Stillfront Group AB (publ)

Welcome to Stellfront's Q1 report. Me, CEO Jörgen Larsson and CFO Andreas Udman will present today. And going into the presentation, we are first some headlines of what we will talk about today. We had a promising start to the year showing an organic growth, which is something that we have prioritized. And we also managed to increase our gross revenues or gross margin up to 80% for the first time. And this is very important. I will go deeper into that later in the presentation. We sustained our high UAC, which is very good news because that is driving not only growth in this quarter, but for many quarters to come, both when it comes to existing products, as well as that we have continued to scale Sunshine Island. That means that the short term, the margin is lower, hence, as we have much higher UAC. So 21% recorded for the quarter in EBITDA margin, which is a 3% down quarter or year over year, but very stable quarter over quarter. We had a free cash flow of 828 million SEK last 12 months, which is a 2% down compared to last year. Looking a bit further into our net revenues, you can see that we are at 739 in net revenues with down 34% UA, which I think is the highest we have been able to deploy ever. And that again is good news because we have not compromised at all on our return rate on this. So that will yield further growth and margins throughout the year. So that is a good investment indeed. If you see also on the rolling 12 months, as a consequence, the rolling 12 months, UA is up to just shy of 30%. You can also see that we have small FX effects, but a negative FX effect of 1% in the quarter. So very stable revenue line there. This continued high marketing spend is important to elaborate on because that is what will fuel both growth and margins for quarters to come. We have not compromised, as I said, on our return rates, which means that this spending, as well as the one from Q4, will yield results already this year. And this is the best investment we can do instead of investing in products where the outcome is much more uncertain and much longer later in time. The best investment we can do is in marketing on products with strong KPI. So we are very pleased and we have steered actively the business in this direction. And that is why we are very optimistic about the coming quarters and hopefully the coming years. You can see also that we have uh you can see the um the um sorry i'm on the wrong slide here you can also see that we have this pattern which is important which is very clear on the ebitda where we last year had a lower uac and hence the results are going up in not the least q2 as you saw last year so i i'm convinced that we see that we can have a similar pattern and what this show is that we are in the normal the market has normalized where we can deploy UA at high levels since we have the products that could cope with that level of marketing and still yield in the return that we seek for and hence that will benefit us Not only for this year, we will get our money back, but it will support growth and margins for years to come. Also, I would like to emphasize that we have, as we said at the Capital Markets Day one year ago, just over one year ago, that we will be more disciplined and more focused when it comes to our capex. And in the quarter, we had 9.1% capex. So that is a significant focus in on our main franchises. And that is paying off because the ROI is much higher. And again, moving these investments into marketing instead is creating a much more predictable and sustainable high margin business for us, not for the individual quarter, but over time. So look at them into our active portfolio. Whereas we had a sequential growth for the whole group of 3%, the sequential growth for the active portfolio where we focus our efforts, where we have dedicated teams working with live ops and where we focus and put our marketing spend are sequentially organically up by 4%. So we have had a significant sequential improvement from the week Q3 that we had last year But then Q4 was the turning point. And then we are increasing sequentially significant again. And I'm optimistic due to the fact that we have been able to deploy profitable and invest in marketing, Q4, Q1, that we are in a very good position to continue to grow our top line with lower marketing, and then we get the double effect. So the leverage or the yield is very strong. And I think that's a key thing to understand our business model. Otherwise, it's easy to misinterpret one single quarter. further we can see and i'm very pleased with that that our d2c direct to consumer efforts that we took on the strategic initiative two years ago is really paying off so we are we are up by five percentage point year over year in dtc and that is of course what what is the main the main reason why we can increase our gross margin up to 80 percent and that is good not only for the immediate higher contribution to our results, but it's also creating a higher marketability because when you look at how you can market products, you compare the average cost per new user versus how much they uh can contribute on gross profit level so and that's why it's a double positive effect to increase your gross margin and also without having these results our marketing would have been lower and hence we wouldn't have positioned ourselves as well for the coming quarters higher revenues and lower marketing spend finally on this one ad bookings we managed to increase that from 13 to 14 percent from q4 to q1 and this is also supporting both cross margins but also as i've said several times before i think we can do better here but it's also a question of product mix and we have been able to grow the Trivium World franchises from super free which supports ad revenues going up further and lastly it's good to see that we continue our Mao and Dao positive development so we have been managed to do what we told also a year ago that we would like to focus on core players that are very engaged and that is the audience that we prioritize and the traffic that we prioritize and we have taken out or let go with low monetizing users. You can also see finally also on this slide that the average revenue per daily active users is significantly up year over year. And that is ultimately a sign of that our efforts, all our game teams efforts on LiveOps is really paying off. Looking down per each of the different product areas, starting with strategy. Strategy has been a dear friend of us from the very start of this company's life. But it also supported us through the tough last two years with high growth. This quarter, it's not strategy that is the main driver of our growth. of getting into organic growth, but they are stable. And also the supremacy franchise still is is very, very strong on its 14th year with a double digit growth. But otherwise, you can see it's a slight decrease in revenues, but also Lowering the user acquisition cost by 15% is only lowering the bookings by 2%, which shows the stability that strategy has, which is different from casual games when you put in UA and you get a much faster return. You can also see on the upper right side here where we have some specifics for strategy shown and the very very strong development on DTC. So more than 12 percentage points up compared to the same period last year and that is of course one of the very clear explanations to our increased gross margin. Going over to SimRPG in action, Sunshine Island has continued to develop this trampoline launch, which we started in Q4, has continued into Q1. And you can see on the upper right side how the revenues have developed month over month, and it continues upwards. So summarizing Q1 compared to Q4, it's approximately 100% uplift. We did deploy a lot of UA here as well, but the good thing is as we now go in stabilizing Sunshine Island on a higher level than we are now, so it will continue to grow. We produce more content, conduct more live ops, but we have a solid audience in place gradually. through Q2 and Q3, we will have less and then significantly less UA, but the revenue will continue up. And then we go into a profitable period for many, many years to come. Just as a reference again, we expect this game will live for some 10 years or so. The previous main game in the Big Farm franchise was launched in 2017, and it's a very healthy and profitable game. product as we speak so this is why it's so important to understand when we have the opportunity to really have a one of this is one of the most successful launches that we've ever had it's you invest and you have a deficit for two to three quarters then and you increase the content of the game and then it will be there for many many years to come with high profitability and loyal users uh beside that you can see that we have a um it's not only about sunshine island we also had a very strong quarter for from nanobit with the narrative franchises albion online was slightly down as you might recall we had a very successful launch of the asia server that started in march last year unfortunately that was um hit by the cyber attack in the summer. But it contributed strongly from March to June last year. This year, however, we also have a server launch that will launch later, 29th of April. And we are excited about what that could bring us. Going in then to casual mashup. We have a sequential increase in both user number and bookings. And we also have the possibility to push UA significantly. And I'm pleased to see that we, after struggling for some time, now Superfree are back to organic growth, which is very good. And it's also supporting us in increasing ad revenues. Not the least, I would like just again to show the unprecedented performance by Joe Walker, as you can see on the upper right side. We have had since we did the investment 41% CAGR, which is an impressive number with very, very high margins. So it has been a very successful acquisition of ours and The whole Joe Walker team is making a tremendous good job in delivering this solid growth. What is now the one downer we have in this area is Storm8 that has struggled for a number of quarters, but there is a new game on its way out going into Globosoft launch here in April, and that's Elangada Restoration. So we have hopes that that will support Storm8 coming back to stronger numbers again. All right. So with that, I would like to hand over to Andreas, please.

Thank you, Juergen, and good morning, everyone. I will talk about the cash flow. We have a stable free cash flow on generation over the last 12 months, and that is supporting the increased investments in new ADA we have had just in the last two quarters as well. So looking at firstly at just the quarter isolated, we generate the operative cash flows of 349 million. There is a decline from last year. However, we are also deploying almost 6 million, so 594 million in the UAS, as Juergen talked about. And that is an increase of 121 million versus the same quarter last year. In line with earlier trends as well, the reference rates on interest has gone up. So we are still supporting 108 million of paid interest in the, or in financial costs during the quarter, which is the 34 million increase year over year. And we paid some taxes, so 53 million in the quarter. We had a negative working capital effect in the quarter. That's mainly driven by the fact that we're growing sequentially from Q4. We have an organic uplift, so we have a negative impact on receivables of 64 million, and that is offset by liabilities Easter was exactly at quarter end. So some banks were closed before and we got also paid or paid after the quarter. So we generate 305 million, even if we manage then to continue to invest in our product portfolio. In terms of our investment activities, Jørgen touched upon as well. We have spent 158 million in the quarter. It is, and that's an intense choice as 9.1% or 67 million less than we did in Q1 last year. And this is how we have restructured our, our, our investments. So we are now deploying some of our investments in UA that goes on the P and L and we have structure reduced the CapEx, but we still investing 158 million in the quarter. So it's not like we are under investing. It's just a shift of where that deployment is happening. We had some financing activities, I get back to that, but we did amortize 109 million on our RCF during the quarter. And we also reduced actually some of our leasing costs, which goes into the financing costs as well. And that has been part of that, because in leasing costs, it is basically offices in Stillfront. And we have gradually reduced the office space when we have also reduced the number of people in the customers optimization programs in 2023. Looking then at the last 12 months, I think here's where we really see we generate a very similar cash flow versus the same period last year. So 828 million is the actual free cash flow that we generated. The operative cash flow, which was almost 1.6 billion, has gone down, but that is driven by mainly by ua so we spend 181 million more q1 ltm 2024 versus the same period in 2023 so so that's an intentional choice how we have and and in that as well we obviously have higher interest costs which is a still 147 million more. You might recall the reference rate started to have an impact early Q1, but more into Q2, Q3 last year. And we also have some one-off time costs in these numbers. So still a very healthy underlying operative cash flow. But how we tackle that is that we have reduced investments. So we have now 738 million in terms of that we invested in the last 12 months. And that's a fairly big decrease of 227 million versus the same period in Q1 2023. And that is just how we shift. Where do we focus our investments? And Juergen was saying marketing is a more sure investment because we know we get our money back. We are running these these deployment models and statistical forecasting models for many, many years. So this is just how we structurally have shifted where we put the money. But in terms of absolute cash flow generation in the business, we are still in a very healthy level, even if we're supporting high interest rate environments. And then move to the next slide. So our Debt profile, we did issue a new bond in Q1, so that is part of our tactics, how we work with our debt portfolio. Even if we did maintain and re-amortize the 109 million of debt in a year, we are quite stable versus last quarter, and that is purely driven that actually the fx strengthens or the sick decreased in value by the end of the quarter so then you have the balance sheet effect of that sort of the the closing of the month so we did amortize that but in terms of reported numbers it's quite stable due to fx we're still below in terms of our leverage ratio we are at 1.95 it's still below our targets so With that, we have also been able to go into the shared buyback program, which I'll get to a bit later. In terms of our maturity profile, we are here presenting the numbers as of 15th of April, rather than on the closing of the books, because we did then settle the last part of the bond that we did not buyback prior to the quarter. So this is how it looks at 15 April. We thought that would be a more clear view. And what this clearly shows that we have now Further than extended our maturity profile, our next debt that matures is in December 2025, so over a year and a half away. And that has obviously given us a good flexibility also looking at the maturity profile on the two bonds that we have now placed at a year between here in 2027 and 2028 in the last year. So there's been a good quarter in terms of ensuring that our balance sheet continues to have strong capacity and also having a strong diversification in terms of maturity profiles. And just to summarize then Q1, you can clearly now see that the discipline in our product investments and what we deploy as CapEx and also actually the cost efficiency in our organization is showing clearly on our P&L is coming through as well as that we are strengthening our gross margin by the DTC activities that we have. And that is something that will create a good operational leverage and that just shows that we can continue to maintain a good cash flow while then heavily deploying money into UA investments as we've done in Q1, but also what we did in Q4. So with all this said and our good maturity profile and the available funds that we have and cash that we have at hand, we can continue to support growth initiatives in the business. But we also then announced this morning that we will do a share back program that will start tomorrow, that we will buy back in a similar fashion as we did last year to cover the shares that we are due to pay for the acquisitions. And that is to not have any dilutions. So we're buying that back and we're starting tomorrow. And that's approximately 15 million shares that we will buy back. And we have one decision now that goes up until the AGM on the 14th of May. And hopefully, if the board will get another mandate, we will continue that purchase to get up to the 50 million shares after the AGM. And with that said, I will welcome Juergen back again.

Thank you Andreas. So just a few words to conclude this presentation that we open up for Q&A. As you have heard us say and present is that we are happy with the development in the winter season. It's a normal winter. We haven't seen this pattern since 2019, actually, where you have higher player activity. You can acquire users with good profitability and hence build for future growth and future high margins. And that is very important. So both that as well as the other activities that we mentioned with new features being very appreciated in our gaming communities has provided us with organic growth. We are quite certain that we will steer the user acquisition, which is completely up to our operational decisions, obviously. So that's why we are confident that we will not be on these levels in Q2. Also, according to the standard pattern that we have of seasonality. So very much more proof points that the market have normalized and is back to higher activity and higher UA. during Q4, Q1, lower UA and good activity in Q2 and then further lower UA and a bit lower activity in Q3. But hence, then we earn the money and increase the margins and cash flow in these two quarters. So we're pleased to see that we can act upon the more normalized market. Also, we have several exciting things from the product side coming out in Q2 and later in the year as well. So that is what we would like to conclude the presentation with. And by that, I would like to open up for questions, please.