Stillfront Group AB (publ)

STO:SF

Earnings Call Transcript 2022-Q1

[Jörgen Larsson, executive]

Good morning, everyone, and welcome to Stillfront's Q1 2022 presentation. I will be presenting today together with my colleague, Andreas, CFO. And we will open with presentation and then open up for Q&A.

Next slide, please. So this is Stillfront as of Q1 2022. We have 69 million unique players playing our games, which is a 5 million increase since last quarter, and that is a significant increase, which we are, of course, happy with. We have 73 games in our games portfolio, which is an increase by 9 games. And we are currently -- or by the year-end, we were 1,560 professionals across 22 studios and in -- at offices marked as red dots in this slide on the right-hand side. You can also see how our revenues were distributed in Q1 on the right-hand side with 46% in North America, 28% in Europe and increasing significantly in Asia with now 21% across Asia, which is something that we have strived for, for quite some time.

Going to next slide, please. So one of the most important things in the quarter is how we have expanded our portfolio. We are a much larger group and a much more diversified portfolio than we have been ever before. And that is important because for the obvious reasons that we increased the number of games, and we are happy to see that we increased with 9 titles during the quarter, 4 coming from the acquisition of 6waves but also 4 coming from organic development from our existing studios. And that means that for the -- since Q3 last year, we have 11 games coming out organically, which is, of course, adding to our trust in reaching positive organic growth for the full year. So that is very important and very satisfactory. And I think that the outcome of the soft launches that we have entered is as we hoped for and expected or slightly better.

6waves adds 4 titles into our portfolio, and these are titles that are strong, very stable and well-established strategy games, which is something we have strived for. And they do that in a market that is very important for us and that we open up through the acquisition of 6waves and that is the Japanese mobile market being the second largest in the world, which is, of course, very exciting. And also exciting with 6waves is that they have not less than 5 games, more than their existing portfolio, coming into soft launch during this year.

We also have worked very hard with what we call engine share. Engine share is when we can take a successful existing game and launch more games on that very engine, meaning that we can achieve 50% to 80% reuse of existing investments to get out new games, which is obviously increasing our ROI on our portfolio performance and lowers the risk and increase the capital efficiency when it comes to product development. And during the quarter, we had Al General launched based upon the Bytro engine, and that is, of course, very -- something that we have worked systematically with and that we are satisfied to see.

We can also -- related to that because it's built on the Bytro grand strategy engine, see how that has been a success for us increasingly over the last 3, 4 years, progressively successful, I would say. So the grand strategy engine of Bytro has really been successful for us also in Q1. So now we have 5 different titles delivered from 3 different studios, showing very clearly and very tangible how we create synergies. That's one example of synergies in our business. Also, we are pleased to see that Super Free are continuing their growth path from October last year. So they also added, in this quarter in Q1, a new game just as they did in Q4. So that is also going in the right direction.

Next slide, please. So looking into our financials. Our net revenue grew by 27%, driven both, of course, by the acquisitions as well as that most of our studio has strong organic growth, but we have some offsets from that Super Free being organic from the 1st of February as the main deviation from that. So we do record, as expected, a negative organic growth of 6.4% when it comes to bookings and 6.8% when it comes to net revenues. We continue to deliver this growth with high margin -- consistently high margins despite that we have a record high UA spend.

And that shows that we are really leveraging our marketing capabilities across the group, the market reach that we have built, both in terms of geography, in terms of number of games that we are marketing and the number of different channels that we master. So I'm very pleased to see that we can -- without compromising on profitability. So we spent some 28% in relation to net revenues in the quarter, which is actually identical with Q1 last year. Usually, the first quarter is very good for marketing. So our organic growth guidance for the full year is intact, mid-single-digit for the full year. And we are confident to reach that based upon the both new products, but not the least, the marketing that I mentioned.

I would also like to highlight that you can see that we -- there is a very clear correlation between how much we spend in UA and what kind of adjusted EBIT margin that we have. You can see that clearly on the left side showing each quarter. There is a difference Q1 '21 that could be mentioned just commenting briefly on. And during that quarter -- since that quarter, as we have increased the pace of investments, of course, D&A also are increased. So if you look at the EBITDA margin, it's more or less the same in Q1 2022 compared to Q1 2021. It's 38% and 37%, respectively. Then, of course, since we did record the expected negative organic growth, the scale -- the nature -- the natural scale of our business then have a slightly negative effect when it comes to comparing with Q1 last year. But otherwise, if you take away that very special quarter, you can see that it correlates very well.

I would also like to mention that you can see that it correlates very well also looking at LTM numbers. You see that both in Q1 '21 and Q2 '21, it's heavily skewed still by the pandemic effect and the very significant uplift that we saw in 2020. So that is still explaining why we skyrocketed our margins. But since then, you can see a more steady development and the relationship between UA and margins being developing nicely and as expected.

Next slide, please. So looking at the active portfolio. We have a stronger portfolio than ever in several different dimensions. So it's more balanced than ever and it's more diversified than ever. And you can see on the lower right side how the distribution in our portfolio looks like, and I'm very pleased to see that we have improved the balance significantly with Strategy increasing. But also in terms of geography with, as mentioned, Japan now being a significant market, and not only that, we're increasing in the MENA region, we're increasing in the Indian subcontinent, it's very pleasing to see. So it's a good balance between the 3 main territories for us, North America, Asia and Europe.

You can see also how the number of users playing our games is increasing organically across the whole portfolio quarter-over-quarter. And we have, in particular, very strong UA performance from the strategy games, which is very pleasing since strategy games are slowly moving. So it's harder to build that organic growth in short term, but you get paid over a longer time, the return yielding over a longer time, which is adding to our confidence of reaching organic growth for the full year. Actually growing the number of users by 5 million or equal to 8% in one quarter, where 98% of that growth is organic is something that we are very pleased to see.

We can see also that the share of mobile increased to 78%, which is driven both by, of course, the organic and the natural strong performance by our mobile strategy games, but also, of course, adding 6waves' titles that are mobile. The ad bookings were, in relative terms, down to 17% from 19%, but in absolute terms, it is on par with the previous quarter.

Next slide, please. So briefly looking at the different areas, I will not walk through all of the numbers here, but I think there are some things to emphasize. And of course, again, strategy bookings up 59% quarter-over-quarter, driven by the strong organic growth in Strategy. And hence, we have allocated more UA with very good returns, and that is satisfactory to see as we are 1 year -- less than 1 year from the IDFA change where the outlook were that for strategy games, that will be tougher. We can definitely see that it is not tougher. We do it with high and good returns in Strategy throughout the quarter.

Casual & Mash-up grew slightly quarter-over-quarter organically but declined year-over-year because we basically allocated UA less to that area. Simulation, RPG bookings slightly down quarter-over-quarter, again, due to the fact that we allocate less UA because it needs less. And again, we see significant organic increase in DAU and MAUs in Strategy, in particular, both quarter-over-quarter and year-over-year. So you can say that Strategy strikes back this quarter.

So next slide, and I will, with next slide, hand over to Andreas.

[Andreas Uddman, executive]

Thank you, Jorgen. Good morning, everyone. So that's the right slide. Looking at the cash flow development, we continue with a very strong cash flow development from operation of SEK 523 million. That includes tax paid worth negative SEK 60 million and also a small positive working capital impact in the quarter. We continue to invest, 6waves, naturally, the big outflow of cash in the quarter. But we also did invest SEK 253 million or 15% of revenues in our product development. We have a strong pipeline. It is both historically that has come into soft launch, but we also have a strong pipeline going forward. So very pleased to be able to deploy that, but still have such a strong underlying operative cash flow.

In terms of financing for the quarter, based on the rights issue, we had a positive inflow there of -- on net effect, SEK 1.9 billion. And that, of course, strengthens our ability to execute on our strategy going forward as well. But looking at cash flow development, as we normally do, we always look at the 12 months. I think this is where the strength -- one of the key strengths in our underlying business is that we have a -- we generate cash flow from operations of over SEK 1.8 billion, which is an increase by SEK 546 million from the same period last year or 42%. We continue or have continued to deploy an increased investments in our product portfolio. We invested, in the last 12 months, SEK 732 million in new products or 12.6% in terms of net-net revenues. This is key for us and to be able to have a strong underlying cash flow, to be able to deploy that in both UA, but also in terms of deploying that in new products. So in the last year, we have generated SEK 1.1 billion of free cash flow, whilst increasing our investment base. And this leads to a cash conversion for the last 12 months of 0.52.

So then move to next slide, please. We have a strong cash and financial position. The leverage is, as expected, well below our targets of -- at the quarter end at 1.2. We have a net debt position of just over SEK 3 billion and a cash position of SEK 1.7 billion in -- by the end of the quarter. We continue to have and have had a diversified financing platform with a good maturity profile. And this makes the ability to execute on our strategy that we are well positioned for that.

So yes, to summarize, Jorgen talked about the 73 games we have. Of course, this adds additional diversification in our cash flow generation. And we also have a stronger diversity or better diversity, both from a product perspective but also from a geographic perspective by exiting the quarter. We still continue to invest strongly in our product portfolio, and this is built up by the strong underlying cash flow we have in this business.

So with that, I will hand back to Jorgen.

[Jörgen Larsson, executive]

Thank you, Andreas. So I would like, on next slide, just to summarize. So we are well positioned for return to sustainable organic growth, sustainable in several meaning -- in 2 meanings, both sustainable because we have done efforts, and we are doing a lot of efforts in our sustainability work with setting up new targets, ambitious targets for this year and for the further years to come. So we have, in the annual report and the sustainability report that we released recently, you can see more details on that. But we have taken significant steps and integrated that in our business processes.

So I think we are definitely taking steps there. But we're also growing sustainable and returning to sustainable growth in terms of our top line. We have been there for a decade, but being in the shadow of the pandemic and with a few other challenges the last quarters, we are rapidly getting into that. And we do that by the new products coming out to the market, continue to invest. And we aim on releasing 30 games or getting 30 games into soft launch this year. So 15 in the first half year, as disclosed earlier, but also additional 15 games in the second half of this year.

So also looking into the fact that we have been growing organically from Q3 to Q4 and from Q4 to Q1 also adds to our optimism and our belief to reiterate our financial target of reaching a mid-single-digit organic growth for the full year. And not the least, we will get help from our Stillops platform that is creating a lot of both cost side but, even more importantly, revenue side synergies and also product developed synergies with the engine share that I mentioned previously.

So Stillfront is in a good shape on its way back to reported organic growth. Thank you very much, and we will now turn back to -- or turn to the Q&A session. So please, operator, let's see if we have some questions lined up.

[Operator]

[Operator Instructions] The first question of the day we have from Nick Dempsey from Barclays.

[Nick Dempsey, analyst]

So I've got 3 questions. First one, in Q2, I know you're not giving us guidance for organic growth for that quarter, but is it fair to say that the moving parts are Super Free, still a tough comp in April and maybe a bit of May, but then it hits an easier comparison, then you've got your new games that you're flagging and perhaps some underlying momentum from some other games? But can you just maybe flesh out or give a bit more color on the different elements of what's going to help us understand whether Q2 will be a positive growth quarter or not?

Question number 2, you flagged in the statement that you expect the current high level of investment, as you phrased it, to continue through 2022. Is that an indication we shouldn't get too excited about an adjusted EBIT margin for the full year any higher than the 30% we've just seen in Q1?

And the third question, do you have a pipeline of further acquisitions that you're currently working on? Or are you going to pause your M&A momentum for a while and focus on executing on the portfolio as it stand?

[Jörgen Larsson, executive]

Thank you, Nick. So on the first question, we don't give a guidance for Q2. We reiterate the full year. So of course, it's something what we believe on Q2, but you're perfectly right in the fact that Super Free had a -- actually Super Free grew full year '21 over top line and especially on EBITDA full year '21 over full year '20, but it was a very uneven development during the year. So just as you point out, sometime during Q2, we think that Super Free will contribute and the team is making a great job in getting there with existing products and the new ones that they have released. So we expect them to contribute to organic growth. But we have so many different growth levers, existing products as well as new products that have gained the momentum, 11 new products coming out since Q3 last year adds to -- of course, adds to the picture in Q2. But the most important thing is that we deliver on our targets for the full year, mid-single digits. So that's my comment on Q2 isolated, we don't give a firm guidance.

And let's see, the second question was about investments. Yes, we continue to do investments. We increased the pace of investments in new products as -- approximately 2 years ago. So that is what we now can see the fruits from these efforts. And I think we have improved our capability to do that without increasing the investment as much as we have increased the output because we are working with engine shares and other refined methods of development. So I'm very pleased with that. And the products are more complex and sophisticated than it was 2 years ago. So I'm pleased with that development. I do expect that we will keep the absolute number of new products coming out to the market approximately on the same level, second half 15, that is, as we had last half of last year, and we had this first half of this year and second half of this year. I expect, approximately, it will be the same in 2023, that level in absolute terms, but obviously, in relative terms, that will be a lower number.

What that drives in terms of margin? I shouldn't -- I don't think you should draw too many conclusions on that. But of course, there is some effect that we have very good traction with more than usual hit ratio of games that will, in the short term, lower the margins as we launch these and scale these games. But I don't expect that it will be a significant impact on margins in the short term or during this year.

When it comes to M&A and pipeline, yes, we have a significant pipeline that is unchanged. Obviously, the market conditions and, not the least, our own valuation is a bit challenging for making acquisitions. But it's also important to note that the raise -- the capital raise that we did and as Andreas pointed out, we are at a leverage ratio of 1.2 and also the fact that we are delivering some SEK 100 million per month in cash flow after product investments on these high levels, of course, also give us firepower. So we do have an opportunity to do approximately -- just to give a flavor on this, we could potentially do 2 acquisitions of similar size as 6waves without raising any more equity. So then, of course, we must take into consideration, tactically, market conditions, prices, our own price and target prices and things like that and financing. I hope that answer your question.

[Operator]

Next we have Oscar Erixon from Carnegie.

[Oscar Erixon, analyst]

A couple of questions for me. Starting with the very strong performance in the Strategy segment, is it mainly Bytro performing very strongly here in Q1 and especially in March? And what do you see ahead in the Strategy segment, given quite high user acquisition investments in Q1 and good stickiness in the segment? How does that affect the growth outlook here in 2022?

[Jörgen Larsson, executive]

Yes, you're perfectly right that there is a different dynamic with strategy games. I mean we have our legacy background in strategy games. And the good thing with strategy games is that when you have acquired users that get into the game, they tend to stick around for several many years, even decades. So of course, that should be taken into account when you analyze and look at our numbers. The value when you are successful in organically growing your user base of Strategy players, that has a higher value than in other areas in the sense that they will be around for a long time on average. So that's, of course, adding to our confidence in reiterating the full year target. They will be around and delivering for not only the coming quarters but for many years to come. So we are very, very pleased with that.

So I think that -- sorry, and it's not only 1 or 2 games or only the Bytro games delivering and -- then on the Bytro engines, there's 5 games, but we have a wider portfolio, both of organic titles, so to speak, but also with 5 titles coming out and being -- coming into soft launch from 6waves, but also other strategy games. So I think we have a wide array of strategy games, many of them contributing, but obviously, the grand strategy part of our portfolio stands out with the growth the last -- not only quarter or quarters, but actually for the last 3, 4 years, it has been a very strong development.

[Oscar Erixon, analyst]

Excellent, Jorgen. And then a question on full year margins. We've obviously seen peers here in the quarter with quite low full year margin guidance that's suggesting more expensive growth perhaps. Do you see anything similar to that? And do you have any sort of comment on news flow regarding negative market growth in Q1 for the purchases part of the market?

[Jörgen Larsson, executive]

We haven't seen so much of that, honestly. So as you can see from the level of users that we have acquired, I mean, we grow our user base -- that active user base by 8%, where [ 98% ] is organic in Q1. And the whole business is growing organically sequentially Q1 to Q4 as well as it did from Q4 to Q3. So we don't see many effects of that and the spending levels are very intact, I would say. So a very, very -- in our view, a very normal Q1. You can see also that the UA level were actually identical more or less in relative terms as Q1 last year. So we haven't seen any significant impact from that though.

[Oscar Erixon, analyst]

Great. It's very clear. And then final question for me. You were right about being well within sort of your marketing return thresholds in Q1. Has that continued into April? And then a follow-on question to that is, obviously, Q1 tends to be a seasonally strong quarter in terms of market expands. What type of seasonality should we expect here this year?

[Jörgen Larsson, executive]

Yes. We don't give a forecast for Q2, which is clearly in the report. But we have a number of products coming out still in soft launch during the second quarter, and we do have good traction. So the momentum that we have built for now, a couple of quarters, I hope and think will continue during Q2, both from existing products as well as from new products. Then of course, it's always very, very hard to say. Usually, it slows down.

As always, it has been the case during the summer for very natural reasons, considering that our audience have usually family and daytime jobs, they go on vacation and all these. So sometimes during summer, it will be slower on the UA side and on top line and then the margins usually go up. But whether that starts in the 10th of June or the 20th of June or the 4th of July, it's impossible to say. But we -- I think, having said that, you -- I hope and think that we will have high UA spend, higher than we have had maybe last year in relative terms in Q2 because we have a very interesting number of products coming out. And the ones that already have passed the threshold, we expect that we can scale further. So that is my comment on that question.

[Operator]

[Technical difficulty] Jesper Birch-Jensen from SEB.

[Jesper Birch-Jensen;SEB, analyst]

Just first on a more industry-wide question. I mean we've seen several entertainment peers kind of flagging for normalizing demand, both for video entertainment, but also from some of your peers within the mobile games sector. And I was wondering if this is something you've experienced so far or lately?

[Jörgen Larsson, executive]

We haven't seen that. As mentioned several times, we see significant growth. And we do enjoy that growth in the most difficult area to grow, which is -- in terms of that, it's usually growing slower, that is Strategy. The good thing with that is that they -- as I said and elaborated on, they will be there for a longer time on average. Higher retention is typical for Strategy. So that's why we are very pleased to see that Strategy is so strong. We haven't seen any significant effects. I mean growing our user base from 64 million to 69 million during Q1 also is a clear indicator and the spending levels are very much intact. So I think we don't see that effect very much.

[Jesper Birch-Jensen;SEB, analyst]

Just a question on your user acquisition spending. Maybe I'm not understanding this right. But in terms of the Casual & Mash-up segment, you mentioned it grew quarter-over-quarter organically and declined slightly year-over-year due to lower UA allocation, but it kind of seems like the UA allocation to that segment is up, both from last quarter and year-over-year. Maybe I'm not reading it right, but any clarification there would be helpful.

[Jörgen Larsson, executive]

We allocate our UA according to how it yields. So -- and the yield has been not as strong as in Strategy and hence, we have lowered the UA spend in relative terms. So -- and I think I don't have the exact number in front of me now. But if we look at how we have allocated, we are lowering the allocation compared to other product areas. And that is what I think is the important thing. But still Casual & Mash-up are stabilizing. Super Free, which was an isolated issue, has been growing since October. And we expect that Super Free will be into contributing with positive organic growth during the second quarter without spending -- overspending in UA, meaning that we're not reaching our harsh return on ad spend requirements of 180 days [ max ].

[Jesper Birch-Jensen;SEB, analyst]

Okay. Got you. And just lastly, [Technical difficulty]

[Operator]

And our next question comes from the line of Rasmus Engberg from Handelsbanken. [Technical difficulty] So our next question is coming from Nick Dempsey from Barclays. [Technical difficulty]

[Nick Dempsey, analyst]

Can you hear me?

[Jörgen Larsson, executive]

Yes, we can hear you.

[Nick Dempsey, analyst]

I just wanted to squeeze another one in, please. Can you tell us whether year-on-year organic growth in Q1 would have been positive if you excluded Super Free?

[Jörgen Larsson, executive]

I mean we have decided not to go out with each of our studios. I think that would be a very tough job for you and others if we go studio by studio. But as you clearly have heard us talking about for quite some time, Super Free is the main contributor to -- that we're not in positive territory. So that is my comment on that. But we have -- operationally, we have solved the problem, and the team has made a great job, both with existing and new products and has been growing since October. So -- and as I said, we expect them to be contributing organically sometime here under Q2. So that's my comment to that. Then you will have individual studios going up and down. So that's why it's not -- I don't think this is exceptional to Super Free. But otherwise, we optimize on the complete portfolio of studios and games to get the best yield, both when it comes to allocating marketing capital, but also developing products. And that is why we are so keen on looking at the full portfolio, rather than individual studios or products.

[Operator]

Rasmus Engberg from Handelsbanken.

[Rasmus Engberg, analyst]

I just wondered, you invested about SEK 0.25 billion in product development in Q1. Is that a level going forward? Is it a peak? Or is it a level you're growing from, you think, in your sort of best guess for the full year?

[Andreas Uddman, executive]

No. I mean I think there's a few things. First of all, we have a very strong operative cash flow. So we do want to deploy a high level. As we talked about, we have significant products coming on into soft launch. We have added products into the active portfolio, and we have a strong pipeline. So we would hope so. Then there are always timing effects between quarters as we've seen historically as well. But we have had, as Jorgen mentioned, an idea of continue to strengthen our investments in product development. But they are, of course, in terms of relation to net revenues, that differs over quarter-on-quarter, but we do have a strong underlying financial performance that support that. But we don't guide exactly on what the level will be, but we have said that we have an ambition to continue to keep that at a higher pace than we might have done a few years ago.

[Jörgen Larsson, executive]

And also to be -- we guide on the number of products that might be a clear indicator. So we expect to release 15 products during the second half of this year, and I expect that level to be relevant for 2023. But in relative terms, of course, as we are a growing company, and as we grow our portfolio, that is less.

[Rasmus Engberg, analyst]

Yes. Clear. And the second question, I was just wondering, little bit curious to look at your balance sheet. You got SEK 1.7 billion of cash sitting there, and then you still have bank loans. Is that just a temporary thing? Or are you going to keep that until you do acquisitions? Or how should we think about that in relation just to the financial net and how -- trying to figure out how close you are to making acquisitions as well, of course?

[Andreas Uddman, executive]

Yes. I mean it's a timing effect in terms of a temporary timing effect, how much cash we held because it's when certain loans or parts of the loans mature, you can choose not to pay a break fee. So it's -- we're talking about weeks differences at the quarter end and...

[Rasmus Engberg, analyst]

Very clear. And just coming back to the investments in the products, where -- in which areas -- I know you've talked a lot about Strategy today, but could you sort of give a feel for your various segments where you're investing the most at the moment?

[Jörgen Larsson, executive]

That's a good question. I think that we -- or I think I know that we have a good balance between the 3 different areas in organic type is being developed. Then of course, we -- which is not yet counted as organic, but still is organic in the wider sense, and that is 6waves. And they have 5 products coming out in the Strategy area, which is, of course, high in relation to the existing number of products, 4, that they have in the market. So that adds to the Strategy bucket, but we have several promising products in all areas. So I expect that we will continue because that is important for many reasons to -- we have a good balance between the 3 different product areas. So I'm very pleased that we have strengthened Strategy both through the acquisition but also organically. And we strive to keep that balance.

[Operator]

We have questions from Jesper again from SEB.

[Jesper Birch-Jensen;SEB, analyst]

I just want to -- as a follow-up, you mentioned that you expect Super Free to return to organic growth in Q2. And I was just wondering if there's any other segment which has been perhaps suffering from negative organic growth lately, which you expect will return to positive organic growth in Q2.

[Jörgen Larsson, executive]

I think that it's very much product-depending and what new and existing products that yields the best in marketing. But we don't have any -- I mean, this was an exceptional isolated issue with Super Free. But again, Super Free did grow top line full year '21 compared with '20 and EBITDA were much higher margin than we expected. So it's a healthy company, but it didn't grow on the levels that they started to grow. So that's why we have this strange comparison for the first 3 months, which then, of course, turns into much easier comps. But in general terms, we don't have any -- as I said just recently, we expect to release new products and we have new products in all areas coming out with promising KPIs. So I expect that we will be able to grow all areas for the rest of the year. And there is no isolated issue in a similar way or -- and also coming out of the pandemic, the shadow of the pandemic comps is, of course, also good for the reported organic growth. So evenly spread and -- both in investment and in returns is what we expect.

[Operator]

Simon Jonsson from ABG.

[Simon Jönsson, analyst]

I was wondering if you could give any color on the differences in organic growth between ad bookings and in-ad purchases here in Q1?

[Jörgen Larsson, executive]

Yes. We stated that ad bookings is lower -- 2 percentage points lower in relative terms, but flat in absolute terms. That means that the organic growth basically mainly comes from in-ad purchases.

[Operator]

There are no more questions from audience. So I would like to now hand over the floor back to speakers.

[Jörgen Larsson, executive]

So thank you, everyone, for dialing in and listening to our Q1 2022 Stillfront report, and thank you also for the questions put forward. And I think we thereby close this meeting. Thank you, everyone, and have a great day.