Stockpicker intervjuar Media and Games Invests VD Remco Westermann

Since our last interview in early December, MGI's share price has risen 150%. What has been the main driver of this increase in recent months? 

– We are very happy for our shareholders that our share price has developed in such positive way and it is also good for the company. The reason for the positive development is, as always with shares, based on many different things. What we can say is that on the operational side, we had a very strong revenue and EBITDA growth in 2020 and especially also a very strong growth in Q4. Overall, we have grown at a strong CAGR of about 45% since 2014. In 2020, we grew 67% versus 2019. Additionally, the KingsIsle acquisition in early January was a very positive event.

Regarding KingsIsle, what attracted you the most with the company?

– KingsIsle fits perfectly into our strategy of acquiring strong multiplayer games with long sustainable revenue streams and lifetimes. KingsIsle has two strong massive multiplayer games, Wizard 101 and Pirates 101, with well over 50 Mio. registered gamers with player lifetimes of more than 5 years and substantial revenues that have been growing year over year. These are very strong IP’s that now are generating 90% of their revenues in North America and are only available for PC. We see a lot of additional potential in further game updates, in internationalization as well as in porting to consoles and mobile. Also, we like the great and very enthusiastic team. And we can already say now that we are very happy with this transaction.  

The price you are paying equals an EV/EBITDA multiple of 5.8 – 7.3x, depending on KingsIsle's growth in 2021. Compared to other acquisitions in your peer group, this is a very low multiple. Will you also pay higher prices in the future?

– The utmost important criterium for us is that an acquisition makes sense. This means that an acquisition must have strong assets, synergies, portfolio fit, a strong team, being based in the right geo and most important, it must be creating accretive value. We like to acquire targets that are distressed as well as targets with positive EBITDAs. In each case we look at the economics. In case of a distressed target we want to earn back the purchase price plus investments and burn rate within 24 months. For EBITDA positive cases we want to pay a fair price. As we are looking at the economics and want to do accretive deals we have set as an internal target to not pay more than 6x EBITDA. This EBITDA multiple however can also include cost and revenue synergy effects, which means that we can pay e.g. 8x EBITDA if there is enough synergy in the case to compensate the 2x higher EBITDA. We are currently observing that there are more and more deals with very high multiples. This is however mostly for gaming companies with over Euro 50 million annual revenues. This is based on the fact that there is high demand for such targets while there are not many available. However, there are thousands of targets available that are generating less than Euro 50 million revenues and there the competition for such targets as well as the multiples are much lower. For that reason, we are and will further be focusing on smaller targets, which however can still be very substantial and accretive as we have e.g. shown in the KingsIsle case.  

Turning to the recently published Q4 Report. What were the drivers for the strong quarter?

– We saw overall strong revenue growth and increased profitability. In the games segment, this was mainly due to numerous updates and events in our games as well as more efficient user acquisition based on our media USP. The strong Covid effect from Q2 also has a  positive effect long term due to the new players that we were able to onboard. The stay-at home lockdowns from Q4 however are hardly affecting numbers anymore according to our data, probably because most people are not obeying the rules anymore. In the media sector, we were able to establish further strong partnerships and have seen strong organic growth especially in the programmatic area. Moreover, further cost synergies were realized in both areas.

Let us stay with the media segment for a moment. Can you briefly describe MGI's business model in this area?

– For gaming there are two main success factors; (1) content to make the games attractive and (2) user acquisition to get more players into the games. Four years ago we decided -as we were not happy with our external media partners- to start also acquiring media companies via our buy & built strategy, similar to how we built critical mass on the gaming side, with the target to build a media company that understands the requirements of gaming companies and can acquire new users in an efficient way for a gaming company as we can sell the ad-spaces of a gaming company in the best possible way to get the most out of them. An integrated gaming media combination gives us a very strong position with a strong competitive advantage based on the synergies between the two segments. In addition to a strong increase in efficiency of our own user acquisition, the media segment has also developed into a profitable and strongly growing business area with third-party customers which are mostly gaming companies. In 2020, we generated more than 81 billion impressions from our programmatic advertising business. The programmatic accounts have grown by 35% in 2021, while at the same time we see a strong retention rate of 85% for accounts generating more than USD 100k revenue per year; both numbers show that our customers are happy and extending their budgets as well as that our offering attracts new customers. Because MGI is active in the entire value chain in digital advertising, we have a special know-how in this area, which only a few other companies have. With our fully vertical programmatic media technology offering, we can offer full transparency and therefore optimal efficiency which other games companies such as e.g. Zynga or King appreciate. We are continuously investing in our technology and solutions to further strengthen our position and growth and have also developed Verve Edge, which is a cool solution and answer on identifiers such as IDFA from Apple being disconnected and allow companies that advertise best of class targeting.    

In the games sector Embracer and Stillfront belong to your peer group. Who are your peers in the media sector and how is the media market developing in general?

– Like the games market, the digital media market is a high growth market. In fact, it is even growing faster than the games market. While growth in Q2-2020 was temporarily slowed down somewhat by the Corona pandemic -opposite to the gaming sector-, industry experts such as eMarketer expect the worldwide market for digital media to grow to over USD 520bn by 2024, corresponding to a CAGR of more than 12%. Our peers in the media segment are predominantly US companies such as PubMatic, Viant or TradeDesk. These companies are all specialized in media. The closest peers however are AppLovin and IronSource. These are two companies who, similar to us, combine games and media, and show the huge synergetic effects between the two. They however started as a media company first and then added the gaming side, while we do it the other way around. AppLovin, who just filed its IPO documents in the US, for example, acquired MachineZone.

You recently commented in a press release that MGI started strong into 2021. Can you elaborate on that and give us a hint about what you have in store for the coming months?

– As already mentioned, we did two acquisitions in January 2021: the acquisition of KingsIsle as well as the acquisition of Nexstar Digital, a programmatic media company specializing in connected TV. With these acquisitions we basically already can tick the box on our minimum annual revenue growth target of 25-30% as well as on our minimum annual EBITDA and EBIT targets. This is however not saying that we will not go for more. As we have proven in 2020, we can grow much faster. We have a number of acquisition targets in the pipeline that we are currently evaluating and expect up to 3 further acquisitions during the year. These include targets in both media and games. We have also several strong organic growth drivers, such as game launches, game updates and DLC’s in the pipeline. One step has already been taken with Trove. Here, we successfully launched Trove in South Korea together with our publishing partner Aprogen Games.  We are also working on bringing Trove to the Nintendo Switch universe, which will happen in 2021 and we can now already say that the KingsIsle acquisition was a very good one; they are tracking well above plan. With Heroes of Twilight and Golf Champions we also have two upcoming mobile game launches, that we got from Tripple-A publishers at the beginning of the year. On top, we are currently working on numerous other projects in stealth mode. So, we expect it to be an exciting year 2021.