Enad Global 7 AB (publ)

STO:EG7

Q1-2025 Earnings Call

[Ludvig Andersson, executive]

Good morning, and welcome to this Q1 earnings call with EG7. My name is Ludvig Andersson, and I will be your moderator during this call. Together with me to present, we have the company's CEO, Ji Ham; and Deputy CEO and CFO, Fredrik Rüdén. After the presentation, we will have a short Q&A session. So please feel free to e-mail your questions to the Investor Relations e-mail.

But now without any further ado, over to you, Ji.

[Ji Ham, executive]

Great. Thanks, Ludvig. Let's go to the first slide. We're off to a great start this year. Q1, yes, is off to a nice start with SEK 455 million of net revenues, which represents a 19% growth year-over-year from last year. Same thing for adjusted EBITDA, also grew by 19% to SEK 74 million, 16% margin, maintaining the same margin as last year.

Next slide, please. Some of the highlights for the quarter. It's a great quarter for Fireshine leading the charge, with net revenue coming in with 214% growth year-over-year, largely driven by the robust physical release slate for the period. We have Sniper Elite: Resistance from Rebellion and also The First Berserker: Khazan from Nexon, both AA, highly acclaimed titles that performed really well. Back catalog portfolio for Fireshine continues to perform well, with Core Keeper leading the way, 70% growth year-over-year.

Also completed successfully a placement of our bond offering, raised SEK 350 million of unsecured bonds, 3-year term with a coupon of STIBOR plus 625 basis points, and we have up to SEK 1 billion of potential borrowing there to the extent necessary, and we have an opportunity for use. It does improve our liquidity quite significantly and provides that flexibility that we've been looking for as we're searching to accelerate growth with M&A and investment targets.

Additionally, we did complete our cost optimization across the organization with Toadman, Petrol and Piranha. And the annual savings here is expected to be approximately SEK 88 million.

Next slide, please. A highlight after release -- after Q1, we have Palia from Singularity 6 that successfully launched just 2 days ago on Tuesday. Now it's on PlayStation 5, Xbox Series X and S. Large expansion that came out with it called Elderwood, significant content update for the existing player base as well as the new.

Now with this availability across all major platforms, we're looking forward to seeing a robust road map being rolled out to continue that long-term growth. And we expect this game to be a long live service, similar to a lot of the existing live service games that Daybreak has, where we expect to build from here on out. So potential for nice revenue growth contribution going forward as well as great profitability where we have multiple years of potential success with this title. So we're very excited for this release.

Next slide, please. Over to you, Fredrik.

[Fredrik Ruden, executive]

Thank you, Ji. Next slide, please. Net revenue in the first quarter was SEK 455 million, and adjusted EBITDA was SEK 74 million, representing 14% FX-neutral organic growth and 16% adjusted EBITDA margin. The net revenue over the past 12 months continued to increase and reached SEK 1.787 billion, which is the highest since Q1 '24, where 3 quarters of our all-time high year 2023 was included. LTM adjusted EBITDA margin came in at 19%, corresponding to past year's quarterly average.

Next slide, please. As we said a few times, we do have a foundation of more predictable revenues and cash flows. More predictable revenues comes from the live service and back catalog titles. Net revenue from this portfolio was SEK 319 million, correspond to 70% of net revenue for the group. Over the last 12 months, net revenue amounted to SEK 1.787 billion, of which SEK 1.269 billion derives from the more predictable revenue base. That portion of our revenue has been trading at 71% to 74% in the past 5 quarter. And if you don't fully recognize these figures, it's due to that we, in Q1, slightly adjusted the definition and the comparable figures.

Next slide, please. So Daybreak is the largest contributor to our net revenue and the largest contributor to this portfolio of more predictable revenues, generating SEK 190 million in net revenue, and adjusted EBITDA came in at SEK 30 million, corresponding to 16% EBITDA margin. First quarter '25 is a quarter with limited new releases for Big Blue Bubble, who generated SEK 66 million in net revenue and is our largest contributor to the adjusted EBITDA of SEK 33 million this quarter, correspond to a 50% adjusted EBITDA margin.

Next slide, please. Piranha delivered a net revenue of SEK 19 million, with an adjusted EBITDA at SEK 3 million, corresponding to 17% margin. The cost savings measures initiated in the beginning of the year are expected to, on an annual basis, save SEK 26 million. First quarter was a bit soft, but May 8, the last DLC for Clans was successfully released. And the winding down for Toadman is underway and is expected to generate annual savings of SEK 46 million, including last year's savings. We have, on an annual basis, saved approximately SEK 100 million in Toadman to be recognized in full second half of '25.

Next slide, please. Following the continued active release pipeline, Fireshine delivered its highest net revenue over the past 5 quarters. Net revenue increased to SEK 145 million, and adjusted EBITDA was SEK 22 million, corresponding to a 15% adjusted EBITDA margin. And following the business optimization efforts executed in the beginning of the first quarter, Petrol generated SEK 36 million in net revenue, with a small 4% adjusted EBITDA margin.

Next slide, please. So this is a new slide that we did for the bond investors to show the past 2 years, '23 and '24, capital generation and usage. And during these 2 years, we operationally delivered SEK 0.5 billion in cash operationally. And we invested SEK 400 million in new growth initiatives and made us debt free by repaying the remaining SEK 100 million in RCF, which we had in the beginning of '23. What we also show in this slide is that we -- that the maintenance investments in Daybreak's and Big Blue Bubble's portfolios are as low as 1.1% to 1.4% of the net revenue. So investments to protect our more predictable revenues are fairly low.

Next slide, please. And during '24, our investment in these new growth initiatives, which is Clans, Palia and the cooperation with Cold Iron, peaked at SEK 238 million. They are expected to be around half of that in '25. And in Q1, we invested SEK 44 million in the 2 remaining projects.

In addition to the investments in the new growth initiatives, we invested SEK 35 million, of which SEK 18 million in Fireshine publishing activities. The maintenance investment in the old portfolios in Big Blue Bubble and Daybreak is corresponding to 1.1% to compare with previous slide.

During the quarter, we issued a SEK 350 million unsecured bond, as Ji mentioned, which gave a cash box of SEK 579 million by end of the first quarter. And looking at the cash flow from operation, it was fairly low at SEK 18 million. And this is, to a great extent, explained by negative working capital movements of SEK 38 million. And negative working capital movement each Q1 is normal seasonal pattern for us, following a high activity quarter and the royalties and platform fees that we need to pay after such quarters.

And over to you here, Ji.

[Ji Ham, executive]

Great. Thanks. Next slide, please. Next one. Okay. Cool. All right. So to summarize, 2025, once again, with our Q1 performance coming in strong, it's off to a nice start, a 19% growth for both net revenue and adjusted EBITDA.

We have some key drivers for the rest of the year ahead of us still. We have Palia that just came out 2 days ago. A little too early to provide trend lines here yet, given that it's been less than 48 hours, but we're quite excited about the performance. And so far, so good. And I think from our perspective, there's opportunity to continue to build momentum with this title for the long term. And we're working very hard to try to get -- targeting this sort of second half of this year with Cold Iron's new title. More to come on that front as we get ready to release the title.

And stronger financial position with this bond offering that we were able to secure, significant cash on the balance sheet. And with that strengthened liquidity, we're looking to accelerate growth. We have opportunities that we're evaluating throughout. And while we don't have anything definitive to announce yet, but we're actively seeking opportunities for growth with M&A in the marketplace currently.

So thank you for the support. We're looking forward to delivering great results going forward.

So that wraps up our quarterly earnings report, and now we'll move on to Q&A with Ludvig.

[Ludvig Andersson, executive]

Thank you very much, Ji and Fredrik. A first question from [ Viktor ]. Could you please explain the benefits of placing the SEK 300 million bond and leaving this money unused for a time?

[Ji Ham, executive]

Yes. So as we have communicated, the purpose behind the capital that we raised was to look for and to finance and fund potential acquisition opportunities given where the market has been. There's been distress in the marketplace. There has been capital -- dearth of capital in the marketplace, especially in the gaming sector.

Having said that, as we're looking for opportunities, not having liquidity available readily in order to transact quickly also have left us a little bit behind in certain situations that we've looked at in the past. So we wanted to make sure that we do show up to the table when we're negotiating transactions and targeting opportunities that we have the financial wherewithal to be able to transact quickly and hence, the reason why we did raise this capital at this time.

[Ludvig Andersson, executive]

Thank you very much, Ji. A question here from [ Joakim ]. Could you please elaborate about your view on success/progress for Palia Elderwood and expectations for Palia for the year?

[Ji Ham, executive]

Yes. I think the goal for Palia ultimately is to be able to broadly distribute the title, get the product to profitability initially. But similar to a lot of our live service titles, we do not look at this as a, hey, look, we got the game out, make most of our revenues and profitability at release. This is not a premium title. It's a free-to-play live service title. So there will be continuing update on top of Elderwood. Elderwood was a major expansion that just came out, but there will be a communication of a longer-term road map that's coming up in June in the next month.

Along with that, the team at Singularity 6 will be communicating a lot of exciting plans ahead of it for Palia. And along with that, the idea is to be able to build a robust community of players across all the platform that the game is on now, finally, across PlayStation and Xbox on top of Nintendo, MTC to be able to grow this title over the long term with continuing content updates and the business model being as we're acquiring and building that community, we'll be able to sustain this opportunity and the live service for the long haul, similar to a number of our other titles.

So we don't have a target that we could communicate today yet, but we do look at the business model for this title to be very similar to a number of our other successful titles, whether that is Lord of the Rings Online or EverQuest. Similar type of outcome ultimately in the long term is what we're looking for.

[Ludvig Andersson, executive]

Thank you very much. Continuing with questions from [ Joakim ]. How does the release pipeline for Fireshine look like for the remaining of the year?

[Ji Ham, executive]

Yes. I mean we're very happy with their performance for Q1. But part of that benefit of that significant performance was some of the delays in physical titles that we're rolling into this year. And their business is still dependent on both digital releases as well as physical. Physical titles were largely front-loaded this year, and we saw that significant increase where when you look at it year-over-year, physical titles net revenue increase was over 1,700%. But this is part of their business, which is physical title releases are a little lumpier in terms of timing because it's dependent on when their publishing partners are slotting out what the release time line could be.

So with that said, they do have an exciting indie digital release schedule for this year on their slate. We already have announced Tales of Seikyu, which is slated for release in May, in a couple of weeks. And there's other titles that they're working towards releasing.

So we're excited for their rest of the year. But along with their back catalog sales, which is holding up very nicely, with Core Keeper being a main contributor, a couple of new titles that they have on their slate for the rest of this year and building on top of the physical success so far this year, we do expect them to deliver a nice year for us this year.

[Ludvig Andersson, executive]

Thank you very much. What can you say about the Cold Iron game publishing window and expectations? Will it be impacted by GTA that now has been postponed?

[Ji Ham, executive]

GTA VI, when that game comes out, I think the expectation is that everyone is going to drop what they're doing to play it. But with that said, they did announce that it's coming up next May. But with that said, for us, focus on Cold Iron is almost entirely on quality. So we do want to make sure that any game that we deliver from our investments meet the quality as well as commercial success. So we're focused on doing that.

And time line is based on that. Are we achieving quality? Is the product where we need it to be in order to have conviction around a success? So still on track for what we're trying to deliver there. But with that said, we do -- we are working with a franchise IP owner as a part of this particular title. So until we have alignment in terms of timing of announcement, et cetera, we can't say too much yet, but we're hopeful that we would be able to communicate that very soon.

[Ludvig Andersson, executive]

Thank you very much. A question from [ Taro ]. The EG7 share price has been under significant pressure for a long time. How do you view this development? And what's your message to long-term shareholders?

[Ji Ham, executive]

Yes. I think it has been difficult for sure, as individually a meaningful shareholder here. And the market has been tough. And I think this is not just pertaining to EG7, but broadly, gaming industry. Other than the biggest guys, the biggest platforms and biggest AAA publishers have had difficult time, right, so over the last number of years with the industry going through its turmoil.

But we do think the market is turning around. When you look at the data last year, in 2024, we have almost 15,000 people in the gaming industry lose their jobs, with big layoffs and also a number of studios closing down. But this year, year-to-date, we're at around 2,000. So pace has slowed down significantly in terms of job losses, which is an indicator that the market could be stabilizing and we could be turning the corner.

So we're optimistic that the market will get better. Along with that, we're focused on, as EG7, executing against our plan. We communicated our long-term plan now, I think, going on 2 years ago. And that's the plan that we're trying to continue to execute again successfully. So 2025 is a very important year building into that 2026 target that we provided.

We have become a little more cautious as to how we invest given where the market has been and where the market still is. But nonetheless, we did raise capital in order to be able to also try to accelerate growth with M&A investment opportunities that we're proactively looking for. A combination of that, together with our continuing effort executing against our organic growth, we remain confident and optimistic that we could deliver. And as we deliver, that's when we expect the stock price to reflect successful execution.

So we're not -- while it is not obviously something that we're happy about as to how the stock price has performed, we do have long-term conviction that with the execution of the business plan that we have communicated that we have a long-term upside for not only individually as a shareholder for myself, but a lot of the support that we have with our existing shareholders. So thank you for your support.

[Ludvig Andersson, executive]

Thank you very much, Ji. A question from [ Johan ]. Could you elaborate on the cost-saving measures and maybe give an indication on when the cost savings in personnel will be visible?

[Ji Ham, executive]

Fredrik?

[Fredrik Ruden, executive]

Yes, I can take that. So if you look in the P&L in the consolidated income statement, it looks like the personnel expenses has increased Q1 -- from Q1 last year, but that is explained by that we also have restructuring reserves based on the cost cutting that we initiated in the beginning of Q1 this year.

And in total, we have approximately SEK 88 million, I think, we came to that we will recognize during second half of the year. And the reason why we say so is that some of these people, they are engaged in certain projects that we are working with. And we honor those projects and would like to keep delivering on those. And they will end in the middle of the year somewhere. It's not really decided exactly when that will happen. So that's why we don't know exactly when we will see the effect from those SEK 88 million. But second half of the year is what we have communicated.

[Ludvig Andersson, executive]

Thank you very much, Fredrik. A question from [ Emilio ]. Is there any seasonality across quarters in My Singing Monsters?

[Ji Ham, executive]

There's a little bit. I think -- so the biggest quarter typically ends up being third and fourth quarters. First quarter tends to be a little lighter because they're coming off of a usually a robust activity during the holiday season for My Singing Monsters in particular. Similar to a lot of the other titles that we have, there's definitely seasonality where you'll see, towards the second half of the year, a stronger performance and Q1 tends to be a little lighter.

[Ludvig Andersson, executive]

Thank you very much. Another question from [ Emilio ]. Please comment on how the ideal M&A case you're looking at to do looks like? Is it restructuring, turnaround case, end-of-life span games or other type of deals?

[Ji Ham, executive]

Yes. I mean, I think we've done several different types of deals historically where we've seen good success. But our current thinking in this marketplace is that there is lack of capital availability for small- to medium-sized developers. So we're looking at those types of opportunities as being the most compelling.

Also, I think I'm sure you guys have seen the headlines, there are bigger publishers also pulling back and more focusing and doubling down on franchises they already have and that are recognized. And they're pulling back from investments in more original IP-based titles or something that they consider to be less core. So there's noncore studios or IPs and opportunities that are also in the marketplace.

So those are the type of situations that we typically like to target mainly because you get to take advantage of some arbitrage, meaning assets that a seller does not want mainly because of whether it's noncore or because it may be distressed in some fashion. Typically don't have a lot of buyers for them. So we like more limited competitive situations where we not only have a valuation advantage, but opportunity to also roll up our sleeves because that's what we've done historically that we do roll up our sleeves and we go in and we try to help shore up the studio, the project, et cetera, to create additional value.

So typically, we will say we do not want to target any transactions where we can't add value. It has to be something where we do believe by us owning it that there's additional value that we could unlock for the long term. But yes, I mean, we're looking at many different types of opportunities. But ideally, we would like to see opportunities and ultimately close on opportunities where we have good valuation plus opportunity to increase that value and return with our heavy involvement.

[Ludvig Andersson, executive]

Thank you very much. A question here from Hjalmar. MechWarrior Ghost Bear has positive reviews on Steam. Has it generated sales as expected?

[Ji Ham, executive]

It's only been out for a week, but so far, so good there as well. It's tracking according to what we expected. Nice reviews like you noted. It's 89%, I believe, on Steam, a very positive reception. And it's a quality release. And I think a lot of the community members that are playing the game and the new content actually are saying that it's even better than the base game that just came out a few months back in November -- October last year.

So we're very excited about the continuing quality releases from Piranha. It's a beloved IP, BattleTech IP, but relatively smaller footprint compared to some of the other sci-fi IP out there, but nonetheless, good quality, great community. Performance-wise, it's doing well so far, and we're excited for them to continue to build momentum around it.

[Ludvig Andersson, executive]

Thank you very much. Another question here from Hjalmar. Can you elaborate on any signs of improvements or improved market conditions for Petrol?

[Ji Ham, executive]

Yes. Petrol is -- has had -- I mean it's like a lot of the other service businesses within the industry. Petrol is subjected to the same type of pressure because typically, when a sector or industry is going through a downturn, one of the first areas of cutback is marketing spend because that's an easily controllable cost to reduce. So Petrol was subjected to that pressure for the last number of years.

But we do see signs of stability. We do see some of the bigger guys coming back to market to start planning for spend, where we see more opportunities, I would say, more volume of business development happening with Petrol.

So -- but it remains to be seen. It's early. We still believe that the market is not completely out of the full distress. It is rebounding, but it may be some time before we could point to sufficient stability to say that Petrol is also back to stable performance.

So we're monitoring it closely, but we did cut back on some of the costs with Petrol in the first quarter as well. So they're operating profitably now, which is good. But we're looking forward to helping and also driving potential growth there together with the team there as the market is stabilizing and turning around.

[Ludvig Andersson, executive]

Thank you very much. Another question here from Hjalmar. Could share buybacks still be relevant?

[Ji Ham, executive]

It's not something that we have -- we haven't -- I mean, so when we -- so for example, being able to raise this capital with the unsecured bond offering, the idea behind that capital raise is to be able to accelerate growth. We believe that growing our business is a better return and ultimately creating better shareholder value creation than simply buying back shares at the moment. But yes, we acknowledge that the price is very -- it is where it is without commenting on what our perspective on value there is.

But nonetheless, it's not something that we're not talking about. But as we look at opportunities, we do think there's more compelling opportunity for investment in terms of being able to accelerate growth with the M&A opportunities that we're seeing.

[Ludvig Andersson, executive]

Thank you very much. A question here from [ Rowand ]. How is the pipeline for 2026? Can you share some light on that?

[Ji Ham, executive]

Yes. I think part of the commentary for the last couple of quarters where we have communicated that we did want to see how some of the existing investments that we're making to perform. So from that perspective, I would say, whether it's some of the -- our franchises that we own, H1Z1s of the world, EverQuest of the world, we are being a lot more conservative there as to should we be investing aggressively to continue to grow or look for opportunities to develop those games. We want to do it. But at the same time, I think we have to be more cautious given where the market has been, and that's what we've been doing.

So it's been a little slower, I would say, on purpose that we are looking to see how Palia performs, given that investment, looking to see how Cold Iron's title performs before we decide to invest significantly again.

So it is -- it may be a little bit slower, but nonetheless, there are other opportunities that we're looking at. M&A is one where we do think given the market where we are, there are some very compelling opportunities that have been in the marketplace. And also, we expect there could be more going forward to be able to help us accelerate our growth going forward.

But we are being cautious. Pipeline-wise, there are M&A as well as organic investment opportunities, but we do want to make sure that transactions or investments that we're making are carefully and with high discipline. We are looking at those ultimately for a really good alignment of how they could fit into our longer strategic vision and growth strategy and really being able to be conservative and also cautious about how we approach risk as we are in this marketplace. And that's been the approach so far.

[Ludvig Andersson, executive]

Thank you very much, Ji, and thank you very much, Fredrik. I think that's all the questions and time that we had. So thank you very much for your time, everyone, who listened in, and we wish you a great day. Thank you very much.

[Ji Ham, executive]

Great. Thank you, everyone.

[Fredrik Ruden, executive]

Thank you.