G5 Entertainment AB (publ) (OTCQX:GENTF) Q2 2022 Earnings Conference Call August 11, 2022 2:00 AM ET
Company Participants
Stefan Wikstrand – Chief Financial Officer and Deputy Chief Executive Officer
Vladislav Suglobov – Co-Founder, Chief Executive Officer and Board Member
Conference Call Participants
Simon Jonsson – ABG Sundal Collier
Anja Soderstrom – Sidoti
Jesper Birch-Jensen – SEB
Rasmus Engberg – Handelsbanken
Stefan Wikstrand
Good morning, everyone. We’re just waiting for the attendee list to load so that everyone is logged on to the meeting. [Operator Instructions] I think everything looks good on my end. So I’ll hand over to Vlad and let’s start this.
Vladislav Suglobov
Hello, everyone. Thank you for joining us today for the presentation of G5 Entertainment Second Quarter Results.
I’ll start by giving you some of the highlights from this morning’s report. Revenue was SEK 344 million, which is up 2% year-over-year, but down about 13% in USD terms. And we delivered this result when, according to Sensor Tower analytics, match-3 market has declined about 10% year-over-year in USD terms, and the hidden object market also had a slightly negative year-over-year dynamic. So there are some headwinds there, which we were working against. We also believe that the market has returned in full force to its pre-pandemic seasonality patterns, and we are facing weaker second quarter and third quarter as people spend more time outdoors. And then we’re going to have a stronger Q4 and Q1 following Q2 and Q3. If you follow the company for a long enough time, you may remember this used to be the seasonality pattern before the COVID pandemic. And it looks like we are going back to that pattern naturally. And this summer is very pronounced in this regard.
So the highlight of the quarter in terms of revenue development was Sherlock, which was up a strong 152% year-over-year. The game became our top game by revenue on Apple and Google during the second quarter, and we expect it to become our largest game by monthly revenue across all platforms already before the end of the year. Our own games generated 69% of revenue compared to 64% a year ago. And the new generation of games, which grew about 6% year-over-year in USD terms, stood for 57% of revenue.
Jewels family of games was responsible for 30% of the group’s total net revenue. And as I mentioned, Sherlock was the star performer. As you can see in the graph on the right, there was a substantial increase in the audience of the game due to the boost and there was very nice continuous development of the top line of the game, and it was responsible for almost 20% of our net revenue in the quarter compared to 7.5% a year ago.
We are still on track to release six new games in the year 2022. We have released two, four more to go. We believe we are on track, no delays there.
The gross margin was strong, 66% higher than a year ago, and that difference is obviously driven by the increasing percentage of own games and the revenue mix and also store diversification and lowering of Microsoft Store fee, of course. Sequentially, gross margin was slightly down. It is due to the success of Sherlock on Apple and Google. So we quite successfully scaled the games revenue there. But as you know, Apple and Google are higher store fee platforms, and that tilted the gross margin balance a little bit in the opposite direction.
So, if we look at what else is driving gross margin, the G5 Store continued its steady growth. And it’s been growing since the beginning every quarter, and it continued then it increased about 16% sequentially from the first quarter.
As we communicated previously, we temporarily increased our UA spend significantly during the second quarter. Instead of the usual 20% that we were spending on user acquisition in Q2, we spent 35%. And this boost was mostly spent on Sherlock and it did well, and it increased the monthly active audience. It increased monthly paying users. It has increased organic downloads substantially and the conversions. So Sherlock really did respond well to this UA boost and the money that we spent acquiring users for Sherlock is going to come back to us in the following quarters. And we will see the impact from this boost in the following quarters. And you can see the effects that the boost had on the Sherlock’s audience in the top right corner of the slide.
So we also continue to have a strong operating cash position. We remain profitable and cash flow positive and debt-free as before. I’d like to underline that if not for the boost that we made in the quarter, if we were to spend on a 20% user acquisition reinvestment level, our EBIT margin would have been around 15%. So a healthy result for the quarter, considering FX pressure and the headwinds in the quarter.
So this all sounds like business as usual. But, of course, we’ve been through another special quarter and still strongly affected by Russia’s invasion in Ukraine.
And on the next slide, I’ll give you an update on our new locations in our operations there. So the safety and well-being of our employees was and remains obviously our utmost priority. And so far, we are getting close to having 125 employees in the new locations. So these are either newly hired or mostly relocated from our existing offices. And this number corresponds to 13% of our total workforce, and the pace of relocation has been gradually increasing in the second quarter.
So while our largest office is still in Ukraine, there are five of these new development offices, and this is Poland, Montenegro, Georgia, Armenia and Bulgaria. And we also have up-and-coming new offices in Cyprus and Turkey. And our long-term goal is to grow these offices into large new development basis. And I think it’s working, and we are gradually moving towards this goal.
While we are making these changes, we open offices in countries with comparable cost of living with the goal of maintaining the same level of costs for the company. But there may be slight increases over time like adjustment in taxes and cost of living. We also believe that we are more or less at optimal capacity right now, and we aim to maintain the same size of the team through the end of the year, around 960 employees that you can expect that basically, we’re going to be around that number through the end of the year. There are no plans to increase it.
Now, let’s take a look at the financials of the second quarter. So as I’ve said, our own games stood for 69% of revenue up from 64% a year ago. And Sherlock was responsible for 19.5% of net revenue and that was up 152% year-over-year in USD terms. So really strong performance from Sherlock there, and we’re really optimistic about the prospects for the game. Our main growth drivers continue to be new generation games, of which Sherlock is a big part. And this is now our biggest segment of the portfolio at 57% of revenue, and that was 47% in the second quarter last year.
And finally, monthly average gross revenue per paying user was a strong US$64.1, not a bad result year-over-year considering the FX situation, right? Because we have headwinds from all our revenue currencies other than dollar weakening. And so our USD revenue and USD metrics get sort of compressed through that and to have a dynamic of minus 3% for the key monetization metric year-over-year, when match-3 market is down 10%, when there is the FX headwinds, that just tells you that our – that we are making progress in monetizing paying users still despite all this.
So now, let’s look at earnings and margins. Our gross margin was a strong 66% substantial improvement year-over-year, and this is mainly, thanks to higher share revenue from our own games and lower store fees in Microsoft Store and G5 Store. And as I said, sequentially, it was down slightly due to the success of scaling Sherlock’s revenue on Apple and Google. So a really good thing considering that the company was deriving a lot of growth and success from Windows Store. And now we have some really good traction on Apple and Google with Sherlock. So that is good news, but it also creates this situation where if the higher fee stores generate more revenue for the company then the gross margin decline slightly.
So if we look at EBIT, we have 0.3% and that’s down from almost 13% a year ago. And while we did have some FX pressures during the quarter and there is that. This drop is mostly related to the temporary UA boost, which raised our UA spend in the quarter to 35% of revenue. This money was spent on Sherlock. We’re going to get it back. But in the quarter, we had this impact. In the absence of the spending, we would see 15% EBIT in the quarter. So fundamentally, the company remains profitable, able to go back to profitability, and that’s what we will do.
So this boost is now over. It was over in July as we have planned, we spent three months doing it. And then at the end of July, we resumed a normal course of operation where we reinvest a certain percentage of revenue from Sherlock back into user acquisition. So even though we kind of returned to normal levels, we also returned to normal reinvestment levels on a higher revenue level for Sherlock. So we will still be spending more on Sherlock in absolute terms compared to three months ago just because Sherlock went up in terms of revenue.
So we will be carefully analyzing the result of this boost and studying the cohorts of the users that we have acquired and making sure that we do get our money back and also learning from this. And we will be using this knowledge, obviously, to plan for future boosts and future improvements in our marketing and user acquisition strategy. And in the meantime, we are back to normal user acquisition for Sherlock starting August. And this means that in Q3, there’s only one month of the boost mode for user acquisition and then two months of going back to normal. And then the margin in Q3 should be substantially better as we go back to profitability and normal strategy of UA reinvestment and then Q4 should be even better.
And we intend to keep monthly user acquisition reinvestment level at the previously communicated range of 17% to 22%. So we’re going back to that previous mode. But again, I’d like to highlight that we were still doing the boost in July, which is one month of Q3. So don’t expect us to come back to expanding EBIT marginality in Q3. It might take a little longer because there was one month of UA boost in Q3.
Now, let’s turn to the next page and discuss the cash flow and our cash position. We have a strong cash position, thanks to our stable cash conversion. Capitalized development expenses impacted cash flow negatively with SEK 46.4 million. Overall, as you can see, capitalization was lower for a number of reasons, including that we have stopped capitalizing on some older games as we put them in so-called harvest mode. And as we free up resources to work on the new projects and new game ideas.
During the quarter, we paid the highest dividend ever in the company’s history, a total of SEK 59.1 million, and that’s corresponding to SEK 7 per share, which also weighted on cash flow.
And despite this, total cash flow was SEK 34 million and total cash at the end of the period was SEK 226 million. But please note that our UA payments were delayed and that impacted the cash flow in the quarter positively.
And now, let’s turn to a brief outlook for the rest of the year. So starting with a brief comment on the war in Ukraine. Obviously, it’s continuing, and we are continuing the relocation of employees to Poland, Armenia, Georgia, and Montenegro. And we’re starting with Bulgaria and then we’re also adding offices in Turkey and Cyprus with the same intention. And we have also started hiring locally in these locations, and we are successfully hiring there.
So we are gradually moving towards a more distributed workforce across several countries. And despite the relocations and uncertainties during the quarter, we are working at full capacity. Thanks to our great teams. Work is ongoing in all active and new projects. We are not seeing any significant delays, and we are on track to deliver six new games in the year 2022, of which two were already released. Once again, we believe we have reached the optimal capacity, and we aim to maintain the team at 960 at least through the end of the year.
So turning to the outlook, we anticipate that Sherlock is going to become our biggest game by revenue across all platforms before the end of the year. Thanks and in part to the boost that we have just completed. As planned, following the boost in Q2 and the first month in Q3, we intend to lower our UA spend back to the communicated range of 17% to 22%. And accordingly, we expect the profitability to rebound in Q3 and even more so in Q4 of this year. We also expect that the overall market is going to improve towards the end of the year, in line with pre-pandemic seasonality patterns, which will be a positive factor. And we expect that the FX situation is going to be better for our profitability towards the end of the year as well.
So our outlook is underpinned by the fact that we have successfully transitioned to own games, and they will continue to increase as a percentage of revenue, resulting in higher gross margins and higher profitability over time. The goal of the increased UA spend was to bring the group’s revenue to a new higher platform to deliver even higher profit margins over time due to the inherent leverage of our business model. And in coming quarters, it is time to reap those rewards. And as we learn from the results of this quarter and of this increase in UA spend, we will use these learnings to accelerate our growth.
And after paying the highest dividend in the company’s history, we finished the quarter with a strong cash position. We remain profitable, cash flow positive and debt free.
And I am very grateful to all our employees for their hard work under these challenging circumstances, and I’m very proud of the strong accomplishments by the whole G5 team.
This concludes my presentation, and I’d like to open the call for questions.
Question-and-Answer Session
A – Stefan Wikstrand
Yes. And we have the first question from Simon Jonsson here. Simon, I think, we should hear you now.
Simon Jonsson
Can you hear me?
Stefan Wikstrand
Yes.
Simon Jonsson
Okay. All right good morning guys. So first one for me here. Could you elaborate a bit on the development of Hidden City and what the trend in that game is right now?
Vladislav Suglobov
It is gradually declining. As we have said, the game is older than 10 years now or getting very close to being 10 years old. It has been gradually very slowly declining for a while now. It kind of made – I think it was more or less flat development quarter-to-quarter, but year-over-year, you can certainly see the gradual decline. We expect the game to basically just extrapolating what we see, we expect the game to continue gradually declining probably with some rebound towards stronger Q4 and Q1, as it usually does towards the end of the year.
Simon Jonsson
All right, thank you. And I think you have talked previously about that game kind of almost flatting out or at least the decline flatting out. Is that a trend you still see or expect?
Vladislav Suglobov
For Hidden City to stabilize [indiscernible] you mean. That’s what we have seen with other games. For example, with The Secret Society, eventually, it found a level at which it became really stable. So it’s still declining, but it was a really small decline and it was virtually stable for several years. So I would expect that Hidden City will find this level as well. I don’t know where it is, unfortunately. So we’ll see.
Simon Jonsson
Okay. That makes sense. And also a question on Sherlock. Now, when you kind of cut back the UA, will you optimize the UA investments for Sherlock similar to other like mature games? Or will you still sort of overweight the UA into Sherlock if it makes sense?
Vladislav Suglobov
Yes. So we are on the aggressive side with the UA for Sherlock. We don’t think the game has matured. We will certainly continue. I think the game can make more money per month than it does now. And so there’s still opportunity to scale and improve. So there is no change in thinking for us in that regard. And we will monitor the results of this boost. And as we get closer to the end of the year, we’re going to have three years of the games development in the data.
And so I wouldn’t even – basically, we may want to do this again, but we will make sure to communicate in advance and explain our thinking and why we think it’s a good thing to do. But it’s not like the boost is over and that is it. We are learning, we are trying to have Sherlock grow stronger, and we want to fully realize the potential of the game, so that our thinking has not changed in that regard.
Simon Jonsson
All right. And as you’ve seen a bit unhappy with the response here for Sherlock, does this mean that you will look to accelerate investments into other new game development or anything such kind?
Vladislav Suglobov
Well, certainly, it really doesn’t have to do anything with Sherlock. I mean, we were just trying to give the game what it deserves and to make sure we’re not missing anything in terms of the game’s potential, right? So that is our framework of thinking. And we would still dedicate a lot of resources to creating and soft launching new games. That’s what G5 is about. Having a portfolio, having existing games, making sure these games fully realize their potential, and we’re not missing any opportunities to scale there, making sure we do everything that we can in this portfolio to develop well, and at the same time, dedicate a lot of resources to generating new ideas, creating new games, soft launching them in the market with a goal to going into global launch with one or two games a year.
So again, Sherlock, the results of the boost of Sherlock are positive. Don’t get me wrong. It’s just been early morning. But maybe they fell short of some really rosy expectations and then also against the backdrop of seasonality and the decline in the market overall, it just doesn’t look like a lot of change right now, but it’s a long-term investment, and this is always how we invest in user acquisition with the goal to get that money back in the next several quarters.
So, the boost is done, but the results of this boost we will experience over the next few quarters, and there will be a lot of learning, and we will make adjustments to our UA strategy based on this in order to continue giving Sherlock everything we can to realize its potential in full and drive the game’s revenue as far as we can, while at the same time, paying a lot of attention to new ideas and new games that we’re launching in the market.
Simon Jonsson
Okay. That makes sense. And just the last one from me here. Now, when you will kind of pull the brakes on the UA spending, at least short term, will you look to increase buybacks or dividends instead?
Vladislav Suglobov
We may, right. We have the mandate from the Board to do the buybacks, and we will look at the market and decide on that depending on the opportunities. With regard to the dividend, we always aim to at least maintain and ideally improve dividends year-over-year. So that may happen as well.
Simon Jonsson
All right thank you. That’s all from me.
Vladislav Suglobov
Thank you, Simon.
Stefan Wikstrand
Thank you. And then we have Anja Soderstrom from Sidoti. Anja, I think we should hear you now.
Anja Soderstrom
Yes. Hi Vlad, hi Stefan. Good morning.
Stefan Wikstrand
Hi, Anja.
Anja Soderstrom
Thank you for taking my questions. So I’m just wondering if you have any thoughts around the timing of the boosted UA spend given the second quarter was a little bit softer due to seasonality, we think. Will they have been made more sense to do it later in the year when it’s a stronger sort of period maybe?
Vladislav Suglobov
Yes. Well, let’s say, yes and no. It’s never an ideal moment because everything is changing in real time. And we’ve just had two years of data of how players play Sherlock. We’ve just received that in the first quarter this year, right? And this is when we started preparing for this boost and it took a little bit of time to prepare and plan obviously, something like this needs to be planned out. And I don’t know what’s worse buying when the spending is muted and sort of therefore, expecting that the spending will be muted in the future just because of how model works or buying when the spending is amplified and then going into a slow season when your expectations with regard to how well users will monetize is not true.
So it is a hard question. But the important thing, as you say, is that, yes, maybe towards the end of the year is going to be a good time also to acquire users. Yes, usually, it is. And we are being aggressive enough with user acquisition for Sherlock to continue doing that.
Are we going to do like the boost thing in order to drive even more organic users into the game towards the end of the year? We will certainly consider. We will look at that, and we will look at how the revenue and the audience develops over the third quarter, and we’ll make that decision. But in any case, we will tell in advance and very clearly explain our thinking. So, I would not exclude the possibility that we will do more boosts in the future for Sherlock or other games.
Anja Soderstrom
Okay. And I understand you kept that boost in July. So, the EBIT margin in the third quarter is going to still be softer. But then in the fourth quarter, what should we then expect there? Because hopefully, the fourth quarter will be much stronger in terms of revenue and then you have that lower spend on UA. So…
Vladislav Suglobov
Yes. So Q3 really depends, right? It’s just one month, and we may make up the difference in the next two months or maybe we decide that we shouldn’t. So we’ll see about the third quarter. But, of course, we start the quarter with one month at very high spending. So the other two, it’s not very high, but it’s higher than normal, but we were already kind of tapering spending from the first two months of the boost.
And then Q4, as long as we don’t do – as long as we decide that we’re not doing any boosts and we are just sticking or we’re staying with our strategy for user acquisition reinvestment, then it can be a really good quarter in terms of profitability, with the pickup in revenue, with, I believe, certain improvements in currency exchange ratios towards the end of the year that will boost our profitability. And with the normalized user acquisition spend, Q4 can be a very good quarter in that trend.
Anja Soderstrom
Okay, thank you. And just one last one. So you’ve been a bit capacity constrained due to the war in Ukraine as you’ve been taking care of your employees. But you communicated before that you’ve been on plan to release the new games anyway, but maybe put off some of the updates on games. Where are you now in terms of capacity and those upgrades?
Vladislav Suglobov
We are at full capacity. So our Ukrainian employees, they are in parts of Ukraine, where the situation is more stable and they’re able to work full hours or very close to that. And so we’ve been on time with the game updates, with releasing new games, the disruption only lasted a few weeks in the first quarter. And as we have said back then, we quickly returned to working at normal capacity, and we remain working at normal capacity.
Anja Soderstrom
Okay, thank you. And that was all from me.
Vladislav Suglobov
Thank you, Anja.
Stefan Wikstrand
Thank you. And now we have Jesper Birch-Jensen from SEB. Now, you should be able to talk, Jesper.
Jesper Birch-Jensen
Yes. Good morning. Can you hear me?
Stefan Wikstrand
Yes.
Vladislav Suglobov
Good morning Jesper.
Jesper Birch-Jensen
Good morning. Thank you for taking my questions. Just first off, you mentioned the Sensor Tower figures here, the match-3 genre and the hidden object genres. And I’m just curious to hear your thoughts on what’s driving the declines. I mean, is it mainly in regular seasonality and perhaps some type of COVID normalization? And what’s your thought on where the market is heading from Q2 going into Q3?
Vladislav Suglobov
I think these are the same drivers that I have listed. First of all, again, the strongest USD in years in Q2, right, against euro, against Japanese yen. And so you have sort of when you look at the market in USD terms, the part of the market that originates in other currency sort of compresses in USD. And you have, by my estimate, or for the G5’s mix of revenue, we lost six percentage points of growth in comparison, six percentage points just on FX in the second quarter. And then, for example, we removed all our games from the Russian App Store and a lot of other developers did as well, and that cost us about 1.5% as well. So you’ve got 7.5% right there.
And so if you look at the overall market dynamic, it’s minus 10%. And you take into account the seasonality, and there’s all this rebound in travel and COVID normalization. So, I think that is what’s driving it.
And as we are going back to maybe more normal relative currency exchange ratios and as we go back to more quarters where people spend more time indoors, we will see the activity, the monthly active users and the organic downloads go back to higher levels as people will search for some entertainment, for some free entertainment as well, right, depending on how you view the economic outlook for the second half of the year, and that will make things better towards the end of the year as it did in previous years before the pandemic.
Jesper Birch-Jensen
Thank you. I mean, even despite the market headwinds, so to speak, I mean, you’re increasing UA for Sherlock. You must have gone the field for how that kind of boost compares to your other successful games. I mean, how would it – because you mentioned in the last report that you could see Sherlock becoming larger than the Hidden City over time. But how is the increase in UA compared to when you’ve done it for earlier successful games in terms of metrics?
Vladislav Suglobov
I think overall, the market is more competitive today, right? When we went through this fast growth trajectory where you can see back in 2016, I think, that was a little bit more dynamic process, but then the competition was much less than the market for hidden object games now. Obviously, we are up against some larger games. And overall, there is a number of really high-quality offerings in the market. And yet despite all this Sherlock continually advances, wins new audiences and brings in more and more revenue. I think it’s just a more gradual process, but the boost was definitely positive. We’re definitely getting our money back.
We definitely have attracted a lot of users in addition to the ones where – which we bought and from which we will recoup the money that we invested in this user acquisition. So overall, very positive and profitable over time over the next several quarters. And this will also provide a lot of learning that we can use towards the end of the year and then the following years to continue realizing the potential of Sherlock. And I don’t know, I still don’t know how big it can get, but I think we can certainly take it higher than now.
Jesper Birch-Jensen
Thank you. And just lastly, on scaling Sherlock on the Microsoft Store. Is that something you see reaching levels similar to sort of your portfolio throughout the rest of the year? Or what kind of process is that? And what’s going to be the main driver there to achieve it?
Vladislav Suglobov
Well, it’s certainly something that we will be discussing. So Microsoft Store for casual games is slightly smaller than Apple and Google. And so there is more opportunity to scale on Apple and Google when it comes to acquiring new users. Windows is a bit more challenging. So maybe it will be a little bit more organic process on Windows than on Apple and Google. And that’s why there is a difference in dynamic.
But we’ve also had this really good progress on Windows Store organically. And so we will work on how can we do this for Sherlock as well. But that’s the difference in dynamic. With Apple and Google, it’s much easier to kind of put the money into really scaling your audience and achieve progress there. With Windows, it’s a bit more gradual and organic process as there is not so many users and the store is not that large in absolute terms.
Jesper Birch-Jensen
Great, thank you. That’s all from me.
Vladislav Suglobov
Yes thank you.
Stefan Wikstrand
Yes, thank you. And then we have [indiscernible] Otterbeck from Redeye. You should now be able to speak [indiscernible].
Unidentified Analyst
Thank you. So just a question on Sherlock and a bit on the – you showed this graph. So the monthly paying user, which looks pretty good. How is the kind of monetization been on this? Is this like normal? And the second question, that would be, do you think you can kind of increase the monetization of these users in Q3 and Q4?
Vladislav Suglobov
Yes, the monetization looks normal, and we have good revenue development from the cohorts that we have acquired. And certainly, we are working on bringing new features into the game with the aim of monetizing the existing user base better. And obviously, it’s a bigger user base now with more paying users with more active users and more opportunity to monetize them down the line. And so I think when the user activity picks up around the holiday time and when we launch big new features that we have in the pipeline towards the end of the year, that may have a substantial effect on the game’s revenue development because the user base to engage with these new features and improve monetization is going to be larger.
So that is certainly our hope is that through the continuous improvement of the game as before, we will be able to increase the monetization but now also for all these newly acquired users.
Unidentified Analyst
Great, thanks. And then a question on seasonality. You mentioned that the market is moving back more to normal. So should you look to maybe at previous years, if you kind of look at what we should expect for you in Q3? Of course, we’re adjusting for maybe higher UA in August or sorry, in July.
Vladislav Suglobov
Yes. Well, so usually, we had a step-up in the improvement in the activity already towards August and then September would be kind of an in between month with really strong October around Halloween and kind of colder weather already. And then there’s usually kind of very stable November and then strong December, followed by strong January, weaker February, but then usually very strong March. That’s the typical kind of rhythmical pattern that we’ve observed over the years. So yes, unfortunately, I don’t have specific numbers for you, just – what increase in revenue to expect, so to speak, from the seasonality, and we’ll see how exactly this unfolds.
But just sharing the thoughts on basically what we observe in the market when the organic downloads go down when your engagement KPIs of the user audience go down and they do in unison across all games except the ones where you’re really pouring in new users that just tells you that overall in the market, the activity is suppressed. And then you just – you couple it with what you see out of your window when you go on vacation and how many people are there and what happens in the airports, and you just understand that maybe people are taking a break from their games. But eventually, it’s going to get colder.
Unidentified Analyst
Right. And then a final question just on the kind of FX impact on costs. Can you give some kind of percent number or anything to understand how much that impact maybe quarter-over-quarter?
Vladislav Suglobov
It is a very volatile situation there because it’s a mix of currencies and some moving in different directions. And then there were recent changes in the Ukrainian currency exchange rate. And there are some – there are certain tax incentives we are pursuing that certain countries do on – for the IT spending and we do that in the new locations as well and in the old locations, too.
So I think that overall, when I look at the overall picture, it should get better towards Q3 and Q4 especially. And so to me, this is my gut feeling is that towards Q4, we’re going to be more or less in the same situation in terms of the pressure from the effects on our spending is going to be about the same as it was last year. So we’re kind of – we went through this stressful quarter, but we are moving back to more normal situation towards Q4.
Unidentified Analyst
Okay, thank you.
Stefan Wikstrand
Thank you. And then we have Rasmus Engberg from Handelsbanken. Rasmus, you’re online. I think you are muted.
Rasmus Engberg
Thank you. Can you hear me?
Vladislav Suglobov
Yes, we can. Good morning Rasmus.
Rasmus Engberg
Good morning. I wanted to ask you, was it ever an alternative to continue to push spending through Q3 as well? And if you could elaborate a bit on your thoughts about why do you push and then stop and then open up for maybe spending again? So what are your thoughts on those issues?
Vladislav Suglobov
So our models show that we should be doing that, right? The resulting effect on the company’s top line would be very strong, though, right, because we are talking about spending a lot of money and becoming not very profitable and not very cash flow positive for a prolonged period of time and what kind of message it sends to the market.
So even if fundamentally, it is a good thing to do, we have to use caution and we have to make sure that we obtain the results that we are hoping for when we set out to do something like this. So I’d like to be extra cautious in that regard. And I’d like to make sure that whenever we do such a boost, we can afford it.
And also, we don’t always have to be this aggressive. In this particular case, we were trying to be as aggressive as we can to see how much additional positive development we can gain from it. But the level of aggressiveness in user acquisition can be adjusted between our normal level and the level of this boost, and we may choose a point somewhere in between and revise our normal range of user acquisition reinvestment.
So we will be learning a lot from this boost and deciding on what’s the optimal way forward so that we can be profitable, cash flow positive, stable, sustainable business and also doing our best to drive growth going forward. So, that is our overall thinking. And I think it also is important to show to the investors that we are in control. We can spend more, but then we can come back to normal levels, and we’ll continue developing the top line in any case. So that’s our thinking.
Rasmus Engberg
Thanks. That’s very clear. And I was a little bit – relative to my numbers, the non-Sherlock, the new games that are not Sherlock, did they suffer because you sort of took the money and spend it on Sherlock? Or how are they trending? I think they’re trending a little bit down, aren’t they?
Vladislav Suglobov
Yes. But we did not take away from them to spend on Sherlock. It’s just we have seen a substantial decline of new organic downloads across the portfolio and the activity of existing users suffered quite a little bit. And we’ve seen that quite pronounced already sort of April, May and for many games. And we can see that August already is shaping up better. So that is, again, consistent with the seasonality pattern where July is kind of a low point. And as you go into summer, things are kind of tapering and then everything starts coming back in August.
So, again, that’s why our thinking about the seasonality patterns coming back because the pandemic is done, right, virtually anywhere except Lufthansa flights.
Rasmus Engberg
Yes. And just a final question, is to avoid being surprised by the FX, which currencies should we look at? I mean, it’s obviously the ruble, but is it the Ukrainian hryvnia as well? Or what caused this increase in this quarter?
Vladislav Suglobov
Yes. So we have some rubles, we have some euros. The ruble spending is decreasing. We have some staff that are paid in euros. The mix of currency is now quite different because we’re also paying Armenian currency, Georgian currency. And then in euro, Montenegro, Poland, Bulgaria, they’re all in Eurozone. So the mix is getting more complex. And then there’s Ukrainian currency situation, but also the employees there are stressed enough to have them suffer due to the changes in the Ukrainian currency, considering the financial – obviously, and war situation, the financial situation in the country.
So our decision was to kind of pin Ukrainian staff salaries to dollar through the end of the year. So Ukrainian currency is not going to have a big effect. But there are other tax incentives there that we can use and that can have a positive effect, but we’ll see about that. Probably it happens towards the fourth quarter.
Rasmus Engberg
Perfect. That’s clear, thanks a lot.
Stefan Wikstrand
Thank you. We then have some questions in the Q&A box. In the meantime, while we answer those, if anyone else wants to ask a question verbally you can just raise your hand as indicated on the slide.
Vlad, do you have the Q&A open or do you want me to read them?
Vladislav Suglobov
Let’s do this, you read and I answer so that I don’t skip on the questions that I don’t like.
Stefan Wikstrand
All right. The first one is from Fredrik [ph]. I know Sherlock is your major title now and most hopes around this title, but you plan any other major releases upcoming months or smaller, easier, cheaper titles?
Vladislav Suglobov
We do have four more games that we want to soft launch before the end of the year. And these will be in our existing genres, but then new genres as well. So some genres that we never tried before or we tried and we failed. So, again, we have spent the last year – well, there was a break obviously, with everything that was going on in the first quarter. But really, over the last two years, our focus was on building out the process of how do we think about new game ideas, how do we test them in the market even before we start making games? How do we shape the concept of the game and what kind of research we do in order to understand exactly what kind of game is the best chance of success for us?
And so we are filling this pipeline with new ideas and these new ideas they go over this pipeline and then when they’re finally tested and we don’t see red flags, we see good potential for the game that go into the development. And within six months, we’re going to have a version that we will soft launch. So we’ve been working a lot on that. And there are some really interesting games in our pipeline in different stages of completion towards the soft launch. And it’s not like we just have the games that we have. There is a large chunk of the company dedicated to making new games that we haven’t launched yet, and we’ll be getting to launch all these games.
Stefan Wikstrand
All right. Fredrik also asked, have you looked into other platforms like Android TV, WhatsApp game platform, Netflix games, TikTok games, et cetera?
Vladislav Suglobov
Well, we haven’t – well, we did look into TV some time ago. And unfortunately, the controls we deemed not perfect for our users – for our types of games. We are looking into some new platforms as well. It’s a little too early to talk about it, but we do look at new platforms all the time, but we only try to – we only try with new platforms when we think it is a good fit, and we see good potential there. But you may expect over time that G5 will try to launch games on new platforms. We haven’t done it in a long while, so we are thinking about it certainly.
When it comes to Netflix, I think, it’s a subscription service, and they just buy games for a fixed fee. And that’s from what I read about Netflix business model in the press. So I don’t know if there’s really a platform for distribution there. But we are really interested in some of the new platforms that are in the market and that give developers the opportunity to make a lot of money and to keep a large portion of what the user pays. And we are obviously going to be working with these platforms where we can retain a large portion of revenue.
Stefan Wikstrand
All right. And then [indiscernible] ask, well, he’s referencing the comment, Sherlock will become your biggest game by revenue across all platforms before year-end. Is this dependent on declining revenue from Hidden City in Q4 compared to Q2?
Vladislav Suglobov
No, it does not depend at all. We are bringing in new audiences into Sherlock. And I would say if you look at Sherlock and if you look at Hidden City, those are not the biggest hidden object games out there. There are bigger games out there that we are competing with for the audience. And I think the characteristics of the game and our ability to bring in new users is the most important factor. I don’t think these two are really connected.
Stefan Wikstrand
Any comment regarding payback time for the Sherlock UA boost? Is it reasonable that we’re talking about something around between 12 to 18 months payback time now?
Vladislav Suglobov
It is reasonable to think this way. So when we acquire users, obviously, we expect to get the money back from the users that we have acquired over a period of time. And in order to be able to be high enough, you want to look at a certain large enough horizon to be competitive in the market. When you have data for that amount of time in your game or at least a good extrapolation that players will spend that much, you can do that. But also you get this organic uplift basically users that you can certainly attribute to your increased spend, the users that you didn’t pay for, but suddenly, you’re getting more such users. That’s the organic uplift. And so you’re bringing extra revenue through that and that helps you recoup the investment earlier.
So I think you have a very good range there. So that’s a good framework to think about it.
Stefan Wikstrand
And I think we touched upon the next one earlier. Would UA be more appropriate in early high season in Q4 and Q1?
Vladislav Suglobov
It may be, certainly. At the same time – I mean, it’s better to get the recoupment earlier and also you have to keep in mind that when everyone thinks that this is the best time to do it then probably prices are not ideal. So there is this working against the market, and it is a very dynamic situation also with a lot of head-to-head competition between different games, doing different things.
And so in reality, like in the beginning of the year when we’re thinking we should do a boost, we have data. We really want to do it. The last thing you want to think is like, okay, let’s wait another nine months, right? If you keep postponing things until the next year, you may end up wasting years, right? And there’s only so many Q4s in the game’s lifetime, so to speak, to work with, especially before it matures and before it’s been in the market for a long enough time.
So I think we’ve done the right thing. We did the boost, but we will be looking at the results of this boost and adjusting our strategy for the upcoming quarters, of course.
Stefan Wikstrand
All right. And then we have the last one here. Do you have any means of hedging against the FX market? And if not, does it make sense for you to work on that? I think I can take that question and…
Vladislav Suglobov
Please.
Stefan Wikstrand
Of course, there are always ways of hedging. And we’ve looked into that historically quite a bit, and we have concluded that cost benefit-wise it hasn’t made sense depending on how the currency flows look. If we talk about the current situation, of course, the markets are not very – for hedging is not perfectly functioning in all jurisdictions where we have operations. I think at this point, it would also be almost impossible to hedge all kind of FX movements that we get impacted by. But certainly something that we look at from time to time and take help into reviewing and see if we should do something in that area. But currently, because I think the question is kind of targeted to the Q2, I think, it would have been almost impossible to do any meaningful hedging to protect us from the movements that we’ve seen.
Vladislav Suglobov
I would add that we are kind of hedged just through the structure of our revenue, right? We have revenue in different currencies. We are spending in different currencies. And most of the time, it works quite well for us, but not in every situation. And so our goal, again, is not to be fully immune to currency fluctuations, but to not be too vulnerable to fluctuations in the currency exchange rates. And I think we are accomplishing that. We are able to withstand currency fluctuations, but our results will be affected, of course. But fundamentally, we continue functioning as a profitable cash flow positive company, nonetheless, and get through it to a more normal situation. And for me, that is the most important thing.
Stefan Wikstrand
We have no more questions in the Q&A box and no one has raised their hand. One of our longest earnings calls ever as well. So, if no one else has a question, I think we can start to wrap it up, Vlad.
Vladislav Suglobov
Thank you, everyone. Thank you for your questions, and thank you for your interest in G5 and following us. Have a very good day.
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