Stillfront Group AB (publ)

STO:SF

Earnings Call Transcript 2020-Q1

[Operator]

Hello, And welcome to the Stillfront Q1 Report 2020. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present CEO, Jörgen Larsson. Please go ahead with your meeting.

[Jörgen Larsson, CEO & President]

Thank you. And welcome all to our presentation of first quarter 2020. On Slide 2, you see myself presenting; and also Andreas, our CFO, will be presenting. We go to Slide 3, just a quick overview of Stillfront where we are currently. We are striving and working hard for building a free-to-play powerhouse. We now consist of 14 studios, and we have been able to achieve significant synergies, operational wise, which we will touch upon during the presentation. We have built also a diverse and evolving game portfolio with a couple of common themes. One is that we focus a lot on games that have long life cycles and also can provide entertainment that nourish that we have loyal users. We will also touch upon that later in the presentation.We had in Q1 9.8 million monthly uniques that played our games and 2.2 million daily uniques. However, that has not included more than 1 month from Storm8 and not the latest acquisition Candywriter at all. Our main market, U.S., Germany, MENA region, U.K. and France, and we are in our offices, in total, 750 professionals. If we turn to next slide, you can see these offices around the world. So it's in North America, Europe and also in Asia, Australia. You can see on the left side also how our revenues were distributed in Q1, Europe represented 42%; North America, 36%; and Asia, 17% and then spread on South America, Africa and Oceania. If we turn to Slide 5. You see our net revenue development. And for this quarter, we recorded SEK 691 million in revenues in Q1, which represents a 65% growth year-on-year. Also, we are pleased to see that we can achieve this growth, which consists both of acquired growth, but also organic growth with a stable UAC in this quarter of 21%. And important is that usually, Q1, also this year, is a very good quarter for marketing. So we have been executing profitable and strong marketing at a record level of SEK 148 million. But you can also see that as we grow, we manage to keep the percentage in relation to our net revenues on a lower level compared to last year, where we had 26% in UAC in relation to net revenues in Q1. Then usually, it goes down in Q2 and Q3, as you can see on the left side in the graphs.I would like to emphasize one thing that we have been really trying to establish through the years, and that is stability and predictability in our financial performance. And I think that rolling 12 or the last 12 months is a very good measurement because then, obviously, you take away quarterly fluctuations and seasonality. So if you look on the upper right side, you can see that how a nice slope of growth that we have. So we recorded last 12 months SEK 2.2 billion in revenues and the UAC during that period has been very stable on 20% last 12 months, and it was exactly 20% the last 2 quarters, last 12 months. So you can see also that we have been able to lower the marketing spend in relation to net revenues by approximately 20%. So if you look at the quarterly view from 26% to 21% and if you look at the last 12 months from 24 to 20, the only way that is possible is that we have an increased efficiency in marketing and also that we are good at so-called live ops, where we get more -- higher monetization from our existing loyal user base.If we turn to next slide. You can see our EBIT development. So we recorded SEK 213 million of EBIT -- adjusted EBIT in the quarter -- first quarter of '20, which is equal to 31% in EBIT margin. And we also can note that the EBIT is growing faster than the top line. So the EBIT growth was 69% year-over-year. And also as reflecting or mirroring that we are a bit lower on UAC percentage-wise, you can see that compared to Q1, we had a higher margin of 31% compared to 30%. And again, I would like to emphasize the stability and predictability that we have been working to establish for quite some time. You can see that on the last 12-month graph on the upper right side as well, that we are very stable in terms of margins. We have fluctuations between the quarter, as you can see. But when we look at the last 12 months, it's very stable, 33%, 34%, 33%, 33%. So it's something that we think is very valuable running the business and also understanding the business and predicting the business. If we go to next slide, we have -- this quarter, we have -- it's the first time we present the new product areas. We have decided to change our -- how we describe our portfolio to better mirror where we stand as a group currently, and I will walk through these as a whole and also dive into each of these areas. So these 3 areas consist of the product area strategy, which is our legacy and our home tariffs and have been for quite some time, and typically for these kind of games is that they have a very strong community that is part of the gaming experience and also creates a lot of loyalty. That's a very clear characteristic for strategy games and a very strong tool for us to higher the experience of each game. Also, typically, for strategy games is that it's very long-term game play. Some of them are completely open-ended and some of them have a round base so that during -- in grand strategy games we have a very strong monetization, and this is targeting mid- to mid-core audience. If we go to the second product area, Simulation, RPG & Action, typically, in these we have the economy and sports simulation games, which could be in very different setting. We have high-paced action games, typically the ones from Kixeye, and also the role-playing games that, for instance, player games with Shakes & Fidget. This caters to another part of the mid-core audience, but still mid-core, but slightly different characteristics. And then we have the newly established and very important area for us, Mash-up and Casual, and that's typically catering to larger audience of younger, slightly younger, but also significantly higher portion of female users. And this is important because we have an ambition to broaden our addressable market as well as our audience. So this fits very well into that. Usually, monetization is lower. The number of users is higher, but we have proven that we have a very healthy level that we will look into in a few minutes compared to the market in general. That is -- thanks to that we focus a lot on these mash-up, the stronger mixes.And then I should add as well as that we have 3% of total bookings equal to SEK 21 million that comes from what we call not the active portfolio. So the active portfolio now consists of 36 games. We had 65% being mobile in the quarter and 3% is ad bookings and 48% in Q1 was represented by strategy games.Looking at the numbers at the top, you can see that our MAU is growing by 73% year-on-year, equaling the SEK 9.8 million I mentioned, but important is that this is only worth 1/3 of the contribution from Storm8, that was only part of it 1 month, and not at all from Candywriter that came in -- consolidated on 1st of May. The monthly paying users has grown by 82%, and that is thanks to that we do add Casual and Mash-up, which is typically, as I said, higher user and more paying users, but on a slightly lower level, which is seen in the ARPDAU now that is going down by 3%, which is quite a small effect. So that means that we have been able to have very stable and high levels ARPDAU on strategy games and Sim games. And all in all, our bookings increased by 60% in the active portfolio, and then we have the 1 banner outside the active portfolio, and the UAC increased only by 42%.So this is the overview of our portfolio. And I must say that we are very pleased with having been able to increase the balance in the portfolio. So it's balanced from mature products to younger products. It's large franchises to midsized and to small games, and growth products from very profitable products. So we are increasing the balance and the performance of the portfolio through systematic work.Going to next slide, Slide 8. If we look into the strategy genre a bit more, it consists of 12 games, 62% mobile revenues, no ad bookings, which is hard on strategy games, but it's possible, but it's harder. 25% come -- of the revenues come from Asia, primarily the Middle East. So as mentioned, it consists -- it represents 48% of the bookings in the quarter. We're happy to conclude that Nida Harb continues its strong growth year-over-year on its third year. So it's really a very strong product in our portfolio. Empire, the large franchise, continued to be very, very stable. And we have Age of Knights, which could be a potential growth product. That is still in global soft launch. And then when it comes to the midsize products, which we think we have a very strong set of midsize product in our strategy portfolio, Strike of Nations, the sister the product of Nida Harb, has gained significant momentum. Conflict of Nations as well as Supremacy also have had strong growth. They are built on the same engine and Conflict of Nations is soon to be launched on mobile. And as mentioned already the last 2 quarters, Supremacy 1914 continued to reach new record levels on its 10th to 11th year of being live. So that is really encouraging that our mature games could represent high growth, and hence, high profitability.Looking quickly at the numbers at the top. You can see that the MAU is down by 8%, the monthly paying users by 2% and the DAU by 10%. But as we have focused more on live ops, which strategy games fits very well for, the ARPDAU is up 21%, which is the reason why we grow by 10% in bookings. You can also see that the UAC has been growing by 14% and that makes the level of UAC at 20% in the quarter, which is down slightly below the average of the whole portfolio. Going to next slide, Slide #9. Looking into our Sim, RPG and Action portfolio. This is really a growth area for us. It consists of 17 games. 52% of the revenues came from mobile, 3% ad bookings, and we have been working actively with increasing that, and I'm optimistic about that. We can continue to increase this in the Sim, RPG, Action area as well as the Mash-up and Casual, which we'll come to soon. 47% of the revenues come from Europe.The Sim, RPG, Action in Q1 represented 36% of the bookings, and we're happy to see that Big Farm: Mobile Harvest continue to be one of our strongest growth engine in the group for its third year. We're also pleased to see that we are now getting growth into Kixeye, and we have prepared ourselves for growing that product. And now we ramped up the marketing activity in the end of Q1. So that is -- we're optimistic about what that could bring. We also, after the reporting period, launched the MENA version of War Commander: Rogue Assault between -- which is a product of synergies and collaboration between Kixeye, Babil Games and Goodgame Studios. And also, which is amazing, I think, is that our oldest game in the portfolio, Gemstone IV, which was launched in 1988, had its strongest quarter since 1999 without a single dollar in UA. So I think that shows the strength in products like ours that they could live for a very long time.Looking at some numbers, you can see that we have a solid, or I would say, even strong growth, both in users. MAU is up 41%, DAU, 26%. The monthly paying users is on a very solid growth trajectory. We also see that the ARPDAU has -- we have been able to increase that, which is not that easy when you increase the number of users at the pace that we do. So we are pleased with that, even if it's lower than Q3, Q4, but then we have, obviously, lower number of paying users or daily users. And the bookings increased not less than 91%. So this is a true growth area for us. The UA was a bit higher than the average as it was 28% in the quarter, but that also caters for future growth into Q2 and the rest of this year.Turning to Slide #10, which is then representing and describing the Casual and Mash-up product area. This is, of course, a bit limited in numbers now because it has only been represented for 1 month in the first quarter. So it looks a bit different here, but it consists of 7 games, all then coming from Storm8. 100% of the revenues comes from mobile. And here, we have 10% ad booking. So it's higher, which is natural for this segment. I think we could potentially increase that as well, which is good for profitability and also a diversification of revenue streams. And here, North America is the dominating part. We also -- we are very happy to see that what we announced and declared when we made the Storm8 acquisition was that we thought that their assets were not fully exploited. They have built fantastic strong products with especially Property Brothers and Home Design Makeover!, but we think that they could increase the spending -- the marketing spend to make the most of it, and that's exactly what we have done in March. So -- and it's showing very good return. And Property Brothers has really had a stellar development, and has been if you look at any or similar tools, you can see that Property Brothers has been up top 50, 60 products in the U.S. the last month or so. So it's a really, really strong development. Also worth mentioning here is that Candywriter games will be part of this product area from the 1st of May 2020.Looking at the numbers, I should describe why it looks a bit different here. So if you look at the graph, the way that we have described this is that we would like you to understand how much users this product area represent for March alone. So you see the sole number of users. But then as we -- they are only part for 1/3 of the quarter, we have to divide it into 3. Otherwise, the ARPDAU and other metrics will be skewed. But that is important to note, that the actual players in March were nearly 10 million monthly uniques, and it was 335,000 paying users, so a high degree of paying users. And the daily actives were 2.1 million. And also, typically, for this segment is that the ARPDAU is lower, but it's more people playing and paying and we have ad revenues in addition, so you can see it's approximately [ SEK 1.60 ] in ARPDAU. And also, you can see that the bookings amounted to SEK 105 million for the quarter. And the UA, that was half -- less than half of this prior to us come in and acquiring Storm8 is now up to a more healthy level of 16%. And again, it returns very strongly. So we are optimistic looking forward. I would also like to emphasize that some of the part -- some of the games that comes from the Storm8 acquisition is part of the Simulation category. So it's not in this category, which means that Storm8's revenue contribution is higher than the SEK 105 million number. All right, if we go to Slide 11, next slide. We would just like to repeat briefly that -- some words about Candywriter, the last -- latest acquisition that we made that is consolidated, as mentioned, from the 1st of May. This is an acquisition which we are very enthusiastic about. First of all, Kevin, Nadir and Gabrielle and the whole team has really a tremendous track record. They have been pioneering in its true meaning mobile gaming since 2006. They were part of the first games that were launched -- the launch games of the App Store. So they have really been able to -- they've been very early out, but also, which is very impressive, there have been several times developing games that have been amongst the highest downloaded games in the U.S. time after time in different areas. And that is you hardly get lucky so many times. So they have really been trailblazing mobile gaming. And what really caught our attention is the latest game, which is called BitLife, which is unique game in many ways. That is representing now 85% of the bookings. But we have very high hopes of what we can do with that unique Mash-Up game going forward. They are a very lean team of only certain full-time employees that are -- in 2019 managed to generate USD 26 million in bookings with USD 16 million in full year EBIT. So that's impressive numbers.On next slide, very brief, why are we so enthusiastic about this acquisition? Well, first, one thing is that it adds to the size and the diversification of our portfolio, which is exactly one of the key success factors for us creating a 3x larger Stillfront the next coming years, is that we need to further diversify, and that is exactly what we're getting with a unique game that was already last year amongst the 5 most downloaded games in the U.S., which is quite impressive from this lean and efficient team.Also important is that it increases our addressable market and the audience slightly, not completely, because it's overlapping. They have 80% being people mainly female audience between 18 and 34, and that adds complement to Stillfront's existing audience with young adults between 18 and 25. So that is something which we also find very interesting and valuable. On the right side of this slide, that is important. We think -- I think that there is no single acquisition to date that we've done in Stillfront that had as strong synergy potential as Candywriter. And that is for several reasons, one being that it's not localized and not culturized, it's only in English, and that we know is very, very likely to draw growth -- further growth. They are very strong in in-game advertising, which is something -- an area where we try to be more efficient and have higher revenues. So they can add knowledge and experience and expertise to other games with different studios. Also, they have the marketing and analytics outsourced, and that's obviously an opportunity if the data proves to be better when we run AD tests going forward. And then the expertise and vast knowledge and experience of live ops is something that the guys at Candywriter see as a great opportunity. So all in all, high synergy potential with this acquisition. So with that, I would like to hand over to Andreas.

[Andreas Uddman, Chief Financial Officer]

Thank you, Jörgen, and thank you all for joining this morning. I will turn to Slide 13 to start off with. This is to highlight the financial highlights of the quarter, the first quarter of the year. Jörgen has talked about the impressive revenue growth of 65%, and we managed to do that while also maintaining a strong adjusted EBIT margin of 31%. We also improved our cash generation in the business in the quarter. This is obviously a foundation for the other activities that took place earlier in the quarter where we laid really the foundation for my financial capacity through our new debt facilities and the bond that we issued in February, where we have been able to, with a moderate leverage, we end up the quarter with 1.15, being able to execute on the Storm8 acquisition. And this is really the critical part for further expansion as well. So strong underlying financial performance of the business, but as well as a strong financing platform has been created in Q1. So that will be the highlights of the quarter.And I will then jump into Slide 14 with a bit more detail on focusing on Q1 and on the P&L. To start off, net revenues, we have 65% growth quarter -- year-over-year. And that is driven by a few things: [ very ] strong bookings of SEK 685 million, but we also have a positive deferred IFRS effect and that is driven by the effects, especially in March, where we see reactivating of old users starting to play again, but also high -- much more higher activity in our portfolio, which created this positive effect. But even if the numbers of growth are very strong, we have started and diversified our revenue streams, even if Storm8 is only consolidated for 1 month in this quarter. There's 1 more studio in this. We have more games. We also have increased our geographical split with now 36% in North America. And coupled with that, we're also getting a genre diversification, which also then has its higher female population. With strong revenue development, the gross margin goes down 2 percentage points. And this is driven by a 65% share in mobile, but we offset this impact by increasing other revenues and sort of ad revenues, but also with the scalability of our business model.UAC, we have a record spend, as Jörgen was saying, of SEK 148 million for the quarter. And if we go into the personnel costs, they have increased with 75%, but it's important to note that some of that -- those costs are also capitalized costs. So the underlying P&L effect here is only 62%. We had a quarter, which was, of course -- items affecting comparabilities of SEK 50 million. Majority of these, or the SEK 43 million, is related directly to the Storm8 acquisition. And if we move into the depreciation and amortization, that goes up as well with 135%. However, that's mainly driven by the PPA amortization for -- which is now SEK 56 million versus only SEK 13 million for Q1. We end up with an adjusted EBITDA of SEK 213 million, which is a 69% improvement year-over-year. If I move into financial items, which is only SEK 4 million reported, we have an underlying financial cost of approximately SEK 25 million in the quarter, both one-offs, but also underlying interest. We have increased our debt in the quarter, but we had a positive effect of SEK 22 million, which is driven by the fact that we raised the capital during the quarter and then we converted into dollar and then prior to the acquisition of Storm8 and that ends up on the financial net. Reported tax rate was at 25%, which is in line with previous quarters, and we have a net result of SEK 77 million for the period.Jumping to Slide 15, the balance sheet. Comparing then the balance sheet, we have grown our balance sheet; and comparing it to year-end '19, we grew our balance sheet with 42 -- quite significantly with about SEK 5 billion. This is obviously driven by the acquisition and intangible assets as a total, i.e., including goodwill and other intangibles increased 42%. And approximately SEK 3.4 billion of that was related to goodwill from Storm8. And that SEK 1.2 billion is from other intangibles. But that is -- when you do your sort of PPA allocation, the majority of the increase in product-related intangibles comes from PPA items. We had a cash balance at the end of the quarter of SEK 472 million, which, coupled with our facilities, is obviously a good war chest, but we also partially going to have it utilized in Q2 already. We had new bond and long-term credit facilities, which increased with SEK 1.1 billion. And the bonds we raised in that project of SEK 517 million. And we increased our drawings on our revolving credit facility of SEK 625 million.In terms of provisions for earnouts, we had -- in our books, we have long-term earnouts, i.e., the earnouts that will be paid after 12 months of almost SEK 1.1 billion. 70% of those are expected to be settled in cash and 30% through new shares. And for this year then, for provision for earnouts, we have short-term SEK 223 million, which is deemed to be settled latest Q3 this year, whereas 61% is expected in cash and 39% are expected to be settled in shares. We had a net debt position of almost SEK 1.8 billion and an adjusted leverage ratio pro forma of 1.15, which is in line or slightly below what we communicated when we announced the Storm8 acquisition, and that is driven by a strong generation of cash in the first quarter as well.Jumping into Slide 16 for the cash flow, slightly expanded slide this quarter as part of a new reporting package. First, I look at the reported for the period. So looking to focus in on Q1 and the cash flow as reported. Very healthy cash flow from operations of SEK 120 million. And coupled with a positive working capital effect of SEK 43 million, we ended up with a cash flow from operations of SEK 163 million. The total investments in the quarter was SEK 2.4 billion. This is driven by Storm8 acquisition, approximately SEK 2.3 billion of that. And we had product development of SEK 100 million, which is in relation to our revenues 14%. This investment and, of course, had -- we did a capital raise, so financing activities related to SEK 2.360 billion in total in our financing activities, which was driven mainly by the share issuance of SEK 1.3 billion and SEK 1.1 billion net debt increase for the quarter.We then also decided to show you a look at the LTM numbers. So I think this is -- when you look at cash flow, it can always differ over a quarter. But looking at the LTM numbers and looking at purely the free cash flow from operations and product development, we have a -- cash flow from operations was increased if you compare Q1 2020 LTM versus full year '19, the increase was SEK 58 million. We have, for the same period, increased our investments, but only with 35% -- SEK 35 million, sorry. And we also increased then our cash conversion from -- with 5 percentage points to 68 -- 0.68. So we have a strong and healthy cash flow generation even if we continue to spend money on both product development and high spend on UA in the quarter.And then yes, jumping into Slide 17. So this is just a recap, looking at what happened post the quarter, including Candywriter, where we -- in conjunction with that activity and announcement, we also released pro forma numbers for the full year '19. And with Candywriter, which would then be consolidated from 1st of May, our net revenues on a pro forma basis would increase with 8%. Our EBIT -- adjusted EBITDA would have increased with 10% and our adjusted EBIT by 11%. So looking at the pro forma numbers, which the historical look-back we would have had an adjusted EBIT of SEK 1.4 billion in total. And the Candywriter transaction was done with a 50-50 split share in equity and that share part rated on a dilution of 2.2%. And this is obviously the summary of Q1, but also looking a bit into the activities in April. And with that, I will hand back to Jörgen.

[Jörgen Larsson, CEO & President]

Thank you, Andreas. So final -- on Slide 18, some comments on what we see as a COVID-19 effect. So up until today, we can conclude that we've had an accelerated gaming activity across the line, all our games and all our product areas, and that is in several dimension. Both we have had large influx of new registered users, but also, which is very important for us, is that it's a much higher activity amongst the existing user bases, both the existing users that played very frequently, but also we have been able to run reactivation campaigns and getting users that are playing from time to time to really be very active in our portfolio. So that is one area that has clearly provided us with accelerated momentum.Also, another area where this is very clear is within marketing, and that is -- gives a double effect because both the prices on buying traffic and to be active when many companies are not so active, of course, the price per campaign and per acquired user goes down. But at the same time, if you have a higher activity level and higher engagement from the players that you gain in, that we get the double effect in the equation between the average cost for an install or a new user in relation to the lifetime value of that -- what that user is expected to deliver. So that has been really, really clear for us as an effect of the COVID-19. So considering that and also considering the fact that the 2 acquisitions that we made this year is only 1 month on one of the acquisitions that is part of Q1, that makes us very -- it's very clear for us that the momentum entering into Q2 and in Q2, up until today, is very, very strong. Of course, we don't know how it looks like in the end of June or in the last half of June. But currently, we have a very, very strong momentum in our business in itself for the reasons that we spoke about here, but also further fueled by the COVID-19 effect.Finally, on next slide, before we open up for questions, we have a high ambition with Stillfront. We would like to really create a market-leading company in the free-to-play space. We are now 1 group consisting of 14 studios and 36 active games. We have had 2 billion players that have played or registered for our games lifetime. We have achieved a number of things. And I think that 2020, even though we are only in the beginning of May, we have really taken a huge leap in reaching and getting leverage on the platform that we established in 2019 to create a 3x larger company in the next coming years. And one of these was to increase the addressable market. If we look at Storm8 and Candywriter coming into our portfolio, we have a very good balance in the portfolio also mirroring how the industry looks like, where approximately 40% comes from mid-core and 40% comes from casual. So we will, in one very short period, have a good representation of the industry. That is one key thing for us to achieve what we would like to achieve being a market leader. Another is that the diversification is really, really important so that we are keeping the risk balance. And I think that now with the new product areas, we can present that in a good way, even though Mash-Up is just in the beginning in Q1, but rapidly increasing fueled by the successful marketing and the acquisitions of -- the acquisition of Candywriter also entering into the portfolio.Finally, our business has proven to scale positively, and that is really important because that is how we achieve leverage on our growth plan and the growth strategy we have. We have center of excellences, which take a acquired growth into organic growth. And we have -- we look at this very carefully. And I -- we have -- since the beginning of 2018, we have conducted 50 collaboration synergy -- driving synergies projects between different studios. And 40 of those 50 projects are active as we speak. So that is really proving that we are creating a scalable business, and we are very optimistic about what we can achieve going forward extra fueled by the COVID-19 effects. Thank you very much for listening, and now we open up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Oscar Erixon from Carnegie.

[Oscar Erixon, Financial Analyst]

A few questions from me. First of all, the strategy product area performed quite strongly in this quarter, and you mentioned solid organic growth now in Q1. Could you please quantify or elaborate a bit on the organic growth in Q1?

[Jörgen Larsson, CEO & President]

Yes, Oscar. So we have organic growth rate, which exceeds the market growth. The reason why we -- there's 4 reasons why we don't focus on presenting that as a KPI, the organic growth, and that is, first of all, the absolute imperative task that we had, the imperative thing for us is that we achieved total growth because size will matter even more in the future. We'll have so many commercial advantages from just the mere fact that you have size, in marketing and in other areas. So that is one reason. The second reason is that we are -- one of the strengths in our model, our organization model is that we are really fast in allocating resources to where it pays off best, where we get the best effect of both marketing spend, but also product development. And that does not harmonize so well with diversing -- dividing our growth into organic on one hand and nonorganic on the other hand because we don't care whether it's a newly acquired unit or if it's a 12-month-old unit that has been in the group for 12 months or 15 or something else. We allocate the resources to where we get the best effect. And that is also something which we -- when we discussed this, which we did thoroughly, that organic growth for units that are less than 12 months in the group is not regarded if you take the standard definition as organic growth, which is, we think, very -- could be misleading when we talk about organic growth because it is organic indeed. And finally, when we have more and more collaboration projects, so for instance, War Storm, which is collaboration between Kixeye, Babil Games and Goodgame Studios, if we would take that revenue in Kixeye, it will not be organic growth. If it's in Goodgame, it's organic growth. And if it's in Babil, it's organic growth. So it becomes a bit weird effects of dividing that. But we continue to deliver solid growth, above-market growth organically, and that is the reason basically why we don't present it as a KPI explicitly.

[Oscar Erixon, Financial Analyst]

Very clear. And regarding the strong trading now in April and May, is it possible to quantify that a bit? I mean, you mentioned both strong influx of new users, existing users and strong monetization. How should one think about sort of how this affects Q2, but also how the customer inflow and reactivation affects coming quarters, Q3 and Q4?

[Jörgen Larsson, CEO & President]

That's a very good question. And the reason why we don't give a forecast is that it's hard to know exactly what happens when quarantine and lockdowns are being loosened up in several markets. We do know where we stand today, obviously. And we -- but it -- we decided not to give a number, but just to describe that we've had a very, very strong development so far. But it's very hard to give a number because that will be easy to extrapolate that and that it will continue on that level, and we don't know. We -- as you know, I think it's extremely data-driven. So we don't like guessing. But again, we can just conclude that the momentum is uniquely strong for the reasons and in the way that I described. We believe that since our games are to a large extent games that show that they have a long life cycle, so when you have started to play there's a high tendency you will continue to play over a long time. And we have a large degree of our users who are very, very loyal and play for many years. I took some example of it, even extreme ones that Gemstone IV, but also Supremacy and other games. So that means that the intake we have seen the increased -- significantly increased intake we've seen in activity levels. But again, we are optimistic about that, that will not go away even though the marketing is not as super efficient as it has been now up until today. So for sure, it will be an effect that continues, but to what extent, we don't know exactly.

[Oscar Erixon, Financial Analyst]

Great. And I also have to ask regarding the new product area, Casual and Mash-Up here, which you discussed for the first time, SEK 105 million in bookings in March. Can you say something about how much from Storm8 are in the other product areas and in advertising? And also, is it possible to say something about the April effect from Property Brothers Home Design, which, as you mentioned, seems to be trending very strongly, especially in April?

[Jörgen Larsson, CEO & President]

What we can say is that the majority definitely -- I mean, it's a smaller piece in terms of revenues that is in Simulation, but still, it adds some percent, but the majority is obviously Property Brothers and Home Design Makeover!, which is part of the product area, Mash-Up. So that is definitely majority. Looking forward, as we don't give the forecast, we cannot say a number, but as we mentioned, we have accelerated the marketing spend in March, and that is -- it's not a far-fetched thought to believe that the majority of that effect is not in March. It comes after March. So we are optimistic about -- we see a strong development, obviously, up until now, but we're also optimistic that, that will continue throughout the quarter and throughout the year. So that is what I can say. And as you point out, it's really a stellar development for Property Brothers, and we are very happy with that, of course.

[Oscar Erixon, Financial Analyst]

Great. And I'll ask one last question and before I leave it over here. Marketing is quite well-contained in Q1, et al. But given the high return on investments now in -- towards the end of March and also, I assume, in April, do you expect to go higher in terms of marketing spending in Q2 given the strong ROI?

[Jörgen Larsson, CEO & President]

I think that in absolute numbers, that's a very fair assumption that we increased the marketing since the spending is that high. Then it's not that easy that you can just increase it to eternity and keep the return level. So the effect diminishes slightly when it come at a very high level. So -- but of course, we try to use the momentum that we have. So in absolute numbers, it's very likely that it goes up in Q2. In relation to revenues, since we see a high growth, of course, it's not clear to us whether it will be an increase percentage-wise in relation to net revenue. So I think that as you can see, we did expand our UA significantly in Q1. But this year, since we grew by 65%, the relation to net revenues, we're actually down even though it was a record spending. So I would expect similar pattern that like in Q1. So absolute spending up, but in relation, not so much up. But again, we are only -- we do not have to do yet. So it's hard to say how it will look like in -- later this quarter.

[Operator]

And the next question comes from the line of Hjalmar Ahlberg from Kepler Cheuvreux.

[Hjalmar Ahlberg, Equity Research Analyst]

Just got a question on the Candywriter game, BitLife, which is the main revenue game there. Can you explain a bit about the competition in this game? Or are there many other games like this? What you believe in -- I mean, the history is quite short this far. But do you see the risk of this game not being a evergreen game? And what kind of competition do we see if you understand the question?

[Jörgen Larsson, CEO & President]

I understand your question perfectly, and it's a very valid question. And when you look at BitLife, you might come to the conclusion, this is simple because it's mainly text-based, and so -- but it's built in a very clever way, and it's much more sophisticated than the surface might show, and it's sophisticated in several ways. One is that the engine is very complex and it's a very open, multidimensional world. Many games that are in this direction, because this is a truly unique game. They have a limited amount, a limited number of outcomes, whereas the engine that has been built here has not a limited number of potential outcome, which drives the fantastic joy when you play the game. And then also that encourages you to play the game over and over again because it's not like you know what kind of outcome your decisions will produce. So it's built in a very clear way. It's hard to copy. So we have looked into 1,600 gaming companies, and I don't know how many games. So I think we have a fairly good view on the market, and we have not found something similar to this. so -- but of course, at sometime it will be -- and it has been people trying to build a BitLife, but so far, they haven't been even close.

[Hjalmar Ahlberg, Equity Research Analyst]

Okay. Got it. And for the Strategy segment, it seems like you have been growing or keeping revenue growing by increasing revenue per user. What do you see? Do you think you can cram up more revenue per user? Or will it be more volume-based growth going forward? Or can you say anything about that?

[Jörgen Larsson, CEO & President]

We clearly see that our live ops is paying off, as you pointed out. That is yielding the average revenue. But then I think also that we hope and think that we could continue on a healthy level of marketing spend. It was basically more or less just below the average of the group. So I think that is a good healthy level. So it will be a combination, I think. But of course, it's quite hard to foresee how much the live ops and events drive the average revenue per daily active users. And then if you grow more by UA or taking in new users, the DAU goes up quickly. And then, of course, that is counter -- it's a counter force, so to speak, to the ARPDAU average. So it's a balance there. But if I put it this way, are we optimistic that our live ops will continue to generate significant revenues? Yes, we are. Are we comfortable that we can continue to market on par with the group? Yes, we are. And also, as we mentioned, the midsized products have had a very, very strong momentum. Nida Harb continues to grow, and we'll come out with Conflict of Nations on mobile. So -- and we had growth in -- even the 10-, 11-year-old product is showing good momentum. So we think it's well-balanced. We don't expect it will be the highest growing product area, but solidly growing and with high margins.

[Hjalmar Ahlberg, Equity Research Analyst]

Okay. And another question on acquisition. I mean, now we've done quite a few large ones, Kixeye, Storm8 and also Candywriter. What do you see out there when you look at, what the level do you still see both large and small? Or is that for bolt-ons now or anything possible?

[Jörgen Larsson, CEO & President]

We see both, is the short answer. We have -- as always, we've had 10 -- approximately 10, 12 companies that we are in talks with. Most of them don't materialize in a deal, but we have the process and the strategy of getting to know the people, getting to know the product, getting to know the data on a very deep level before we enter into a deal mode. So that's why we work that way because that lowers the transaction risk, and we know what we buy, and we can define a growth agenda pre-transaction. So there is no change. We don't have -- emptied the pipeline in any way. But then again, you never know when the right time is to try to do the next deal. As Andreas pointed out, we have established during the quarter a strong financial capacity for not stopping here, so to speak. So I mean, the leverage ratio of 1.15. So we still have some -- with the existing debt and equity and cash generation of the lease that is very, very strong currently, high cash flow, strong cash flow and strong growth. So yes, we have the capacity; yes, we have the appetite; and yes, it's part of our strategy going forward as well.

[Operator]

And the next question comes from the line of Lars-Ola Hellstrom from Pareto.

[Lars-Ola Hellstrom]

A lot of questions have already been taken. But we have been discussing that marketing price. It is lower, but I know it's hard, but can you, on a like-for-like basis, give us a hint now how much lower they are due to the COVID-19 situation, just to get a feeling? We know that monetization is better. But just to get a feeling how much better ROI is.

[Jörgen Larsson, CEO & President]

Yes. But -- and it's, of course -- I would love to have a very clear answer on that, but it's not that clear because as you also spend more, then you drive up the prices yourself. If you have a good cohort and you increase the spending because you have a super high initial return on that cohort, you increase the spending in that direction. And we have hundreds of campaigns running. So we are really fast and agile in redefining and reallocating marketing money at each and every day and in many different campaigns. But I mean, it's not like a few percent like-for-like. It's decades of percent is what I feel the expression could be. So that is what we have seen. And of course, that is very healthy for the ratio between lifetime value, which is also increasing, if you also lower the CPIs with 0.10%.

[Lars-Ola Hellstrom]

Okay. Fair enough. And in terms of the games segment, a little bit detail here. But Jörgen, you said that Nida Harb is continuing to grow. Is that on a year-to-year basis or also on a quarterly basis? And are we also to expect a strong Q2 now due to the Ramadan?

[Jörgen Larsson, CEO & President]

The seasonality is exactly what you point out. So usually, Q2 is the strongest. And yes, it is a sequential growth as well as the year-over-year growth for Nida Harb in Q1 already. So of course, we hope and think that, that will continue into Q2, fueled by Ramadan and the general effects as well from COVID-19.

[Lars-Ola Hellstrom]

And also on the MENA region, now with War Storm being launched, if you compare it to Nida Harb, has it the same opportunity to KPIs as strong as it is for Nida Harb?

[Jörgen Larsson, CEO & President]

It's too early to answer that question. We don't know. What you do when you launch a new product is that you start with collecting data, and based upon that data, you refine the product and you make it even sharper, even better performing provided that the initial cohorts and the initial period is strong enough, which we are optimistic about. But it's not decided this will be a product on level 100 or 50 or 10 after a few weeks. So that is premature. But we know that the product as such War Commander: Rogue Assault, is a strong product and we have seen that we now are starting to gain momentum and growth with that product. So then, of course, we are quite optimistic about that the sister product, the culturized version also could be performing well. But it's too early to say anything based upon data.

[Lars-Ola Hellstrom]

Okay. Then back to UAC. Can you give us some indication of a few key titles that you have continued to scale beginning of Q2 and where you see positive scaling effect?

[Jörgen Larsson, CEO & President]

Well, as mentioned, we see -- continue that -- the Mash-Up titles are running well. So it's -- and also the ones that we mentioned here continue to [indiscernible]. We just spoke about Nida Harb, Strike of Nations, Conflict of Nations. So it's basically -- there is no distance pattern going forward. It's the product that has good momentum get even better momentum to summarize it.

[Lars-Ola Hellstrom]

Okay. And on the Casual segment, we have discussed Property Brothers already, but Home Design is flat on charts. Is this a decision that they are all right, it's simply so much better though on Property Brothers right now, so you're simply pushing that game? Is that a - is it -- or has the game kind of peaked, Home Design?

[Jörgen Larsson, CEO & President]

No. We don't think it has peaked at all. So it is in a growth situation. So -- but as you pointed out, which is obvious from open sources that Property Brothers is returning marketing at scale, much, much better, but that doesn't mean that it's not marketable from design maker. On the contrary, we have a growth there as well. But it's not compared to Property Brothers as super impressive as that one.

[Lars-Ola Hellstrom]

Okay. And on Candywriter, I've been reading that there has been a lot of content updates, et cetera, for the BitLife game. So I guess that the revenue level is higher in Q1 than it was in Q4. But will you start running at once, pushing marketing spend given the situation that we are in right now for BitLife?

[Jörgen Larsson, CEO & President]

Yes. That is -- now we are on the 6th of May, and we got access, so to speak, to the 1st of May. So it's very early, but that is an obvious opportunity -- sorry, and just as in Storm8, we think that it could be and should be accelerated. So that is a very -- that is very likely that we're encouraged to increase the marketing spend. That is clear. And also since they have ad bookings. Ad bookings, when the prices go down, ad bookings per space, per unit, so to speak, the revenues are lower. Now they are mainly advertising other games, which we all know is not suffering from any COVID-19 on the contrary. But again, the ad bookings is not growing that much, but the in-game advertising is growing. And it's an increase -- I would like to just mention also that one of the reasons -- there are several reasons why we have the ambition to increase the ad bookings as part of -- a portion of our revenues. Besides that there's not any platform fees on ad revenue, so it goes directly down to profit, that is good, of course. But also, it's an in-built hedge if we have ad revenues. If the CPI goes down or CPM goes down, so that we get less paid for ad bookings. Then on the other hand, our own marketing is performing better and vice versa. So by adding ad revenues to our revenue or mix, we get an even -- we add to the stability and predictability in our business. So that is one -- there is a strategic rationale to that as well besides that we just increase the revenues.

[Lars-Ola Hellstrom]

Okay. Two more questions for me. The first is to tie in a little bit to Oscar's question here about how to view Q2 and Q3 and Q4. Would it be reasonable given the situation that we are in, that we will see lower seasonal effects in Q3?

[Jörgen Larsson, CEO & President]

Very good question. That is one of the questions that we ask ourselves. And I mean, it comes very much down to what we all expect and all of us can do our own guessing about what will be the effect from quarantine and lockdown loosening up. Or so the first question is, when do they loosen up and in what pace, and et cetera? And then what will be the effect? And I think it's super hard to have a clear answer to that. We can all make our own guesses. But I don't -- honestly, I don't know. If it continues with lockdowns and COVID-19 restrictions of different kinds, I expect, definitely, it will be lower. But if it -- if those are taken away in Q3, maybe equal or flat or deeper, I -- we don't know actually. It's a complete -- we have no historical data on a thing like this.

[Lars-Ola Hellstrom]

Okay. The final question is on acquisition. Storm8 and Candywriter was #1 and #2 on your wishlist for a Casual game. But what would you like to add next to the group? Is there any specific regions, segments that you would like to prefer? Or is it just the right company at the right time?

[Jörgen Larsson, CEO & President]

We have several business, which we, for many reasons, not the least competitive reason. There is competition on the M&A side as well, but we have several different themes that we are working with. One that we were very clear about at our Capital Markets Day, the 27th of November last year, that we would like to increase our strong footprint. I can say that, that is -- that we have done. And so we have a good balance between mid-core and Casual Mash-up. So that we achieved much faster than I dreamt of, to be honest. So that is very satisfactory. So that one is not maybe highest up, but if we find the right mash-up games because it's less competitive on mash-ups compared to, for instance, Strategy, then, of course, we look at that. So you have to have a certain degree of being opportunistic, but we do have a number of themes like the one that I mentioned, but also there are other themes that we have in our filters looking at companies, but I don't want to present them.

[Operator]

And the next question comes from the line of Erik Lindholm from Nordea.

[Erik Lindholm-Rojestal]

Yes. Most questions have been asked. But a question on the Strategy segment. You mentioned Age of Knights is currently in soft launch. When do you plan to bring this to full launch? And what are your current thoughts for the game?

[Jörgen Larsson, CEO & President]

We turn it into full launch when the data is what it should be. So we are completely data-driven. When we go into soft launch, we say that we should achieve certain data in order to push it into global launch. And as many games for us and in the market in general, soft launches tend to be more extensive, for us and for others. So that's why we are working with this. We -- some of the KPIs are really, really strong, really strong. But some others, we think that we could and should improve prior to push the -- turn the throttle on marketing in global launch. So it's very hard to say, and that is how it should be. We shouldn't guess. We should be data-driven.

[Erik Lindholm-Rojestal]

Okay. Yes. And just one more for me. You talked about the hedge in -- the in-built hedge streaming game advertising revenues. Have you seen any effect on in-game advertising revenues from COVID-19 so far? You said that you have a lot of game advertising, but is there any effect here?

[Jörgen Larsson, CEO & President]

Yes. There is a slight effect on the CPMs, not huge, but a slight one. So then we can compensate that in many other ways, as I touched upon but that we have seen.

[Operator]

And the next question comes from the line of Kristoffer Lindström from Redeye.

[Kristoffer Lindström, Equity Analyst]

Just a few brief ones. Do you see any difference in the product areas in terms of the effects from the COVID-19? I mean, the CAC to LTV ratio, if it's more positive in some area like Casual? Or is this just good across the portfolio?

[Jörgen Larsson, CEO & President]

It is across the portfolio positive. So all areas, almost all, every single product has a positive effect. But then it could differ a bit in pattern, but that is -- as you know, Strategy games, you have a slower ramp-up because there's a few or less percentage of the players that you require that actually become devoted to the game, on one hand. On the other hand, they become more loyal and play typically longer and monetize higher. So you can say that Strategy game moves a bit slower. But still, we see the clear effect. Casual and Mash-up moves faster, and the Sim, RPG, Action is in between.

[Kristoffer Lindström, Equity Analyst]

Yes. And looking at the Casual and Mash-up KPIs, if Candywriter would have been included during March, then I guess we would have seen a lower average revenue per day in the active user. But how would the UAC as a part of bookings? Would it have been up or down just to give a hint of the direction?

[Jörgen Larsson, CEO & President]

Yes. I think that it would have been more or less the same in percentage-wise. But the big thing is that we would like to -- as long as we get support from the data, we think that it's a good idea and a good opportunity to increase marketing for BitLife as well. So that will imply that we think it could be slightly higher in percentage-wise. But as I touched upon earlier, when we have high growth of revenues and increase the spending, the absolute numbers would increase, but it's a bit harder to see how much, or if at all, the percentage-wise will go up. But I will say slightly up is my best answer at this point in percentage-wise.

[Kristoffer Lindström, Equity Analyst]

Yes. And looking a bit -- a question to Andreas. Looking at the -- in the report, we see our pro forma and the discussion about the leverage ratio just to confirm that the pro forma adjusted EBITDA would have been briefly SEK 1.55 billion compared to SEK 1.7 billion as the pro forma figure for Q4. So a slight drop in underlying EBITDA. Is that correct?

[Andreas Uddman, Chief Financial Officer]

No. I think there's 2 different things. What we -- since we bought Candywriter in Q2, or in April, that is not part of that pro forma EBITDA in the report. That will only be added then in Q2, whereas the pro forma for '19 is still from reported plus Storm8 and Candywriter.

[Operator]

And the last question comes from the line of Oscar Erixon from Carnegie.

[Oscar Erixon, Financial Analyst]

Yes. Two follow-up questions for me. First is for Andreas, I would say, a question on product development, which were 14% of sales in Q1 or 8% net of operational D&A, if you understand what I mean. Could you elaborate a bit on that and how you see that developing now in 2020 and beyond? Do you expect D&A to increase [ and let the market ] capitalization to decrease?

[Andreas Uddman, Chief Financial Officer]

Well, we have said, I mean, the 14% is slightly higher than we had in the last quarter. We have said that over time, and this obviously fluctuates between quarters. We will see an increase, of course, with the launch of -- soft launch of War Storm, that always leads us to a bit more activations. So that will fluctuate over time, but as we have committed it before, there is likely due to production value that this will go up from the sort of historical 10% that we've been talking about even if you haven't seen that in the last quarters. And of course, with more activations, then your product development, your amortization for that will go up as well over time. Does that answer the question?

[Oscar Erixon, Financial Analyst]

Yes, yes. Sure. That answers the question. And then a question for Jörgen. I mean, I think this COVID-19 impact is quite important to understand and also interesting. Is it possible to -- looking at the growth in Q2, the start of Q2, is it possible to sort of get a feeling for the pro forma run rate year-on-year now in the start of Q2? And also what's the additional positive effects from COVID-19 is on top of that? If you could elaborate on that, that would be really helpful.

[Jörgen Larsson, CEO & President]

It's difficult. But I mean, we have decided not to give a forecast because we think it's too early in the quarter. So it would have been a short update, that if we report later this time. But -- and the reason for that if not anything else than that we are humble about that we don't know what happens potentially in June, if lockdowns are going away. So we don't want to give a view that is not -- that we're not comfortable about. So that's why we express ourselves in qualitative terms. And it's very hard to answer your question without being very, very close to give the numbers. But it's a significant growth. That's the only thing I could say at this point and a significant -- sorry, significant effect.

[Operator]

As there are no further questions, I'll hand it back to the speakers.

[Jörgen Larsson, CEO & President]

Thank you all for listening in and have a lot of questions. That is also always very appreciated. So thank you for listening in. And have a good day all of you. Thank you.

[Operator]

This now concludes our conference call. Thank you all for attending, you may now disconnect your lines.