will feel it in the quarterly results, but I don't think right now we're at the scale where you can actually see it in the quarterly results.

Rasmus Engberg: All right. Thanks so much.

Vlad Suglobov: Thank you, Rasmus.

Stefan Wikstrand: We also have Henrik Jernbeck from SEB.

Henrik Jernbeck: Do you hear me?

Stefan Wikstrand: Yes.

Vlad Suglobov: Yes.

Henrik Jernbeck: I also have a question regarding the average spend in games. As you can see, as we can see, it's rather stable and increasing year-over-year. Why do you think you can maintain a high spend despite a declining number in players?

Vlad Suglobov: I'm sorry. Could you repeat? I missed part of your first phrase.

Henrik Jernbeck: Average spend in games is rather high and quite stable. And it's up year-over-year despite a -- quite a double-digit decline in player numbers. And first off, just talk a little bit about that and why you think you can maintain such a high level?

Vlad Suglobov: Well, first of all, as I said, the last year's numbers were inflated by the UA boost. And the way it works is that, the paying users, they actually -- the loyal users tend to be the paying users and vice versa. The paying users tends -- tend to be the loyal users, so as we -- as the audience shrinks, we obviously first lose the players that are not as loyal. And so whenever the audience shrinks, the remaining audience automatically becomes of higher quality, right, because you have less random people, but you have more people that are loyal players. And so through that, for example, you usually see the improvement of the payment metrics, so I think it's just a natural situation that, even during the reduction of the audience, if you take a -- if you do the -- sorry, do this mental experiment and you just imagine us getting rid of all the non-paying users; and also all the users that are maybe not as interested in games, to pay substantial amounts of money. So if you remove these lower-quality users, you will end up having what we would call, let's say, a golden cohort of super loyal users and payers. And so you would see audience numbers shrink dramatically and yet we would generate most of the revenue. And we will see very high monetization per paying user just because we're looking at a higher quality remaining audience. So I think this is what creates this -- the metrics here, they don't show the complexity, the full complexity, because the payments distribution within the player audience is -- it's very uneven, right? You have this 90% of players don't pay. Of paying users, a relatively small number of paying users generate disproportionate amount of revenue. And those are the ones who are super loyal, play these games for years and spend substantial amounts regularly. And so this distribution creates this effect in my view. And again I don't doubt that we will be able to continue to see high monetization, probably even improving monetization, as value of money basically goes down over time among these core loyal audience. That's just a natural cause of things. I would even say that we can see some sort of tapering of that dynamic or a reversal of that growth in the payment per user if we start aggressively acquiring a lot of new users that are, for example, from countries which on average pay less, because that would dilute the payer's base. And it will reduce the average payment per paying player, so it's a little bit counterintuitive, how it works. I hope it makes sense.

Henrik Jernbeck: Yes. And a follow-up question to that

Vlad Suglobov: Yes, I can answer, yes. So the game is doing great in terms of attracting users and retaining users, but internally it's not built out yet for its full -- for the full potential of its monetization. So we will continue working on monetization for this game, but the good news is that we know exactly what we need to do to improve that. And this is where we need to put in some effort in the coming months, to do that and that should help us scale the game.

Henrik Jernbeck: Okay. Thank you. That's all for me.

Stefan Wikstrand: Thank you, Henrik. We don't have anyone else that have raised their hands, but we have a few questions in the Q&A box. The first one is, could you please elaborate on what the USD-related balance sheet items refers to, which caused the cost in the P&L? And I think I can answer that. So the question alludes to we have two lines in the P&L, other operating income and expense, which in the quarter impacted EBIT with roughly minus SEK 14 million. It is simplified, to say that it's only USD. There are more currencies involved, but USD is our primary currency when we operate, and also then the primary currency we have on the balance sheet, so that is the main driver for this effect. And it is essentially a revaluation. We report in SEK and we hold assets and liabilities in USD, and the net position of those is revalued and goes into the P&L. If we look at the trend over the year, we had a positive impact Q1 to Q3. And then the SEK is strengthened quite a bit towards USD at the end of the year, so that effect is kind of reversed. So if you look at the full-year number, it was minus SEK 1.7 million. So yes, not a big effect over the full-year, but between quarters, the effect was quite drastic and especially now in Q4 where we saw this minus SEK 14 million. And then we have a related question to that on, please explain how the revaluation of short-term investments in the financial net, which has been a relatively large item in recent quarters, differs from what has now been recognized in other operating income? So the short-term investment is distinct. We own shares in a listed company called Artifex Mundi, based in Poland. That was classified as a short-term investment and that share has appreciated quite a bit over the year. And that has -- that revaluation has gone into the finance net. It has nothing to do with the -- under operating income and expense, so they are distinct. Now Artifex has been reclassified as a long-term investment from Q4, but it is distinct from the other operating income and expense. All right, moving on. So Ula [ph] asks a question. And Solitaire Explorer, Martha's Mystery and Green Blast was recently removed from Google Play. Very in-depth question here. It was recently removed from Google Play. How many active soft launches do you currently have? Is three a correct number?

Vlad Suglobov: Good question, Ula. I think -- let me count. Three may be the correct number. And to be honest

Stefan Wikstrand: All right, next question is, normally your balance sheet contains close to zero accounts receivable. This quarter, it is around SEK 25 million. Prepaid expenses and accrued income has decreased with around the same amount. What kind of item has been reclassified? And this is not the first time that we have accounts receivable. It's like you say. Usually it is close to zero, but the time period between when we kind of issue the invoice and we get the payment is very short, so -- and depending on Q4 is a very good example, because you have a holiday period and then payments can be a bit delayed. So we reclassified from accrued income to accounts receivable when the kind of invoice is generated. And then the payment usually comes very soon after, so that's why we usually don't have any accounts receivable, but only accrued income, but it has happened before and will happen again. But yes, it's correct. It's -- usually it is zero. All right, next is from anonymous attendee. Could you please elaborate on the decreased head count of 60 heads? Is this mainly related to development, or is this related to any other functions? Has there been or will there be any severance pay for the leaving employees?

Vlad Suglobov: Well, this was across the departments, so there was part in marketing, part in development. We also looked critically at functions outside of marketing and development. We have supporting functions, and we -- so it was across departments. If anything, I think that development -- the reduction in development was not proportional to the total head count, because obviously for us -- the development of new games is what can make a big difference for us, right? The getting to a better situation with regard to the top line dynamic is certainly through the development. That said, over the course of the year, we've -- actually did start to use generative AI tools in our everyday work. We are -- we have decreased substantially the money that we use to spend on localizing our games. It looks like, within a short period of time, we're probably going to be seeing just one person run all the localization efforts, more or less. And that is quite a big difference compared to how game translation was done before. All right, obviously manually at some point then with tools like Google Translate and now on a totally different level with generative AI, which is improving all the time in that regard. We can also look at the work with the artwork and especially at the concept stage where you are just exploring and creating illustrations and mood boards and whatnot. So that used to be very time consuming and also very intensive, like labor-intensive, part of work. Now it's -- it used to take weeks to create a high quality artwork in that stage of work and now it can take you minutes, so there's a tremendous difference in the amount of time that these tasks can take. We have substantial progress in automating generation of artwork, which is a very -- I will say, content that has to be there, but it's not like super creative or super unique. I don't want to go into the details, but a lot of our games have -- they have content which has to be there. It's an important part of the monetization, but it's also nothing special. But it just needs to be there. And so we've had really good experience with training, neural networks to generate that type of content, with a little bit of help from a much smaller number of artists. And so this is -- these are just some examples of the actual real saving of an optimization of our game development efforts due to the generative AI. So a big number of the reduction that we've done within the development is actually due to the generative AI and then, of course, also better focus on a smaller number of games and higher quality as well. So I hope this answers your question. Was there other part of the question, which I forgot while I was answering.

Stefan Wikstrand: Yes. The final part was if there was any severance payments. I don't know if that relates to current period or future periods, but it was not significant. And so it impacted the fourth quarter, so we don't have any costs or significant kind of cash items related to that going forward. So yes, I think that covers that. And we have a question from anonymous attendee again. Do you see a trough for your sector in the game segments or -- and games segment in general, for your sector and games segment?

Vlad Suglobov: Well, I think the overall industry -- if you look at the overall market, the market remains to be down. And this negative dynamic obviously puts pressure on a lot of companies. There are companies out there. There's not a lot of them, but there are companies out there doing really well. But I would say, for the majority of companies in the industry right now, it's a more difficult time. So yes, it's not as good as it was just a couple of years ago. I think we can, we could attribute it to the reduction of the amount of time that people have on their hands to enjoy games, right? If you look at the macroeconomic situation, it looks like people have to do a little bit more work hours. Plus you have all the inflationary concerns and the effect it has on the money that they can spend. Again I think different corners of the industry are affected differently. Some corners of the industry are affected very strongly because of the type of the users that they had and the financial dynamic there. We are serving, the core of our audience is probably people who are retired, still have a lot of time on their hands, still have access to funds. And they're -- it's the wrong way to put it, but they have a relatively good financial situation and they're getting their indexed and whatnot. And they don't have to put in work hours maybe, so I think our core audience is more resistant, but the overall amount of players in the app store, I think, is not what it was obviously during the height of the pandemic. And we're still going through the stroll and trying to find the bottom of this. It's -- I think it's supposed to be close. I also think that, again, the industry dynamic in whole is one thing; and then the situation in a particular company is another thing. Even on the declining markets, there are companies that are capturing market share or increasing revenues. And so our focus, G5 should focus on creating new games that our players love, and that will allow us to scale the revenue of these -- from these games. And we don't need that much just to turn-around the top line situation, and we will be working towards that basically.

Stefan Wikstrand: All right. Then we have the final question here. Can you also comment on G5's ad revenue and any plans you might have to improve that?

Vlad Suglobov: Sorry. Could you repeat the question, please?

Stefan Wikstrand: Can you comment on G5's ad revenue and any plans you might have to improve that?

Vlad Suglobov: Ad revenue.

Stefan Wikstrand: Yes.

Vlad Suglobov: Ad revenue. Well, I think that the potential for ad monetization in our games is kind of what it is. It is we're not hyper casual. We tend to not hold onto the audience that is not willing to dive into the complexity of games really well. On the other hand, we are sort of what everyone aspires to have. We are monetizing our audience really well. If people are hooked on certain game mechanics that are quite complex, if they enjoy that complexity, then monetization comes naturally. And then that core audience is much more willing to pay rather than interrupt their experience with advertising. So we've been trying with advertising for quite some time. We have achieved certain results. It's a welcome additional incremental revenue, but it's also not a large percentage of our revenue. And it varies. On smaller games that are more casual, we see that we're able to achieve much higher percentage of revenue from advertising. However, so far, our big successes came from more complex games. And maybe this is where we are on the spectrum, so unless we find a success in the genre that's not typical for us, I think you can't expect that we can dramatically increase advertising revenue from here, also with all the privacy concerns and so forth and the reduction of advertising targeting. That said, we are working on some games and game ideas that may be more appealing to mass audiences, more casual. And in that case, this creates the opportunity to monetize through advertising and increase the revenue share coming from advertising, but that's a more -- a little bit more just in the future, so we're not talking about any games that are released yet. So that's the situation.

Stefan Wikstrand: Okay, I think that is the final question. So no one has raised their hands, so I think, with that we can move to the final remarks.

Vlad Suglobov: Yes. Thank you, everyone, for following us and for your time and for joining us today. Have a good day. Thanks again.

Stefan Wikstrand: Thank you.