Stillfront Group AB (publ)

STO:SF

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to the Stillfront's Q1 Report 2021. [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 very much, and good morning, all of you that have dialed in. It's also Andreas Uddman, our CFO, attending this call, and will also present the financial parts.We can start with Slide 2, Stillfront At A Glance. This is how we look currently or at the end of the quarter, we were 19 studios globally with approximately 1,250 employees. As we have continued for quite some time to constantly improve and build our portfolio, and they have 2 common themes, as always, that is long life cycle game, loyal users that play our games, which we think contributes to our stability and predictability in our business model.We had in March, 60 million unique players on a monthly basis and 12 million on a daily basis. And we had our main markets being U.S., Germany, MENA region, U.K. and France in terms of revenue. You can also see on the lower right side how our revenues were distributed per -- globally in the first quarter, and it was North America 53%; Europe 32%; Asia 10%. And you can also see our offices on that slide.Next slide, please. We would like to take the opportunity to highlight some of all the very high level of activity in our portfolio. There's always a lot of development going on, on new products that we'll come back to, but also with our existing portfolio. One of our strengths, I would say, is to conduct so-called live ops, where we add on new features and functionalities and run events on our existing portfolio. So here are some highlights for the quarter.We added 10 new titles into our active portfolio from our acquisitions. We can also see that Word Collect and Trivia Star consistently were ranked among the top 3 downloaded apps in that very category, world and trivia games, in the U.S. in Q1. We're also happy to conclude that the BitLife internationalization has started, naturally with U.K. and in a very good way, was the #1 downloaded app on iOS in late January. So we had a good start on the internationalization of BitLife and more will come later in this year.Conflict of Nations continues to scale well on mobile and showing strong performance since it was launched on mobile in September last year.On the topic of events, we have chose to highlight the Shakes & Fidget event, Legendary Dungeon, that in March led to a 25% increase in monthly bookings just for connected to one event, which shows, we think, the power and the efficiency of working actively with live ops. And this is only one example, obviously, out of -- we have events of this kind or similar kind in all our games on the active portfolio on -- it's not monthly, could be, in some cases weekly, in some cases it's by monthly, but you can see the kind of effect it could generate.Also very satisfactory is Fashion Nation from Nanobit who came into soft launch in the U.S., showing strong early metrics, not the least retention numbers, which is usually the most tricky one to get right. So if that is right, it's promising, but it's too early to make any projections, but we are very pleased with the first soft launch and hope to see that continue as we roll out in more and more countries later this year.Albion Online is another very exciting -- the Albion Online mobile version is a very exciting opportunity for us. Where we go through cross-platform, which has been the success for our grand Strategy portfolio for so long time for Bytro and Dorado. And that is following the plan, so we're scheduling the soft launch coming in for June. So we think that it's also very exciting.And then we have the small Horus Heresy: Legions, which was part of the -- or the main game when we acquired Everguild. It's now -- have now onboarded using the -- what we called the center of excellence, now we call it the Stillhub for marketing. And already in a few weeks, we have been able to triple the investment in marketing or marketing spend with very short return on marketing. So that's also very promising for the rest of the year and for many years to come hopefully.So all in all, a lot of things going on in our portfolio. Here are just some of them. But in general, we are very pleased with the composition and the broadening of our portfolio and not the least, how our studios are taking care of live ops and development.Going to next slide. An overview of our revenue development. So we had 91% year-over-year Q1 net revenue growth. And that was, of course, driven primarily from acquired studios, but we also had 9.5% organic growth, which we think is decent and as our addressable market is between 8% and 9%. We also had a negative FX of 8.9%, primarily with a weaker U.S. dollar compared to SEK. Of course, that is not present in local currencies, but nevertheless, in our reported numbers.So there you can see on the right side how we bridge the Q1 '20 revenues to the Q1 '21 revenues. We also had a tough comparison for a short period, but maybe -- or maybe still affecting the organic growth in Q1, but not as much as it will do in Q2, and that is due to the very fantastic, I would say, uplift we had last year, and that we would not have for anything in the world would have been almost without because it was really exceptionally beneficial for Stillfront and our financial performance last year. The only downside is the comparison number, but in a perspective of building this company for yet another next coming 10 years, that is only a small comparison thing. It doesn't change anything on how we operate our business.You can also see here that our UAC in relation to net revenues were up to 28%, which was exactly what we also flagged for that it will look a bit -- slightly different when we have more cash flow gains. So this is according to plan. And we also think that this number is representative for the rest of 2021, then we think we don't say it's representative for 2022 and onwards.Okay, we can go to next slide, please. Our EBIT development. We had a 103% growth year-on-year of our EBIT in absolute numbers, which is a satisfactory number indeed. You can see that we had a 33% margin, which we think is strong considering, which is almost forgotten our Q1 last year, we had 31% in EBIT margin. But the big difference is that last year, we spent 21% in UA, whereas now, we spent 28%. So hence, you can see clearly that we are more efficient, and our business model is scalable. And we also have a higher gross margin as well as OpEx is lower in relation to our net revenue. So that is the change that we sought to establish, and I think it has come in, in a very satisfactory way.You can also see that we have still Q1 LTM, 37% of EBIT margin equaling from SEK 1.7 billion in EBIT the last 12 months. And again, it's very important, so please don't hesitate to ask questions about understanding the dynamics now with higher UA with higher gross margin and a fairly strong EBIT margin. That dynamic is important that you understand.Going to next slide, please. Looking to our active portfolio. You can see, as I mentioned earlier, that we -- in March, where we -- the first month with all the acquisition consolidated, we reached some more than 60 million unique monthly playing our games, whereas more than 12 million playing our games every single day. So that's strong numbers, and they have been growing some -- over 300% year-on-year. The MAUs and the DAUs have been growing 237%.So this is very important numbers because from our perspective, the fact that you have both a wide portfolio of games that is attractive for your audience and that you have a very large pool of players playing your game regularly, that will open up for opportunities that you can source a lot of players to add against within the portfolio from 1 or 2 games they already play, which means that we will be less dependent on external sourcing and external UA for increasing the activity in our portfolio. So that is something which is strategically very important for us. And hence, we have taken these steps. And I think we have exceeded so far our expectations on reaching these numbers of active users.You can also see in terms of monthly paying users for the first time, it's more than SEK 1 million. So it's SEK 1.2 million, paying for our entertainment every month, so that is satisfactory. You can also see that UA is increasing as a consequence of what we just spoke about by 143%. But all in all, we think we have a very strong diversification are -- now 62 games are -- we have in this quarter, Casual and Mash-up are actually the largest ones. Strategy, where we haven't done any acquisitions for a while, still are very solid, I will go into that in a minute, that's representing 28%. And Sim, Action, RPG are 33%. We had, in total, 77% of our revenues coming from mobile, and we have now 15% in ad bookings and a number higher than that in March, whereas all the new entities were consolidated.So we think that we are basically on the high teens in March of ad bookings, which was something that we communicated as a target a year ago or something. So I think we can say that we have reached that point.Going to the next slide, a bit into the strategy part of our portfolio. So you can see how very stable and predictable this part of our business is. You can see that also despite that it's moving more slowly than Casual and Mash-up, we had a clear uplift in Q2 last year. But otherwise, it's exceptionally stable. You can see that the MAU are almost unchanged since Q3, it's 5% down year-over-year. The DAU's are 2% down year-over-year, but actually increasing from Q3 and Q4.The ARPDAU is growing by 14%, which is basically what explains that we are growing this area organically by 10%, as you can see in bookings. That is that we have been able to convert more users into payments as on average. It's not the average revenue per payment so that is going up, it's actually going down, but we are broadening our paying user base. So now it's up to 117,000, which is a 70% year-on-year growth, which we think is very good and healthy.So the 12 games in this category, 66% of the revenue comes from mobile, and it is a Europe-intensive part of our portfolio, it's overrepresented, I should say, in Europe by 45%.Going in -- looking on the next slide, it's our Sim, RPG portfolio, consisting of 23 gains, 62% in mobile, 44% in North America. Very stable ad revenues in this part of our portfolio, 5%. And you can see also that our MAU is growing impressively in -- the MAU number's grown by SEK 143 million year-on-year. And also, we can see that our DAU is growing, 69%, and our monthly paying users is growing by 123%. Our WA is also going up in this area.We can also conclude that Albion Online has had a very good start, and this is despite we have not yet launched the mobile version, which I mentioned will happen in June, we hope, I think. And Big Farm: Mobile Harvest and Shakes & Fidgets continued to perform very solidly and strong throughout Q1 as they did in Q4.And the only small disappointment is the Kixeye titles that are delivering below expectations in Q1, and that is, of course, having a negative impact on our organic growth. But we have taken measures, and we are convinced that we will have a good development in Kixeye for many years to come.Going into the Casual and Mash-up part of our portfolio. Not surprisingly, it's growing rapidly due to the acquisitions of Super Free and Moonfrog, even though they're not fully into the numbers here, but they are performing according to plan, and we are also happy to see, but not surprised, that the Storm8 main titles are very stable. And from 1 month, it's growing, one of the months it slacked, so it's very stable since Q4. And that's very good, and it were expected since they had a tremendous uplift in Q2 last year. Since these cohorts of users that we took in, in Q2, they are more or less out of the system. They have churned in according to the natural pattern, but now we have stabilized and we are convinced that both Property Brothers and Home Design Makeover! have good growth opportunities for years to come.We can also see that we have 33% ad bookings, so it's significantly increased, primarily driven by the Super Free titles, and 73% of our revenues come from North America in this area. And also, you can see that we have 700,000 monthly paying users, which is a significant number as well. Yes, so I think we could hand over to Andreas to go into the financials more in specifics.

[Andreas Uddman, Chief Financial Officer]

Thank you, Jörgen. Good morning, everyone. Let me start on financial highlights for Q1, Page 11. Jörgen was mentioning, we continue to have a strong underlying revenue growth as a group with 91%, and we continue to have a good adjusted EBIT margin of 33%. In line with what we've seen before, we still have a strong cash flow generative business. We generated SEK 0.25 billion this quarter as well, even if we had negative effects on working capital due to mainly timing effects from our platform providers. So strong cash flow generation. We still have a strong financial position with SEK 1.2 billion of cash and unutilized long-term facilities of SEK 1.1 billion. And we keep our conservative leverage -- conservative levels of leverage of 1.3% in the quarter, which is below our target of 1.5% and even if we, in the quarter, paid for both Moonfrog and Super Free.So overall, Q1, we continue to have an underlying good healthy performance of the business and a continuous strong financing platform. And this will help us to continue to be part of this consolidation that happens in the market.Moving to the income statement. You're going to talk a bit about the dynamics, but our net revenues in total grew SEK 628 million for the year-over-year to 91%, organic growth of 9.5% and acquired growth of 91%. And then we had some negative effects on reported FX of 8.9%. I think the key thing around revenues is what is really showing coming through in this quarter is the diversification of revenues, we added 10 new active gains to the portfolio and also to the nonactive portfolio as well. But we also added more ad revenues that now represents 15% of our total bookings in our active portfolio. And this now shows around that we increase our gross margin rate by 3 percentage points. And this is something that is creating a good natural hedge, more games, more diversification, but also strengthening of our gross margin.And that entailed that we can spend more on UA without distorting the whole P&L. That's a very important dynamic that now is visible in the numbers. And it's important to remember as well that this 15%, both Super Free and Moonfrog has a higher share, as we communicated before, ad revenues, and they were only consolidated 2 months for Super Free and 1 month of Moonfrog.And in terms of our other costs, both our external costs and our staff costs. Here, we have also a positive impact on FX. I mean, our cost base is sort of naturally hedged to our revenues and that we see as well. But it's also important that these combined where we naturally grow -- increase our cost base, but they increased less than revenues. And this shows some scalability, quite a bit of scalability in our business model, whilst we can actually spend 28% of our net revenues in UA. And this is a very important dynamic, which is now coming through.Going below the EBITDA, we have more amortization and depreciation from our claims that are sort of going live or have been going live. So that's a natural increase and an adjusted EBIT margin of SEK 432 million, which is 103% increase from last year.Some items affected comparability this quarter, majority of that or a big portion of that is from the Moonfrog acquisition. And then we have some cost optimization projects ongoing as well as, again, what we are talking about.Financial items. The underlying interest cost is SEK 30 million, which is we utilize more of our facilities, so natural increase there. We have SEK 23 million of sort of noncash interest, which is booked on the financial items section. And then we have a positive effect of FX of SEK 9 million in the quarter. We reported a SEK 60 million of tax, which is equal of 29%. But in that, it's also an impact of transactional costs, which is not deductible. And if we strip that out, our underlying tax rate is around 26%.Then moving to the next slide, the cash flow and the balance sheet metrics. First of all, looking at the quarter, cash flow from operations before working capital adjustment, SEK 387 million. We had a negative effect in the quarter of SEK 138 million of working capital. This is mainly driven by receivables. Q1 has less days so some of that receivables were only received in early April. So it's money we will get back. Even with that effect, generated SEK 249 million of free cash flow from operations.High investment pace, of course, with 2 acquisitions completed, which was approximately SEK 1.3 billion of cash that went out. And we spent SEK 144 million of new product development, so 11% of revenues, so in line with previous trends we've seen. And we strengthened our cash flow for the period with SEK 174 million after investments.Cash flows, always last 12 months, shows the trend, I think, the best here, we have a 150% increase in our operative cash flow to SEK 1.3 billion of cash. So that increase is 150%. And we continue to spend and increase our spend on product development, which has increased 73%. But it's that relationship that is very important to point out that, yes, we do increase our -- the absolute amount we invest, and that is also leading to more -- a bigger product pipeline, but our operative cash flow increases more.So that relationship is important and something that we look at a lot. And with that investment, i.e. being able to deploy almost SEK 0.5 billion in new product development in the last 12 months, we still generated SEK 810 million of free cash flow that can fuel our acquisition strategy as well, or part of it, as well as our financing activities.We introduced a new cash conversion ratio this before we added our net profit. We are now tracking it against EBITDA. Seems much more relevant because we have so many noncash items in our P&L, such as PPA amortizations and earnout interest, and that was 0.45, which is significant increase of 50% from the same period last year.Looking at our key balance sheet metrics. We have continuously -- we have utilized more facility. We're still below our target of 1.5. And we do continuously work with our financing on a technical basis. So the sort of foundations we laid last year that has served us well to be able to execute on our M&A strategy, whilst we're keeping a conservative approach to our actual leverage. And we have still SEK 1.2 billion of unutilized cash in the group.Another part here, which is very important, we would look -- when we look at that, we don't look at just absolute numbers. We look at our maturity profile. And here, we have a good structure at the moment with the first due date on our 2022 bond in end of 2022. And we have the RCFs that we utilize, which is 2023, and then we have the 2024 bond. And maturity profile is something we look at. This is also important that we can not just look at an absolute value of debt, but we actually look at how this instructions to be able to remain conservative on that part as well.To sum up, we continue, as we have done in the previous quarters, strong underlying performance in the business, continued strong cash flow generation, and our financing platform has served -- that we laid in 2020, has served a good purpose by us being able to execute 2 new deals and finalize them without doing any additional financing, except for utilizing our facilities.With that said, I will hand back to Jörgen.

[Jörgen Larsson, CEO & President]

Thank you, Andreas. So to summarize and give an update on some few special topics, that will be the final part of this presentation. So if we go to the slide with IDFA, a topic that is spoken a lot about, and now it's finally here, so we can get through that one. And as you probably know, the -- during April now, the -- Apple has started rolling out the changes with the iOS 14.5 update.So as we have concluded for quite some time, and we started already in June last year to prepare ourselves for this change, so that is good. And also, we saw that in our portfolio, the actual users that we have acquired last year, 20% to 40% of the users on iOS actually already have manually opted out. So for -- it indicates that we have been able to cope with it up to that level. But of course, that it will be more that it's not trackable in the way that it was previously when it's the reverse thing that you have to opt-in to tracking instead of manually opting out.What we expect, many in the industry, is that the CPI is expected to drop, so the cost per install. The prices are going down. Of course, we, as a company, representing some 1% for the global market, it's not only up to us adjust the market price, so it's very much depending on how others will act in this, but it will, for sure, be an adaption of CPIs for some types of marketing short to midterm.We have also, since the very inception of this company, focused a lot on being strong or even leading in terms of diversification of channels and providers of marketing opportunities, which is -- was not made 10 years ago due to any changes in iOS, but it serves us well now when the change is actually happening. So I think that, that will open up, for sure, opportunities because in some areas, in some regions or some type of marketing and campaigns and for some type of products, it will open up opportunities. For others, it will be more challenging, but then the price level will compensate.So I think that we are in a good shape. We have made an extensive A/B testing of different ways of adopting our marketing. And I think it's too early to say after the first week here, more or less, the outcome of this. And it's really hard to say anything before it stabilizes, whether that takes 3 weeks or 2 months, I don't know. But I'm absolutely convinced that we are in a position to take on this change and also, both handle the limitations where they come up, primarily in the Strategy area, I would say, where you target more, but then we have other ways of doing that, which we will come back to when we report Q2. But also that we can seize the opportunities that we expect will come from lowering prices and that the market will be not completely efficient for a while before it settles.So all in all, I think we are in a good shape. Very hard to say for the short term, but midterm and onwards, we think that it will not be any larger impact to our business.Going to a few words on our business outlook on next slide. We think we have had a solid start to this year, in line with our expectations very much. And both in terms of the numbers, slightly higher margin that we may have hoped for or had hoped for. But that's, of course, very good. We have been able to compare to Q1 last year. We can really see that, Andreas also elaborated on that, our business model is highly scalable and that we can increase the marketing, get back some of that increase in marketing by increased gross margin and also lower OpEx in relation to our net revenues. That model change is something that we really would like to -- that we have sought to achieve for quite some time. It leads us to a more solid foundation, stronger diversification in our business model.As I mentioned also earlier, we had a very strong pipeline of games entering into software 2021. It's more than 20 products, and this is also very encouraging that we have been able to more than double the number of products coming out. Actually, it's almost a factor of feel compared to last year. And we keep our investments into product development on the -- at around 10%, 10.9% in Q1. So we are not exceeding our investment levels. However, we are significantly achieving more results with that. So that is very good, of course, promising.As said, we will have -- it will be sensational if we would struggle with a comparison number in Q2 because we had this exceptional growth. So we expect a negative organic growth for Q2, but we also are convinced that in Q4 and the end of the year, we will definitely be back on growth, organic growth again. So exactly if that kicks in, in Q3 or in October or in November or when it kicks in, it's hard to say and always dependent on how our new products can scale.Finally, we have intensified the process to transfer from First North to the main market in Nasdaq, Stockholm. So we are -- we hope and think that we will be able to do that within the next coming months, of course, depending on receiving the necessary approvals, as always, but it looks good, we think.So that was it. And we -- with that, I think we open up for QA.

[Operator]

[Operator Instructions] Our first question comes from the line of Alex Duval from Goldman Sachs.

[Alexander Duval, Equity Analyst]

Just a couple of quick ones here. Firstly, on the Apple situation, you articulated that there could be some risks but also opportunities, and that you feel the company is in good shape to deal with this. I wondered if you could quantify a little bit the sort of range of impacts we should be thinking about? What's your expectation at this point? A little bit more detail in terms of numbers would be helpful.And secondly, you obviously achieved 9.5% organic growth in the quarter. And there's an expectation of sort of roughly high single-digit, low double-digit market growth in organic terms this year. I wondered if you could talk a bit about how we should think about your progression as a company. Relative to that, perhaps how many percentage points, roughly, we could be thinking in terms of outperformance, if that's relevant.

[Jörgen Larsson, CEO & President]

Thank you. So first of all, IDFA, again, in the very short term, it's hard to say. But we are convinced and we are collecting data as we -- literally as we speak, to see where potential opportunities will arise because they will definitely do so. But it's -- to be honest, it's exceptionally hard to make a prediction. And of course, we have different scenarios that we work with, but it's not -- it's hard to make any firm statement to the market on what we expect in the next, say, the first 3, 4, 5, 6, 8 weeks or whatever.But again, if you take a very large picture of this, it will always be that the strong demand will find the supply of products on the market. So -- and it has been changed previously when GDPR, it was told that no one could play anymore on desktop, which has proven to be completely wrong. So I'm sure it will open up opportunities.But to quantify them, both to the numbers and to time them, it's very hard. So we don't do any statement in this situation, but it's only gone 1 week and not everybody has updated their phone figure, so I think it's premature.So when it comes to organic growth, if we take away -- and again, it's important to understand why we are explicit about the negative growth because we had a tremendous traction in Q2 last year, which also comes in partly to Q3 on the Casual side because the Casual games are growing very fast, but you fuel the marketing, week end of the marketing, but then also the revenues from Casual customers declined much faster than it does in Strategy. So that's why we will see some effects in Q3.But we have said it many times that we are as convinced as ever that we have built ourselves a possibility to grow stronger than the market. And our view on the market growth is 8% to 9%, and that is because we have a blend of 23% being browser game, where the market is declining. We don't have a very large presence in some Asian areas where the growth is higher. Now we have just entered into India, which is exciting for us, but it will not contribute to the total that much this year, but we see that as growth potential.But considering that we have built this huge universe of marketing opportunities where we constantly optimize putting our donors where it pays off the best over the whole portfolio, all channels, all regions and constantly evaluate and rebalance our marketing mix, that is one of the few but one of the exceptionally important structural competitive advantages that you ever can build on this market, and we are very strong in that. And that's why I think that over a longer time, we have a good chance to grow by 1 or 2 percentage points over longer time than the market structurally. Then, of course, as we have had in some quarters in history, 3 successful launches in the same quarter. Of course, we will outgrow the market more in that particular quarter, whereas if we don't have any successful launches for 1 or 2 quarters after that, then we might not grow that much faster. So -- but besides that, if you look at the long trend, we have provided ourselves with opportunities to grow 1% to 2% larger than the market. It's growing faster than the market.

[Operator]

Our next question comes from the line of [ Chira Barua ] from HSBC.

[Unknown Analyst]

Just the first one is the -- on the negative impact coming through in Q2. Just to clarify, is that purely based on comps, and there is no quantification of IDFA within this. Is that correct?

[Jörgen Larsson, CEO & President]

That is correct. So again, we see low visibility to IDFA. It consists of both opportunities and challenges short term. CPI will drop if that goes in a short time. It opens us for good marketing opportunities in Casual because Casual don't use targeting. So for them, a lower CPI is just compact good news, so to speak. So -- but basically, there is -- this is based on comp. So not that we have put in some cushion for IDFA.

[Unknown Analyst]

So could you talk a bit more about what the time line and plan is for IDFA going forward, given, I guess, Google will probably phase out [ GIID ] and CPIs go down, will the return on cash spend also decrease. How are you sort of thinking about this in a time line going forward?

[Jörgen Larsson, CEO & President]

I don't think -- if you take away the very short term, again, I see no reason why -- or no logic why return on market spend should be lower because what will happen in that case is that the market should just swallow just to pick a number out of the area. Say that it's 20% less efficiency. But if that will just be followed by the market, that means that the market will have, on average, 20% lower profitability, and that will not happen. So we are in a good spot because we have a wide diversification of products. We are in many regions where we actively promote our games. We have channel diversification like few others. So we can optimize that, but that's why we are so convinced that the prices will go down because the value of the traffic that we're acquiring is lower, for the cases where you target.

[Unknown Analyst]

That's really clear. And just on the -- just on some of the business performance. So to Kixeye delivering slightly below expectations in Q1. Could you elaborate a little bit more on what the underlying drivers are behind this?

[Jörgen Larsson, CEO & President]

Sorry, the underlying...

[Unknown Analyst]

Just the underlying drivers of the underperformance of Kixeye?

[Jörgen Larsson, CEO & President]

Yes. So Kixeye was quite a special acquisition when we made it. So for those of you that followed us at that point in time, we didn't buy -- it was not the founder following the business. And it was a kind of large asset deal or carve-out from another business, which was a good decision, by the way. But we can see that we -- the structure of the business was not optimal. Now we are making efficiencies. We thought that it may be compensated by the fact that new products would have come out earlier but -- to compensate for that. But basically, the cost structure were not optimal. But we -- it hasn't changed our view on the possibilities for Kixeye, and they have several exciting projects and products in their pipeline.

[Operator]

Our next question comes from the line of Danesh Zare from Redeye.

[Danesh Zare, Research Analyst]

Gentlemen, great report. A question regarding the fee decrease on the Microsoft store on PC. They lowered from 30% to 12%. And of course, very good development for publishers overall, especially on a long-term perspective. But Microsoft store is a small part of your revenues today. So would you perhaps consider focusing more on this channel due to the fee reduction? And how do you think this will affect the market overall going forward? I mean, Apple has cut App Store fees for small developers in the past. Maybe you could elaborate on that?

[Jörgen Larsson, CEO & President]

Yes. I think it's positive, as you rightly stated, and I think that from our perspective, we're always trying to diversify unregarding this. The channels that we actually have launched in April prior to knowing this, big for mobile harvest on the Microsoft store. But as you also said, it's neglectable revenues at this point in time. But of course, we take -- we are completely return on -- I mean we are return on ad spend driven. And of course, one component in that, if you have a difference of 18% in platform, and it answers decently to our marketing efforts. Of course, that is taking into consideration.And I think -- so I think it's great in general. It's rational in general as well. And of course, it will put some pressure, I would assume, to Google and Apple over time. I don't expect that will change in short term or midterm, this or next year. But over a longer time, I think it's not a far fetched thought that the platform fees will be lower from the main channels, Apple and Google, some point in time as well.So -- and I think also this will not only put some pressure in general terms, but it also shows that maybe 30% is high because when a market leader goes down to 12%, it indicates that. And finally, it will definitely, in my view, it's early, but I think it will increase the volumes in the Microsoft store because -- for the reasons that I mentioned.

[Danesh Zare, Research Analyst]

Great. And you have really strong report overall, especially the high margin despite high UAC. Could you comment or maybe elaborate on the UAC market? Now that many companies we're seeing reincreased advertising budgets? And maybe give some color on the large EOA spend of 28% in terms of net sales and your view of the marketing return on investment KPIs?

[Jörgen Larsson, CEO & President]

Yes. Yes, so it has been a quite normal Q1 in the sense that it's normally the best quarter and also this year to market because the market prices are lower in January, February and March than it is in December. So you're far away from the seasonality weakness in Q3. So it's usually the best period for marketing, and it has been so for us for many years. So that is one component. And that was -- following that, so basically, the prices were expected lower than it has been -- where Q2 was special, but Q3, Q4 last year. So that was satisfactory. Again, as we have said, that the nature of the business in casual is that you have a higher UA spend because the dynamics is that you drive more traffic, it's a less portion of in that purchases returning the marketing spell.But instead, you get -- especially and that scale positively volume you get ad revenues, which has 100% margin and no platform fee. So it's a different dynamic, but we have seen that it has come in, in Q1 according to what we hoped for and expected. So I think that is good and that adds dimensions, just as Andreas elaborated on to our business model. So that is that is all good. I think that we will be on this level for 2021 to build volume and to take the growth opportunities. And again, if you take away the -- how the uncertainty of how fast the CPIs will drop, we have never had a high return on marketing spend in terms of days. So it's significantly lower than 180 days in Q1. So we are optimistic about that we can continue to market.We have also had a strategy since many years to focus on the LTVD side of that equation, meaning that if you have content that people like to play and pay for, then, of course, meaning that you get a strong LTV. Then it entails a lot of things down the road, if the prices are going up for a short period or a longer period. We are in a good position relative to others. And also, we can increase volume as the CPIs are lower. So I think that strategy serves us well.

[Danesh Zare, Research Analyst]

And last question, a follow-up connected to that. Regarding cost comparables, we're moving into tougher comparable territory now in Q2. And with the start of Q2, have you noticed any change to the play cohort. So basically, the permanent boost or -- from COVID, have you seen a permanent booth in terms of gamers' behavior and then sticking around and players -- COVID crated a lot of new players. Have you seen the retention being lower than usual?

[Jörgen Larsson, CEO & President]

It has followed what we have said several quarters now. The cohorts on the COVID Q2, or from March to June, have acted very normal. That was our hypothesis already in Q2 last year, and it has proven to be exactly the case. So that means that the cohort in Casual and Mash-up, they spend typically some 80% to 90% of the cohort's total spend the first 6 months. So that's why the effect of that was out already in Q4.Whereas in Strategy, players scaling up slower in spend. But in Strategy, the lifetime value is spread over a much longer time. So there, you gain more uplift over a longer time compared to Casual & Mash-up. So basically, the retention curves are very, very representative, including -- I mean, if you look at Q2 and compare them to Q1 this year or Q2 '19 or whatever. So very representative.But that's also what explains the tough comparison because the massive, massive intake of users that gave us several hundreds of millions of extra revenues. Of course, that when we compare with that, it would be sensational if we can grow with the same organic number after these cohorts have churned out. So -- but it's just for 1 quarter. So I don't see -- that does not impact the way we execute the business, execute the strategies or build this company. It's just that the comparison numbers, which is a seasonal thing, it's not -- it impacts in the way that we operate, it doesn't matter basically from an operational perspective.

[Operator]

Our next question comes from the line of Jesper Birch-Jensen from ABG.

[Jesper Birch-Jensen]

A couple of questions from me. As you've highlighted, and after looking at the report, it seems like the increase in advertising revenues is really what's -- is boosting gross margins, is really what's allowing you to keep a good level of profitability despite increasing user acquisition. So in Q1, you had 2 months of Super Free and 1 month of Moonfrog. And what -- you had 15% of revenues through ads. What type of levels are you expecting here in Q2 and going on? I mean, are we going to see 20-plus percent, and that's seeing elevated gross margin levels for the full 2020 going forward compared to 2020?

[Jörgen Larsson, CEO & President]

As we stated in the report, we expect the UA of 28% is quite representative for this year. So that is one part of answering that question. That we -- as I said, I think, in the beginning, we had in March when we had all the existing '19 studios consolidated, we were in the high teens in ad revenues, which was -- happened to be the target that we communicated some 18 months ago or so. So I think that is what you will see, and that, of course, increases gross margin. Maybe you, Andreas, could just comment on the gross margin impact or how it plays with the ad revenues.

[Andreas Uddman, Chief Financial Officer]

Yes. I mean, if you look at Q4, we had 7% to 8% of ad revenues. Now we have 15%. And we made that jump through adding 2 months of Super Free and 1 month of Moonfrog. So it wouldn't be unrealistic to say that, that goes up above 15%. Yes, we're testing from mathematical equation. And that is sort of more or less the ad revenues. It's 100% gross margin. So there's no -- there are, of course, some fees, but very marginal. So that will be -- continue to strengthen, exactly how much, we haven't communicated. But if you take the line from Q4 to Q1 and then extrapolate impact of 1 full -- 1 month more of Super Free, then we get to a slightly higher number than we have now.

[Jesper Birch-Jensen]

And I mean, like you mentioned, you reached your target for now, but is your long-term target to keep this in the 20% area or high-teens area? Or are you looking for acquisitions, which might drive this even higher? That's a margin risk?

[Jörgen Larsson, CEO & President]

It's a multi-dimensional thing what we look at. And we have a very clear view, but for obvious reasons, we don't communicate that externally. But this has been a strategic target for us, hence, being something that we have looked at and valued high in the criteria for acquisitions. So what the optimal decision is, I -- we have ideas, but nothing that we communicate. But I think that it should be a substantial part of our business because it also -- besides the fact that it further diversifies our revenue base, which is something that has a value in terms of risk lower -- improving a risk-reward ratio, it's also an in-built hedge.So if the price -- if the CPIs drop, it will, for inventory, so to speak, lower the ad revenues, for sure. But also the other way around, if the market prices on the CPI goes up, then the value for inventory of ad revenue or ad space increase as well. So it's an in-built hedge. It's not only a diversification.So we think and have an ambition that it should be a substantial part of our business. We don't want it to be completely dominated because then it would not be in balance with the net purchases. So whether that means that it will come into '20 or '25, it's not that simple. It's put in context, and it's put into evaluating further things. But I think we have so much more to do there. And it's not only acquired growth. We have reached some promising results organically, which we'll come back to later this year in terms of improving or increasing ad revenues in other games than the one that we just acquired.

[Jesper Birch-Jensen]

It kind of leads me on to my next question. There's been a lot of questions on IDFA on the potential negative impact, but you also mentioned potential opportunities. It'd just be interesting to hear what types of opportunities you could see there being for Stillfront due to the IDFA changes?

[Jörgen Larsson, CEO & President]

Yes. One is that the CPI will drop, and it will not drop exactly the same amount on all markets for optimal type of products in -- so if you have a wide diversification of channels that we market on and you have a complete system where you optimize, they were running hundreds of campaigns every single day, and 20 of that will be changed tomorrow because other campaigns are more efficient.So if you have that system, if you have that discipline, if you have the operational excellence to do that, of course, it's a higher probability that you will find the channels that will lower the CPIs earlier. If you compare it to a company that only market their products in the U.S. through Facebook and Google or whatever, which is not that uncommon, of course, you cannot optimize your marketing mix in the same way as we do. We have almost 50 different channels that we work actively with, in almost 60 territories and now with 52 products and 52x50x60, then we have a much higher amount of campaigns that we can optimize over -- compared to having 2 products on the market and 2 channels.So I think it will, for sure, open up opportunities. That is a longer -- it's a big topic, but what this leads to over time is that CRM and taking care of player progression and things like that will be more decisive for your competitiveness. And it will be moved since it has been very profitable just to buy new users and not get the most out of these users. Now, if that moves because you cannot target and the marketing will be less efficient, it will, of course, pay off better if you're able to conduct cross-marketing and -- a lot of things that you can do in the game to control the progression of these players in the game so that they are satisfied. And we're doing a lot of things in that area currently, and therefore, makes games even more competitive in the future.

[Operator]

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

[Hjalmar Ahlberg, Equity Research Analyst]

Maybe a question on your commentary or negative organic growth for Q2, that is -- I mean, the way you defined organic growth it includes Storm8, but then you also have Candywriter, Nanobit and Super Free, Sandbox and Moonfrog as well. Could you comment anything on growth rates for those companies, maybe compared to last year? And then how do they look like?

[Jörgen Larsson, CEO & President]

Well, many of the ones that you mentioned were not then taking into account on organic growth. But we think that we have a lot of growth opportunities, both from these ones that we mentioned, they have new products on their way out, and we are increasing the addressable market for the new studios. So again, for the very -- that's very typical.If you look at Super Free they're completely focused, have been completely focused on the U.S. market. Now we can open up knowledge about other particular markets, which is a tremendous opportunity for them. Then that is not a quick fix, but it will happen. We will hopefully see results of that during the year. So I think to answer that more competitive to the forecast, but nothing has changed in our view on these acquisitions nor our strong pipeline and the opportunities for them. It will be a similar pattern as it has been in the market.

[Hjalmar Ahlberg, Equity Research Analyst]

Got it. And I know you don't give any forecast, but since you did -- you said you expect negative organic growth. Can you say if you expect single-digit or more than that?

[Jörgen Larsson, CEO & President]

We don't comment on that specifically. This is the Q1 report, as you know, and it has only elapsed the 3rd of the quarter. So it's too early.

[Hjalmar Ahlberg, Equity Research Analyst]

Yes. Got it. And then in terms of seasonality, typically Q2 is an uptick compared to Q1. Do you think that looks -- I mean, your portfolio is a bit different now compared to historically, but do you still expect portfolio to perform in that way as it looks now as well?

[Jörgen Larsson, CEO & President]

Yes. I mean, again, several layers coming in here. So that's why Q2 is very special. But I cannot expect in anyway that this industry and the consumer behaviors, I mean the consumers don't think that much about IDFA. Obviously, they're impacted, but they don't think so much about this. And I think it will definitely be a very similar pattern for years to come when you play and how you play on the seasonality in Q3 that we usually have had or every year and has more or less, if that is lower, but then again, the mobile games are not affected as much as desktop. And in Q4 and the winter, playing is more intense. And in Q1, marketing is the best period. I expect that to continue for many years to come because that's driven by human behavior, not by any tech changes.

[Hjalmar Ahlberg, Equity Research Analyst]

Got it. And you mentioned a bit on potential cross-selling between different games, but you're now a large portfolio. Is this something that you already do, or something that you are looking to going forward?

[Jörgen Larsson, CEO & President]

We do that, but it's not a large amount. Again, it hasn't been a burning platform to do that but we're accelerating these efforts because it has been very, very profitable, and it is very, very profitable still to buy new users. But I think looking at the longer perspective, this is a great opportunity for us. Because the gaming companies with a wide portfolio and a large audience will be able to fuel by the internal sources by cross-marketing and backfilling in the ad space that you have to backfill with your own products if you don't get better paid from external sources and mediation.So there are so many things strongly suggesting that you will have a vast advantage from having both of our portfolio. It's not good enough with a few products and a large audience, but both a wide portfolio and a large audience, then we will increasingly, and we have a lot of initiatives ongoing, but I shouldn't say that it will dramatically change anything this year, but next year and onwards, I think we will have step-wise a constantly increased part of our traffic coming from our own ecosystem.

[Hjalmar Ahlberg, Equity Research Analyst]

Just the last question on maybe more longer-term and comparing -- I mean, your current portfolio, as you say, you have a bit more cash flow now compared to last year with slightly more U.S. spend, which would mean EBIT margin is a bit lower. But do you think this portfolio that you have now is, I mean, has the potential to achieve 35% EBITDA margin long-term as your target is?

[Jörgen Larsson, CEO & President]

Yes. We have a plan of how to achieve as well. So -- but as we have stated, we take a lower margin. Then again, it's -- you shouldn't forget that it's 2 percentage points higher than Q1 last year where we didn't have any significant cash flow revenue. So -- but we have a very clear view on how to achieve this. And then it's all about executing. And we are prepared and we have the strategy. So it's just doing it.

[Operator]

[Operator Instructions] Our next question comes from the line of Erik Lindholm from Nordea.

[Erik Lindholm-Rojestal]

Yes. So in Q4, you said Super Free had an exit run rate of about $100 million in revenues. Is it possible to sort of get an update on the current exit run rate of revenues for Super Free here at the end of Q1?

[Andreas Uddman, Chief Financial Officer]

Well, we haven't stated that particular, but I think they are executing on their plan, as we have expected, but we don't have an exact run rate number for one. We tried to -- it will be a nightmare for you, as an analyst, if we communicated the run rate for 52 games and 19 studios and tried to combine that. So we don't communicate individual games on a regular basis. But that was the run rate.We also think that, as communicated in conjunction with the acquisition, they have a pipeline of 5 games coming out later this year, not the first half, but second half. And of course, we have expectations coming from that. So for Super Free, just as for several of our studios, and all the full pipeline, the majority of these games will come out in Q3, which usually is quite common within that and especially, it's -- I mean, we are very satisfied with Fashion Nation from Nanobit, they started in now, as you saw in some weeks ago.But otherwise, of course, when the visibility is lower in -- for a couple of weeks, or a number of weeks, whatever that number is, due to the IDFA, it's potentially not optimal to launch a product at scale, at least. But we are developing the product according to the product plans we have. So we have no significant delays or so that we haven't communicated any time lines, I think, for that, but the majority of these gains will come during the second half of the year, including Super Free.

[Erik Lindholm-Rojestal]

Perfect. And just you gave some guidance in conjunction with the Super Free and Sandbox acquisitions of achieving SEK 1.5 billion to SEK 2 billion net revenues for 2021 for these acquisitions. I mean, could you say something -- do you think you're trending towards sort of the lower end or the upper end of this guidance? And I mean I know it depends on game launches and so on, but is it possible to say anything on sort of how you're trending towards this?

[Andreas Uddman, Chief Financial Officer]

Yes. I can just say that we have no reason to change that, but where it will come up. Again, it's very important to understand that -- I mean Sandbox is launching their mobile version of Albion Online here in June. If that will go like Conflict of Nations, then we will be, of course, significantly higher. And then the Super Free games are Casual games, so they move very fast. So also that could be really quicker later in the year. But it's both hard to predict when and how it will kick in, but we have no reason to change the interval.

[Erik Lindholm-Rojestal]

Perfect. And one more question here from me. So I mean, you expect a higher UA level here for 2021. But yes, like we have discussed a higher gross margin and maybe lower OpEx levels, is it fair to assume kind of that adjusted EBIT margin stays around this level for the rest of the year?

[Jörgen Larsson, CEO & President]

I mean if you just take the simple math of saying that Q1 is represented more or less, you will wind up, but I think if you take the existing bids and the guidance that we gave on the acquisition, including a lot of it back in October, you will wind that up mathematically a blend of 32% margin. So I think that, that would be a good starting point. Now we have 33%. So -- but it's very, very hard to say. And for us, it's more about whether it's 32% or 33% or 31.5%. It's less important than we make ourselves competitive and continue to grow and continue to take positions for the next coming years to achieve and hopefully exceed our financial targets for 2023.

[Erik Lindholm-Rojestal]

Okay. Perfect. Just a final one here, one with an update. So I mean, at the start of Q2 here, I mean, maybe you can't say this, but have you seen the normal pattern of seeing a Ramadan boost to move [ the heart ], for example? And I mean, can you say anything on the activity levels in April and March -- sorry, May?

[Jörgen Larsson, CEO & President]

Well, again, we don't give forecast, but -- and as we mentioned in the material, I mean the harvest has been maturing slightly the last quarter. So meaning that it has declined. Then we have seen that, for instance, with War and Peace and other products that were launched at the same time in Q4 '17, they could still go into rapid growth. And if you see also that we stated in the report that Supremacy 1914 has been growing tremendously, or at least I think it was in Q4. So mature games to grow, Conflict of Nations grew by 200%. So mature games can absolutely grow.And that is the strength of our portfolio, it goes up and down. So yes, we expect that Ramadan will have a positive impact on Babil and MENA region revenues, including the Babil, but also that product has -- the MENA product has been in a more mature and a bit softer territory in Q1 than usually. So yes, that is what I can say.

[Operator]

Our next question comes from the line of Oscar Erixon from Carnegie.

[Oscar Erixon, Financial Analyst]

Thank you. So a question on your organic growth comments here. Could you just clarify what one should expect sort of beyond Q2? You mentioned uncertain if organic growth comes back in August, December, October. What should the base case be for organic growth in Q3, given the sales did decline sequentially in Q3 last year?

[Andreas Uddman, Chief Financial Officer]

Yes. So it's many components. You know that we always had the ordinary seasonality in Q3 and that we expect to happen again. So it's typically some 5% to 10% lower activity like-for-like in Q3 compared to Q2. So we expect that will happen. We expect that -- especially looking into Mash-up and Casual, again, they spend 80% to 90% of their revenues as a cohort within 6 months. So even though we didn't have any operational COVID-19 effect in Q3, we had a financial one from the large intake in especially at store made. But as we have said, that stabilized. So how that all will come out is actually quite hard to say. And also depending on how our new launches come.But for sure, the second half, if it's 4 months, 3 months or 2 months or whatever, and onwards, we are convinced that we will be back on the right organic growth that we have communicated. We think that we have provided ourselves with opportunities to grow structurally over a longer time, faster -- 1 to 2 percentage points faster than our addressable market. And there is no reason whatsoever to change that mill. But of course, with this comparison, it becomes a bit tougher to analyze.

[Oscar Erixon, Financial Analyst]

Understood. And I'm not going to ask about organic growth and sort of the magnitude in Q2. But I will ask, if you say something about the organic growth in the second half of March. You mentioned in the report that comps were much tougher. If we discussed season growth in the second half of March and also that if you compare the comparisons in the period last year in March and in April, May, for example, would be helpful.

[Jörgen Larsson, CEO & President]

Okay. It's not very simple to take by heart, but I don't have the second half of March compared to April by heart. I don't recall that number. Anyway, so I think, usually, it's strong in March, April, May, and it will be from an operational perspective. But again, it becomes a bit lower in the picture because the comparison numbers are what they are. But otherwise, we don't think that it will be many changes here, but we have another factor, as stated several times, and that is the short-term IDFA changes. How fast will the market adopt? So it's super hard to say and -- but we are very pleased with our March month. It was very strong. So -- but it's unfortunately, the other thing I can say. I don't know if you would like to add something, Andreas.

[Andreas Uddman, Chief Financial Officer]

No. I mean, it was in March last year, and there was a -- Storm8 was consolidated, and we started to see the first positive impact last year in Storm8 earlier. And that we have sort of seen a bit negative impact in March versus March, but we haven't communicated the exact impact of that.

[Operator]

We have no more questions from the line. I will hand it back to our speakers.

[Jörgen Larsson, CEO & President]

Thank you for listening in this morning and for all the good questions, and we hope to talk to you soon and meet with you soon, also face-to-face with the audience as well. So thank you, everyone, for this morning. Bye-bye.