Stillfront Group AB (publ)

STO:SF

Earnings Call Transcript 2022-Q2

[Jorgen Larsson, President and Chief Executive Officer]

Welcome to our Stillfront Group Q2 Earnings Call. I will be presenting along with our CFO, Andreas. Today's presentation and it will be a Q&A session afterwards in the ordinary way. So please, the first slide.

Next Slide. We -- since the last month of last year, we have gained great momentum into Q1 and that has continued into Q2. Our revenues grew in Q2 by 31% in total, where 1% organic growth, and this performance has been primarily driven by the new games that we have launched to the market and the new games that we launched earlier that we have been able to scale up alongside with -- that we have created synergies, when it comes to several areas and collaborations, between different studios that has gained momentum.

And also, last but not least, we have had successful live ops, which is a very efficient way of growing our revenues in a cost-efficient way. We also outperformed the strong cash flow, as we have done for several quarters now, and the cash flow grew -- the LTM cash flow grew by 18% in the quarter.

On the right hand side, you can see also the distribution of our revenues, where we have North America still being the largest partner, you can see also that Asia is increasing and Asia is almost on par with Europe. You can also see through the red dots there that we are a truly global company, which is not only looking beautiful on this map. It’s very important, because that is the way that we can have the proximity to different markets and that really can leverage our market reach capabilities to support all our studios worldline.

Next Slide please. So just some highlights for the portfolio during the second quarter, so we had three new games coming into our portfolio, our active portfolio during the quarter and in total we have had 14 games coming in organically the last year. So we have a good outcome of the increased soft launch that we have increased investments that we started some 12-months, 18-months ago.

Also, we have to enjoyed a continuous good momentum with Bytro's grand strategy based – engines-based games. So now we have five games outperformed three different studios built upon the same very successful and this is providing us with a strong component in our total organic growth and has been [Technical Difficulty] for some time and we expect that it will be going forward as well.

Nanobit also had an exciting quarter both -- we announced the collaboration with Netflix, taking a game to the market in 2023, which is yet another example of how we can get leverage on our existing assets, our existing game engines in this case, in collaboration with Netflix and it's yet another dimension of the Stillops platform and how we gain access to new distribution forms through in this case a good collaboration with Netflix. Also, Nanobit has a very successful scaling up of the new game wins during the quarter. So that has really contributed to the good development for Nanobit, and for the Group.

And also, we've seen that BitLife has a very good trajectory in the quarter with a lot of live ops and several feature updates that has been very well received amongst the users. So Candywriter has been growing 40% year-over-year organically, which of course is a very strong performance. Further, we have a good collaboration between Candywriter that is the publisher and the developer behind BitLife together with Goodgame, we have made culturized and adopted versions of BitLife in Portuguese and in Spanish. So we have had some good traction in Latin America during the second quarter and we are enthusiastic what that could bring for the next -- going forward basically.

Next Slide please. Looking into our financials, we had as mentioned, 31% growth in total revenues, where 1% in organic revenue. So the SEK1,811 million in revenues are built up and developed from last year, according to the revenue bridge, you can see on the high upper right corner of the slide here. So 1% organic growth, just shy of 21% acquired growth and 10% FX -- positive FX effect during the quarter.

We have been able to deploy continuously high UA levels without compromising on our profitability targets of a robust of less than 180 days and I'm very pleased to see that we have been able to do this and very much again, the reason why we can achieve this during the quarter where the market has been a bit mixed is that we again leverage the Stillops capabilities and our marketing capabilities, the way that we have this data-driven way of marketing our products rapidly we had to take UA to where it yields the best on regarding geography, on regarding products, and so on, so I think -- and channels. So I think that we definitely that is one of the explanations that why we have been able to improve our top line that much in the quarter.

We had slightly lower margins, compared to Q1 and Q2 and that is due to that we have several growth initiatives ongoing, both of course that we invest more in new products that increases the DNA, but also that we have slightly increased investments and cost taken for improving the Stillops platform further, improving our data capabilities further, as well as the different other parts of the Stillops platform that is yielding returns we think already and we’ll do so even more in the future.

We also have a different product mix in the quarter with a higher degree of mobile revenues, less ad revenues and also that 6waves is consolidated for the first on the full quarter, which has a lower gross margin. So that is also something that impacts, but we are convinced that this will be improved in the short to mid-term, the different componens here supporting our market expansion going forward. And we reiterate that our organic growth to be in the mid-single digit area for the full-year this year. [indiscernible] can also mention that our LTM curve for net revenues is increasing steadily as you can see in the -- on the slide here. So it amounted to SEK6.243 billion in the last 12-months now in Q2.

We can go to next slide, please. Looking into our total portfolio, we have continued to strengthen and balance further and not the least diversify further our portfolio. This is a pillar in our strategy to have a very strong and a legal risk reward looking into our portfolio. And I think that we have taken a lot of important steps during the quarter -- this quarter as well, just as we have done for this year. So I think that is maybe one of the most important thing so now we have with the three new games added to our portfolio, we have 76 products in our active portfolio and you can also see how the daily actives and the monthly active users year-on-year has been very, very stable, whereas our monthly paying users have increased by 8% showing that our live ops and the traffic that we have acquired contains a higher degree of conversion into paying users, which is of course satisfactory. That is also mirroring that strategy we’ve had a strong development during the quarter.

The share of mobile, as mentioned, increased to -- being 79% of the total revenues, ad bookings down in percentage wise of the total revenues to 16%, it's fairly flat in absolute numbers, but it's lower in relative numbers. You can also see the distribution between our different areas and it's pleasing to see that the strategy is again increasing to 35% and we can look into some more details on the next slide for the different product areas.

So next Slide please. So, we can see that -- it's a very strong development for strategy. So I said it last quarter, I say it again, strategy strikes back growing some 83% year-over-year, with a high degree of that coming from organic growth and it's core strength. You can also see that in our average revenue per daily active users, it's really increasing for strategy showing that we are confident and the updates on what we do with our live ops in general are very appreciated in our audience, of course, also supported by the fact that 6waves are part of our Group now for the first full quarter.

Also Casual & Mash-up are growing, which is satisfactory to see by 24% year-on-year. Loan area, that is not as product area regarded is growing is slightly declining by 3% year-over-year, is Simulation, RPG and Action and that is basically due to the fact that we are not allocating as much UA to that area as we do to the other ones, because it's not yielding as much as the other areas in this quarter, but I'm sure that we will see further traction later in this year also in that area.

It's good to see that all three product areas is improving their monetization, despite the fact that we have a higher degree of new products, which is usually not monetizing as good as a mature product when it's a new product sustained we are able to cross the board, increase our average revenue per daily active users, not only in strategy. And as mentioned the number of paying users are significantly improving, not the least in strategy that is contributing in that respect as well.

So with that, I would like to hand over to Andreas to go in deeper into some of the financial aspects. Please, Andreas?

[Andreas Uddman, Chief Financial Officer]

Thank you, Jorgen. Turn to the next Slide, please. I'll start with the cash flow for Q2, we could have a continued strong cash flow development from operations of SEK477 million prior to working capital adjust movements. This includes taxes paid of SEK58 million.

In the quarter, we had a negative effect from working capital movements, mainly due to accounts payable being paid, which is a reversal from Q1, which was SEK27 million. So cash flow from operations after net working capital is SEK450 million. We continue to invest in our products, we spend in terms -- in total from our investments SEK829 million in the quarter, SEK249 million of that is for product development from new products, which is the equivalent of 13.8% of net revenues. We also settled some of the cash components for the earn-outs relating to 2021 and that had a negative effect on investment activities of SEK523 million.

In terms of financing, fairly flat negative SEK4 million, mainly driven by lease payments of SEK15 million offset by some slight increase in borrowings for the quarter. We exit Q2 with a cash position of SEK1.47 billion, so strong cash flow once again for the quarter. Looking however at LTM numbers is always important to look at how that grows.

In the last 12-months, we generated from operations after deducting the IFRS 16 R&D costs SEK1.85 billion of free cash flow, this is an increase by SEK452 million versus last year. We have continued and tactically decided to continue to invest in our products and we spent SEK832 million, which is an increase from last year over SEK302 million.

In relation to net revenues of the same period, that's 13.3%. This is however important to note that we do continue to spend, grow our operative cash flow and more in absolute terms than our investments cash flow. So we are over the period increasing our cash flow after investments of SEK151 million to just over SEK1 billion. Cash conversion is SEK0.45 in the quarter.

And with that please for the next Slide. Net debt has been fairly stable versus last year of SEK3.6 billion, it increased before SEK150 million from Q1, which is mainly due to the settlement of our amounts where we used our free cash that we had at Q1. We had a net -- we had a leverage ratio of 1.4, which is below our targets of 1.5. We have a strong cash position of SEK1.47 billion of cash at hand, plus we also have SEK2.3 billion or unutilized credit facility when we exit the quarter.

Looking at -- to the right side of this slide, we have a balanced and have maturity profile on our debt, which ensures that we can both tackle market uncertainty and be well prepared to refinance our existing facilities when we need to.

So then, yes to summarize, we continue to have our diversification in revenues. We now have 76 games versus 56 games in Q2 of last year. We have continued to invest in our product portfolio and in our Stillops platform. This is supported by strong underlying cash flow and also continued healthy margins. This together with our diversified financing platform allows us to continue to invest in the business and if we select to be -- look at M&A opportunities going forward, so strong balance sheet position and good cash flow generation from the business in line with previous quarters as well.

And with that, I would hand over to -- back to Jorgen.

[Jorgen Larsson, President and Chief Executive Officer]

Thank you, Andreas. We can go into the next Slide. So summary -- short summary and an outlook, so we have returned to organic growth, something that has been our priority and I'm pleased to see that we can go from minus 7% to plus 1% organic growth in just one quarter, and we can do that with a good profitability and a very strong cash generation as Andreas pointed out.

We are entering into the seasonality, the weaker seasonality that we have had, I think for -- if not almost all of the 12-years of this company's history. We expect that to be following the quite usual pattern as for the ones that have followed us for time. You know that the strategy games are more impacted on seasonality usually the casual games. But all in all, we think it will be acquired usual seasonality in Q3.

But to finalize, we do reiterate our -- we are following our plan to be back on reached a mid-single digit organic growth for the full-year. So, I'm pleased to see that we are on track towards that guidance and that target.

So with that, I would like to open up for questions, please take it away.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Nick Dempsey, Barclays. Please go ahead, your line is now open.

[Nick Dempsey, Barclays]

Yes, good morning guys. I've got three questions, so first of all with strategy organic, up 29% in the quarter, Simulation, RPG and Action there is no M&A in that, but we can have a decent idea of what organic is? I still get Casual & Mash-up to be seeing negative organic growth. And then when I dig into that division Candywriter going really well, so does that mean, we're still seeing notable organic year-on-year declines from Super Free instalments combined? And should that also ease in the second half, if I'm right on that?

Question, a year on from IDFA change, do you think that with all of the adjustments that you've made internally and the adjustments made by external players you use for marketing that you can now achieve close to the same level of targeting for the same unit of spend as you did before the change or not?

And the third question, with the U.S. dollar moving in your favor, should that help margins a bit in the second half? And I guess your revenues are bit more weighted to dollar than your costs are?

[Jorgen Larsson, President and Chief Executive Officer]

Thank you, Nick. I can start on the FX, I think Andreas to take the last question. So when it comes to organic growth from the different areas, you're correct and that we are still not where we are heading and what we would like to be when it comes to organic cash flow Mash-up. But we are definitely in the situation where we have closed the gap of this issue we have with the very uneven performance from Super Free last year, which we have elaborated on. Remind, however that Super Free did grow topline wise, full-year ‘21 versus full-year ‘20. So it's not like they were in a crisis situation in anyway, but it was a very uneven topline development for Super Free, which make the common thing very uneven as well of course.

I think that we’re -- we will see continuous improvements. So we have seen continuous improvement from Super Free since October and they have for the third consecutive quarter launched successfully a new game that comes interactive portfolio. So, they are definitely in a good spot. They are not for the full quarter closed the gap, but they have closed the gap at the end of the quarter. So I hope and think that we will see them contributing to our reported organic growth for the rest of the year.

Also Storm8 has been developing nice that they had, as you might recall a tremendous uplift from the pandemic. So they were the ones that grew the most the first quarter being on board with almost 70% organic growth in one quarter or just actually in a few weeks. So they have been struggling with that comps, but the business is developing positively. They have been successful in several updates in their games as mentioned in the report. So I'm also optimistic about that when we come out now of the comparison issues with -- from the pandemic, especially for Storm8, they will also contribute later in the year with reported organic growth. So for us internally that is not a special topic anymore with Super Free and it hasn't been a special topic in that way for Storm8 as well. But you're right in the fact that we still need some time for it to be contributing organically before a full quarter.

Coming to your second question on IDFA, I think that we are definitely post-IDFA, we have been so operational-wise for several months now. So I think that what we can see and strengthened by the fact that our best-performing area is strategy, which were supposed to be most hit by the IDFA change. And I think that while this has made is that we are on average, you have a lower LTV on the traffic that we buy, since it's not as refined as it was free IDFA, but we will also pay less, so we can have the same relationship between LTV and CPIs for cohort nowadays. But then on our side, when we have both the traffic, we refined the traffic.

So, basically, we are strengthened from this factory even though it was a quite an effort to get to that point. But now we are refined into traffic and that is one of the reason why we can be successful in growing strategy as well. So for us it's not targeting in the same way it was pre-IDFA. But this is part of our industry. And the reason why we have been focusing so much on being data-driven and building prediction models, because it will always be different changes in different channels and that's the reason why we have focusd so much on this market reach to master many different channels for many different products in many different territories. So we can always optimize which marketing campaigns that needs to the best allocate very dynamically, and with the high discipline to where it needs the best. So I think that is we have benefited from that and we will benefit from that. So IDFA is not a topic for us or issue for us, any longer and hasn't been for since the beginning of this year, actually. So, I'm pleased with that.

And on your third question, I leave to Andreas to talk about the impact from FX.

[Andreas Uddman, Chief Financial Officer]

No, I mean, you're right, it's been a very volatile FX market in the last few months, but even in the last week. But in terms of how it impacts as Stillfront is -- we have a very strong hedge in our portfolio in terms of our P&L, that revenues are very linked to the direct costs. So and also this includes of course platform fees or direct costs and also our marketing spend, but also the fact that our cost structure looks very similar to our revenue structure. So it's well of course impact the absolute numbers that you report. But it won't impact the margins as such, because it is -- is it we have a nice natural hedge in terms of that in our portfolio. So the cost structure is very similar to our revenue structure.

[Nick Dempsey, Barclays]

Thanks. That's helpful. Thank you.

[Operator]

Thank you. And our next question comes from Oscar Erixon, Carnegie. Please go ahead, your line is now open.

[Oscar Erixon, Carnegie]

Thank you, and good morning, guys. Couple of questions from me: first of all very glad to see you being back to organic growth. You have some quite cultural comments here on the return on ad spend and also on the sort of market health -- mobile gaming market health in Q2 as opposed to some peers perhaps. Would you say that you had seen any data anomalies on any platforms for Q2? May for example it looks quite strange from some providers would be useful to hear? Thank you.

[Jorgen Larsson, President and Chief Executive Officer]

Yes. We have seen some mixed signals and some strange things in third-party data. Having said that, I'm sure that the conclusion when this is sorted out or summarize the second quarter will show a weaker development to work against, at least what we expected. So I wouldn't be surprised if the sum of the second quarter be minus 5% in mobile gaming markets or something like that. So it has been a much higher numbers that have been out there and it's a bit uncertain about how the market has been developing in the second quarter, due to some data errors, but also that there is mixed signals in the market and we have seen that different subgenres and different types of product and different market has developed very differently. So I think that some companies that has a low diversification has been something more and either compromising on margins or lowering their spend basically. So I think that again the fact that we have a very diversified portfolio has supported us to grow much faster than the market we think has been growing in Q2.

[Oscar Erixon, Carnegie]

Understood. And just a follow-up on that, just curious to hear more about what subgenres have done well and not so well, I mean, Casual & Mash-up was quite strong, for example, for you, compared to my expectations in Q2?

[Jorgen Larsson, President and Chief Executive Officer]

Yes. So it's a multi-dimensional answer for that one. So I think we should not go into all aspects, but there are some suggestions that certain type of larger products have had the challenges to grow larger products and with smaller mid-sized products and fairly large products that has been relatively easier. Strategy has been strong and that has been a bit stronger than I expected not only Q2, but for the first half of this year.

Casual & Mash-up, Mash-up has been stable in marketwise I think. We are improving steadily, but still some more mileage to walk and some of the Simulation, RPG games has been a bit weaker, RPG maybe. So, but it's quite not a very unified picture you can get from third-party data, besides the fact that the market has been developing slower than most of us expected I would say.

[Oscar Erixon, Carnegie]

Understood, very helpful. And two more questions if I may. One for you, Jorgen and one for Andreas. So first of all, just want to understand the comments on return on ad spend a year a bit better. Id the returns of the returns better in Q2 versus Q1, any further comments on that? And I mean, the spending levels in absolute terms should reasonably logically bode well for Q3 growth, but you mentioned expecting usual seasonality despite of high spending would be useful just to hear your reasoning here, please?

[Jorgen Larsson, President and Chief Executive Officer]

Yes. So, we are pleased to see that we are well within our 180-days robust requirement, which is a very strict one. And the reason why we have that is that we force ourselves to utilize the full of our market reach and the different channels that we mostly in the different regions and the fact that we now have 76 products in our portfolio. I would say that it's not -- it’s on par with Q1, and also Q4. So we have consistently been well within our 180-days. What differs is that we put more into strategy where it's tougher to get the money back within the breakeven within 180-days. So I'm pleased to see that even despite that we are increasing in relative terms in strategy, we can still return well within our 180-days. So I think we have seen quite similar levels for the last three quarters that is what builds our momentum basically.

Then within the second quarter, there are some you referred to the third-party data, we have an unusual fluctuations within the quarter. So, April and June were stronger than May, so that was a bit unusual, but nothing big in that. But the important thing is that we have been able to deploy 26% of relation to net revenue are on a high level with very good returns. When it comes to the seasonality, usually we are deploying a bit less in relation to top line in Q3, but that is, of course, if we can deploy the same level as we do in Q2, that is of course supporting our growth, so that we would like to do that, but we will not compromise on profitability and usually cannot deploy that much. So I would expect it will tick up again in September as it usually does, and then we go into the six, seven months of strong marketing opportunities following the ordinary pattern basically. That is what we expect at this point in time.

[Oscar Erixon, Carnegie]

Fantastic. Thank you Jorgen. And just one final question sorry for asking so many questions. But for Andreas you talked little bit about your debt structure. What's your view on refinancing versus not refinancing the debt maturing here first of all influenced by two, but also in 2023 more importantly, you have roughly, I think SEK1.5 billion cash, but also earn outs to be paid a quite nice free cash flows would be great to hear your elaborate in the follow-up? Thank you.

[Andreas Uddman, Chief Financial Officer]

I mean, we have a bond of SEK600 million maturing in Q4 this year, of course, we are following closely the development of the bond markets. And we do have -- as noted almost SEK1.5 billion of cash and SEK2.3 billion of unutilized facilities. So, and we have a cash flow generating business. So we are very comfortable that we will be able to deal with that. And then what and when of course we have to talk about when we get there and then we have the next maturity, which is down in 2023 and that's with our banks and we have a good bank relationship -- relationship with our banks.

But as we always do refinancing, we need to consider the market conditions, we need to consider how we work with this, both from a strategic perspective, but also from a tactical perspective, but that's why we’ve been historically and now also conservative in what type of leverage we have and how high it is and also looking much -- as much, not just on the absolute value, but also on the maturity profile. So we always -- when we look at it should be able to repay that with existing cash from existing facilities. But as you probably note, you have noticed as well there. There are obviously various step markets that are more difficult now, but we are in no rush and have a strong balance sheet to sort of go through that period.

[Oscar Erixon, Carnegie]

Excellent. Thank you very much. That's very helpful.

[Operator]

Thank you. And our next question comes from Chirag Vadhia, Bank of America. Your line is now open. Please go ahead.

[Chirag Vadhia, Bank of America]

Hi, thanks for taking my questions and first one was just on EBIT margins, which was down this quarter and you mentioned it was due to investments in growth initiatives and the short to mid-term effect in gross margins from the current product mix. Could you call out anything in particular that drove this? And if you expect this to continue?

And the second question was, how do you view the ad exposure of the Group with revenues being cyclical in nature in a recessionary environment, in particular the Casual & Mash-up segment, which has more revenues in ads?

And final question is what do you think if Apple's new version of SKAdNetwork announced the WWDC? And do you think this will affect your user acquisition positively or negatively on iOS in a post IDFA world? Thanks.

[Jorgen Larsson, President and Chief Executive Officer]

Thank you, Chirag. I will try to answer these questions. So when it comes to our margin that we see that we -- if you look at EBITDA margin you can see that we are 35%. So compared to the consensus out there we -- 2 percentage points more in D&A, which is a direct effect of that, we have increased our investments in product development since 18-months. So that has also paid off, so that is one discrepancy towards the concerns of going into this earnings, due to report basically.

But I think it's more -- it's as important, but looking into other parts where we see that we short to mid-term will improve our margins, besides the obvious that UA, when that goes down to a more normal level or to lower level that directly correlates with our margins, but taking that away, we also have invested some approximately equal to 1% in margin in our Stillops platform, our data capabilities, where we're doing quite a heavy investments or taking cost for that and some other parts marketing capabilities, as I described, we see that pays off very well, but some of that approximately 1 percentage point in margin comes from our P&L.

On the gross margin, 6waves as they entered into the Group for the first full quarter this second quarter, they have third-party publishing today absolutely dominating, which then provides us with direct cost in terms of royalties. We have a very clear path that they already started prior to the acquisition, so getting more first-party publishing and second-party publishing. Further, we see a lot of synergy opportunities where they will publish in the Japanese markets, several of our others still from portfolio gains and obviously then that will immediately have a very good positive impact on gross margin.

So I think that we have an opportunity to improve over some time for months maybe we can improve the gross margin just by that. But maybe by 1.5% or so, that's the potential there. And then the fact that we have increased mobile part of our business also has an impact, in-game advertising down to 16%, I think we could be -- we should be, we're not doing good enough I would say. So I think we should be at the high-teens even up to 20%. If it would have been 20%, it's more like 1.5 percentage points, improving gross margin as well.

So, and as I mentioned earlier, yet another point that supports margin expansion looking 12-months ahead is that we then will have a less degree in relative terms being young products and young products being under upscale, monetize slightly less than mature products, so that will also support our margins going forward. But we have done our decisions to prioritize getting back to organic growth, increasing our investments both in the Stillops platform, as well as in our product pipeline. And that is paying off, so I'm pleased with that. So the other parts we are -- we have a clear plan on how to get back to the margins, where we were.

And looking at ad revenues, how that will be impacted, if [eCPM] (ph) and the prices in general goes down, I mean, this is again something where we have a almost perfect in-built hedge in our business where we have ad revenues. Yes, that will obviously go down if the eCPM goes downloads or the CPIs go down. On the other hand, that will support our marketing further, so that -- this is the dynamic that is so important, but strategically important for us to have established. And we should be hired 16 in ad revenues, so that will balance. We haven't seen any massive movements or large movements in eCPMs so far. They are more volatile, but not the structural significant change so far. But it's hard to say what happens in the second half of this year.

And your third question about the SKAdNetwork changes, I think it's early to say how that will exactly play out. We haven't received the full understanding, we haven't got the full understanding yet of what that is, but the first viewer and analysis from our data analysis and marketing people is that, it will be unchanged to slight positive when that comes in, but again it's early to say anything more than that, but it will hardly be on the negative side is our view.

[Chirag Vadhia, Bank of America]

Thanks so much. Really helpful.

[Jorgen Larsson, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. And our next question comes from Edward James, Berenberg. Please go ahead, your line is now open.

[Edward James, Berenberg]

Great. Thank you for taking my questions. Just a couple from me, so just and firstly on the Nanobit and Netflix games, can you just discuss how that sort of revenue model for those games or those licenses or upfront payments or they kind of monetize and like the rest of your portfolio you've seen sort of a variety of revenue models and for sort of platform partnerships like that?

And second question, just on wages and cost inflation and is that impacting the margin profile at all? And are you, sort of, seeing in line or higher or lower cost inflation, this is some of your peers and, sort of, how is that impacting your sort of margin outlook? Thanks.

[Jorgen Larsson, President and Chief Executive Officer]

Thank you. When it comes to the Netflix collaboration, we cannot disclose the commercial terms, but we think it's very good way for us to leverage our scale of platform more precisely our game engines. So the game engines that Nanobit has developed fits very well with the narrative type of games, fits very well to other IP owners, not only Netflix, potentially could also the other ones. Then how did these look like, it’s different from one case to another, but we are just as I think, I'm convinced that Netflix are pleased with the deal that we did strike. So it has a positive impact for us. But I cannot unfortunately go into any details of that commercial agreement. But I think there is a strategic value, we value that collaboration highly. So we think there are more opportunities potentially in the future as well.

When it comes to the wage and cost inflation impact. First of all, a very important thing is to note that our -- we have much lower staff cost in relation to net revenues than traditional game developer, we are at bit over 16% from Andreas. So that means that if the inflation rate would be 10% across the board, which we don't expect to be nearby, then we will have since half of that increase is capitalized, the P&L, immediate P&L effect would only be 0.8% approximately. So we are not that exposed to wage inflation.

Having said that, in some areas and some offices, in some regions we see some wage inflation, in some other areas since we are largely distributed locally, there is no or very little impact. So basically a large economies and large hubs like -- in California, in San Francisco to some extent in Germany, it's higher whereas in Eastern Germany, it's lower. But also it will be interesting to see that what kind of effect it will have that some tech -- several tech companies are actually lowering their staff in total. So this -- the demand side and the supply side is changing slightly we expect during the second half of this year. Would you like to add something Andreas on that?

[Andreas Uddman, Chief Financial Officer]

Yes, Jorgen. We have been exposed to what I call the tech inflation for years and that was -- Jorgen was alluding too, now we have normal inflation, which we are not lying to, but there might be a offsetting effect between those two waves as such, which is important to keep in mind.

[Jorgen Larsson, President and Chief Executive Officer]

All right, anymore questions?

[Operator]

Yes. Our next question comes from Rasmus Engberg, Handelsbanken. Please go ahead, your line is now open.

[Rasmus Engberg, Handelsbanken]

Yes. Hi guys. Hi, Jorgen and Andreas. Just wanted to ask you a bit more longer-term. I mean you've been in a sort of an investment phase now for about a year or more to get back to organic growth and so on. Is this, kind of the new Stillfront or we -- or is it kind of like as we go forward that the rate of expansion of new games is unchanged, meaning that the costs and maybe the potential investments are coming down sometime in the beginning of next year when we meet the comps? Or is it kind of a new Stillfront that we're seeing?

[Jorgen Larsson, President and Chief Executive Officer]

Thank you, Rasmus. So that's correct that we took a decision 18-months ago to increase our organic development of products, and I think we -- that has really paid off. We have 14 new games organically that has come out to the market and generated revenues on the levels to qualify for active portfolio. So it has been a very fruitful and good returns on these investments. But we have as communicated earlier, we have kept the pace of 15 products first six months coming into soft launch, some of them were fame, some of them will be very successful and some of the rest will be in between, somewhere. So I think the outcome has been good.

But of course as we now have 76 games in our portfolio, 15 games in relation to that, it's a lower number. So what you can expect is that we -- as we see it now, we will keep approximately this pace in absolute numbers, but in relative numbers that will go down, that is what I expect now. Then of course that is something that is evaluated constantly, if we find good investments and get good traction and could do clever investments with a good risk-reward such as publishing more games on the biker strategt and then has been exceptional successful for us with a very good risk-reward and short time to market and good return. So that we will like to do more off.

But I had to summarize, I would expect us to have lower investments also when it comes to what we do with the Stillops platform, as I mentioned that there is maybe 1 percentage points that go in margins that go into increased costs for expanding our Stillops platform. So we have seven very clear identified areas where we think that as our investment pace in relative terms goes down, it will support margin expansion in the next year.

Would you like to add something Andreas?

[Andreas Uddman, Chief Financial Officer]

Yes. We have a very strong cash flow generating business, so we can afford to make those tactical decisions. We are generating cash flow and we have decided and taking our decision to use some of that, not all of it to build -- continue to build Stillfront a better company, so that's what we can take that luxury, because we can afford it, just to add.

[Rasmus Engberg, Handelsbanken]

Yes, thank you. Thank you very much.

[Operator]

Thank you. And the next question comes from Simon Jonsson, ABG. Please go ahead, your line is now open.

[Simon Jonsson, ABG]

Yes. Hi all, two questions from me. So the first one a question on 6waves, you said it was stable here in the quarter, could you explain what that means? Does it mean that it maintains the Q3 LTM sales numbers you gave us of SEK750 million or should we expect slightly declining sales until we see the new releases coming later this year?

[Jorgen Larsson, President and Chief Executive Officer]

Yes, we don't give explicit guidance on each of our studios like that way, but what we need in stable is, it's revenue more stable, because it's strategy games and strategy games, you know, we have had strategy games as core on our business for 12-years now. So they are very stable for the very straightforward reason that the loyalty amongst users when you're progressed in the strategy game is very, very high. Having said that, it's also the area which is heightened -- most impacted by seasonality, because you don't play the more time-consuming strategy games on average as much during the -- when you are on holidays with your family or whatever it might be and the audience is also a bit older on average than in casual games.

So, considering that we are not even had a full-year with 6waveas on board and they, it's not the perfect synergy the LTM before we entered and the February to June that they have been consolidated. So these five months are a bit softer than the full-year average, I would say. But KPIs are looking very stable and we are looking forward to grasp the growth opportunities from their existing pipeline and not the least from publishing existing Stillfront games into the world's second largest market for mobile games, which is the Japanese by the way 6waves has a very, very strong knowledge position.

[Simon Jonsson, ABG]

Okay, thank you. And my second one, you commented on the LTV development earlier and how it has been impacted by the IDFA? You don't target the same way as before basically. But could you help us maybe understand how you are as confident in your estimation of LTV and ROIs as before, even after private exchanges. What are the factors behind that as the visibility should be lower?

[Jorgen Larsson, President and Chief Executive Officer]

The visibility is lower when it comes to looking at the traffic and buying the traffic. So it's less refined, we cannot be buying as precise targeting traffic as we could do pre-IDFA, but that is, again there is so -- it's a natural part of our industry that you will have changes all the time in the marketing conditions. Now IDFA was the bigger change, because it came from a platform owner that changes in the platform or the channel, sorry -- for marketing would be something that we have -- we will see in the future as well.

What this leads is that we are building the refinement of the traffic. So our prediction models to analyze the traffic, which is not as refined when we buy it, we do ourselves. So the prediction model and the prediction rate and the precision in our predictions are on par with pre-IDFA, but it's different, because we do more, we have refined our models, we have made new models on our side, because we cannot get us precise traffic from our partners, the intermediaries where we buy our traffic from.

So result is, at least as good, which on the other [Technical Difficulty] strategy would never be possible to grow as much as we have done. So the outcome is at least as good as pre-IDFA, but it's different, but that's why we are here the way that we are. So yes that's my answer to that question basically.

[Simon Jonsson, ABG]

Okay, that makes sense. But could that also mean that U.S. as a larger-scaled player in the market has an advantage?

[Jorgen Larsson, President and Chief Executive Officer]

Absolutely. I mean, if you are dependent on few channels, I mean, the highway previously were -- if you are a U.S. player in particular, you work with primarily a large portion iOS and you work to a large extent with the channel in Facebook, that was the main road two years ago. And of course you are much more vulnerable, whereas Facebook entered into the issues with your algorithm as a consequence of IDFA. So I mean we have very much on accelerating the leverage from the fact that we marketed many channels, we market many products in many different territories. So you are absolutely right in that statement and that has accelerated and it will continue to accelerate. So you benefit from having this diverse of [being deep] (ph).

[Simon Jonsson, ABG]

All right. Thank you so much Jorgen and Andreas. That was all from me.

[Operator]

Thank you. [Operator Instructions] There are no further questions at this time. I hand over to you speakers for any closing remarks.

[Jorgen Larsson, President and Chief Executive Officer]

Thank you very much and thank you everyone for dialing in this morning and also for raising good questions, so we have a good discussion and interaction. And we are pleased to see you next quarter again, if not earlier. Thank you everyone and have a great day.