Stillfront Group AB (publ)

STO:SF

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to Stillfront audiocast with teleconference Q3 2021. [Operator Instructions] Today, I'm pleased to present CEO, Jörgen Larsson; CFO, Andreas Uddman. Speaker, please go ahead and begin.

[Jörgen Larsson, Founder, CEO & President]

Thank you very much, and good morning. We would like to start of today's session. We're just making a reflection on -- before going into the presentation on how we came in this year. We came in this year with 2 well-known and explicit challenges in the terms of both the IDFA, or the changes for marketing conditions, labeled the IDFA issue. And secondly, we entered into difficult comparison numbers from that sensational and exceptional, I should say, growth that we enjoyed from mid-March to June last year, with a very high intake of new users. So obviously, comparison numbers and the IDFA change were known and dealt-with challenges. And I would say before going into the actual numbers for Q3 and commenting on the details, this is important with the Q3, to see the full perspective because we feel that we are now with the Q3 and what we've seen so far in Q4, we are leaving these challenges guardedly behind us. So we are in the new normal and with less comparison in the picture. Anyway, so entering into the presentation on Slide 2, you have the ordinary still front at the glance overview. So we are now 21 studios. If you also include Jawaker, which is not included in the Q3 number because it's consolidated from the first of October that nevertheless, was acquired during the quarter. We have constantly developed and evolved our portfolio of games that have a long life cycle, and you will see that, again, that is developing and that it's performing. And we have now 62 million unique players playing our games worldwide, and you can see how these are distributed. North America continues to be our main market with 52% of revenues, and then Europe 30% and Asia 12%, and U.S., Germany, MENA and U.K. and Canada are the individual largest market. And we are now more than 1,250 professionals distributed according to the red dots in the map on the lower right side of that slide. Going into next slide. A few comments on some highlights of our portfolio. We have enjoyed a very strong year-on-year organic growth performance from some titles, which are encouraging and War & Peace that was launched in Q4 '17, has really had a tremendous growth coming back to tremendous growth after being first growing -- being one of our engines for growth, the first year, the first 18 months, and then being a bit slower and weaker but now have come back to be a strong growth. And this is important not only with the numbers per se, it's important to see how products that has been around for, in this case, 4 years can come back to high-growth numbers. We're also pleased to see that Conflict of Nations has been growing tremendously for us. So that is one of the absolute most successful launches ever for us that was launched in the mobile version in September last year. And not the least, which we will come back to, is the success of BitLife from Candywriter. We also can see that the Moonfrog’s product Ludo Club was the #1 brand product on Snapchat worldwide in September. So Ludo Club has had a great start being part of the group. We also -- which we will come back to, but it's important to emphasize the number of products that we have in pipeline and soft-launch for the short term going into soft-launch. So in total, we have more than 16 products that just have entered into soft-launch or will enter during Q4. And of course, that is something that sends us with optimism and opportunities for quarters and years to come. We also have opened up a publishing division at Goodgame so that we can leverage the capabilities we have for publishing, also for products from other studies. So the first one is War Alliance that was launched in a few weeks ago. And also, we have DogLife, which is worth mentioning that was launched as a sister product, BitLife, by Candywriter in early November. So we expect and hope and think and believe in every aspect that we will see a significant UA ramp-up. We already have seen that in the latter part of Q3, but we expect that, that will continue into Q4 and through Q1, fueling the starts of both existing and new games. And as you -- I'm sure you are aware of, we are entering into the seasonally stronger quarters during the winter and autumn, winter and early spring. Turning to Slide 4. A few words about the numbers. Bookings grew by 32% and net revenue grew by 28% in the third quarter driven by acquired studios, and some organic good growth for some studios. But all in all, we still have a negative organic growth, 8% in bookings and 11% in net revenues. So we come in the upper part of the communicated guided range with SEK 1311 million in revenues. And we -- what is important to note as well is that we always have had during the -- since I founded this company 11 years ago, Q3 is a slower quarter because our users, typically 35 years, goes on vacation with their families and play less games. And this -- the outcome of SEK 1311 million related to Q2 is actually in the lower part of what we usually see as the seasonality pattern, which is 5%, 8% or some years even 10%. So I think that is a very typical pattern that we see. What is important for us is that we work successfully with LiveOps and one metric of LiveOps the average revenue per daily active users and also how we are successful in capitalizing and monetizing on ad revenues. So we are pleased to see that the organic average revenue per daily active user increased by 13% in Q3, and that was across all product areas. And the pro forma growth rate for 24 months, just to visualize the effect, the comparison effect that we have been struggling with this year, is that we are close to 10% in compounded annual growth rate with one studio exception, if you look at the last 2 years. So it's clearly relating to the exceptional development during the pandemic as an effect of pandemic in last year. We managed to spend 24% in UA in relation to net revenues, which is a very high number for being Q3, which was exactly what we expected. And as you can understand that, that was very profitable as well since we have also delivered in the upper range of our revenues in Q3. So we are pleased with that development. And also we can see on the LTM graph in the middle of the slide that we are an all-time high in revenues with SEK 5.1 billion approximately in revenues. Turning to our profitability and the adjusted EBIT development on next slide, Slide #5. We can conclude that we closed the quarter with SEK 433 million in adjusted EBIT, which is equal to 33% EBIT margin. So that is clearly above the communicated guided range. and that is due to both that we were able to deploy the UA with higher profitability -- with lower UA, but still we are higher on top line. That means that we have been -- that's one proof point that the IDFA challenges and the marketing challenges are definitely gradually having less and less impact. And we can also -- which is something that is very important for us, we have always strived for having a very predictable and stable development financial-wise. I think if you look at the development on the left graph, you can see how very stable we are in profitability, both in percentage-wise but even more in absolute numbers. We also -- in this case, we are on LTM, last 12 months, on all-time high in terms of EBIT with SEK 1.741 billion. Turning to Slide 6. Looking into our active portfolio. We still have 56 games in our portfolios, 76% on mobile. We are almost flat on ad bookings in relative terms. So we have 19% in Q2, now we have 18%. So we are keeping this ambition from 19% that was communicated to be at high teens. So the bookings in the active portfolio increased by 29%. We also again saw that ARPDAU is organically growing, as I just elaborated on, but it is down in absolute numbers and that looks -- that is a paradox it looks like, but it's basically that we have a different product mix. Also worth mentioning is that the bookings from games outside the active portfolio increased quite significantly and amounted to SEK 78 million in Q3 which is then driven by the product that entered into soft-launch during Q3, but not yet are in the -- qualified to be in the active portfolio, but that is, of course, a positive sign for us. Looking a bit deeper into strategy on Slide 7. Strategy consists of 13 games, 65% on mobile. So a lot of our Strategy players still enjoy the big screen experience from desktop. 44% of our revenues here is generated in Europe, so very strong there. And again, Conflict of Nations grew by almost 200% year-on-year and is now one of the largest product in the home products category of Strategy, which is again very pleasing. And I would like to emphasize to grow a Strategy gain by 200% year-over-year is not very easy because it's much more competitive and much more slower moving in Strategy compared to Casual. Again, War & Peace continuing to develop very strong, and the Empire titles is very stable, which is a good contributor, of course. And even though low numbers, it's worth mentioning that we are increasing, not percentage-wise, but in absolute numbers, we are continuing to increase the ad revenues in Strategy. And I think that is promising. We think that we can do several percentage points even in Strategy, where you usually see that more -- a bit more tricky than in Casual to generate ad revenues. Turning to Simulation, RPG & Action, the next slide. It's 32% of our bookings. We had a 53% year-on-year growth primarily by acquired titles, but also several games being strong organically. To take one of them, Shakes & Fidget, again, very mature product, but you can find ways of growing them strongly even when they are 10, 12 years mature. So that is something that is very important in our strategy to have games that match for a long time. And we have many proof points this quarter just as previous quarters. We have weak performance year-on-year of Kixeye, but important is that it has stabilized quarter-over-quarter, that is satisfactory by hard work from the team. And also, we can see that we have 57% are mobile in this area. So it's a lot on desktop as well. And ad bookings increased from 5% to 7% in this product category. And then looking into next slide, the Casual & Mash-up area. Here, the comparison numbers are very special because we have been growing significantly with acquisitions. But now we have 17 games here, 96% are generated on mobile, 35% are ad bookings. And this is very U.S. or North America heavy, with 65% of our revenues. And this area now represents 43% of the active portfolios bookings. And we see very strong performance from Moonfrog and Candywriter. Moonfrog has enjoyed good development for the full presence in the group and Candywriter, I would elaborate on. However, Super Free has been significantly performing below the expectations that we have. And I would like to elaborate, before turning in to Andreas and the financials on next slide, because this is important that we can describe and you can see the dynamics clearly in Casual & Mash-up, which we entered into as a category just as a consequence of our statement 2 years ago on our Capital Markets Day. Casual in particular, but also Mash-up, is a much more fast-moving category than any of the other ones that we have. So it moves more rapidly upwards when we get momentum and downwards when you don't have the momentum or when the marketing is not meeting our very top criteria for profitability. And some examples here because this is important to understand the dynamics. Storm8 grew significantly by more than -- approximately 65% in the few weeks last year when we had this exceptional marketing opportunity driven by COVID-19. That would not have been possible if we were present mainly in Simulation and Strategy. So that was very beneficial for us. On the other hand, when we cannot market the product with the same profitability on the same level, they bounce back. So I think that's very clear. If we take away Storm8 from Q3 this year, the whole group would have been growing organically. So that's a natural bounce back, and it's moving much faster upwards as well when it bounces back. But they have stabilized on high levels. So we're very -- continuously very pleased with the Storm8 and the fantastic timing of the lease grow last year, but also on the levels that they are now. And we are further pleased to conclude and see that there is a new match-3 game in development aimed for being released at around the year-end strong Storm8. Looking then at Super Free that had a very strong Q1, has showed significantly weaker top line development. When a game like that or a studio like that declines, it goes faster and it becomes large numbers. So that is the #1 disappointment that we have, and it's basically that we haven't been able to market their products on the levels that we forecasted. We have a full attention to that issue, and we are remaining confident on the studio's long-term prospects. And this has been the case in 2 to 3 history, previously. So it's nothing new, and they have shown at least 2 or 3 times that they can bounce back and grow rapidly when they gain momentum with existing and/or new products. Finally, with Candywriter, if you recall, the ones that have followed us that, we saw that as a downer and a slight disappointment in Q2, Q3. The only studio that did not benefit from the COVID-19 effect last year. But all of a sudden, through hard work and very professional management from the team at Candywriter, they have had a -- it's one of our -- basically one of our key growth drivers last year. Up until now, both Q2 and Q3 this year. And BitLife, their main product has now, in quite a short time, entered into being one of the second largest title basically in our whole group. So that shows again that when you gain momentum, it's rapidly growing. And we are, of course, very excited with the prospects of DogLife, which is built on the same engine and just recently soft launched, so that would bring the next coming years. Also, as touched upon, Moonfrog is also -- has also started very strong in the first 7 months in part of the group. So what is important to understand here also in both directions is that this area is moving much faster, which is exactly the reason why we want this on board because we can grasp opportunities in a different way compared to a Strategy. But of course, from time to time, some of the products will not be able to scale and then they lower their top line rapidly. So this is nothing strange. It's part of our business model, but worthwhile elaborating on. So with that, I would like to hand over to Andreas, please go ahead.

[Andreas Uddman, Chief Financial Officer]

Thank you, Jörgen. Good morning, everyone. I will turn to Page 12, please, the financial highlights of Q3. Continued to have a solid revenue growth of 28% and a good adjusted EBIT margin of 33%. A record cash flow generated business of SEK 486 million in just Q3 from operations. We continue to have a strong financial position with almost SEK 1.2 billion of cash plus an undrawn credit facility of SEK 3.2 billion. Our leverage for the absolute reported in the quarter was 1.2. However, we did complete the Jawaker acquisition post the quarter, and we expect that -- would that have been included, we would have been around the financial targets of 1.5. So strong financial performance and diversified financing platform, which we've been continuing to build on, and this will create flexibility for future growth. And I will turn to the income statement on Page 13. The net revenues grew by SEK 284 million or 28% to SEK 1.3 billion, and this is driven by acquired growth that delivered 40% increase, and offset by a negative organic growth of 11%. With a slight impact, a negative on year-over-year on FX of 1.3%. I think just one thing to note around net revenues, and Jörgen pointed that out as well, is that in Q3 2020 we had a fairly big deferral positive effect. So the organic growth is still negative on bookings by [ 8% ] and is really the bookings are trying the business. And we also see in this -- underlying this is and what is very important for our whole portfolio is that we continue to diversify our revenue generation. We have the acquired growth, which brings both existing titles, but also new titles. But we also have higher revenues from games outside the active portfolio. And that is, of course, continues to derisk and diversify our revenue streams. Ad revenues, as we have noted in the last quarter as well are now 18% of net revenues. That also creates this diversification, and that was SEK 241 million for the full quarter. So looking at -- even if we grow with 28%, our platform fees are only up 1% by SEK 4 million. And this is really the dynamics that is important that we've seen now coming through during this year, that our gross profit, so after that profit, is up 37%. So -- and that is very important at that increase of profit -- of gross profit margin by 6 percentage points. And this increase and this increase of cash, we can obviously deploy and utilize in our user acquisition, where we have increased by SEK 155 million or 24% of net revenues. And this is a very high trend for Q3, but Jörgen did elaborate more on drivers of that. Other external expenses is up 20% or SEK 20 million or 40% year-over-year, and staff costs increased by SEK 84 million or 56% versus last year in the same period. Amortization and depreciation increased by SEK 33 million. This is in line with what we've seen in previous quarters as well, and this is just more projects being amortized over time and in line with our product development. Adjusted EBIT increased by SEK 14 million or 3% to SEK 433 million in the quarter. We had some items affecting comparability, mainly driven by the transactional costs booked in the Jawaker acquisition of approximately SEK 18 million, and we have a small IFRS effect of SEK 2 million. PPA items, as we've seen in the past quarters as well, naturally increased by the acquisitions that we've done in the last 12 months. So that is now SEK 170 million, SEK 75 million increase versus last year. And that gives us an EBIT for the quarter of SEK 243 million. Financial items was SEK 55 million, and the underlying interest costs were SEK 41 million, which is the cash cost of that. And then we have SEK 17 million of noncash interest that is booked late in an earn-out considerations. Just to note that it's lower versus Q2 this year, and that's, of course, because we paid out a lot of earnouts in Q2, so the increase components, so that goes then down in the following quarter. And we had a small effect on FX moment. In terms of the tax rate, it was SEK 58 million or 31%, so similar as we had in the previous quarter. But exclude -- if you exclude the nondeductible transaction costs, the tax rate would have been approximately 28% for the quarter. Then turning to the next slide, to Slide 14, the cash flow. Briefly touch upon the cash flow for the quarter. As mentioned, we had a record level of cash flow from operations, SEK 486 million, which is a 47% growth in just the fourth quarter. We did pay taxes of SEK 63 million globally. And we did have a positive effect on working capital, whereas this was primarily driven by that we got 4 settlements from one of our bigger platform providers in the quarter, not in our studios but in the majority of our studios. We did have SEK 181 million of investments, majority of that was from product development, which is up SEK 143 million in line with the relation to revenues of 10.9% in the previous quarters as well. And we did pay the last cash for the game asset Crush Them All that we acquired in Q2. And then we had, of course, a big small movement on the net effect on the financing activities. We did bring a -- get in SEK 877 million on the capital raise, and the last change of that from one of our major shareholders only came in Q4, and we did utilize some of that cash to pay back temporarily the credit facility toward our banks. So very strong cash flow generation in the quarter, but I think especially looking at the 12 months as a normal basis, it's how this develops, it's how you should view cash flow generation. I mean the last 12 months, we have generated over SEK 1.5 billion of cash flow from operations, and this is an increase of SEK 610 million or 65% looking at the same period in Q3 2020. We've continued to invest in -- we invested in the last 12 months of SEK 558 million in new products, which we are now seeing -- started seeing in soft-launch. And that is still increasing in absolute terms. But in terms of in the relation between the investments and the operating cash flow, there is a very healthy balance where the actual free cash flow after that growth to SEK 991 million or 86% comparing the 2 periods. And the cash conversion also improved in this quarter -- in the last 12 months, and we now have 0.52 versus our EBITDA. So strong underlying cash flow generation. As of -- in terms of the balance sheet, temporarily, this has gone down. We expect that to be -- would we have completed the Jawaker acquisition and with the last tranche on the equity rate has come in the quarter, we would have been around our financial targets of 1.5. Continue to have a well-diversified maturity profile on our debt portfolio, which give us flexibility going forward. Just a summary, continued revenue diversification and growth and exceptional cash flows in the quarter from operations and it's driven by a strong margin. And we continue to invest in our portfolio and we have a diversified financing platform. So with that summary, I will hand over to Jörgen.

[Jörgen Larsson, Founder, CEO & President]

Thank you, Andrea. So I will conclude this presentation with Slide 16 and 17. So we start with 16, we decided to do -- to provide an indicative guidance for the fourth quarter. So basically, driven by the fact that we see that there is still some -- has been some uncertainty about the sector, the IDFA effects and so on and the comparison things, so we think it's a good idea to provide this guidance again. So the guidance that we provided is that we have net revenues between SEK 1,350 million and SEK 1,500 million, with an adjusted EBIT of SEK 425 million to SEK 475 million. And that means that we foresee a growth, Q4-over-Q4, between 25% and 39%. And if you take the midpoint, the full year '21, net revenues will be just over SEK 5.4 billion with an adjusted EBIT of just below SEK 1.8 billion, which is equal to approximately 33% EBIT margin for the full year. Turning to next slide and the final one. So I think that we can say that we continue to perform stable and well in the quarter, with several studios showing strong organic growth. We have -- we are passing through and leading the 2 challenges that I opened this presentation with, namely the pandemic comp numbers and the IDFA. They are definitely transitory, and we are soon leaving them completely behind us. And we have, as mentioned, several -- many exciting, I would even say. So 15 products in soft-launch or will commence their soft-launch very soon during Q4. And we also have a good pipeline for soft launches the first half of next year, which is approximately additional at this point in time. So we are in a very good position to return to organic growth in the latter part of this quarter. It's hard to say exactly when because it obviously depends also on the launches that we have and are conducting. So with that, I would like to conclude the presentation and open up for questions. Please go ahead.

[Operator]

[Operator Instructions] First question of the day we have from Marlon Varnik from Pareto Securities.

[Marlon Varnik, Research Analyst]

So first, just a question on Super Free Games. It continues to underperform, with less spent on user acquisition than expected in the past 8 months. Can you give some more flavor here of your expectations in the past but also going forward, when we can expect it to return to growth? And then before you can quantify the take you had on the UA spend here in Q3.

[Jörgen Larsson, Founder, CEO & President]

I think it's absolutely key to put this into perspective. We have the experience and we have been around doing this for quite some time that it's far too early to judge any long-term development only from less than a year. So if we look at Bytro Labs, if we look at Babil Game, if we look at Candywriter, for instance, all of them are performing not so good or even in some cases, significantly lower than our expectations, but then came into tremendous growth. So it's not a sign that they are broken in a kind of fundamental way. It's just when you come into the early first month, you have a plan and you have product on its way out. And then, of course, it becomes very clear whether these products -- whether you gain traction in marketing. And it's several factors coming into the UA spend. So -- but are we concerned about this in the mid- to long term? No, we are not. We know that they have been showing capabilities of coming back to growth again. And they have an engine that is very competitive and a portfolio of existing, but not the least new products in the future. And they have been improving, doubling their revenues in 6 months, at least 2 or even 3 occasions previously. So we think that there is -- we expect that this is -- we see it stabilizing, and we expect that we will be able to return to growth again with Super Free. Then it's very hard to say whether that will be in, I don't know, January or February or something else because that is not how this works, because we are very, very disciplined when we allocate our UA. We only allocate if their needs are very high expectations on return on marketing spend, and we do not compromise. So we're not throwing our best money after a lower return. Instead, we put them at other studios with higher return. And we don't present the absolute spend per studio or game. So that is what I can say. But obviously, it's a significant top line bit for the reasons that I elaborated on that these games are moving much faster than other games, but in both directions. We can see that BitLife is increasing with this high pace.

[Marlon Varnik, Research Analyst]

And I assume that also -- I mean, the ad bookings are slightly down compared to Q2, 30% to 35% [indiscernible], assume it's related to Super Free as well here.

[Jörgen Larsson, Founder, CEO & President]

Yes. So that is a part of that. Definitely so. But we are still on the high teens that we have discussed, but you're right in that comment.

[Marlon Varnik, Research Analyst]

But would it then be fair to assume that the Super Free performance in Q3 is more below your expectations than it was in Q2?

[Jörgen Larsson, Founder, CEO & President]

Yes, that's a fair assumption.

[Marlon Varnik, Research Analyst]

And I think also need a comment on the Kixeye earnout dispute. I mean, it seems to be timing-wise well triggered. And I understand that it's filed by the sellers and not by anyone active in Kixeye today. Is that correct?

[Jörgen Larsson, Founder, CEO & President]

That is correct. And it was a unique transaction in the way that the founders did not follow. So I think that is important to note in this context. But also, I mean we are -- I mean I founded this business 11 years ago. And if you conduct business on a global scale and grow businesses, acquire businesses, dispute happens when you run businesses. So it's not something that is very neither scaring or strange. We are confident in our position. We see no factual nor legal basis for the claims or the lawsuits. We have in dialogue with our external auditors see no reason to do any provisions in our balance sheet. So we think we are in a good spot, but we follow the protocol for handling processes like this, which is not in public.

[Marlon Varnik, Research Analyst]

And getting about the time line here of the process, when do you expect the final statements on this?

[Jörgen Larsson, Founder, CEO & President]

In relation to this, you mean?

[Marlon Varnik, Research Analyst]

Yes.

[Jörgen Larsson, Founder, CEO & President]

I mean, this process could take -- they could continue for years. So -- but again, it's also important to note that this is not a material number. So even if we, which we cannot foresee, will not have a success at all, this was not -- will not be a material number for the group. But -- so that is also important to conclude.

[Marlon Varnik, Research Analyst]

Just finally here on the organic growth, that you expected to return to organic growth towards end of Q4. You have comps already in the beginning and mid of the quarter as well, can you give any year-over-year comments here and also organic growth drivers towards the end of Q4? What can you say here?

[Jörgen Larsson, Founder, CEO & President]

No. I mean it becomes somewhat strange KPI, because for each quarter now, they are entering new studios into being organic. For instance, Nanobit has come in, being organic, which it was not organic, so to speak, in Q2. So this will constantly be difficult to compare because the number of studios that are -- which studios are organic changes for every quarter of the past. But basically, the reason why we don't want to say that from the 25th of November, we are organic positively, is the very reason that our philosophy is to assume the product that returns that needs the best. We don't care, to be honest, whether it's a studio that's been with us for 11 months or 13 months, we put the dollar where it needs the best. And that is why we will never say that just for the sake of it, let's try to keep up the organic growth and put money where it needs not as good as it would otherwise. If we would have kept that -- or would have had that philosophy instead of the one that we have, this company would have been much smaller and not being able to consistently perform with the kind of margins that we have done for many years now.

[Operator]

Next, we have Oscar Erixon from Carnegie.

[Oscar Erixon, Financial Analyst]

A couple of questions from me. First of all, regarding your guidance here for Q4 and your comments as well in the report. Is it fair to say that you're not seeing an inflection point of sorts in October and November, and that seasonally adjusted CPMs are coming down and UA efficacy, and hence, also better momentum for in-app purchases based games and UA?

[Jörgen Larsson, Founder, CEO & President]

Yes. So we have seen gradual improvement in the performance of our marketing actually since July and onwards. But -- and it's not -- you cannot only focus on the CPIs, or cost per install, it's the relationship between LTV and CPI. So in some cases, the CPIs are going down. In some cases, the CPIs are stable, but we have a much higher LTV. So the whole thing, the whole trick of the trade is to be able to market with a good relationship between the average lifetime value for a cohort in relation to the average CPI per cohort, and that is improving. So we see increased yields on marketing or return on marketing spend gradually and not the least now into Q4 and, even November seems stronger than October. So it's going in the right direction. One related question is how it will look usually from -- after the first week of December up until the holidays or the 26th of December, it's usually more competitive for UA. But this year, we have seen some signs that traditional retail that usually -- or online retail, that usually are marketing heavily during this period. Have stated publicly that they potentially are not marketing as much as they usually do. And if that is the case, that is positive for us. But that is something that we haven't -- the basis for our guidance and our forecast are not that, that happens, but it's a potential different pattern than usually. Otherwise, this part of the year as well as from the 26th of December and throughout Q1 are usually the best for marketing in general terms. And I'm very optimistic that our way -- both our products but also our channels, and I'm really pleased to see that we have been able to leverage the fact that we have such a wide diversification and a wide array of marketing channels that works for us. That is one of the key competitive advantages which I expect that we will leverage even more as we grow our portfolio.

[Oscar Erixon, Financial Analyst]

Great. And you partly answered my follow-up there regarding supply chain issues and potentially less competition for marketing from other sectors. But will you say now, I mean, almost mid-November, are you seeing those signs now or reduced spending from traditional retail ahead of Black Friday, for example?

[Jörgen Larsson, Founder, CEO & President]

I think it's -- the number of data points is not enough to make such a statement. But I think -- sorry, I can just conclude what you stated and what I stated that we, of course, follow the market closely. But I wouldn't draw 2 drastic conclusions from 2 data points.

[Oscar Erixon, Financial Analyst]

Understood. And then the Q4 guidance, unusually wide in terms of the revenue guidance. Does this reflect the back-end loaded expected marketing spending and the game launches? Or how should one view that?

[Jörgen Larsson, Founder, CEO & President]

Yes, we -- there is hardly a usual guidance range for us because it's only the second time. But yes, you're correct, it's larger than it was in Q3. So we're just over 10% in the range, of how wide it is. But it's what you indicated, with 15 products in the scale-up phase or in the soft-launch phase, some of them and some still to come, and we launched products going into soft launches at least each and every day now. So it's, of course, not very easy to say what traction we gain up until the -- I mean the New Year's Eve. I mean that's not how you operate it. But obviously, the outcome for such a short period is not very easy to say. But we -- the longer perspective, we think we have a high quality of exciting products coming out that we are convinced will contribute significantly next year. But how much comes in, in Q4 and how much came in, in Q1 and onwards is a bit tricky.

[Oscar Erixon, Financial Analyst]

Understood. And then I think you have a quite a positive tone on IDFA issues being behind you now. which I'm glad to hear, of course. Do you see any risk for further changes from Apple or Google impacting marketing efficiency ahead? Or is this now sort of how that it will ever get in your view? And then I can add on question to that on -- that Apple will not be allowed to delay the actual payment change seemingly. Do you still expect to be able to link to external payment providers from iOS here, from December?

[Jörgen Larsson, Founder, CEO & President]

Yes. So we don't really use the phrase of as bad as it can be because this is the new normal. And it has been an absolutely normal component in our business for 11 years, that some -- there are always changes in market channels. This one is, of course, larger than others because it comes from a platform owner, so that strikes for in a much wider way than other changes in channels. But it will always be changes, and it's all about adopting. So actually, I think that -- but that's a longer discussion. But I think that this change and other changes actually strengthen publishers and content owners because we -- as we acquire less refined traffic from intermediates like textbook and others, we do more of a refinement on our side of the fence, so to speak, which means that we have a larger portion of the total value chain over time, even though it's cumbersome with an individual change, it has been a challenge, but it has played out nicely. So I don't see the IDFA change per se being a significant topic for us going forward. It will still be some changes in channels, but one way of handling this, by the way, was that we, in just a week or so, changed the majority of our Facebook spending when they had the challenges over to TikTok, to IronSource, [indiscernible] channels that didn't exist a couple of years ago. So that shows that we -- this is business as usual basically with handling changes. Changes are constant, obviously, IDFA being a larger one. But -- so we are -- we feel comfortable in our marketing work in general terms. Then on the App Store, the changes with App Store fees and so on, of course, it's beneficial for us that the rule making works also -- and ask for getting more time that Apple forwarded was dismissed. This just the last 12 hours, I think. So from the 9th of December, then we -- it opens up for other shop solutions. So obviously, that is an opportunity for us. Then to what extent that really happens because you never know until it's really is implemented, but we are ready to take advantage from that. We have shop solutions that are ready, but it will not be overnight complete shift, but it's obviously something that is good for us. And I also think that there is increased pressure all the time on the actual 30% store fees that will continue as we go forward.

[Oscar Erixon, Financial Analyst]

Excellent. And then just one final question from me. Sorry for asking so many. But regarding Super Free, you mentioned the games not stressed, being ready in terms of marketing efficiency to scale and to grow. Is this related to the marketing mix, perhaps Facebook game development or something else? And do you expect Q4 improvement first half of 2022? Second half? How to think about it, please?

[Jörgen Larsson, Founder, CEO & President]

It's a mix of these factors that you mentioned that is behind this. But I -- as I elaborated on, I see no reason to not believe in their mid- to long-term opportunities. And I think that we are on track on gaining growth again, but it's not the way that we operate to say at whatever cost we should get Super Free grow, they have to qualify to be returning their ad spend within the limits that we put on them and put on all products. So it's only by delivering solid results that they will be back. But I'm -- again, it's a far too short time to draw conclusions like is this is an issue over a longer time. As I mentioned, Babil, Bytro Labs, Candywriter, 3 very important studios for us and big studios, all of them were underperforming for a short while and then all of a sudden you gain traction, and then it scales significantly again. So that is how we view it.

[Operator]

Next is Edward James from Berenberg Bank.

[Edward James, Analyst]

Just a couple from me. Would it be possible to just break down the Q4 guidance just in terms of: a, the seasonal uplift that you traditionally see Q3 to Q4, the contribution from Jawaker acquisition and then what's sort of baked in, in terms of the improving UA back up? And then secondly, I've noticed just on the sort of sensor tower data that downloads for pretty much your entire games portfolio has significantly accelerated in late October and November, obviously help us on the game launches, but there seems to be a significant acceleration in downloads across multiple games. Is that indicative of the better user acquisition backdrop? And secondly, does that give you more confidence in putting your game pipeline into soft-launch and releasing those games in the back end of Q4 and into 2022?

[Operator]

Yes. So first of all, we -- to spare you and others a lot of time, we don't give forecast for each and every game. So -- and also, this is not because just to play some games, it's just because with -- it's about that we are rapidly -- which is again, a key thing to understand our company, we are very disciplined and we are very, very, very agile in reallocating capital to wherever, whatever product in whatever studio returns the best. Concurrently as we speak now, I expect that we run maybe 1,200 campaigns in parallel, [indiscernible] ultimately. And we will do that tomorrow again, but maybe 100 of them has been changed because they are not top performing. So it's a very sophisticated marketing philosophy that we have implemented and worked hard to get in place for quite some time, which means that it's not the way that we make this guidance betting on that product A or C or G will be the ones performing. Then, of course, having said that, we have higher expectations for some products. And as you clearly and rightly commented and if you look at the outsources for downloads, that should to be a good indicator. Not necessarily 100% secure source for how these products will develop, but of course, we are encouraged with seeing new products and the download numbers. It's different for -- worthwhile mentioning that it's different for existing products because existing, more mature products is more oftenly grown by improved and more efficient live-ups, such as new content and events and such. But for new games coming into soft-launch, the initial thing -- an initial indicator that is important is, of course, number of downloads. So we are pleased with what we see and we will come back to report on right about Jawaker. Of course, we will come back to development, they have been consolidated for a very short time so far. But we have high hopes on that acquisition. And the quality of the team, the quality of the product is really something that is -- that stands out the way that they have built their business on the products. So we have high hopes for not only Q4, but for the long run with Jawaker.

[Edward James, Analyst]

And just a final one from me. Would it be possible to provide comments on the FY 2023 targets? We haven't sort of touch on those for a while, I guess, for obvious reasons. And if not now, will that be a subject at the CMD later this month?

[Jörgen Larsson, Founder, CEO & President]

We, as stated in the report, we remain committed to these targets, which means that we will not update them in a week's time. Obviously, then that wording would have been a bit strange. So we believe that we have -- the way that we have developed our business is we have a much more robust business in things that you don't see, I mean, how we operate, how we optimize our portfolio, how we can get collaborations going between the different studios and create synergies, not the least in how we take new products to the market. I mean, we have more than tripled the number of products going into soft-launch, and they are much more complex and refined products than ever we've had without increasing, actually slightly decreasing, the product investments in product development in relation to net revenues, it was down, as Andreas pointed out to 10.9%. So I think that we are we are on a good spot to gain traction from there. Then, of course, when it comes to acquisitions, which is part of reaching the financial targets in 2023, we just concluded this quarter an important and high-quality acquisition. But of course, we need to factor in our share price. We need to factor in the multiples on private health company versus public health companies, not -- I mean the market has changed. That will be adjusted. And also, I think that we need to also tactically, as always, factor in how we finance acquisitions. That is what we always have to do. And if you believe that we will be traded on multiples on this level for 2.5 years and by -- sorry, private company will not drop in multiples, then of course, it will be harder and more challenging to conduct M&A. But we don't expect that, and hence, we keep our financial targets. Do you want to add something, Andreas, on the financing part or...

[Andreas Uddman, Chief Financial Officer]

No, I think if you -- I mean, we could just raise equity in Q3. So I think -- I mean, and we always work practically with it. I think that's how we work. We have a broad financing portfolio with different type of financial instruments. And we have readiness to be able to execute. But of course, it's a tactical thing to fit into overall strategy.

[Operator]

Next, we have Nick Dempsey from Barclays.

[Nicholas Michael Edward Dempsey, Research Analyst]

I've got 2 left. So just coming back to Super Free. Is one reason why you've not deployed as much UAC because you're worried about the efficiency of that? Is it just because word and trivia apps are more competitive? There's a bunch of them around, we can all see them. Is it the more competitive segment and therefore, will be forever, and that will always make it a little bit more challenging to efficiently deploy UAC? And the second question, we're hearing from a bunch of different companies that there's notable wage inflation in the U.S. in particular, in what kinds of tech sectors, particularly anything to do with data. So is wage inflation something you expect to be a factor for margins as we move into 2022, given that 52% of your staff are in the U.S.?

[Jörgen Larsson, Founder, CEO & President]

Yes. So the first topic, we think that -- I mean, that was why we acquired Super Free, that they are very competitive and have an engine and a capability of building, operating and developing products in these categories, which were white spots for us prior to this acquisition. We have not changed that in 7 months, again, just as little in the previous deals that we mentioned and just recently with Candywriter, we believe in the kind of products which led up to us acquiring them. We have kept that believe even though the first 2 quarters were not that strong for them. Now we see that all of a sudden BitLife is #2 in our complete portfolio and they're growing with very strong numbers, and they have the sister products on its way out. So it's not that all of a sudden and see a completely different competitive situation in just a few months. They are strong. They have earned a position over a long time. It's just that in short time, you get less traction. And with the model we have, with this very dynamic allocation of UA, we amplify the already faster and larger changing category of Casual games with our approach of allocating UA, that will be amplified in both directions. Because we feel with more UA when we have good traction and when they meet the requirements and when they're not meeting, we're not allocated. So no change in the belief, and what we said in the report as well, is that we believe the category will be there forever. It's a green field, and we don't expect that it's not that easy to be -- to master this category started from scratches not a lot of new entrants in that way either.

[Andreas Uddman, Chief Financial Officer]

Yes. And in terms of the salary inflation, of course, we also noticed, but it's important to note that we have 2 studios in the Bay Area, and that's where the inflation is happening. We have -- then we have other locations in the U.S. But the majority of the U.S. workforce is actually less than the rest of the world. We have a lot of other locations globally from India to Europe, to Germany, et cetera. And then of course, there's earn-out, et cetera, that is structured for some of these to tackle that as well. But I think, yes, of course, we're keeping an eye on it, but we have also a diverse set of being able to employ people globally, which is also a thing that studios when coming in, all of a sudden they have a sister company that can employ somebody in a different jurisdiction.

[Operator]

Next, we have [indiscernible] from Redeye.

[Unknown Analyst]

A few questions on it. First, maybe on the Strategy genres, it looks like UA in relation to revenue was a bit higher this Q3 than normal. Is this IDFA related? Or have you invested more because you see potential growth and some gains from some new launch?

[Jörgen Larsson, Founder, CEO & President]

Sorry, I didn't get that -- it's breaking up a bit. Which areas, sorry?

[Unknown Analyst]

The Strategy genre, you seem to have a little bit higher UAC spend in relation to revenue then historically in Q3. Is this IDFA related? I mean, low returns? Or do you see that some gain, that is worth investing and that will grow in the coming quarters?

[Jörgen Larsson, Founder, CEO & President]

I mean, as we pointed out, we have had good growth with Conflict of Nations. So I also -- and that is important to note that the IDFA thing were supposed to be completely about targeting traffic, which you usually have in -- have had in Strategy. So I'm pleased that we are -- we have been able to develop strategy in a good way throughout IDFA as well, because that means that to buy this less-refined traffic and then build the models on our side, which we do to analyze user behavior and to make conclusions on which users are high spenders and mid spenders and low spenders, is working quite nicely. But then Strategy -- so it's different layers in this. We have some products that has very good traction. But on the other hand, usually, Strategy is slower in Q3 than other segments because playing these games is more time-consuming compared to playing a Casual game. And hence, when you are on vacation with your family, it's less likely that you take on playing a Strategy game compared to playing a Casual game that you can do if you're on the beach or whatever you do on your vacation. So it's different layers on this. But again, Conflict of Nations we have been able to grow throughout the last year. But also both Bytro Labs games, Supremacy have continued to perform solidly. And I'm pleased to see that in the -- for Strategy games challenge Q3, we have been able to spend relatively on good levels.

[Unknown Analyst]

Got it. And interestingly Storm8 seems to be stabilizing after tougher comps last year. Is there any specific mix or else gains in the portfolio performing similar? We're in a specific market that is doing better.

[Jörgen Larsson, Founder, CEO & President]

I think that -- I mean they have 2 main products. They are both quite stable. Then, of course, it would vary from one month to another between these games, but they are solid, solid contributors, both Property Brother Home Design Makeover! So that is very pleasing to see. Further, we are excited about to see the new store-made product coming out quite -- in a quite short time hopefully at around the year-end. So that is -- that will be exciting for us. And hopefully, that would be a growth contributor for Storm8.

[Unknown Analyst]

Got it. And the game pipeline seems to be more bigger than normal looking into 2022. What kind of risk do you see here that this cannot perform? I know that you say you only invest where it works. But if you can comment anything on the risk in the game pipeline. Is it the new genres or new type of games or iteration of existing games?

[Jörgen Larsson, Founder, CEO & President]

So that's a good question. But we -- first of all, we have been improving our performance in terms of what we call engine shares, where you basically take an engine from one game, not necessarily only in your own studio, but we are collaborating between studios so that we have more products built on already proven engines. And this is a very, very important and significant synergy that we have been significantly better in achieving because obviously, taking a proven gain, the engine that drives a proven game. If you take that and put it into a new setting or a new setting, you both gain time to market. You increase the probability that it will all be a success. And the investment obviously is much, much lower needed to take a sophisticated game. And the sophistication of the game is also higher because again, that has been proven already has been updated on a white weekly or biweekly basis for, in many cases, several years. So we get a more advanced product with less investment in shorter times market. So this is definitely one of the major achievements that we have seen coming out of the Stillhub platform, our business and synergy and organic growth platform the last couple of years. So I think that we will see next year even more engine shares. But of course, we also allocate capital to more innovative products in the sense that it's not part of what we -- I mean, engine shares, you could argue that we're not innovating to the same extent that innovation could also be very expensive experiment. So it has we are talking a lot about a controlled and incremental approach to being innovative as well. So we have processes in place to figure out where we would like to experiment and make completely different games. But yes, so I think we are improving the pipeline quality in that way as well. And that is what you -- I mean, this we started several years ago. So I think that what you see now is the direct effect of our improved -- the Stillhub business platform that we have basically.

[Unknown Analyst]

Got it. And maybe last on the M&A market. I mean you mentioned it a bit, but can you say anything about your M&A pipeline? Is it growing? And are the discussions on price or anything else in the target?

[Jörgen Larsson, Founder, CEO & President]

I mean we -- there are 300 to 400 companies that will be consolidated in the market by the consolidators, which is, say, 20 to 30 companies, us being one of them, that will happen in the next coming 3, 4, 5 years. So I expect the pace -- you can see already, I would say, that the pace is has slowed down a bit because due to the multiple developments on the public listed company, but that will even out. I think public listed company will bounce back. And I think private-held companies will go down in expectations. And then you have the necessary arbitrage between public and private health companies that is one thing. And secondly, I think that when that happens, the pace will slowly go up again. And as Andreas elaborated on, we think that we take away the tactical always very important basket. So financing there is an appetite to invest in growth companies like in gaming, even though the sentiment, obviously, have been weaker for 6 or so months. But I think also when IDFA and the question marks around the whole thing with IDFA is coming back. And the comp things, the things that we mentioned, that challenge is when that is not only for us it's for market in general. Well, that is now coming to be history, I think that will be good for the general sentiment around this is game [indiscernible]

[Operator]

Next, we have Martin Arnell from DNB Markets.

[Martin Arnell, Analyst]

Jörgen and Andreas, just on the comments you made on Storm8. Did you confirm that you see improvements year-on-year so far in Q4?

[Jörgen Larsson, Founder, CEO & President]

Well, I didn't make that statement. So -- but we -- what we have seen is that we acquired Storm8 in the beginning of 2020, treatment in this time, we were just not we're lucky. And then pandemic is not luck, but it came in handy for their growth. So they grew by incredible 65-ish% in just a few weeks with tremendous return on marketing. And of course, since these users typically have their LTV 90% or so -- 90%, 95% of their LTV, lifetime value, is within 180 days. So obviously, the massive amount of users that we took in has churned out now. So we have been able to stabilize the business. So -- but of course, it's a drop if you compare it to the massive growth that we have, but that is the whole thing. And I think that it's good for visualizing to say that if we take away Storm8, Q3-over-Q3, we would have been organic the whole group. So that shows that it bounces back as a very natural effect of the massive intake. But it's a very healthy and solid business. So it's not -- we have no expectations whatsoever that they should continue to that they would have continued to decline. It's just an effect that they took in so many users last year and their revenues were 65% up in the week. So we are very comfortable with the team, with their existing games and not the least excited about their new game coming out very shortly.

[Martin Arnell, Analyst]

Sorry, Andreas, you wanted to add something?

[Andreas Uddman, Chief Financial Officer]

You can simplify it. They overachieved our expectations last year and our asset expectations this year.

[Martin Arnell, Analyst]

Okay. Yes. Okay. And just on the marketing spending. Now you've had some time to analyze the actual impact of IDFA, I'm just curious to hear sort of your -- the key learnings and surprises so far. And also, I think a few months ago, we talked about the Facebook situation and we were discussing sort of the potential that they would change it back and make it easier for you again. And how has that progressed?

[Jörgen Larsson, Founder, CEO & President]

Well, as mentioned several times, we have seen -- we and others, I should say, have seen a gradual improvement and very much played out the way that we have expected. So we did -- we leveraged -- sorry, we leverage the fact that we did prepare building these kind of models that I mentioned 1 year prior to the actual change happens. So we benefited from that, and we benefited significantly from the fact that we have for years been building and trying to be market leaders in how many different channels and how diversified channel we are mix of channels we're using for marketing, that's definitely played out as expected in a very good way for us. I mean we changed the majority of Facebook volume in just a week or so to other channels with unchanged high profitability. And I would bet you that, that is not many that will achieve the profitability and increasing the spend. So that played out as we hoped. The big surprise, of course, was that sales book in the first but to start with, got these encounter these challenges in their algorithm as widely as they did. I mean, that was a surprise for us, for our peers, and not the least for Facebook themselves. So that was the big unknown that came in. But we, as I said, through the fact that we have a lot of different channels, we managed that in a very good way. So our teams, our marketeers and analysts made a great job in handling that. So I think that, that is history. But again, we have experienced significant changes in marketing channels several times before, and we will do it in the future. Even though it's not as big as this one, I'm sure that or I know that this is part of our business. So we're not very scared or whatever word we should use for changes in marketing channels. That's why we have business wide spectrum of channels that we master in many different verticals as well.

[Martin Arnell, Analyst]

And for the moment, do you see it has stabilized when it comes to sort of switching channels? Or are you weighing back to Facebook or how should we look at it right now?

[Jörgen Larsson, Founder, CEO & President]

Yes. Facebook has increased compared to when we moved everything away more or less. So when it didn't work at all this summer. So -- but for 2 reasons, we don't go up with the split. It's for commercial reasons. We don't communicate how we allocate over different channels, for strictly commercial reasons. We would love to have those from our peers. If you have them, please send them. But the second reason is that it changes very rapidly. So literally from 1 day to another, we are changing on channel level, but also the combination of channel, product and territory are changing extremely rapidly. So it will be very hard to try to communicate that in an efficient way basically.

[Martin Arnell, Analyst]

Excellent. And just my final one on the cash flow, you have positive changes in working capital boosting a bit again here. What do you think, Andreas, going forward on how should we view the working capital impact?

[Andreas Uddman, Chief Financial Officer]

Yes. I mean over some period, depending on when you have that period, it's sort of -- it grows, the working capital impact growth with more how the top line grows. But Q3 has been this year and last year the strongest sort of operating cash flow due to the working capital, and that's because one of our biggest platform providers, they run their own calendars when they pay. So they pay 2 times in Q1, 3 times in Q2 and then for some, but not all 4 times in Q3 and 3 times in Q4. They have a slightly different calendar than rest of the world. So to me, that's how it works.

[Operator]

There are no further questions at this time. So I would like to now hand over back to the speakers for their final remarks. Over to you, speakers.

[Jörgen Larsson, Founder, CEO & President]

Thank you very much, and thank you for dialing in all of you this morning and providing us with some good questions. So thank you for today, and I wish you a great day. Thank you.

[Operator]

Thank you so much, everyone. You may all disconnect now. Thank you, and have a pleasant day.