Stillfront Group AB (publ)

STO:SF

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Jörgen Larsson, executive]

Welcome to Stillfront's Q2 earnings call. I will be presenting, Jorgen Larsson, CEO, together with our CFO, Andreas Uddman.

So, next slide, please. We posted strong margins. We had a strong margin development in the second quarter. We had net revenues coming at SEK 1744 million, which is in line with Q1 and lower revenues by 4% compared to last year.

We increased our gross profit by 2 percentage points, up to 80%. And we had an EBITDA margin of 29%, up 8% quarter-over-quarter, driven by lower acquisition costs and up 0.5 percentage points year-over-year.

Our free cash flow amounted to SEK 272 million, which is almost the doubling from the previous quarter. You can also see in the slide that we lowered our gross profit, which is the one that we are steering the business on by 1.6% only, and that is an important number.

Next slide, please. Looking into our lower user acquisition cost, there is a few highlights that I would like to emphasize on this slide. One is that you can see that we are on a normalized level at 26%, whereas we both in Q4 and in Q1, had a significant uplift in user acquisition costs due to the so-called trampoline massive launch of our big success in Sunshine Island.

That was on very high levels, now we are back to 26% as we were also in Q3 last year. You can see also the stability both in terms of net revenues for individual quarters as well as we have on LTM.

You can see that we are still then obviously, since we had this uplift in Q4 and Q1, we still on LTM/UAC are on high levels but they are going slightly down then there.

We can go to the next slide, please. So, looking at our lower cost base, which is a product of the efforts that we took on 18 months ago is really kicking in now in our margins, which is satisfactory.

So, you can see on the left side that our margins were 29%, our EBITDA margins, which is, by the way, the highest margins that we've had for 3 years, and it's a significant uplift from Q4 and Q1.

And also, this is driven by the gross margin improvements that I mentioned briefly. We have staff costs that we have lowered by 12% which then equals to 1.6 percentage points compared to our revenues.

UAC up by 2.5% year-over-year, driven by, again, Sunshine Island. What is also very important than a third part in the initiative that we took on at our Capital Markets Day in February 2023 is to focus our investments more to where it gives the best, where we get the highest ROI, and that is also one of the main explanations to why we have been able to improve our EBITDA margin in the way that we have had.

Next slide, please. And the important driver behind the improvement of gross margin, it is a product mix effect that is in there as well. But the most important thing is that we did work very actively with the DTC, direct-to-consumer channel.

And, as you can see on the upper right graph it's up to 33% from being 29% and last year, 26%. And obviously, that is very margin accretive that we have a direct relation to our consumers, it's good for their consumer relationship as well as it is for margins.

We can see that our monthly paying users are stable. We have a drop on MAU and DAUs, which is a consequence of that we are focusing our efforts, our live ops on the customers that are most valuable for us, and that is paying off.

You can see that the average revenue per daily active user is on the lower left side graph up from 1.7% last year, which is a quite significant improvement. So, more focus on these customers as well as that we work with our direct-to-consumer channel.

Next slide, please. Looking into the different areas of our active portfolio, looking at strategy, strategy saw a clear slowdown in June, basically in the second half of the quarter, which was a bit earlier and a bit more than we had expected.

And you can see that it's a clear drop in both bookings by almost SEK 99 million approximately, but you can also see that our UAC has gone down significantly from 28% in last quarter to 16% this quarter, hence, we have not been able to deploy the level of UA and continuing with our ROI targets.

So then, we lower it, and it's also, by the way, strategy that always is the most obvious evidence that we come into the usual seasonality of this industry. So, a bit slower than we hoped and expected in June, but nevertheless, a stable performance.

And UAC is actually down by 40% compared to last year, whereas bookings down 12% and gross profit only down 7%. And you can also see here that we are very strong on the D2C channel in the strategy product area on the upper right side. So, we have DTC amounting to 44% of our revenues.

Next slide, please. Within the Sim RPG product area, we can see that sequentially increase in bookings and users driven by 2 things. One is that we have been able to launch one server, not as successful as the Asia server, of course, Albion Online last year, but nevertheless, a successful launch and contributing positively to the quarter, but also that we have been able to continue to scale or, I would say, probably most successful launch ever, which is then Sunshine Island.

You can see on the upper right side that we are now from running as it should look when you have a good success on your hands that you are able to deploy a lot of UA and the revenue start to pick up.

So, in Q4, it was 22 revenues or bookings, 62 in UA. Then we are closing the gap slightly in Q1, doubling the revenues. Now, the Sunshine Island revenues are up by 10%, whilst we are scaling down user acquisition cost by 40%. So, they are on par.

And what we will do now is to continue to work with further content, further optimizations, further features for Sunshine Island, so it will serve us with profitability for many years to come.

Also, we hope and expect that we can scale it as we come out of the weaker season of the year into Q4 and then Q1.

We can go to the next slide, please. In Casual and Mash-up, we were flat sequentially and year-over-year in Casual and Mash-up. Very satisfactory is to see that Super Free's Word franchise has gained traction.

So, it scaled well in the second quarter and drive both organic growth for the franchise and we hope and think then and see good KPIs indicating that we can continue this for the second half of the year so that we get another contributor for growth over time.

Then we also have Jawaker, which has continued its massive, very impressive performance. So, you can see on the upper right side of the graph of the slide, how they have developed. So, Q2 was the highest uplift we've had so far.

So, they are still on the 41% CAGR since we made that acquisition with very high margins, so it's really a gem that we have in our portfolio. On the other hand, we have struggled a bit with Storm8's Home franchise so we're working both to see to that we adopt the studio for other circumstances, that's one thing.

The second thing is that also, we launched at the Ellen Garden Restoration game and slowly scaling it, and we hope and think that, that could contribute to Storm8 further progression during Q4, not the least. So, good early KPIs, but nevertheless, it's still some mileage to walk there.

So, with that, I would like to hand over to Andreas.

[Andreas Uddman, executive]

Thank you, Jörgen Larsson and good morning, everyone. I will look at the cash flow for the quarter and also the LTM numbers.

We had a strong cash flow in the quarter. We had cash flow from operations before, net working capital effects of SEK 482 million. Within that, we spent SEK 462 million of UA, which is actually still a higher absolute amount of SEK 28 million versus last year, significantly down versus the 2 previous quarters.

Now, I'll get a bit more into depth of that. We had a financial expense of approximately SEK 100 million in that, which is an increase versus last year of SEK 20 million, which is driven mainly that we have been in a higher interest rate environment, even if that is now coming down.

Paid taxes of SEK 45 million, and we had a negative net working capital effect in this quarter. It's mainly driven by reduction of liabilities. As Jorgen was saying that we saw a slight decrease in the spend especially on strategy by the end of the quarter was, we had spent a lot of UA in Q1 and especially in March.

So, that is just a fluctuation that impacts the quarter negatively. So, that ended up with a cash flow from operations of SEK 434 million. And on the investment side then, we had, as usual, in Q2, we settled our earnouts, and that was SEK 432 million of earn-outs that was paid in cash.

We have invested also SEK 152 million or 8.7% of net revenues in CapEx. So, as we talked about previously, that is now coming down in the numbers. So, you can see there's a SEK 40 million reduction from last year or 1.9 percentage points lower in terms of relationship to net revenues.

We also had a negative effect in terms of investment activities based on the deconsolidation due to loss of control of our Moonfrog system subsidiary in Bangladesh, which impacted investment cash flow of SEK 82 million.

So, for financing activities, these were SEK 260 million. We had a net change in borrowing of SEK 463 million and we purchased shares for SEK 182 million in the quarter and these shares have then been used to settle the equity components of the earnouts, which has now all been settled in Q2.

And I think, looking at the graph that looks free cash flow per quarter, which is the low graph to the left is that, that's how we come from a period where we have intentionally invested more money into UA, we spend both in Q4, but also in Q1.

And that was because we can see that we are gaining the financial leverage or the operational leverage in our P&L through the reduction in terms of fixed costs, but also in terms of the improvement of our gross profit in combination that we also have focused on our investment.

So, when we then reduce UA, we still invest 26% so it's not like we are completely scaling it down. It's still on a normal level, even if June was slower.

We can directly see the positive contribution in terms of the cash flow, which is then shown in the Q4 and Q2 numbers. So, that also impacts the LTM numbers, which is the graph to the right that we come through this investment period, and we still have cash flow from our operations prior to working capital adjustments of SEK 1.6 billion.

It is a decrease from last year, but that is driven by, partially that we have spent a lot more UA in the comparison to periods of approximately SEK 248 million more comparing the 2 periods.

We still have higher financial costs versus the LTM numbers in Q2, 2023, and that is SEK 132 million more that we can still service our debt, but that is, of course, impacting our cash flow from operations.

In here as well is some of the effects or defects that we're seeing that we've been able to reduce our fixed costs, which is partially then staff costs, which is down 12% versus last year. We have some onetime cost of SEK 49 million for these cost optimization programs.

In terms of investments, here, we can really see what we were talking about in terms of the Capital Markets Day, we have invested in the last 12 months, SEK 698 million, which is 10.1 percentage versus net revenue.

So, that's around the period or the area we stated that we will come down that we have now come down to. And if we compare it to just a year ago, there's a decrease of SEK 211 million.

So, a bit more we were talking about creating operational leverage in the business or financial leverage by increasing gross profit, reducing fixed costs, reducing CapEx, is clearly now visible as we as well taking down CapEx in the last 12 months.

So, in terms of the free cash flow, that was down if you compare to the comparative periods, but it was still SEK 737 million, and a large driver of that is obviously the increase of financial costs combined with the intentional investments in more UA and especially Q4 and Q1.

Then we can jump into the next slide. Leverage. We ended the quarter at 2.15, which includes the cash earnouts, it is as normal in Q2. The next years' earnouts, either ones we're paying in a year from now or a bit less, they're now falling into the measurements.

We have settled the earnouts for 2023 and now in the measurement, the earnouts for next year is falling in. So, that's a normal sort of cycle that we peak around Q2 in terms of leverage in that sense.

Taking out the earnouts we would be below our financial target and we would be at 1.93. We had a strong cash position of SEK 895 million in the quarter, and we had approximately SEK 1.5 billion of unutilized short- and long-term facilities.

I think it's also important to remember that this quarter, we reduced our outstanding bonds completed the transaction for SEK 2.5 billion to just SEK 2 billion. So, we have 2 bonds outstanding, which is also visible on the maturity slide that we have now shifted our maturity profile.

The next maturity we have is in December 2025, so it's almost 18 months away and we will continue to work tactically with our maturity profile and with our financing structures to ensure that we can maintain a healthy and derisked approach to that. But it also led that we actually used a bit more RCF, but it's still almost 30% out that we are unutilized.

So, to summarize, we have increased the discipline in our product development. So, in investments, we are more focused. The cost efficiencies are coming through and you can really see that this is leading to a margin-enhancing initiatives, which gives us the flexibility with UA as we've done in the 2 previous quarters, spend more now we reduce it to 26 percentage points versus net revenues and then we see that the margins and cash flows are coming through.

So, with this, we can move to the next slide. We also announced a share buyback program this morning where we stated that we will buy up to SEK 80 million of shares pending that, and we are hoping and intention is that the volumes will be there so we can complete this buyback programs during Q3.

And with that, I will hand back to Jorgen.

[Jörgen Larsson, executive]

Thank you, Andreas. So, next slide, please. So, to summarize, we had a very strong margin development in the second quarter and we are entering into the low season of mobile gaming or gaming in general, but we are pleased to see that we are reaching the higher end, the higher part of the spectrum of our financial target.

We are at EBITDA margin of 29% in the quarter. We did see, to summarize and repeat that we did see, especially in June that we had a slowdown. So, the low season is here and that is clearly visible in strategy, which is most frequent, the most clear hit by the lower season.

On the other hand, they are stronger in the high season as well. We expect that we can reaccelerate some of the UA, which is currently at low levels, but we can reaccelerate that during the second half of Q3, so that we enter into the strong period Q4 and Q1 with some pace.

And also, as mentioned several times, we are pleased to see that our profitability measures that we have taken are really showing the leverage, the operational leverage so far. But also, we are in the process of identifying new projects and initiatives going forward that we think will both further lower our cost base and provide us with operational efficiencies that we don't have today further but also increase accountability and transparency in our organization going forward.

We will come back to that during the fall. So, with that, I would like to conclude the presentation and open up for Q&A.

[Operator]

[Operator instructions]. The next question comes from Simon Jonsson from ABG Sundal Collier.

[Simon Jönsson, analyst]

I want to start with the strategy. It was a rather sharp decline and given that you've spent record levels of UA in the segment in Q4 and Q1 and now record low levels, at least if we talked about the levers when compared to the bookings, can you please talk a bit more about moving parts in the segment during the quarter, especially given that you said the big game, Supremacy and Empire were more stable?

[Andreas Uddman, executive]

Yes. So, we saw, for the first time that supremacy was on much lower activity levels as we entered into June. We followed our plan quite well, I would say, both in April and May, but then it turned out.

Then, of course, it's multiple factors behind that. I've done this for more than 15 years so, sometimes it started earlier. It could be triggered by other events like the Euro 2020 and Copa America in football and such things but it's quite normal that strategy games in general are more hit by the seasonality than other areas.

And then, whether it's in June, whether it starts in July, of course, when we have an earning's call on a separate quarter, that individual quarter will be clearly so. But as you said, I'm very pleased to see that Empire, despite that we are on low levels of UA for that franchise, it's really performing steadily and with low or almost no UA, it's margin accretive.

But it's primarily within the supremacy franchise that, that slowdown came. But at the same time, the perspective and the performance of supremacy, it's important to notice that it has been between double-digit, 10%, up to even 100% growth for quite some time, many years now. So, sometimes you have a setback slightly but we're not concerned over time.

[Simon Jönsson, analyst]

And when you talk about lower activity in Q3 as well, do you mainly refer to strategy or do you mean in a broader sense in the portfolio?

[Andreas Uddman, executive]

No, I think what is good since 1 year approximately, is that we are into a normal market after first, the pandemic boost and then the effects from the downside effects from that.

So, we're back in the way that this industry works. And, in general, there is a slowdown in gaming, in general. Then it is more in strategy because for the very simple reason that playing a strategy game is more of a commitment, takes more time and when you have your holidays, you with your family, whatever friends, then you play less.

Then in Casual and Mash-up, usually, it's a lower effect since it's not as big a commitment to take on playing casual game. So, you have the full scale from Casual/ Mash-up, not so much to strategy clear slow down.

[Simon Jönsson, analyst]

And on the cost side, you talked about potentially finding some new initiatives you can make in [indiscernible]. Can you talk about the magnitude of those potential realizations and compare it to what you have done already?

[Andreas Uddman, executive]

The very short answer is no, because we are initiating these efforts now in Q3. But we think it's important to signal and to be transparent about that we see other pension initiatives that we haven't done yet, not only lowering cost base but also increase the transparency of our business but we will come back to that rest assured during the second half of the year.

[Simon Jönsson, analyst]

And one last from me. In terms of new titles heading into the second half of the year, could you maybe name drop some of the games that you are more excited about to add to the active portfolio?

[Andreas Uddman, executive]

Yes. So, partly new, but not completely new is Ellen's Gardner Restoration, which, again, everything is early, so it's hard to just extend the line.

But the KPIs so far are promising. So, we hope that, that would be a growth product for us. But we also have some unannounced, a couple of unannounced games that we will go into soft launch during fall further, and that is important that since we invest now 8.7% in the quarter and at around 10% CapEx in relation to net revenues, a lot of that CapEx goes in to extend our existing strong franchises.

So, it's meaning that we can do extensions or bid live for other franchises that we have as well. So, it's not only the number or completed entitles that counts, it's also significant extension or future releases of products that we have already.

[Operator]

The next question comes from Amar Galijasevic from Carnegie Investment Bank.

[Amar Galijasevic, analyst]

A couple of questions from me here. The first one being on Jawaker. You're mentioning they're growing very quickly here, having high margins. Just a question on what makes Jawaker stand out so much in terms of the margin profile compared to the rest of the group? Is it market exposure or anything else?

[Jörgen Larsson, executive]

Yes. So, Jawaker, it's a tremendous franchise and studios. So, what they have built is, the nature of their products is that they take social behavior, which is the strongest driver of playing games and take it digitally.

They have taken it digitally and expanding, so they have more than 50 games in 1 single app. What happens then is that if you're good at making this and it's not easy, is that you get the network effect.

So, they had a larger portion of their marketing is just by organic or viral marketing, which means that UA is on very low levels and they are cost efficient. So, they really stand out, both in the way that they can grow, I mean, 41% CAGR since we acquired them, it's a really impressive number with outstanding not 0, but close to 0 in UA.

So, they have positioned themselves uniquely within their both region but also the types of games that they have.

[Amar Galijasevic, analyst]

And then just a couple of cost questions here. You had a very solid gross margin in Q2, and I guess that you're driving more DTC and supporting the margin. Was there anything unusually good in Q2 that we should keep in mind for H2?

[Jörgen Larsson, executive]

I would say it's a product of hard work over a long time. So, we're pleased to see that. Without going any forecast, but I think that we have opportunities to further strengthen our gross margin over time.

But it's, as you know, composed of several things, one, is how good we are on promoting our DTC channels, which are now up significant to 33%, but there is also a product mix component in it.

So, certain games like in strategy are usually very, very strong on DTC, whereas Casual on the Mash-ups are usually a bit lower. But I think that we are pleased that we have progressed further than we thought 18 months ago, but we can do more.

[Amar Galijasevic, analyst]

And then just a final one on the personnel cost. I know you talked about it a bit, but would you say this is a new normal level, given what you've said so far? Or should we expect costs to decrease further or on the other way increase further in H2?

[Jörgen Larsson, executive]

Andreas, would you take that one?

[Andreas Uddman, executive]

Yes. No, I mean, as we were saying, we see that we have opportunities to tackle our cost base further. We will get back to that. But I think it's also how we reallocate capital between different studios.

So, some studios will get more capital, especially in terms of our core franchisees and then some studios will not have the same kind of capital allocation which ultimately are people that have built our game.

So, I think we see that we have opportunities on the total fixed cost base but exactly how that's going to develop, we will come back to in the near future.

[Amar Galijasevic, analyst]

And lastly from me here. I mean, you're generating healthy levels of cash flow and have been doing for some time, could you just discuss kind of what leverage ratio would you be happy with perhaps starting to spend more cash on buybacks or dividends, et cetera?

[Andreas Uddman, executive]

I mean, we have a target of 2, so, that's what we will be happy to have. Now temporarily, especially in Q2, that's just above our leverage ratio but that was to be expected and sort of a normal thing.

Today, we announced that we will continue with the buyback program and buy hopefully the shares for SEK 80 million in Q3 with volumes allowing on the market. So, that was a decision made, that was good capital allocation in terms of the free cash flow we do generate.

We do have earn-outs coming up next year and as we also noted in the report, Jawaker is very stable and growing so they are also the ones that stand for the majority of the earnouts in our portfolio.

So, there was an investment decision made on where we can still balance deposition of buying back shares, deploying UA and being ready for also making product investments. So, it's always a balance of how we keep that level. But we are roughly around our financial targets today.

[Operator]

The next question comes from Nick Dempsey from Barclays.

[Nick Dempsey, analyst]

I've got 3 left. So, first of all, just going back to the weakness in strategy, can you give us an indication of whether 6 Waves is performing better [Indiscernible] buy back?

Second question, your commentary on Q3 focuses on it being a lower seasonal quarter, we care about year-on-year progress. Am I right to judge from the tone though, that the weakness in strategy may make it difficult to see positive group growth in Q3 despite the easier comp with Albion Online?

And the third question, over time, where do you think the D2C bookings as a percentage of group can ultimately get to?

[Jörgen Larsson, executive]

Thank you, Nick. So, on strategy, 6 Waves, it's 2 parts in the performance of commenting. One is that they have not been able to launch new games.

The other concept that is obviously hurting top line over time, but it is strategy, so, it's not a dramatic drop immediately because they have a loyal significant user base. The other thing that happens is that since they're not scaling new games, they're instead not growing top line, they are growing their margins, which they have done significantly during the last 12 months.

So, they are not accretive for the moment in top line, but they are accretive and increasing their margins in a satisfactory way.

Looking at Q3, yes, of course, everything else, you don't want the seasonality to kick in and the strategy part to kick in so we do expect that for at least half the quarter, Q3, it will be lower activity and that is a negative impact.

On the other hand, it depends also when we get traction with UA again because even in strategy, we can get quite not as fast as in casual, but we can get some effect. So, I think that we don't give [Indiscernible], I cannot say that, but it's a bit softer June than we had hoped for in strategy, and that is, of course, I would have preferred the opposite.

But we have a chance to be at organically in Q3, yes, of course, we have but I don't give any forecast about that.

Your third question, DTC, how far could you go? That's a great question. And to be not honest, I don't really know because it's many bits and pieces moving around. And it's also important to understand that what we focus a lot on is the customer experiences and through live ops.

And if you push too hard when it comes to DTC, especially in Casual and Mash-up and some other products, it could be on the mid long-term cost of the user experience, which would be much more expensive than increasing DTC. But I'm absolutely convinced that we can do more than we have today. That I can state.

[Operator]

The next question comes from Martin Arnell from DNB Markets.

[Martin Arnell, analyst]

My first question is, I think, Jorgen, you mentioned that you're back to a normal market now, but I guess you still have an ambition to grow your top line. So, I want to know what are the main things that you think is needed for you to return to top line growth?

[Jörgen Larsson, executive]

Yes. So, we did grow organically from November and through Q1. But now in Q2, as I stated in the presentation as well, we did have this SEK 80 million one-off revenue from Albion East, and that is very much what we're down year-over-year.

So, I think we are in a good position for getting back to growth. We think that the market, my best guesstimate now is that the market this year, full year. There's a lot of numbers jumping up and down and the ones that we are looking at are often moving it from one quarter to another literally.

But if I should pick a number, I would say the market is growing by 1% to 3% this year. But then you should remember it's quite unevenly spread. So, the world's largest mobile game currently is on its own some 1% to 2% market growth they are driving.

So, the market is not growing by high numbers yet but I think, ultimately, when it comes to us, we have a very focused CapEx strategy, we know it yields in a good way, we're good at live ops so you can see on the average revenue per daily active users that yields, which is important for our growth, obviously, and you can also see that we're able to scale new games and I think the combination of these 3 will allow us to grow.

And also, the final comment is that we see that we probably will be stronger on gross margin, stronger on cost control, but maybe on average, being on a slightly higher UA taking away the Sunshine Island effect because that stands out.

But on average, compared to what we thought in February 2023, when we thought 25% would be a number, now I would say it's probably a couple of percentage points higher. And that, of course, since we're not compromising on return on ad spend also will support top line growth.

[Martin Arnell, analyst]

And then, can we talk a little bit about the DAUs also, which has fallen quite rapidly, I think it was negative 19% year-on-year in this quarter? Can you elaborate on why it's falling by so high level?

[Jörgen Larsson, executive]

Yes. Again, coming back to live ops, coming back to focusing on our core users, you can see that the monthly paying users are that's quite stable and these users are the ones that we really make our money from.

So, we have shifted from not focusing so much on low-volume users and there are many, not the least in our Indian business that have had a tremendous amount of low monetizing users and it doesn't really pay off to pay them too much attention.

So, instead, we focus on the best customers we have, the most loyal users we have, and then you get the ratio difference, but I prefer a high ratio of the pay users to MAU users instead of the opposite because then it takes off to work with live ops. I hope that makes sense.

[Martin Arnell, analyst]

Yes, it makes sense. And do you expect the ARPDAU levels to be fairly stable in the coming years?

[Jörgen Larsson, executive]

I think we have good opportunities to continue leverage our live ops activities, which means then that we don't think that we are maxed out on our ARPDAU, but then in Q3, it's lower activity levels, but we're entering into Q4, Q1, and then usually it goes up.

But the trend line, I'm not optimistic about that we can continue to improve ARPDAU cross the line.

[Martin Arnell, analyst]

And I have a final question maybe for you, Andreas. The efficiency actions that you're doing, the ongoing and also the upcoming initiatives, is it enough to stabilize the free cash flow trend, assuming that the top line trend stays where it is or maybe improves a little bit, what you think?

[Andreas Uddman, executive]

Well, I think it depends on what you mean by stabilized. I mean, in the last 2 quarters, we have intentionally made investments in terms of additional UA investments. That was a conscious choice that we did.

So, we did spend record levels both in Q4 2023 but also in Q1 and we could allow ourselves to do that whilst we had these things already showing up in the financials in previous quarters but now it's even more visible.

So, I think it was an intentional decision to do that and so it wasn't something that just happened. In terms of going forward, I think we have been working diligently in, where do we deploy our capital and that has yielded cost savings so far, especially on the fixed cost side and also on the CapEx side.

But how and how that's going to be progressing, we have to come back to in the fall.

[Operator]

[Operator instructions]. The next question comes from Rasmus Engberg from Kepler Cheuvreux.

[Rasmus Engberg, analyst]

I just have one question left actually. If you roll time forward a little bit and you do continue to generate about SEK 1 billion on cash flow and pay earn-out of maybe SEK 500 million here, what is your scenario of what you want to do as earnout that comes off? Where do you want to take that money?

[Jörgen Larsson, executive]

I can start and then Andreas you fill in. So, first of all, it's not only a management decision, as you know, but I think that being highly cash generative gives you options. And then it depends, obviously, on what levels we are traded. If buyback would be something that we do for a long time, whether we have products that yields very good for deploying more UA and so on.

So, it's a tactical decision over time but, of course, when we are traded on the levels that we are buybacks as we have declared today is an attractive thing for our shareholders with it. So, that is how I would like to phrase that answer, Andreas, you can fill in.

[Operator]

The next question comes from Viktor Lindstrom from Nordea.

[Viktor Lindström, analyst]

Just a quick question here regarding the UA levels going forward. How should we think about the UA levels in the second half compared to last year?

[Jörgen Larsson, executive]

I think, first of all, we must take out, as we have said many times during this call, we must take -- look at this from 2 perspectives. One is, which is a very rare thing, we have a product with a strong KPI outside Sunshine Island, then it's our obligation to max and do the so-called Trampoline launch, which we have deployed, I don't have the exact number, but you can see it's more than, I think, SEK 150 million or SEK 170 million or something in Sunshine Island only.

And that has happened, I think, 3 times in this company's history. So, if we take away that, I would love to have such a success again and then we should take that opportunity. But most likely, we will not have successes on that level, but still good deployment opportunities.

So, taking that away, as I mentioned a few minutes ago, I think that when we look at the composition of our P&L, it's likely to expect that we will be on higher levels than the 25% on average, I would say, 27%, 28% or something over rolling 12 months.

So, a bit higher there, but we gained back in gross margin through the DTC work that we have, lowering staff costs by 12% and also being more efficient in allocating our CapEx. So, we are in a good position to deliver on our 26% to 29% EBITDAC margin financial target and also then deploy more UA and having a more efficient CapEx makes it profitable to deploy that to reach the other part of the goal, which is to grow above market.

So, I think it's not unlikely that we'll be rolling 12 months higher than it was 2 years ago. But we can make up, more than make up for that as we can see this quarter as well. I hope that answers your question.

[Operator]

The next question comes from Edward James from Cantor Fitzgerald.

[Edward James, analyst]

I've just got 2 remaining. Can you clarify a comment you made earlier on user acquisition as a percentage of sales? I believe the comment was earlier last year, believe that 25% of sales was the appropriate level.

However, now going forward, you believe that, that level might be a couple of percentage points higher. Can you just clarify that? And I imagine that, that is offset by the reasonably material gross margin gains that you've made. And does that leave Stillfront as a higher, lower or the same in terms of structural underlying margin profile?

And then the second question is, I appreciate your comments on daily and monthly active users. But even if we look at monthly paying users, it's declined year-over-year in, well, 7 quarters in a row. And the strategy monthly paying users after increasing in Q4 declined in Q1 and obviously declined by approximately 10% in Q2 with only strategy RPG action seeing consistent increases.

So, I guess the question there is, at what point do you believe that this will stabilize because that seems pretty same for organic growth to return on a sustainable basis? And are there any learnings you can take from what seems to be much better momentum in simulation RPG action and apply them elsewhere because the other 2 categories seem to have pretty precipitous paying user declines?

[Jörgen Larsson, executive]

Yes. So, to the first question of yours, yes, I believe that it will be a different structure in our P&L compared to what we elaborated on, not forecasting, but we elaborated on in February 2023.

So, I repeat what I just said that I expect it would be higher than the 25% that we penned down at that point in time again taking away these trampoline launches. It's more realistic at maybe 27%, 28%.

But just as you said, and that is important that we can offset that clearly with the stronger progress in gross margin with stronger and more efficient CapEx spend. So, EBITDA margin, as we clearly see this quarter being at the upper end of our targets already, and we have more things to do that we also announced.

So, I think indeed that UA will be on average higher, yes, but we can more than compensate that with the other factors, so that is confirmed. So, the margin profile in total is not changed at all, but it will be the disposition of the P&L will look slightly different. That's how we view it at this current point.

When it comes to your question about users, as I also said, I mean, we had channels, we had platforms that were not yielding any revenue. So, we have worked our way down. I mean, even on Snack Games, where one move for game thing when that existed was the largest game globally on Snack Games, but that platform does not even exist any longer.

But they had some paying users, even though it was a massive amount of MAU and DAUs. So, we are focusing again, and this is important, we are focusing on our most valuable users so that we can get most leverage on our live ops. And that is important because you can see what is the key thing is not only the player numbers, it's the MPU times the average revenue per paying users, and that is going in the right way.

As you rightly pointed out, even if MPU has gone slightly down or depending on product area, we are still increasing the average revenue per daily active user, so hence, it's strong on average revenue per monthly paying users indeed.

So, I think that's a natural development. Of course, I wouldn't mind everything going up always but this is not an alarming thing for us. It's a product that we work very actively with our most loyal users and live ops.

Sim RPG, I mean, we've had some good traction but I remember, a year ago or 2 years ago, the question was often why don't you only work with Strategy games because they have been growing for, I think, 3, 4, 5, 6 years by high numbers.

But now we can see that, that's the whole point with the portfolio that we have 73 different games in our active portfolio, it will vary from quarter-to-quarter, from month-to-month, from week to week, but also from 1 year to another.

So, I think that we are very pleased, as you now state that it's Sim RPG delivering that we have the different areas that we have. So, not being uncomfortable on the contrary, I think it's much better to have a wider array of games in different channels.

[Andreas Uddman, executive]

Maybe I'll just add a bit of flavor to the gross profit in UA and how that's directly linked because how we measured forecasted ROAs is basically revenues minus the cost, so the gross profit, right?

So, that's the one we measure. So, when studios have been able to deploy more DTC trials, they obviously get the natural impact becomes that the number of days goes down. So, that's also why there's a shift between those 2 parts, that higher gross profit, and then you can deploy more in UA.

So, is it a direct link to those that's how we actually operationally steer the business.

[Operator]

There are no more questions at this time. So, I hand the conference back to the speakers for any closing comments.

[Jörgen Larsson, executive]

Thank you all for dialing in and also for you that had questions, and I hope that we had shared some insights besides the actual quarterly report. Thank you for this time. See you next time again. Bye-bye.