Media and Games Invest — Adtech player with first-party content

MGI is a fast-growing and profitable media and games company, combining a specialist ad-software platform with first-party games content. In FY21, MGI delivered revenues of €252m, up 80% y-o-y (FY20: €140m) through strong organic growth (FY21: 38%), coupled with M&A, principally the acquisitions of KingsIsle and LKQD in Q121 and Smaato in Q421. Adjusted EBITDA increased 144% y-o-y to of €71m (FY20: €29m), with margins of 28% in FY21 up from 21% in FY20, as they strengthened in the games and (particularly) media divisions. This strong performance resulted in the group reporting a net profit of €16m, a five-fold rise year-on-year (FY20: €3m). The group had cash and cash equivalents at 31 December 2021 of €180m (FY20: €46m), with net interest-bearing debt of €199m (FY20: €62m).

MGI has now delivered a five-year revenue CAGR of 45% to FY16–21 with its ‘Buy, Integrate, Build and Improve’ acquisition strategy supplementing healthy organic growth. In FY21, group operating cash flow was €65m (FY20: €25m), an increase of 157%, highlighting the strong cash generation of the business (Q421 cash conversion of 122%). Net leverage remains within management’s target range of 2–3x adjusted EBITDA, rising to 2.8x at 31 December 2021 from 2.1x at 31 December 2020, with FY21 interest cover falling to 3.2x (FY20: 4.1x).

In FY21, the media sector became the largest contributor to net revenue (Exhibit 2) as it outgrew games, and its relative contribution is only expected to increase with strong organic growth and targeted M&A. However, with an adjusted EBITDA margin of 38% vs 20%, games still contributes the majority of profits (Exhibit 3).

Verve served more than 411bn ads in FY21, with 250m daily active users and 1.7bn connected devices. The division has more than 400 software clients with over US$100,000 of revenues, with a 95% client retention rate.

Having brought all of its games properties to a common platform, gamigo, MGI has repeated this strategy in media, aggregating its adtech properties on a single platform, Verve, serving both advertisers and publishers. Verve is a transparent, vertical omnichannel ad-tech platform that specialises in games and consists of connected demand-side platforms (DSP), data management platforms and supply-side platforms (SSPs) that enable and serve ads on mobile web, in-app, on web and via connected TV and digital-out-of home. Management thoughtfully set out its ambitions in adtech in a media seminar ahead of its acquisition of Smaato in June 2021.

The vast majority of Verve revenues derive from its function as an SSP (FY21: 86%) (Exhibit 5), taking revenue from advertisers looking to identify ad-space, with 71% of revenues coming from mobile devices (Exhibit 4). Management has identified that in FY22 M&A is likely to be focused on building up MGI’s DSP capabilities.

FY21 saw media revenue growth of 115% y-o-y, with the acquisition of Smaato (announced in July 2021) having a major impact on the growth of the segment in H221. As a result, media represented 55% of group revenues in FY21 and 39% of adjusted EBITDA. Adjusted EBITDA margins rose from 9% in FY20 to 20% in FY21.

Critical to MGI’s strategy are the synergies between the group’s games and media platforms. The essence of this is set out in Exhibit 6 below, where Verve is used to deliver cost-effective user acquisition for gamigo, delivering potential players at a lower price than gamigo could achieve through third-party ad partners and providing effective monetisation of its ad space. Additionally, by operating across the adtech value chain, Verve captures a greater proportion of advertising revenues for MGI. In particular, through accessing gamigo’s first-party data and its unique advertising inventory, Verve is able to leverage its owned content to deliver materially higher margins for the group. By management’s calculation, this allows Verve to double the cost per mille for MGI owned content over a third-party provider. When coupled with lower player acquisition costs for gamigo, this can lead to a tripling of the value retained within the group.

Verve’s success at positioning itself as a specialist games adtech platform can be judged by the clients it is attracting and retaining, with the likes of Applovin and Ironsource now clients, together with games publishers such as Zynga (Take-Two), King.com (EA), Loop Games and ILoveLOL.  

MGI’s games business has been built around its games platform, gamigo, and includes c 10 massively multiplayer online games (MMOs) and over 5,000 casual games, across the role-playing game, fantasy and strategy genres with over 100 million registered players. Titles include Trove, Aura Kingdom, Desert Operations, Grand Fantasia, Fiesta Online and Pirate101 and Wizard101, acquired through the KingsIsle transaction in January 2021. Gamigo delivers average revenue per paying user of €61.

Games delivered 50% growth in FY21 y-o-y, representing 45% of MGI group revenues and 61% of adjusted EBITDA. MGI’s games content remains the engine of group profitability.

MGI’s core MMOs are all established games operating a games as a service model, with games supported with regular content to maintain active communities, encourage user retention and add new players. This model extends the games’ lifespan and keeps players engaged and entertained. Gamigo regularly launches new games. with 370 games launched in FY21. This means that, on average, MGI published 30+ casual games every month with major releases weighted towards Q4, to drive engagement and monetisation in the high advertising season.

At 31 December 2021, net interest-bearing debt increased to €199m (31 December 2020: €62m), leading to a rise in net leverage to 2.8x from 2.1x at 31 December 2020. This follows the acquisitions of KingsIsle and LKQD in Q121 and as well as Smaato in Q421 but remains within management’s target range of 2–3x net leverage. FY21 interest cover fell to 3.2x (FY20: 4.1x). Absent major M&A, and given a full-year contribution from Smaato, management expects both net leverage to fall and interest cover to rise in FY22.

MGI has achieved annual revenue growth of over 70% y-o-y for each of the last three years, contributing to a five-year revenue CAGR FY16–21 of 45%. In FY20 and FY21, management has developed an attractive habit of beating guidance:

Management guidance for FY22 is:

Management recognises this guidance is conservative, but also includes an allowance for c €20m of revenue from discontinued businesses (its media affiliate and influencer activities), which at the adjusted EBITDA level is broadly offset by the full-year inclusion of Smaato, so margins are sustained at 28–29%, a similar level to FY21.

In FY22, management intends to focus on growth based on its ‘integrated owned and operated ad-tech’ strategy. Management will continue to focus on growing both the media and the games divisions organically, enhancing the synergies between the two platforms and by M&A. Management believes that the synergies between media and games will underpin growth for FY22 and beyond and has maintained its medium-term targets for the business.

As was identified in MGI’s FY21 results presentation, as a fast-growing market in which MGI is underweight, management has been clear to identify mobile ad-tech infrastructure and mobile games content as key areas for M&A in FY22. Deals are likely to include small specialist acquisitions to build out platform capabilities (eg DSP acquisitions) and larger acquisitions that deliver scale. Management’s top five M&A targets are all in the mobile space, with three mobile adtech platforms (all DSPs) and two mobile games developers.

Management expects to complete further M&A deals in both the games and media sectors in FY22.

As well as the company’s guidance for FY22 and its medium-term financial goals, for the first time management also set out four longer-term targets for the group:

We intend to examine these ambitions further and monitor progress in future research notes.

With media now the largest contributor to revenue, we have started to look at both games and adtech peer groups for MGI. Based on consensus, MGI is now trading broadly in line with its European games peer group but remains at a material discount (30%+) to its US adtech peers, such as Magnite, Applovin, Ironsource and Viant.

Management’s FY22 revenue guidance is for €290–310m (a 15–23% increase y-o-y) with adjusted EBITDA guidance of €80–90m (a 13–27% rise y-o-y), margins of 28–29%. At the midpoint of this guidance (adjusted EBITDA of €85m), MGI is trading on 2.3x FY22e EV/revenue and 8.1x FY22e EV/ adjusted EBITDA.