Fractal Gaming Group AB
STO:FRACTL
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Hello, everyone, and welcome to today's presentation of our Q1 report. We are very excited today to update you about the latest development in our company and share the details of our report.
Looking first at some highlights from our Q1 report. Our sales increased by an incredible 66% year-over-year measured in Swedish krona and increased by 49% measured in U.S. dollars. And we are, of course, very satisfied with this development, and we will talk more later in this presentation about specific dynamics of the market turnaround and also our revenue development.
Our sales at revenue increased by 32% year-over-year, which is also a very positive sign of the market turnaround. The difference in sales and increase and sales out increase is explained by the channel stock filling dynamics, where our sales partners need to also increase their stock levels to match the higher run rates.
And the recovery in the markets, which we saw started already in the second half of 2022 has further strengthened during the quarter and clearly shows that there has been a pent-up demand that we have talked about in previous presentations.
The increase in sales out is, however, also explained by a very positive market reception of a new K series launched in 2022, which were the new models of the Torrent series and the new case families of POP and North.
The North especially launched in December 2022 and has been a monumental success for us and is one of our best-selling cases in our history. As a result of our strong product lineup, we also see that we are gaining market shares in key markets.
Our EBITDA increased to SEK 42 million compared to SEK 11 million a year ago. Our product margin is slightly higher year-over-year. We had 40.4% compared with 40.2% last year with a positive impact from lower shipping rates, but offset by a less favorable product mix.
Looking at the general market development and trends. We saw in Q1 that the leading gaming platforms team set another record with 33 million concurrent players, which is a testament of the still strong gaming interest in activity. There's also been some strong game releases in the quarter, especially the best-selling Harry Potter franchise Hogwarts Legacy, which have further boosted gaming activity.
And it is predicted that the popularity of cross-platform games will continue to rise, where pieces remain the platform of choice for the majority of the gaming developers.
We think that this year will be a busy year with many major game releases, also paired with lower prices and additional options within the graphics card category, which can fuel increased demand.
And also, as we have discussed in previous reports, the gaming industry has proven to be relatively recession resilient in the past. And we believe it's likely that gaming will continue to be strong in coming years despite macroeconomical headwinds.
I mentioned previously that the North case launched 2022 has been a big success for us with a tremendous reception from both media and customers, followed by very strong sales numbers. Now we are also very proud to report that the North has won the prestigious Red Dot Product Assign Award for 2023. And our focus has always been on creating products that combine exceptional functionality with remarkable design, and this recognition from the Red Dot Design Award is a testament of that endeavor.
And with that, I'll leave over to you, Karin, to continue.
Thank you. So moving on to net sales and sales out. The graph at the top shows the development in net sales. The first quarter started strong with a net sales of SEK 196 million and a growth of 66% compared to the first quarter last year.
We also measure our sales in U.S. dollar as we sell exclusively in dollars regardless of the end markets and the organic increase in the first quarter was 49%.
The recovery in the market, which started already in the second half of 2022 has further strengthened during the first quarter 2023, which has led to our retailers having to increase their inventory levels to meet the increased demand. So when sales to end customers increase, retailers need to increase purchases to cover for the increased sales run rates but also to maintain a certain stock level which gives a temporary boost effect to be able to adapt to the higher run rate. And of course, vice versa, if the run rate goes down, then the effect -- then the retailers reduce purchases for reduced run rates as well as to reduce stock levels.
In the past 2 years, we have made many successful product launches, as Hannes just talked about, and we now have the strongest product portfolio ever, which has contributed to increased sales but also increased market shares.
Case series, Torrent, POP and North were among the best-selling products during the quarter.
The strong sales in recent quarters clearly shows that there is a pent-up demand as many gamers have waited to upgrade their equipment. We now have a significantly improved market with good access to graphics cards, lower prices, while new generations of graphics cards have been launched, which increases interest in France products.
In the graph at the bottom, you can see our quarterly development in sales out to end customers that distributors and resellers report to us measured in dollars.
Sales out is an important measure that shows the underlying commercial development. In the first quarter of 2023, sales out increased by 32% organically compared to last year with an increase in the case category of 36%, which shows increased demand and great interest in our products.
Sales out has been on a high level during the last 2 quarters and in the first quarter 2023, it was USD 17 million and the strongest quarter since Q4 2020.
Moving on to the next slide and segment development. The strongest region in the quarter was EU with net sales of SEK 98 million, corresponding to 50% of total net sales compared to 42% last year. The increase was mainly driven by increased demand from end customers, successful launches and low inventory level at retailers.
Americas net sales amounted to $71 million, which is 37% of total net sales; and APAC and other amounted to SEK 26 million, which is 13% of total net sales. Sales of cases was 91% of total net sales compared to 89% last year.
Moving on to the next slide and product margin. In the first quarter, product margin was 40.4%, which is 0.2 percentage points higher year-over-year. Factors affecting the margin were lower shipping costs which positively affected the product margin by approximately 5 percentage points as shipping prices were even lower than before the pandemic. The comparative numbers in the first quarter of 2022 were historically high as freight prices peaked in the fourth quarter of 2021 and the first quarter of 2022.
And we have the currency effect, which had a positive effect on the product margin by approximately 2 percentage points attributable to inventory that was purchased at a lower rate and sold at a higher rate.
The product mix effect affected the product margin negatively by approximately 8 percentage points and was mainly attributable to lower gross margins within the product groups.
Let's have a look at the next slide and earnings. In the first quarter 2023, EBITDA was strong and amounted to SEK 42 million, and the margin was 21% compared to SEK 11 million and 10% margin last year. The increase in EBITDA was mainly due to increased sales and higher product results and lower warehouse costs due to decreased stock.
Looking at operating cash flow, which was strengthened to SEK 59 million compared to SEK 7 million last year, positively impacted by higher EBITDA. The positive change in net working capital was mainly related to lower inventory and increased accounts payables. The cash flow from investing activities amounted to SEK 10 million and in line with last year. The bank overdraft facility was SEK 18 million compared to SEK 123 million last year and was mainly related to purchases of products in stock. Lower utilization of the overdraft facility is mainly due to increased sales. Total credit facility amounted to SEK 120 million.
Moving on to the next slide and the income statement. As previously presented, we had a net sales increase of 66%, mainly due to retailers having to increase their inventory levels to meet the increased demand, successful product launches and good access to graphics cards with lower prices. Lower shipping costs as well as positive currency effect improved the product results. Warehouse costs was lower due to lower inventory level, but some variable costs were higher because of increased sales.
Fractal is in many ways a dollar company with 100% in dollars down to product margin. Fractal's reporting currency is SEK and the numbers are affected by fluctuating exchange rates in currencies other than SEK. The first quarter had an average U.S. dollar SEK rate at 10.4 compared to 9.3 last year, which is positive on our results.
Debt financial net is mainly affected by interest expenses related to the overdraft facility and FX translation effects.
With that, I hand over to Hannes again.
Thank you, Karin. So a summary of our presentation here today in the quarterly report, including net outlook. The recovery in the markets that we reported already in the Q4 report strengthened further during the quarter, and we saw net sales growth of an amazing 66%.
And we can also proudly say that our product portfolio is now more attractive than ever, which have contributed significantly to the sales growth and growing our market shares.
Our product margin continues to be on a very solid level of 40.4% and EBITDA margin was in this quarter, very strong at 21.3%.
Furthermore, as also mentioned by Karin before, our cash flow was very strong in the quarter, which have reduced our debt significantly, which we're very satisfied and happy about.
And the market turnaround we see currently is, of course, very encouraging, but it's still too early to judge, of course, the length and strength of it, but we continue to see a strong momentum in the start of Q2, which gives us confidence in our ability to drive profitable growth in this year and beyond.
So with that, we have finished our presentation, and we would like to open up for any questions.
[Operator Instructions]
The next question comes from Amar Galijasevic from Carnegie.
A couple of questions here. First one on the regional performance here we see Europe standing out very well from the rest of the regions and you talked about increasing inventory levels at the resellers and stuff, but is there any particular reason why it's not the same effect in the other regions?
Yes. I mean, we have seen now in the first quarter that the return to growth has been particularly strong in Europe. And I think there are several reasons to that. And one reason is that the comparable numbers of Europe last year was quite weak. So therefore, the growth becomes stronger. We had relatively decent market still in the U.S. and it [indiscernible] last year.
But in general, the channel stock dynamics is something that is mainly affecting our European and Asian markets, whereas in the U.S., we have our own inventory. There is some channel stock, of course, but it's more limited.
Okay. And if we look at the product margin very solid here in the first quarter. But if we look out further out this year, is there anything that affects the product margin in any direction that you see now already?
Well, I think it's worth mentioning the FX effect, which we had as a positive contribution in this quarter and have had for some time now, which is basically because we repurchased some inventory at lower dollar rates in the past and are selling it now at high dollar rates. But now our inventory is starting to normalize to the current dollar rates. And if the dollar rate would be dropping over the year, that could turn around into a negative FX effect. So that is something that is worth mentioning. We don't know how that's going to develop. But at least the positive FX effect will likely slowly disappear.
The other part, which we could see on -- could actually switch to that slide again for illustration. This slide, we can see the waterfall here. And so we have the freight costs, which have now come down significantly compared to where they were in 2021, 2022, and that has a positive effect. That is not something that we believe will disappear. We believe the freight costs will now stay low or stay normal rather because what we see now is return to normal freight levels before the pandemic, the price hikes.
And apart from that, we also have a product mix effect in the first quarter, which is mainly attributed to some of our new Case series, which have lower margins than some of our other Case series, which is mainly attributed to the POP and the North Case series. The POP because it's more value-oriented rent case; and the North because we have some quite expensive [ wood ] details there, which are quite costly. We have worked very hard on getting the cost down, especially on those 2 product categories. We have, in general, had quite significant cost downs in the first quarter on all our products, but we worked especially hard on the POP and the North to get our cost down and also to make some price adjustments in order to remove this negative product mix effects. And we have done significant progress on that. And I foresee that it takes some time for that effect to fully be realized in the P&L with stock to lay and such effects, but we further on in coming quarters, and we believe that the negative product effects -- product mix effects will vanish. But on the downside, there could be a negative FX effect.
And just a final one for me. You talked a bit about the game releases, Hogwards here in Q1, very strong release. And you mentioned a bunch of other AAA type that was being released throughout the year. I was just wondering, do you see any material effect for your business when there are more, let's say, AAA releases in a quarter or no similar effects?
Yes, for sure. No, it's always an important driver for gaming hardware upgrades. It's not 100% correlated, but there are certain correlation to a strong game release road map to the interest of upgrading your PCs.
It depends a little bit on the type of titles as well if there are more performance, too many titles, like for example, I think it was 2 years ago now that the Cyberpunk 2077 release, which was extremely performance hungry game that drove a lot of upgrades. But yes, there is some correlation to game releases and general gaming activity and need for upgrades in particular.
[Operator Instructions]
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you. We have some written questions we have received.
The first question is in which of your 4 business areas do you see most recovery and which least in 2023? Will there be new water cooling products to compete with the latest innovation.
We see that the main recovery has been in cases, which I think is mainly attributed to that. We have launched a lot of new strong products in the last year in that category.
And in terms of water cooling, yes, we're always working to make sure that we have a competitive lineup, and we will further release further upgrades to our current lineup and also in the water cooling segments.
The other question we got here is could you expand on large impact on gross margin from product mix in the quarter. What are the drivers would you expect going forward.
I touched on that a little bit before on Amar's question. We see that -- so the product mix effect is mainly attributed to some of our newer launches, which have had a bit lower margin. But we have been working very actively on that since Q4, and we have done a lot of improvements, and we see those improvements will at least reduce or perhaps entirely eliminate that product, that negative product mix effects.
All right. With that, I think we have covered all the questions, and thank you all for your time today and wish you a great day.
This concludes the call. You may now disconnect.