Chit Chat Stocks - Rovio Entertainment (ROVIO) | Not So Deep Dive

Episode Date: September 27, 2022

Rovio Entertainment creates, develops, and publishes mobile games. The company is most popular for creating Angry Birds. Rovio was founded in 2003 in Finland. At the end of the month, we will publish an Arch Capital episode (only available to CCM+ subscribers) that will cover the company: Electronic Arts. Listen closely as Brett and Ryan go through the history, financials, and future prospects of Rovio Entertainment. Enjoy the show! Is this episode locked? Access our “Not So Deep Dive” episodes by signing up for CCM+. Sign-up directly through Spotify or Apple Podcasts. If you listen on another podcast player, use this link and create a private RSS feed: https://anchor.fm/chitchatmoney/subscribe Need more information? Check-out our launch newsletter: https://chitchatmoney.substack.com/p/welcome-to-chit-chat-money-plus  Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (1:50) Industry | (12:12) Management & Ownership | (15:30) Earnings | (20:23) Balance Sheet | (22:17) Valuation | (24:08) Our Analysis | (25:42) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode on Chit Chat Money. This show is only available to CCM Plus subscribers. So if you're listening to this, thank you for subscribing and

supporting the show. We're talking Rovio Entertainment today. To finish up our Not So deep dives on gaming companies previously we have done what capcom ubisoft xbox and then for our arch capital episode which is again only available to ccm plus subscribers we're going to be doing electronic arts and that'll be coming out soon so hopefully that'll hit your feeds definitely want to listen to that one should be a fun one as well one side note if you're subscribed to an apple podcast and you are not getting our newsletter emails that gives you the show notes and all the charts associated with each episode that are the perfect notes to have

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because that is part of your $5 a month subscription. But let's get to it. Ryan, we're talking Rovio Entertainment, the maker of angry birds well i gotta we gotta we gotta we gotta make sure people understand what you know rovio means nothing to most people here so what is rovio entertainment what do they do when were they started yeah rovio is a mobile first gaming company uh and they as you mentioned are responsible for developing the angry birds brand slash franchise if you want to call it that They're headquartered in Finland

They now have seven studios Located around the globe They've got, I think, two in Canada Stockholm Yeah, they've got one in Stockholm One in Finland Anyway A bunch of studios around the globe

Seven all together And it's all mobile focused So they don't develop any AAA games Any console PC games, anything like that There may be Maybe I should redact that Because I think there may be some They're discussing it

Desktop versions of Angry Birds and stuff like that It's in the pipeline, there's just nothing out there right now Yeah, almost all of their revenue Comes from in-app purchases And so Actually I've got the numbers right here 77% of revenue comes from in-app purchases And that's things like

You can buy, it varies depending on the game But you can buy Either 99 cents worth of gems six dollars worth of gems that kind of thing and then you can unlock new birds basically is what i understand you used to be able to like skip levels and when the game first came out you could buy basically i think it was called like the mighty eagle which would basically just get you past the level so little in-app purchases like that that's about 77 of revenue 18 comes from in-game ads. So they also run some ads promos within their Angry Birds channels and I guess

some of their other games as well. 2% comes from custom contracts. So this is like distribution agreements with places like Apple Arcade. There's some other ones as well, but a tiny fraction of the overall revenue. And then 3% comes from brand licensing. This has been a higher percentage of revenue in the past. The brand licensing component can be a little lumpy. So for example, they had like the Angry Birds movie. I think they recognize probably a lot of revenue when that first comes out. And then you don't get quite as much in off years, but they still get a lot of like the merchandise revenue. There's a lot of companies that manufacture goods and pay back Rovio a royalty fee on each sale. So that's part of the revenue as well. And I also kind of just like to think

of the brand licensing, maybe almost as marketing in a sense, because you're really trying to get your brand out there in different ways and merchandise and movies and tv shows are one way to do that um they also have an angry birds theme park in finland uh that that i think you could almost just lump into the marketing as well uh it's pretty small um sounds like the it's not maybe it's not like a disneyland yeah this is gonna be the next disneyland that's what i was gonna say and and then as i mentioned they've produced several movies and tv shows over the years or it may not have been their production but there was angry birds movies there's the show there's an anime show on netflix now there was yeah there was a sequel to the movie

i mean track it if you want they make some of this stuff sometimes and then to go on streaming platforms youtube stuff like that either way almost literally all of their revenue comes from just in-game monetization um the roughly 90 of their revenue also comes from north america and Europe. So the big markets for them are really like the US and a lot of the Western European countries. And then in total, their games have about 7 million daily active users. And they're the third largest mobile publisher of all time in terms of downloads. So they were pretty early to the mobile space. And I think they've had, the Angry Birds franchise in particular has had a lot of staying power since that time. In terms of the actual games, Rovio kind of categorizes them

into four groups when they produce a game. So there's Grow games. I'll just go through them all. Grow, Earn, Catalog, and Hypercasual. So Grow, these are games that are in the process of scaling up. That means they're probably operating at a loss. They're spending a lot of money to acquire users, trying to get it to a level of scale where it can kind of earn on its own and be meaningful to the business the second one that earn category this is where they're generating most of their operating profits these are games that can still grow but the focus is really profitable growth um these games also have like live operations teams lots of developers that are still building out like more content for the games and they're still allocating a lot of resources to those games

and the catalog this is sort of like their older games typically in sort of a decline but they're They're just milking it for cash. They're not really spending a whole lot of resources trying to grow that business. There's pretty much no user acquisition costs on those. So, you're basically just generating cash from the back catalog on those. And then the last one, this is something that they're pushing more into, is hyper-casual. So, Rovio recently acquired a company called, I believe it's Ruby Games. That is correct, yeah.

Or a studio called Ruby Games. And their focus is hyper-casual kind of puzzle-based games. games zynga zynga style people know those these are like really fast and cheap to produce but then they go the life the shelf life of game like this is pretty short so it goes through the grow earn and catalog phase pretty quickly yeah but the good thing about those games is it compared to making a console game or something like that or a shooter game the developmental costs are much much lower sorry do you want to get to the history as well yeah fairly fascinating history so it was 2003 there was three students oh man i wish i looked up we get the the nordics the nordic

pronunciation is going to be impossible for us americans yeah basically there was three three students that went to helsie helsinki university of technology um they kind of joined together to take part in this mobile game development competition and the game or the competition was sponsored by nokia and hewlett packard at the time um keep in mind this was 2003 so it was before the launch of the iphone these were like games for older style mobile phones games like their phones like nokia phones um and they built they won the competition with a game that i think was called king of the cabbage world um eventually it got renamed but they won and they decided to set up a company around the game a couple years later they sold they ended

up selling it and they got a little bit of money from an angel investor with the studio setup they continued to kind of produce games. They hired more people, but the one thing they found is they really struggled with distribution. Um, and that kind of led to a big lack of financial success, which meant they had to fire a lot of people at, I think it was 2009. There was only 12 employees at the entire company. Um, most of their staff was gone. However, in 2007, as most people know, the iPhone was introduced and with those kind of 12 remaining employees, They've said, basically, this is going to be our future. This is what we're going to focus on primarily.

And they tried to profile the iPhone customer base and try to get a grasp of what kind of characteristics their game should have to attract users like that. And there was a few things that popped out. So first of all, they wanted something that had minimal loading times because you got to be able to play it really quickly. You need an icon that stands out in the app store. it also needs i'm blanking on some of them but there was basically they identified these characteristics that said it needs to be something that's very easy to play casually and people could

just play in the meantime without having to exert too much mental energy to do it um and so they they tasked their artists to come up with these designs they came up with a bunch and one of those designs was basically these round angry birds uh that could not fly and they had to put a story behind it so they were mad at the the story that they put behind it was that they were mad at the pigs for stealing their eggs right yeah eggs but i'm thinking i think yeah um and this just ended up clicking and they started to it was kind of a side project at the time but once they finally got it launched people at the employees of the company were kind of testing it and they'd find that they'd play 15 minutes when they were just trying to play like one level and they'd kind of let the time go

and forget about it. And so they knew this could kind of be a big product, a big hit. And so they officially launched the game in 2009. It wasn't very successful at the start. So they decided to try and market it to smaller countries and really get like some adoption within one smaller country. And that first one was Finland. Reached the top charts there, kind of gained momentum that way.

They replicated that success in a bunch of other small neighboring countries. And then once it made it to the UK charts, it took off. It went from like 600th to the number one most downloaded app. Then it basically went global, became a huge success, and it reached escape velocity. At the time, the game cost 99 cents to download and it ran ads on, well, it only ran ads on Android, but it cost money on iOS. And then now today it's free and it's primarily in-app purchases. But that was the start.

And since then, they haven't really established any new franchises, but they've come out with a bunch of different Angry Birds games, different modes, now they've got movies, TV shows, everything I've alluded to. They began selling merchandise around that time and they found that people just absolutely loved the brand. They received another 42 million in VC funding in 2011 and then officially went public in 2017. The stock's been somewhat underwhelming, but they have consistently grown their gaming revenue since uh that 2009 time frame yeah but we will talk about some of the downside which is the dwindling um dau base but that's something to discuss later let me hit industry and competition the mobile video game market really dominates the

overall market um oh shoot i forgot to put the screenshot down there on the notes i gotta remember uh to put that because there's a nice little chart i forgot to copy over hopefully i have it in there, whatever. I'll find it later. But it's $136 billion worldwide. So if you're maybe older or you don't spend a lot of time playing mobile games globally, it is a huge market. However, the estimates this year is kind of, they might come down. As we've seen the last two quarters, spending has stagnated or declined in many countries in 2022, which was a bit unexpected going into the year. But over the long-term, projections are still for the mobile games market to continue this really rapid growth. I remain a bit skeptical myself about

the potential of the mobile games market to get much larger than it is today. But I kind of caught myself and thought I would have said the same thing three to four years ago. So I don't know what the ceiling is on the mobile games market, but it seems like it can continue growing most likely. But we'll see. And there might be some short-term hits if we have a global recession. now if we look at competitors pretty simple yeah companies like king which is owned by activision blizzard which is going to be owned by microsoft uh they make candy crush which is probably a pretty big competitor uh to angry birds you got games or excuse me companies like niantic that makes something like pokemon go you got zynga you got roblox you got play tricks

there's you know the list can go on and on and on there are so many mobile developers out there given how much simpler the games are to build compared to the console or pc and that's you know it's a positive because a smaller company like rovio and they can toss in 10 to 15 developers and make a game but it also makes the market much much more competitive because a group of you know 10 developers or a team of 20 people can make a game that can be just as big as angry birds uh you know the barriers to entry are much much lower yeah the the way i've heard it described is barriers to entry are really low barriers to success are really high yeah and that makes it a tough market in my opinion uh now another competitor i would say

is the nintendo switch because that is a mobile device if you want it to be uh and that has over 100 million copies sold i think that could be a competitor and also it should be an asset i would hope rovio is going to smarten up and release a game on this device they've hinted at new game formats and stuff like that i'm kind of surprised they don't have angry birds on nintendo switch and if you're looking it up they don't uh ryan have any games out on the nintendo switch i did confirm seems like the perfect one there but maybe that's in the future growth opportunities we'll save it for later but either way the nintendo switch type games you know that maybe someone's playing in their free time while they're waiting in line sitting on the bus or something

like that you're an animal crossing you're in whatever on your mobile switch device um that's competing you know with angry birds now and on the whole as i've said with most of these gaming companies. Rovio is really just competing for time spent when someone is taking a break, doing a leisure activity, sitting on the toilet. That's their bread and butter right there is when someone is going to the bathroom, to be honest. Now, let's hit management and ownership. Pretty simple. They didn't have much on the specifics on some of the incentive structures, but I think you can go through some of it. Now, they have a new CEO. His name is Alexander. He's French-Canadian. And I'm not going to pronounce his middle name there, but it's Alexander Norman.

You can see him on the website. He was nominated as the CEO in 2021 from a vice president role. So it was an internal hire. And he was at the internal role before that in 2019. Now, he has about a decade plus experience in the gaming industry, and he is not on their top 100 shareholders list. For whatever reason, they post their top 100 shareholders on their website. And we have a link to that in the show notes that we'll send out in the email or on the

Google Drive. So check that out if you're interested at their shareholders. list. Now, like the CEO, the other leadership team members have had short tenures with a lot of them seeming to have been brought in to get this turnaround going. If you look at their stock price, if you look at the numbers that we're going to go through, that Ryan is going to go through with earnings, and you see the charts we have out here, the company is kind of stagnated. And they have the CEO that came in, I think, five years ago. She basically got fired, I think, two years ago now. And then now they have this new CEO who's been here for a little

over a year, who is Norman. So he hasn't been there for that long. And now if we look at the three founders, yeah, I'm not going to pronounce their names, but they don't seem to be associated with the company anymore, except for Nicholas Head, H-E-D is the last name, who is a member of the board and owns about 1.7% of the company. Either way, though, the founders aren't associated anymore. And I think the big takeaway from that is that from an owner's perspective, this is a wide open stock that anyone can really own. And I think there's a lot of ingredients here for an activist to come in and influence this business. I would put that, I don't know if that is that a positive or negative for you when looking at this, that the activist potential, given the small cap

stock, given that basically anyone can take a 10% position if they have the money, is that a positive or negative for you? I guess we haven't even mentioned that they have a market cap of just over 400 million dollars so there's certainly a lot of activists that could step in i would say that's a positive it's a positive that someone could but it's a negative someone hasn't it's yeah or it's a negative that there needs you know potentially needs to be one now all right i'll move into employee compensation now they have some interesting things here they have an employee share savings plan which is on a simple level it allows rovio employees to save a portion of their salary and invest in Rovio shares. And if they do, Rovio will match one share for every two shares

bought under this plan. I like that idea. Seems pretty good. And we'll reward their employees if they buy some stock and get some skin in the game. Now on executive compensation, they have a performance share plan. I have some quotes from the interim and annual report that outline it. But just to sum it up, they have performance criteria for the 2021 period and the performance criteria were sales growth and rovio's adjusted operating profit margin that's the most i think when looking at executive compensation the most important thing is what they're incentivized to hit yeah um and for them in 2021 it was sales growth and rovio's adjusted operating profit margin now the potential rewards were around a little over 600 000 corporation shares i don't

know why they called it corporation or excuse me just shares outstanding which was about 0.8 percent of shares outstanding. Could come in if they hit those, decent dilution, but not crazy amount. And then if we look at the 2022 to 2024 period, they actually changed their incentives. And it was EBITDA, which is a 50% weight, and then groups net revenue as a 50% weight as well. The change is interesting. I don't know if it's really that big of a deal because it's adjusted operating profit margin versus EBITDA, which are both kind of adjusted numbers. And then it's just revenue growth. It was a slight red flag to see them changes and actually changed it from 2020 to 2021 as well. So something to watch if you're really interested in shareholder

or excuse me, executive compensation. I hope you can't, I hope they're not able to acquire their way to hitting those goals. Well, yeah. I mean, I think the big thing is, is what are they incentivize to do? They've talked about acquiring companies. They've talked about inorganic growth. And maybe that's a smart move given the cash position that we'll talk about upcoming here shortly. But I think it's really important for this company, especially for the new CEO, especially the new leadership team, along with the CEO to look at what they're incentivized to hit and whether you think that lines up. And usually EBITDA lines up fine for a gaming company, but we'll see. All right. And again, we'll have the shareholder table to look

of the owners here and they're, they're all Nordic. Uh, so I had really no idea. I couldn't find much information, but Ryan, do you want to move on? Let's hit earnings. Yeah. Let's talk about some of the financials in the last 12 months. They've generated basically $330 million in revenue. Um, that's up in the most recent quarter that was up 14%. However, that includes their acquisition of Ruby games. So if you exclude that is down 1.1%, so virtually no growth. Um, And then right now, the two games that are accounting for the majority of revenue are Angry Birds 2 and Angry Birds Dream Blast. They do have a fair amount of just like old back catalog Angry Birds games that just generate

cash. So ideally, that should just be a nice little tailwind that they don't have to like invest back in too much at all. And they can just continue to generate cash for the next 10 years off those. 75% gross margins on this business. They're generating about $60 million in free cash flow over the last 12 months. Euro or dollar? I know they're pretty close in that exchange rate.

It was dollars. Dollars. Okay. According to KoiFen, dollars. Yeah. But the euro, again, since this is a Helsinki company, Nordic company, it could mess up some stuff here. So make sure to check those numbers, do those currency exchanges, however you like to do

them. They have adjusted operating margin of 14% this quarter. it's generally tended to stay around there, anywhere between 10% and 20%. They aim to pay out 30% of their adjusted net profit in dividends. However, I was going through the report and I couldn't find their adjusted net profit. So it was a little hard. Obviously, you could have found probably the dividend payout, but that's basically their structure is they want to grow the top line at a steady rate and they want to have steady

margins and pay out a big chunk or not a big chunk, but 30% of that. Yeah. Let me get the dividend yield right now. 2.23%, just as a reference. In terms of the balance sheet, there's virtually no debt except for $7 million in lease liabilities for some of their office spaces. And then they have $184 million in cash. So about $180 million in net cash sitting on the balance sheet. Again, Euro or dollar, I know it's- These are dollars. Yeah. But that was in dollars as of the last report. If it was held in euros, that's a risk. We were talking about this before the recording.

Yeah. If they're holding that in euros, it might be a risk for US investors. I believe they're holding it in euros, but it's also bank deposits and money market funds, so they are earning, hopefully, some interest on there. And they generate, as I said, $50, $60 million in cash each year. So So big cash pile, growing cash pile. Yeah, let me- I think they said in their investor day, they said they have a war chest for mergers and acquisitions.

Okay, yeah, yeah. All right. Do you want me to, let me just read off from 2017 and 2021, their operating cashflow, which translate pretty well to their free cashflow. 59.6 million, 42.6 million, 10.5 million, 63.6 million, 44 million. So all positive. One year was down.

That's probably just timing issue. But yeah, pretty good cashflow. Not really any consistent growth. It's been a stagnating business, but the cashflow has been positive. And they spend, if they have a big, I mean, it's lumpy because if they have a big game launch, like Angry Birds 2 is a big game launch. If they have something like that, they're going to put it in the, it's in the grow phase. And so they're going to spend tons of money on Google and Facebook marketing and probably

app store marketing as well to just try to get user acquisition up. And then obviously, there's very little incremental costs once they're on the game and stick around. So that can sometimes tend to hinder profitability in certain time periods. Yeah, makes sense. All right. I'll hit valuation. Very simple one. Market cap 416 million euros translates pretty well to dollars.

So think of it one to one, essentially. Although as this comes out, the euro has been collapsing a bit. But now if we look at that cash balance and we take that out, their enterprise value is actually much, much lower at 233 million euros, which brings their EV to sales and EV to operating cash flow to pretty dirt cheap levels for a gaming company. Now, I like to use EV to sales because it can, at least for a gaming company, because you look at their margins, you kind of look at that potential margin expansion that could be there. and they've never really been able to get there, but for a gaming company with high gross margins, you can maybe see, you know, you have the potential to really have 20%, 30% margins.

And you can kind of look at it and say, okay, if they really execute, can they get there? They haven't been able to get there. So I don't know how much we should trust Rovio to do that. But I do like to look at the sales ratio just to see how cheap it would be if they can hit those strong, you know, that some of the top-notch gaming companies

would be able to hit. And it's at 0.81. So really, really cheap. But if we look at their actual cashflow, So EV to operating cash flow is 5.3. So again, dirt cheap. You're looking at this in euros though. So that EV might actually come.

It might not be that in dollar terms, if the euro keeps getting devalued versus the US dollar, that might be an impact on that cash balance, but it wouldn't be, I mean, I don't think it would. It's not going to take up that whole cash balance. So we'll see, really cheap. And I think that was probably the highlight for both of us for this company.

Maybe, I don't know. we haven't discussed what we like and dislike yet let's move to anecdotal evidence ryan i mean everyone's played angry birds at least once so uh you know we've probably played it i love the characters i love the game i think it's a lot of fun uh i don't have it i don't have it downloaded on my phone anymore uh probably not the target demographic much anymore but i did play recently a version of angry angry birds at top golf and so they have basically this like Like, you can, like, hit – it's like you're throwing the birds when you hit the golf ball kind of thing. And then it has this – it tracks the ball.

You can knock down the pigs kind of thing. It's a lot of fun. And it was a game that really got – I mean, it's not going to be a needle mover for the business, but – Licensing revenue, there we go. To how this – how the brand is kind of loved everywhere. and a lot of people i think nine and some survey i don't know what the survey was nine out of ten people in every room know what angry birds is um yeah the brand awareness is high very very high and whether you know look at their dau numbers not great but versus that brand awareness but

people know about it um yeah i mean same downloaded it when i was a kid played it a couple times um i think that's the highlight and the low light is because you know everyone's downloaded and played it, but the vast majority of people are not playing regularly anymore. So, you know, it seems, you know, the brand has had staying power, but it has not nearly been as relevant as a candy crush. The execution on retaining your user base and especially the paying user base has been much, much worse than King. All right, let's move to future growth opportunities. Ryan, what do you have for us? So mine is Beacon. I've got a quote here from the investor day. Someone, I think it was the VP of marketing came up and he said this, Beacon allows our games teams to plug into a full

suite of market leading tech to operate, optimize, and scale their game. Basically, from what I understand, this seems to be a centralized database that is shared across all of Rovio's studios and so it helps teams really on the post-development side of things so the way he described it there's an art and a science to every game the art is the building the development process the science is the distribution and um creating awareness for the game and actually making it a success um this is meant to be the platform for the science aspect of it it seems like it's basically just a platform full of the company's best practices and it covers they talked about all the areas it covers. So I'm going to name a few. There's player identity, analytics,

attribution, A-B testing, live operations, payments, cross-promoting, privacy framework. That was a big thing because the app tracking technology, what was it? The Apple stuff. Yeah. They said they had to work really hard on that. Yeah. So this is just a way for people to, let's say they acquire a studio like Ruby Games, they can now log into beacon or use beacon to access all the best practices and kind of leverage those for their own success after the development of the game so maybe there's even some components uh in the development stage that are on there it seems that they seemed really excited about this on investor day and it seems like it could

be a really useful asset in terms of getting better growth after an acquisition like allowing them to kind of scale up in an easier way and get better at distribution well i'll say with that as they better we better see the growth then because i was honestly disappointed that this was their like huge talking point doesn't every big gaming company have this they just don't brag about it we have a we have a sheet in our google drive that says best practices well no every big gaming company i'm just has this yeah right like i king definitely has this yeah whoever um i if they're bragging about this they better get performance that's all i'm saying uh all right mine is um look it's angry birds right now and we can get some other franchises out there right

that's kind of one of the big you know things they've been talking about for years is getting new franchises out there to get diversified but right now it's angry birds and angry birds only And I think the easy future growth opportunity is to get games or game packages onto the Switch and Roblox. They already highlighted a Minecraft DLC during their investor day. And I think it would only make sense to go after the two other large platforms where kids are playing. It is very, very important for them to get younger people to experience playing with

Angry Birds, which allows Rovio to capture that percentage of that audience who end up being paying users and have nostalgia for the Angry Birds brand. i just why don't they have a switch game why aren't they in roblox i just don't understand that um it's just i thought they are at least on the roblox the roblox side maybe they are i they did they did not highlight that on the investor day um but they are definitely in minecraft so they've been working towards that and that was a recent development um but i just hope they can get just everywhere because you're tied to that mobile uh phone uh let me look angry birds roblox oh yeah they did all right well they came to roblox with a little thing there hopefully

that can work uh but maybe they were not highlighting that in the investor day uh that might have been a disappointing performance either way the big one i think is getting on the switch you get a five dollar game on the switch i think that could work really really well especially if it's well executed all right should we talk highlights low lights yeah go ahead all right so for me highlights they have some of the most loved characters in mobile gaming i honestly can't think of any more recognizable mobile brands yeah possibly roblox well then that's different though because it's not yeah it's not a character the thing is that they're just gonna build sort of a mario-like oh it's not i mean it's not that good but it's it's yeah it's good but the

disconnect between uh recognition and monetization is of the most of any brand yeah yeah um the other part that i like uh overall growth of mobile gaming kind of just provides them a nice tailwind a lot of people know what angry birds is as they get a mobile phone it's kind of one of the first apps they're able to download they get a lot of organic traffic because of that um and so their their pie of customers is just growing the third one it seems like and maybe every company has this as you mentioned but it seems like that beacon platform could really help with m&a and i yeah i think what m&a could yeah you're right yeah i think they really need to establish another franchise which is hard to do organically to in today's world it's not competitive they bragged

about it like the 53rd try we came up with anger birds and i was like are you bragging about this like that seems pretty bearish to me but uh but m&a if you have a studio that makes something that has a hit you acquire them get like 25 people or whatever launch them on beacon that can be very helpful yeah all right and then low lights for me i i struggle to tell whether or not this strategy of putting angry birds everywhere and having to just be like this ubiquitous brand where it's just on every platform it's in top golf they've made whatever 12 different versions of the game maybe more tv shows and movies i don't know if that's good because it makes everyone recognize the brand or if they're exhausting the brand yeah they're in some insurance commercials

i see on football games uh yeah i wonder if like that's really helping look at the user numbers it's not revenue though oh i mean let's look at let me read off the charts gaming revenue has gaming bookings this is i mean gaming bookings from 2017 to 2021 in millions in euros and euros remember they're getting a lot of the revenue in dollars in 2017 though 248 253 263 259 271 that's not much growth okay angry birds 2 launched what 2017 yeah i mean i'm saying that's five years though okay take it one more year back but i don't and you've got probably well that's actually a point is well that's when they ipo'd and they had that huge step change and people were very optimistic about their growth and it didn't show up so their timing on the ipo and what they were

promising investors was way way way like i didn't look into the details closely but it seemed like they misled people about their growth potential or they just executed poorly because i mean look at the game booking numbers and especially because of the exposure to north america with the devaluing of the euro that gives them an easy tailwind for you know the that what the number it looks like in euros i mean in 2017 booking game bookings were 240 basically 249 million euros in 2021 is 271 like what you added 20 million but it's still around the it's still there yeah and but i also look at look at this is that gaming revenue or is that gaming bookings so basically gaming revenue yeah yeah the anyway i guess that's kind of my point is i can't tell if

I can't tell if they're doing good by the brand to put it everywhere or if people are getting exhausted by it and they're kind of juicing it for all it has. Yeah. One good, where is it? Do I have it? Do I have the number? It's going to be in the charts. Average revenue per DAU climbs pretty significantly from 2017 to 2020. It doubled. So average revenue per daily active user, which means they're getting more revenue out of their existing user base, but they still were declining that user base. So it feels a bit like they're trying to juice it. And I worry, it's good that they doubled average revenue per DAU in a vacuum, but what, you know, would they have to sacrifice for that? Yeah. And then my second low light, because it's basically just the barriers to success are so high in mobile. it makes it really hard now to build or develop a good successful brand um i can't remember the

last one that did it recently oh in mobile uh i can look at the charts staying franchise pokemon go that was decently long ago i mean there what is that one called from it's like Genshin Impact. Anyway, it's just... It's hard to think of there and you can't think of them off the top of your head now. I think the mobile market,

it's tough to establish successful IP. The third one for me, this feels like a company that would be great to work at. I was watching a lot of videos and it seems like they care a lot about their employees, but it also feels optimized for employees

as opposed to shareholders. so great maybe you'd love to be an employee there but i felt less inspired to kind of be be an investor yeah and revenue per employee is down they're also a 500 person uh gaming company they have a both chief sustainability officer and a head of pr which not against those people i'm sure they do well at their job i don't know anything about their skill sets uh but they are both useless positions for a small cap gaming company like they're just not necessary i yeah i i usually i don't know about a chief sustainability officer at a big company maybe it's helpful but i think you are it almost comes across as snooty to me

if you have a chief sustainability officer with less than a thousand employees it's almost like you're you are drastically overestimating your impact on the world that is a good point um all right i'll move to highlights yeah i mean durability we mentioned the down like some of the negative things in the users we were seeing but the durability of angry birds franchise has been you know way better than i mean what were the games people were playing in 2010 doodle jump temple run what were those ones none of them stuck around angry birds did subway server subway surfer's still around uh but none of them are successful as angry birds no no yeah none of them i wouldn't be surprised if this takes around for another 10 now i don't know how relevant it's

going to be from a user perspective i don't know but i still think it will be relevant the big thing is capturing the younger audience which is why i think they need to invest heavily into again minecraft dlc roblox dlc uh switch probably some other stuff i'm forgetting as well Second one, the licensing business seems strong if they can build that up. We could be, I know it could be. Yeah, I know the chart looks really bad right now, but maybe, and if I'm spinning it optimistically,

we're just at kind of a trough here and they're going to have a new movie or something like that. Favorite story movie? Yeah, and maybe we're at a trough with that. I don't know. They didn't say much. And then third is the balance sheet is very conservative.

It gives them freedom, gives them flexibility if we go into a market downturn. Downside of that, currencies, butts, and also they could be buying back stock. They have bought back some stock, but they're very, very conservative. But it also gives them the dry powder. Another highlight there is it gives them the dry powder for the M&A without taking on debt and all that stuff. Low life for me, this business has stagnated the last five years.

The new leadership team has been running to fix this. It's only been a year, so I don't think we can say they failed, but it's unclear why I should believe in them to do it. Like, why should I think that your revenue is going to grow? There's no reason to. It is unclear to me, second low light, whether Rovio is just a one-hit wonder. They haven't proven they can diversify away from Angry Birds, and it gives me pause. If you're a one-hit wonder in gaming, it's just so risky.

Third low light, growth in developer count has been modest. I, you know, you had a strong cast position and you have all these discussions watching your three hour investor day about expansion, new studios. I just would have like, why aren't we being so cautious about, you know, employee expansion? You need the employees to build these games. They're talking about the studio in, I forget what city that had nine employees. And I was like, okay, well, what are we going to see a game in 2027? Like, come on, like give them the firepower they need.

Yeah, I agree. All right. bull case right i think the bull case is that they're able to build sort of a maybe a mini conglomerate within mobile games i mean zenga did this i think i think so maybe not maybe it was a little different from an m&a perspective but yeah if they can become i put here a match group for games where angry birds kind of your tinder and then you've got a whole bunch of different shots on goal with the hyper casual games maybe you're able to establish a second franchise that would be great. I think that gives them probably a good chance of doing what management has outlined as

their goal. And so I guess for this to be a successful investment, you'd probably need exactly what management said at the investor day, which is above market revenue growth, which I think the market's expected to grow like 7% annually gaming revenue on mobile. But who knows? They're just pulling some, it can be way different than that. Yeah. And then, but they're also at the mercy of some of the industry. Yeah. So it makes sense to kind of have that as a goal and then steady margins. So if you outpace industry growth and you have steady margins,

given today's valuation, I have a hard time believing that would. It'd be impossible to lose. It'd be impossible to lose money unless they just threw it away, which is if the year goes to zero, maybe, and maybe who knows the way we're looking at it right now uh my bookcase is similar it's earnings and cash flow durability we you know the big positive what i saw is positive cash flow last five years i mean there's always going to be a bit of lumpiness with the games business but if angry birds can stay relevant you know among the paying users uh this business should do fine the i think the new ventures and the acquisition

strategy that they highlighted that um well they made one right now but they basically said explicitly, we're going to do more when we can. I think that is completely unpredictable on whether it's going to be successful or not, but it could add some growth in the mix. Who knows? And if Rovio's cashflow generation actually grows and it's consistently over, say, 60 million euro a year, the stock has to do well. It has to. But let's move to the bear case. What you think fair case for me is that more of the same pretty much they're not able to land in new franchises and angry birds you're pretty much running to stay in place right you're putting a whole lot of work in this is a classic example of games that look a lot like the old games

and you pretty much have the same fan base over and over yeah this is a classic example of the the analogy i like to use of a treadmill business where you're not you're running you know you're working hard to go nowhere yeah the other thing is with the crowded market the user acquisition costs are going to go up over time i think that might be part of the reason why the aus have gone down over over the years um i just don't see the bear case feels realistic to me that this business looks the exact same in five years yeah i know i was optimistic at first looking at this at five times cash flow but i think there is a reason this trades at five times cash flow yeah i have the same concerns there's been very concerning trends over the last few years if we look at daus

uh went from a tad what would it go from 9.2 remember this is from 2017 to 2021. 9.27 5.9 4.4 6.5 now went up in 2021 could have been i think that was the new game launch maybe there there was something there who knows maybe that's the resurgence but if we look at even a more concerning number is that it's monthly unique payers these are the most important users it went from 555 000 to 504 000 to 497 000 to 467 000 then bumped up to 485 000 but still i mean that trend is just highly concerning if that continues um you're one hit you know you have one branch the downside's low it's very very low i guess well maybe maybe there's a bear case that it gets acquired well at a low multiple it seems like but it seems like it could have been acquired

already i feel like i don't think they want to get they would be acquired if they wanted to there's that there i i mean you'd probably agree with this 100 they've had inquiries Would you be upset if EA purchased them at the current price? No, no. EA would – people hate EA, but like we're going to talk about, they are well-run for monetization. They could – oh, they could turn angry. They could double – they would do – I think they would do extremely well with this asset. I mean, they acquire way worse assets than mobile, and they're doing fine, fine with those.

All right, more or less interested, let's wrap things up. Ryan, this is going to be an interesting one. What are your final thoughts? I'm less interested and part of it is just that the mobile market for me

is really unpredictable like yes it will grow but what brands will be relevant in 10 years I have no idea

the only one I would have any confidence in is Candy Crush because that team seems to execute phenomenally I don't even know if I'd have that much

confidence in it maybe yeah 10 years is a long time for a mobile game I can say with pretty good like sense of surety that there's like fifa is going to be around yes and the console and pc yeah you

know yeah yeah the soccer simulation games will be around i mean i think call of duty will still be around yeah exactly mobile games are so hit or miss it's hard to know what's going to be a success especially some of these like really weird concept games like you need you pitch this to me i would not have thought this was going to be a very successful game yeah and in mobile you need diversification and you need a team that knows how to optimize yeah and i don't think rovio is proving like new either i am in the same boat i'm less interested i wanted to be more interested because of the cash flow multiple yeah but i just can't be especially because i mean you add on the foreign exchange risk and they haven't done a whole lot with that cash oh exactly yeah they

had you know they had a good cash position let me look at where their cash pile has been just for reference i know we're kind of going along today let's gone up over time yeah it went in 2017 we were under 100 million euros and now you know q2 2022 we're pushing 200 million euros what do they need 200 million euros for apparently the acquisitions your shareholder oh yeah let's buy back some stock guys uh activists if you're listening to this i don't know if the small amount of people that listen to the premium shows if anyone's an activist uh any size really let's step on you know let's get in let's get in there get a board i feel like activists don't want to touch it because mobile is so hard to predict. Yeah. I agree. And hard to predict with no

diversification. Now they have a top brand, but again, we don't need to talk in circles forever. All right. Stock for next time. Actually, two. Well, we're moving to the new theme for the month of October, and that will be housing. Let me pull up the schedule to give a little teaser for everyone. And then on top of that, next week, or excuse me, this week, While you're listening to this, we will be releasing our Arch Capital episode on Electronic Arts. Outline why we own that company and why we think it's one of the best gaming companies out there. Now, if we tease the October housing one, we're going to be doing NVR, which is a home builder. Zillow, that one is going to be with Brad Freeman.

I've seen he's already doing some research on that as well. Then we're going to be doing DreamFinder Homes, small home builder. LGI Homes, which is a manufacturing house builder, I believe. And then we're going to do an Arch Capital episode on Consorcio Ara, a Mexican home builder. So, yeah, there we go. That's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors and anything we say on the show is not formal

advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time. Bye.