G5 Entertainment AB (G5EN) Interview - Vladislav Suglobov (CEO) | VALUE INVESTING | INVESTMENT CLUB

Yes, thank you for the introduction. So I myself was born and raised in Moscow, and since early childhood I would say I got interested in computers because my dad would put them together, like these kit computers you would find in magazines at the time. So I started programming early on, and then I got really excited about games. Those were very early games, but I was very excited that you could actually program something that would be interactive and that would give joy to people. For some reason, that was really interesting to me. So I wanted to make games, and since 11 or 12 years old I was trying to code games. I learned some programming languages rather early on, and I convinced my parents to get the appropriate computer so I could practice that. Then I entered the university, the computer science department of Moscow State University with the goal to pursue programming, algorithms, and mathematics to get better at games. At the same time, I started working in one of the first Russian game development companies in Moscow. At the time, that was 1995, and in that company I eventually met my co-founders. I became the CEO of the company that was formed a few years later, and I remained the CEO since then. We had some early success with mobile games, and we were one of the first mobile game developers in the world actually. So, that's the brief story before G5. G5 happened around 2001 and then more formally in 2005 and 2006 when we listed the company in Stockholm for the first time.

Yeah, so if you look at the overall development of the games industry, it initiated about 40 years ago, and then mobile games started about 20 years ago. Ever since the industry has appeared, it was growing. There were certain cycles with consoles and hardware, but especially in the last 20 years, the industry keeps growing at a very healthy rate. I think it's just natural given that this is interactive media that is very engaging, that allows you to experience things you cannot experience in real life. Then 20 years ago, with the start of the mobile gaming, the industry was really taken to the next level. If we look at the last 10 years, the fastest growing part of the video games industry is the mobile games market. You have PC, you have console, and the fastest growing segment is mobile gaming. To me, mobile is just a way of reaching more users. Now everyone is carrying a video game console in their pocket. What do they use it for? Do they play first-person shooters or racing games or casual games like something that G5 makes? It really depends on your preference as a player. But the key thing is that everyone has access to a device that is in their pocket and that can run games at any moment in time. So whenever you have time to spend, it's really easy to reach for that device and play. This is the most accessible games have ever been. With in-app purchases and payments within the apps, we are getting to an inflection point where people will be able to spend more money in their games just because they tend to spend more time playing games than watching movies or doing other types of things. I think we're still catching up with that, and there's no doubt in my mind that the market is going to grow and the audience playing these games will continue to grow. There's an advantage to spending your time experiencing something interactive, challenging your brain, solving puzzles, even if you play different types of games like challenging your reaction rather than just watching a passive video stream. So to me it's clear the market will continue to grow, and I think mobile will remain one of the important sources of growth for the market in the following years.

I don't have a number for you, unfortunately, but I think it will continue to grow as a percentage of the market. Like you said, if you just look at where it was 10 years ago and what the trend was, console is relatively unchanged, portable consoles are pretty much extinct at this point. Personal computers are growing, PC gaming is probably the second fastest growing segment of the market after mobile, but really the bulk of growth is coming from mobile. So mobile is going to be a larger part of the video games market. Again, it's all about accessibility and the fact that this is a device you have always with you, and it's just very easy to start playing. When you have something so accessible in your pocket or on your table, on your couch when you sit in the evening and want some entertainment and it is immediately accessible, it just gives a big advantage to mobile gaming specifically. But to be clear, I think that mobile is how the content is delivered to you, it's just the channel. So it's a device in your lap or in your hands, and it makes it possible for you to enjoy games everywhere. If you look at what kind of games people specifically consume, you have to look at what games they like, what genres are there, and these genres can be accessible both on mobile and on PC depending on what is more convenient for you at any given moment. So when we think about our audience, we certainly understand that we are a mobile-first company, but we also understand that a lot of people who have an iPhone or an Android phone have a personal computer with a large screen, and these are computers and laptops which are very suitable for casual gaming. So our games are available for these devices as well. In fact, if you're on your personal computer, you can go to our website and just launch a game in the browser, and your progress will be synchronized to the mobile version, or you can download a game to your computer and play. We make it seamless. We try to be platform agnostic. We think in terms of what is the audience of casual players who would like to play the kind of games we make and what is the most convenient device for them to enjoy these games. Mobile phones and tablets are great because they're always with you. Computers are great because they have large screens, and we see a correlation between the average check and the size of the screen in our games. So we're just there to make our games as accessible as possible to the players.

The video games market started by guys making games for guys, right? That was the inception of video games essentially. For a long time, the video games market developed like that. Creating games that would reach the female gamer was kind of a holy grail in the industry because it was supposed to double the size of the industry, because basically half of the population in the world didn't really want to play the games that were made. So casual gaming started in the early 2000s with the goal of elaborating successful casual gaming concepts like card solitaire and Minesweeper. If you remember, those games were popular in early Windows versions. These games became first very popular on personal computers. A number of genres were developed that were found to be popular with the audience of women specifically, women older than 35, and that was the ultimate expansion of the industry into the female demographic. We got involved with mobile games but also with these casual games quite early on. Then when the iPhone came out in 2009, what we did was we brought some of these casual games to the iPhone, and we realized that they're working really well. We realized then that there's a very strong female, predominantly female demographic on mobile platforms that is very interested in this type of games. So these games we call them puzzle adventure. There's no violence in these games; what you do is you solve puzzles, and by means of solving puzzles you advance through a certain storyline, a certain adventure. Interest in finding out what happened in the end is what drives you through the puzzles and keeps you interested in the game. I think this is just the type of game that a large part of the audience really likes, and this part of the audience may not be as interested in games about violence, war, kind of more traditional video games that were at the inception of the industry. I think the expansion of mobile gaming in many ways is driven by the games industry finally reaching this mass demographic of people who never thought they would play games, who had no interest in playing games, who don't think of themselves as gamers, and who are not interested in what the traditional video games industry produces, like first-person shooters. So all these people finally were able through their iPhones and Android phones to access these games, to discover them, and get really involved and interested. That's what's driving the casual gaming market. It is very easy, these games are free to play, free to download, easy to start playing. You don't have to have strong skills or previous experience as a gamer to play or enjoy these games. You just start playing, it's really easy, and then over time you understand you really like it. That's how we acquire a lot of users; they discover our games and really like them. That's what's driving the casual gaming expansion and what's bringing in more female users into the market, and again this is why this dramatic growth: because the games industry finally found a product that is interesting to half of the population of the planet.

I believe so, yes. The barriers are low. We see that our players stay in our games for a very long period of time. We build our games with that in mind; we really build our games in such a way that you can play them for years, and there are many opportunities for more monetization that come up over many years of the time that people spend playing our games. So there's an opportunity to continue to increase revenue, because if you calculate how much money people spend per hour of enjoying movies for example, it would still be much more than what they on average spend in games. And that's still what we see in our games as well, because they're free to play, we're giving away a lot of entertainment time essentially charging nothing. There's a great opportunity to better monetize the entertainment value that casual gaming is creating.

Certainly, with regard to some of our competitors, we have very different customer profiles. In some of our games, especially hidden object games, about 70% of the audience are women, and the largest demographic is women older than 35, as you have said. In terms of the paying audience, in some of our games we see that the most paying segment are women over the age of 55, and overall we see that the segment 55 plus is quite pronounced in many of our games. So a lot of people, kind of older people, enjoy our games, and it's only natural because they provide the puzzle experience that people are seeking. There's something to exercise your brain basically, and we see a lot of reviews on the application stores where people thank us for providing this kind of opportunity to exercise their cognitive skills. Over the years we have really understood what this particular segment of customers want, and we know what type of gameplay they prefer, what type of game mechanics they prefer. I think we know certain recipes that work very well for this demographic, and so we have decided to really focus on this demographic. In the last few years we've been doing exactly that by learning more about them, trying to create more relevant games. The new generation of games that we have developed internally and have been releasing since 2019 have really worked very well, and I think we have capitalized on the knowledge of our audience with these titles. Two games that we did not mention, Jewels of Rome and Sherlock, are two of our biggest games from the new generation of games and were released relatively recently. Sherlock was released about a year ago, Jewels of Rome in the summer of 2019. If you look at these games, Jewels of Rome allows you to surround yourself with the atmosphere of ancient Rome and the Roman Empire and rebuild the Roman settlement. If you look at the interests of the audience, the target profile, you'll see that history is a relevant topic for them, so this game allows them to experience certain historical themes within an interesting adventure and solving puzzles brings them the flavor of Mediterranean culture if you want, and this is very relevant to the audience. Or you can look at the game called Sherlock, which pretty much provides the audience with the ability to relive the storylines of their favorite books, their favorite classic books that they know so well from their lives, from childhood. We found out that this is a very interesting theme for this segment of customers, and so we have created a game with that in mind. In the second quarter it was responsible for 7% of our revenue, pretty much from zero in just a few quarters. So this is what the focus on the customer segment brings: a better understanding of what they need and the ability to create games that really engage the audience, I would say.

Certainly, when we started there were fewer of them. Now there are quite a few companies active in casual gaming, and I would say anyone who's serious about casual games keeps that customer profile in mind. They may have more even distribution, maybe 50-50 gender split of the audience within their games, but it still means they have to create games that are engaging the female part of the audience, so they have to keep that in mind.

I play a lot of Jewels of Rome, and this is the game where the gender mix is more towards like 50-50, so we have more men playing that game. Maybe that's why I like it more. It is a match-3 game where you have to match crystals, three in a row to disappear, and then you solve puzzles that involve that mechanic. When we look at hidden object games like Hidden City, The Secret Society, Sherlock, there's more female players there. Historically it's a mechanic that on average is more preferred by women than men, but still about 30% of the audience are men. So by far the largest genre in casual games is match-3, so it's the bulk of the casual games market, and that's why we decided we have to have match-3 games in our portfolio. Starting with Jewels of Rome we have released a number of successful match-3 games, and we're generating millions of dollars a month from this segment of the market. This market is really big; we are still a very tiny percentage of the overall market, and yet we're already making millions of dollars from it. So if we can continue to increase our market share, which is very gradually going up, there is a lot of opportunity in this market. With hidden object, we have a more solid percentage of the overall market. This market is not as big as match-3, but it's still quite substantial. We're also making millions of dollars a month in revenue from the hidden object market. What else can I say about hidden object? Well, Hidden City, who is a hidden object game, has accumulated over 330 million dollars in revenue and more than 70 million downloads. So I think this is the biggest for your games, right?

Yes, as we have said. To finish about the genres, there's another important third genre for us. It's called Mahjong Solitaire, sometimes referred to as match-2. It's just the smallest genre of all three, but we came into this genre early on, we have a very substantial percentage of that market, so we are pretty much dominating the Mahjong Solitaire genre by revenue that we generate. We plan on continuing doing that and releasing new innovative games, and that genre remains our third very important genre. We also venture out to other genres; there are parts of the casual games market where we are not represented yet. So we aim to release four to six games every year, and we will be trying to get into interesting new genres where we think we have the potential.

I wouldn't really prefer one segment. We know that players who like to play hidden object also like to play match-3 and vice versa. So Sherlock, which is primarily a hidden object game, also has a second option to play, instead of hidden object you can choose to play match-3. So what we are doing is we are sort of inventing a new genre in the intersection of these two parts of the market. It's a different risk profile. When we were getting into match-3 games, the opportunity was amazing and very large, but the risk of spending money and then not achieving success was very high as well. For a couple of years we really had to invest in two match-3 games in order to have our breakthrough in this part of the market. Hidden object for us right now is a safer bet, of course, because we have a large audience there, we know the market really well. But we wouldn't want to really focus on one genre; we would like to diversify among different genres. We are in the entertainment business; people get tired of playing the same thing over and over again. So when someone gets tired of one game or one type of game, we want to be there with other games that they could play. In that sense we would like to create games that sort of replace games that our players play, so that when they get bored of one particular game they can go into another and just continue being within the G5 portfolio.

Yeah, so when we first realized the potential of the mobile games market, we were still a rather small studio, we had maybe 50 people. And we stumbled upon understanding that casual games work on mobile really well. So we didn't have a lot of capacity; we were always a game development company, we always had developers, we were always making our own games, but we realized we cannot possibly make games quickly enough to fill the demand that we saw in the quickly growing mobile market. So that's how our publishing business got started. We had some initial successes with our own games, and then we reached out to many other developers who were good in PC casual but did not have experience with mobile, which was this very new market. And we published a lot of games from other studios on mobile. Then when we pivoted to free-to-play, we also made deals with a select number of studios where we funded really talented developers to try and develop free-to-play games. Some of these games became wildly successful, some of these games that we developed through our publishing partnership failed. The successes that we had as a company we just ran as far as we could with them. We were scaling up The Secret Society and Hidden City as much as we could, doing the best we could in marketing to achieve the best possible outcome for the developers and ourselves. When we had reached a much larger platform in terms of revenue and the audience around 2016-2017, we thought: well, going forward we know these genres really well, we have a very good understanding of what kind of games players would like to see. So we really need to focus on producing games that we think will work well in the future, instead of trying to source it from other companies in the ecosystem. That was the moment when we really started investing in the internal development capacity. The idea was to bring the internal development capacity to the place where we can develop several new games a year. So we went from having about 200 people a few years ago to now having almost 900 people, and most of these people are game developers. There's part of the company which works on developing the marketing platform and different tools and solutions for marketing games and monetizing games, but the bulk of these 900 people are actual developers. So we have multiple game development teams. The obvious benefit of sourcing more games from internal development is that you don't have to share revenue with external developers, and so this improves our gross margins. If you look in 2018, the situation was that about 70% of our revenue was coming from licensed games and 30% from games that we have developed internally. That situation has reversed in three years, as you said, we have about 66% of revenue from own games in the second quarter and the rest from licensed. So this helped us expand gross margins and improve the profitability of the company dramatically over the last few years. I think the future is there. Our publishing program still remains active; we are signing up new games when it's a good strategic fit for the company. So we have some games that we are licensing from other developers that we are publishing that are coming to the market. But I think very gradually the percentage of own games is going to continue to expand going forward, and this is one of the important factors why the profitability of the company is going to improve.

We really don't. The whole point is we operate a portfolio of games. Our goal is to generate successes within this portfolio. So our process is to generate ideas of what games can be successful in the market, test these ideas, then develop these games and try to make them into a success. If that strategy works, naturally there will be more successes among own games and the percentage will increase. It's probably not going to be, you know, the licensed games are not going to go to zero because Hidden City is such a strong title, it will continue making money for many years. But the percentage is going to gradually increase, but we don't really have a specific target. In any case, we are talking about increasing absolute revenue, increasing scale, which combined with the inherent leverage of the business model again will lead to improved earnings margins.

Not that is an easy question really, too late to ask this question to me really. I've been running this company since I was 23, so that's been for 20 years now, and the last time I had a boss was back in 1999. It is difficult for me to say what I'd like to work for another company. In games, I think I really like where G5 is. I'm more excited about what the future will bring for the company than the past that we had. So I'm sorry, I'm not going to give you a specific name, I'm happy where I am.

You know, there are some amazing successes in this market. Obviously, there is King, there is Playrix. Those are humongous companies in the casual gaming space. King is Activision, right? King is now Activision. That's right. I think a lot of success happens in games through the chance you may have. Companies that are equally prepared and equally high-quality companies, but then some companies strike gold and other companies strike less gold, they strike silver so to speak. I think the important part of our strategy is just to continue being here. When you are dedicated to creating the best possible games and you really study your customer and you try to think strategically in terms of how you come up with successful ideas, you are positioning yourself to eventually having a big success. No one at G5 could imagine that for example Hidden City would become such a success, and that just happened. But we positioned ourselves to harvest as much as we could with that particular success, and we try to be well positioned to run with the future successes that we no doubt will have as far as possible. So that's our thinking. We try of course not to be worse than other companies in terms of user acquisition and the quality of our games. We study our competitors quite a bit. We try to recruit people with different kinds of experience in different companies, also in industry-leading companies. So I don't say experience has no value, experience matters obviously. But I think that if you look at specific companies you can also see what niches they are specifically good at, but you can also see where they are no good. It's a very specialized industry, you usually have to be a specialist in a specific thing. So it's all relative and you have to understand where is your niche, where is your market, what is realistically the market where you can achieve success, and then work using all the experience you can get and from your competitors as well, look at what your competitor is doing, but then really just try to do your best to entertain your audience, and I think that's the path to success.

So we said this year we're going to release six games. We have only released two so far, yeah, so four more. And I'm keeping my fingers crossed we will be able to technically launch them before the end of the year. Even if they're delayed by a month, it's no big deal. Usually within the first six months at least new releases don't really make any impact on the company's revenue or profits. So our goal is to continue making these bets, testing these ideas in the market that will eventually generate successes.

Larger successes like Sherlock, Jewels of Rome—ideally, the success of the magnitude of Hidden City at some point. So that's our strategy: we will continue to work to release four to six new games every year, trying to come up with a very successful game in terms of the success rate among our new releases. We've only had maybe five games or so during the last ten years that lost money. And then there is a solid middle where there's a big number of games that make profit—they don't have a large impact on the company's size or profitability, but they do make profit in the end and it's a good return on investment. And then there were several games, I would say also five, that have generated amazing returns—hundreds of millions, tens of millions of dollars in revenue, same kind of magnitude in terms of profit. And so I think it's a very healthy result, a very healthy success rate, and we're quite happy with the outcomes.

So let's look at two basically two parts of this pipeline. When we have the idea that we know we want to develop into a game, a team is dedicated to this concept and is working towards the first launch—a soft launch of the game. When the game is soft launched, we look at the KPIs, we look at how players are retained by the game, how well they monetize, are they returning to the game often enough. And based on that, we sometimes make tweaks to the game, we continue improving the game to reach the KPIs, to reach the benchmarks that we have set from the marketing perspective for the game to be scalable, for the game to be good enough to invest in its marketing more heavily. And when we see that we are achieving those benchmarks, we work on increasing the audience and the revenue of the game. We do that with user acquisition, which is performance marketing—we buy advertising in popular apps, other games, and so forth to bring users into a new game. We also cross-sell a lot, so we bring players who don't pay in our other games, we try to bring them into our new releases to see if they would monetize there, maybe they would like these games enough to monetize. So we do all this while we scale the game. And any game has a life cycle—at some point you reach a level of monthly sales where you just can't go past that. That's because the market is competitive, that's because there's only so many people interested in a particular game. Depending on the success of the game, this level can happen at one million, two million, eight million, or something like that dollars a month. That happens for different games in our company at different net revenue levels. And after that, usually the marketing spend is reduced dramatically. In this first live stage there is a lot of ramping up of the game's revenue and a lot of reinvestment back into marketing, and the profitability is not very high. But in the second half of the cycle, which can last for years, the marketing spend is actually quite small and the game is extremely profitable, even if the monthly sales are actually declining a little bit or stagnating. We see that in this later stage of life, games can continue to persist for very many years—like The Secret Society, it's been off-peak since 2014, I believe, so for seven years now, but it still continues to bring in a lot of money every month and it's highly profitable.

It kind of forms this long tail of revenue where we continue to receive profits from the games that we have released in 2011, 2012, 2014 that are long time off the peak of their sales, but we continue to derive substantial profits from these games every month. So I think the idea is to reach as many as possible of this kind of game—not that they have a long cycle with low acquisition cost and are so profitable, but I think it's not easy to have a Hidden City every year. You can reach two or three, but it's not easy to have every year one game like this.

Hidden City now still makes millions of dollars a month. Some less successful games make hundreds of thousands a month. Some other less successful games make tens of thousands of dollars a month. So the question is what is this long tail revenue for a particular game, and it's sort of proportional to the highest success that this game had. But it still means that even for games that weren't very large in terms of revenue, we continue to receive more and more profit every month. We have a game called Virtual City Playground which peaked in 2011, and it still continues to increase its profitability every month because it's there in the portfolio, continues to make money every month. It's not a big enough revenue to make a difference for the company, but among all of these games together it's quite a substantial amount—in hundreds of thousands of dollars every month where we don't have to do anything. We're just collecting money because these games are still in the App Store, we do cross-selling, and they still gain audience that is active and monetizing. That's another advantage of having a portfolio of games.

One of the big things that happened to us with the pandemic is that we let everyone work from home, and this was quite an amazing experience. We just couldn't really decide to try this letting people work from home, and suddenly we were forced to, and it worked perfectly. We still work from home, just coming back—we're starting the efforts to bring people back on a hybrid system. But it worked flawlessly and we had no interruptions in the development of games. In fact, we were able to hire people from cities where we didn't have offices, and that was a great boost to our productivity. Now we have a lot of people outside of cities where we have offices—we're even opening new offices in cities where we didn't have an office before because of that. In terms of player demand, the big difference was the second quarter last year, when the first wave of lockdowns was introduced in many countries. A lot of people found themselves playing games, and we had a great inflow of users. Usually our summer quarters, Q2 and Q3, would be weaker compared to Q4 and Q1 winter quarters, but last year Q2 was actually amazing—it was as good as Q4, and that was clearly caused by the lockdowns. But this trend receded already by Q3. After the second quarter last year, things kind of went back to normal—we had this really nice big push towards growth, but then the pattern was more typical. Since then we had typical seasonality: Q3 last year was weaker than Q2, but then Q4 was very strong, Q1 beginning this year was very strong. And then the second quarter this year, we were thinking there's going to be some sort of reopening, people will maybe play less, so everyone was a little bit concerned about that. Some gaming companies saw their revenue drop significantly year over year. But instead, revenue in USD terms grew three percent year over year for us in the second quarter. We were able to do really well in Q2. What we have seen is that in June this year there was certainly a decline in player engagement, and we thought that this had to do with people going out and enjoying their vacations after a year in lockdown, with the rollout of vaccines. Especially if you look at our audience, they're maybe older—those are the first people who got access to vaccines and maybe they just rushed out to enjoy their vacations. But then in July already we were back to normal levels of engagement. It felt like everyone took their vacation that they really waited for in June, but now they're back at home and back to playing games. Since then we saw continued strong engagement. Q3 was very good in that regard, and now we have really high expectations for Q4. Traditionally Q4 for us is a very strong quarter—you have Halloween, Christmas and New Year's holidays, and this really drives our audience into the holiday content of our games. We do our best to create events that are very engaging. These are the holidays that have this emotional engagement that for us usually translates into increased audience, increased hours played, increased monetization. We really look forward to having a really strong Q4 and really strong Q1 afterwards. I think that pandemic or not, I don't think lockdowns are as severe as they were in the very first wave. But fundamentally we were doing the right thing. The pandemic pushed us along the growth curve and we did the best we could with this extra momentum, but we continue on our fundamental trajectory of growth.

Well, you can invest in competitors. If you invest in video game companies, choose the company that you like the most. I can point you towards what makes G5 stand out among other companies that are publicly listed in this space. First of all, we don't have any debt—we don't carry any debt. We are cash flow positive, we are profitable. If you compare to some other publicly listed companies, you may find that they either have a high debt load or they're not that profitable, maybe not profitable at all. We have access to development capacity that continues to grow, with a very strong base in Eastern Europe. We are able to hire developers in a cost-effective way—very talented developers. There's a lot of successful games coming out of this region, and we are able to hire these developers for a fraction of the cost of what you'd find in some developed countries. That creates a tremendous advantage because we can develop more games, we can spend less money per game, we can be a little bit more bold about what kind of ideas we pursue. When you have to make a lot of games, it's good to keep your costs under control—developing a proper mobile game nowadays can cost millions of dollars. It's good to have a cost advantage and break even at lower levels. These are important advantages. Then there's the amount of years we've spent in this segment, working specifically with this audience, which speaks to our dedication and knowledge. Some of the companies that are publicly listed are more of a collection of other companies that may not be properly integrated or properly aligned in the long run. We'll see which approach prevails. We see the advantage in being a company that can create game development teams without using M&A, without issuing shares, without taking on debt, and connecting all these teams to a single technology platform, single promotional platform, and a single set of tools—which creates very strong operational leverage. These are a few points that make G5 stand apart from the competition. There are also companies which are closely held that I really admire in this space, but they're closely held. G5 went public very early—we listed the company when the share price was three Swedish kronor per share; now it's traded at about 400 Swedish kronor. The company went to the market early, and you're getting the performance of a growing company. This isn't a deal brought to you at the peak of the SPAC craze or market froth, at the peak of their growth potential and valuation. You can see some history here, and you can see that we've been actively buying back shares from the market, which may tell you something about the quality of the company. This is my take—you have to look carefully at the companies that are out there, although there are some amazing companies.

There are several aspects of what we do that drive this number up. It's important to understand this is just an average. One is that we are seeing more users play Match Three games in our portfolio compared to Hidden Objects—Match Three is gaining popularity. If you look at how many players we have playing Match Three, that proportion continues to go up, and Match Three is a better monetizing mechanic than Hidden Object. They're quite different, so the average is moving from purely Hidden Object to a higher average that you'd expect from Match Three players. That's one reason, and these Match Three games become a larger proportion of our revenue. Another is that since we changed management and marketing in the fall of 2019, we really focused on the efficiency and effectiveness of our user acquisition. We don't really aim for the number of players as much as we aim for acquiring player cohorts that recoup the investment in acquiring them. We would prefer to buy a user for $100 if we know we're getting back $200 from them, then buy a user for a dollar if we're only getting back $1.50. This focus on return on investment reduces the number of useless downloads we could generate through advertising. In free-to-play, about 90 percent of the audience never pays anything. Technically speaking, we don't even have to acquire these people—if we could not waste money on acquiring them, our financial results would be exactly the same. Our monthly active usage may shrink, but the monthly paying user will stay about the same or shrink a little. But we would pre-select users towards having a more valuable core that on average spends more money, and that's what I think is happening. From these metrics of audience and paying users, you don't see the quality of the user. The monthly average gross revenue per paying user shows you the quality of the core of the paying users that we're forming by acquiring users we believe will be more valuable, in countries where they can provide substantial revenue. Another thing is that due to marketing, we were buying more users in the US where we generally find better return on investment than in other parts of the world. That's why our share of revenue from Asia was gradually shrinking but increasing in the US. Another thing is we continue to improve our games—our teams are very focused on improving the lifetime value of the player. Over the years, this really makes our games better at monetizing and retaining players. I still don't really see a ceiling—let's put it this way: if there is a ceiling to how much money on average we can get from a paying user in a month, I think it's still very far out. There is certainly a limit, but right now we are still scratching the surface. The amount of entertainment value we create, measured in hours, makes it a very affordable form of entertainment, and people still pay very small amounts for it, so there is still opportunity to capture more economic value.

Yeah, I think it will continue to trend up. I would like, as you would like, to see an increase in monthly paying users and monthly active users as well. I think we are entering the part of the year which usually delivers on that—usually Q4 and Q1 we see more active users and more paying users. I really hope we see progress there. But you also have to keep in mind we are going through a transitional phase where licensed games are gradually declining and a new generation of games is quickly growing. Our top line growth was quite strong in the first quarter; in the second quarter it was three percent year over year. I'd like us to obviously grow our top line, and I think growing the top line will go hand in hand with the increased number of paying users and active users. You just have to wait a little bit for the growth in the new generation of games—this segment that accounts now for almost 50 percent of the company, and which two years ago was zero. Now it's 50 percent. It's going to get there. It will shine through the top line development in a few quarters, and I think we will see the development that you're going to like in that regard.

You touched upon several important topics here. User acquisition fluctuates between games—we have different approaches—and quarter to quarter it can change. But to be predictable, we have said that we will spend between 17 and 22 percent in any given quarter on user acquisition. You have the lowest and the highest, and you can take that into account. We're not going to go over 22 percent—we will at least do our best not to. So far we are quite consistent in that regard. So you have some understanding of where our marketing expenses are going to be—Match Three or not, they're going to be maximum 22 percent of gross revenue. Even if gross margins improve, the maximum we would spend on user acquisition is still 22 percent, so the rest of the improvement in gross margin will fall through to EBIT and other things. More expenses can happen because we continue hiring people, but this is a very slow, gradual process. Starting August 1st, Windows lowered their store fees from 30 to 12 percent. This is very big news for us. Your estimate was about 20 percent, some other analysts are saying we derive up to 40 percent of revenue from the Microsoft Store—the truth is somewhere in between. We don't break it down specifically by store, but we will release the Q3 report very soon, in one month, and it will be the first quarter in which starting August 1st these lower fees will be included. There will be a bump in the gross margin, and I will make sure to point out exactly where that bump is. In Q4 we will see the full impact because all three months will be with the 12 percent commission on the Microsoft Store versus 30 percent we had previously. Another interesting development with gross margin, in addition to reduced licensed revenue and reduced payments to other developers, is this really good thing from last week—the Apple and Epic Games decision that allows developers to use alternative payment methods for in-game purchases. If we look at the specifics, Apple was ordered to stop prohibiting developers from having a link to their own payment processing, which allows us—if we have the technical capability—to drive at least some of the revenue into our own payment processing, lowering the effective store fee on Apple revenue as well. We haven't heard back from Apple; we're eagerly awaiting to see what they decide. Will they fight this decision? Will they lower their store fees as they did for non-games? Will they keep fighting developers? I don't know. I hope they choose something reasonable. Letting more money pass through to developers and letting more money be used to develop games is a great decision in the long run that will benefit them, the App Store, and their business. They want developers to use that money to create even better games. I hope they understand this and lower their fees or allow developers to use their own payment processing. But there is very strong momentum building in terms of regulation and the legal situation. No one is talking about raising store fees at this point—it used to be a popular question for me several years ago. I would just keep saying no, they will probably lower them. The more pressure and competition there is, the more moves like Microsoft lowering to 12 percent, avoiding all scrutiny by setting a reasonable rate that no one would question. Apple has 15 percent for some apps, so we know exactly where it can go. I think it's a very positive development for us and for all other game developers. With Microsoft, we are probably one of the top developers by revenue on the Microsoft Store—I wouldn't be surprised if we're number one or number two. We are probably the public company benefiting the most from this particular change. We look forward to developments with Google Play and Apple as well. Another important thing we discovered—as an experiment we launched G5 Store. We gave players the ability to play directly from our website, download games directly, and pay within our games with our own payment solution. This store really took off—it's growing every month very quickly. What's impressive is how willing players are to download games directly from our website, trust this developer, go through G5-branded payment processing, enter their credit card or use PayPal or Amazon Pay, and process these payments. We see very high conversion rates and very healthy monetization metrics. It looks like you don't have to use Google's or Apple's payment processing to reach your customers. Players are more than willing to do that. The argument that you have to channel all payment processing through a single high-profile processor is just not true. There are many alternatives. There should be fair competition—no one should be able to charge 30 percent for processing a payment when the rest of the industry charges just a few percentage points. We're very excited about G5 Store—it lowers our effective store fee, mixes into the overall revenue mix, and increases our gross margins.

Number one priority for us is developing more games—that's fully funded. We have more than enough capital to develop new games, but we've been actively hiring more people to create new teams and build out solutions like our suite of tools for user acquisition. That was addressed in the last two years and is all fully funded. We've set the threshold for marketing spend, so there will be no surprises there going forward. The question is what we do with the rest of the cash we generate every month. We do pay a dividend—I don't think it makes a lot of sense to be an overachiever with the dividend, but we aim to pay a reasonable dividend, and as profitability increases we will gradually expand it. The bulk of the capital we've deployed over the last year and a half was on share buybacks. In the last year and a half, we bought almost 600,000 shares from the market—that was by far more capital than we've deployed on anything else. We do try to be aggressive with share buybacks as much as we can. We prefer to be fiscally responsible—we don't want to take on debt and we want to maintain a healthy reserve. But every month we're looking at the millions of dollars in positive cash flow and thinking about the best usage. You have to take into account four months in a year are called silent periods, so we're not allowed to buy back shares for a month before each report. There are also regulatory limits on how many shares we can purchase in any given day. Nonetheless, we went from well over nine million shares at the beginning of last year to now less than 8.5 million shares in the market. The effect of share reduction is gradual according to IFRS—it will continue to boost earnings per share going forward as a delayed effect because we use average shares outstanding during the period. In terms of M&A, the market's been a bit frothy with all the interest towards the games market—it's been a competitive market. We had the best possible alternative to spending capital on acquisitions because we could invest in creating new games with teams we hire and connect to our existing engine and solutions. Instead of spending tens of millions to acquire as much revenue as Sherlock brings in a given month, we invested in building a small team of talented people who created the game from scratch. Last year Sherlock was making zero; as of Q2 this year it's making seven percent of the company's revenue. That's a much better return on investment. Since our strategy was really to focus on internal game development, we didn't see the point in changing tracks. We are looking at potential targets, chatting with companies sometimes—nothing is happening. If we had anything going on, I'd have to send news about it. We are screening potential targets, looking for truly strategic acquisitions with certain synergies. I wouldn't say we wouldn't do it, but it's not a priority because we're very happy with our strategy and it's bringing great results. We haven't fully realized the potential of all the investments we've already made into internal capacity, and you'll see this realization in the next few years. That said, maybe there is a correction, maybe certain things happen in financial markets that bring down prices of some companies—we're already seeing it a little bit—so maybe there are good M&A opportunities in front of us.

Sounds great. Thank you, Kim, for inviting me again. It was a pleasure.