Stillfront Group AB (publ)

Good morning and welcome to the Steelfront Q4 report. I am Alexis Bond, the Group President and Interim CEO of Steelfront. And I will be joined later by Andreas Hundmann, who's our Group CFO. We had strong cash flows and adjusted EBITDA in the fourth quarter. This in spite of net revenue being down by 5% year on year organically. Cash flow was up by 170% year on year, sorry, on a quarterly basis. And for the full year of 2024, it totaled 1.05 billion SEC. So very strong cash flows in the fourth quarter, in spite of the organic growth being slightly lower than we would have liked. We had overall a normal Q4 in terms of UA, but I mean really overall because it was harder to place it for certain games and we had to shift around the investments more than usual during the quarter. So lots of kind of, you know, moving UA from game to game depending on the results that we saw. So normal overall, but challenging in terms of placing it depending on the games. We improved our adjusted EBITDA quarter on quarter, but also significantly compared to Q4 of 23. This was driven mostly by lower fixed costs, lower UAC in the strategy product area, and lower capitalization as we focus our product investments on our key franchises. In the quarter, the overall decline in MAU and DAU was offset by higher HARPDAU. We also had solid growth in our direct-to-consumer year-on-year. This is something, as you know, that we've been focusing quite a lot on, and it now represents more than a third of our total bookings, and that is more than any individual app store, just to give you an idea of the size of it. And ad bookings were stable. We've been trying to kind of push ad bookings more, but it is a difficult environment at the moment to increase ad bookings, but that's something that we're looking into for the future. In our strategy product area, we had lower levels of marketing for the Supremacy franchise. This resulted in lower bookings, but stronger adjusted EBITDA in the franchise. We are also making significant product investments in this franchise, and that includes a new game that will be soft launched in the second part of 2025. And this should allow us to unlock future growth in the franchise and also in the product area. Furthermore, the higher level of USC in Q4 2023, you know, boosted the strategy bookings in that quarter, but also then in Q1 2024. As well as MAU and DAU in Q4 23, and all of that kind of explains the decline in Q4. Here in this product area as well, the IT consumer continued to grow and now represents close to half of the bookings in the product area. In the simulation, RPG in action, product area, we also had lower levels of UAC in the quarter compared to last year. But Sunshine Island was able to grow its bookings year on year, and that's despite in reduced investments in UA, as we focus on product improvements to unlock further growth into that game. And shakes and fidgets, as you remember, we had some issues with shakes and fidgets in the previous quarter in terms of some UX user experience issues. The game is now slightly recovered to compare to Q3 2024 as we've kind of been fixing those issues. In this product area as well, we have this lower level of UA year-on-year, and we are really focusing our investments in terms of where we think there will be the most difference. If we look at the casual and mash-up product area, we had continued strong growth within the Joe Walker franchise, while we continue to see product challenges with the home design makeover franchise and a high dependency also on UAC investments for that franchise, and in particular for the world franchise that we have from our studio, Superfree. The team at Storm8 is working on a large player experience improvement from Design Makeover. We have identified some clear fixes that we need to do to that user experience. So we hope that will allow us to turn around that franchise. And the team at Superfree is also looking at ways to improve the word franchise from a product point of view. And we want to see how we can kind of, you know, have that franchise be less dependent on UA and to have kind of sustainable levels of UA for the world franchise. So a bit of a mixed story here in casual mashups with, you know, obviously Joe Walker performing extremely strongly. And with that being said, I'm going to pass on the word to Andreas.

thank you alexis um good morning everyone i will uh we have a bit of an extended presentation today so i will go through the the cash flow of the quarter to start off with we had a strong uh cash flow as alexis also mentioned in the quarter and also looking in the last 12 months of of a cash flow from operations of uh before work networking capital of 374 million We had positive effects of working capital that we almost generated then 500 million. Even if we're in that, we did pay taxes of 63 million. We did pay interest of almost 90 million or 89 million. In that interest, it's obviously coming down versus with the reference rates going down and our margins that we pay to banks going down. But still, we are paying almost 90 million of interest in the quarter. So we ended up with almost 500 million, so 491 million of cash flow from operations in the quarter. We have taken down our investments, so we invested 138 million in product development or 8.3% of the net revenues in the quarter. So we have taken down our investments. We are improving our operative cash flows. And that allows us then to utilize, one, to pay off some debt in this quarter as well. So we paid off almost 230 million of debt. debt in the quarter and we did a buyback as we announced also of 40 million. Then of course looking at cash flows it's always in quarters etc. We always look at an LTM perspective and I'm very pleased to see that we have from a free cash flow i.e. our cash flow from operations minus any leasing costs for offices etc. and minus product development we are now back to above a billion in terms of our cash flow. And that is of course driven by some of the cost initiatives and optimizations we've done in the last sort of 12 months or even if longer than that that is now starting to show also in the margin where we even if we have a disappointing top line performance in the quarter we can still deliver both healthy very healthy margins and and then resulting in a very healthy cash flow We have taken down our investments, and I think it's very clear on the light blue bar here to the right on the slides. So we are just below 600 million, so 598 in the last 12 months. That has been an intentional choice, and you can say, okay, have we taken it down too much? No, we believe that... between eight and 10%, that will be a good investment pace. There was difference between quarters, it was different between years. But I think we're still investing 600 million into our portfolio. so then moving um to the next slide which is the uh our death portfolio um here we actually did a lot of activities in the quarter um first we issued a new bond and so the 850 which is now maturing in 4.75 years. That was an intentional choice to have a good distribution in our bond structure. For some of you that remember, we did reduce the outstanding bonds earlier in 2024 and now we sort of now we got a much better maturity profile on that so that's very pleased following that we also um negotiated or or we completed a a new um rcf for 2.5 years with existing banks we took down the the the amount um from 3.75 to 2.5 billion since we don't actually need that much. We still pay for an outstanding amount of debt. So a lot of things happened on that one. I think it's important to remember that Silvan has always focused on the maturity profile because that gives us the flexibility and i think now the next maturity is in june 2027 so we have a good flexibility and a solid balance sheet and solid financing structure in terms of our debt portfolio In addition to that, we had, as I mentioned on the cash flow, we did reduce some of our debt. On the reported numbers, the FX, especially the dollar debt, closes at a higher level. But we are still around our financial targets of 2.2x in terms of leverage ratio. And we have still unutilized cash position of 1.2 billion or credit facilities. And we have almost a billion of cash in our balance sheet. So rounding off the year in terms of our cash flow and our balance sheet positions, we have strength in our margins. We have strength in our cash flow from operations and reduced our investments slightly. And that is yielding strong cash flows. And we have significantly in 2024 improved our maturity profile in terms of our debt portfolio. So we enter 2025 and we will speak more about this business in a very, very short time to give you a bit more flavor in terms of the financial performance of our new business areas and how we will run the business going forward. And with that said, I would hand back to Alexis.

Thank you very much, Andreas. So we'll be taking questions at the end of this slightly extended presentation because we obviously have been doing a bigger organization of the company. And so we wanted to basically explain to you what we've been doing, what has been realized, and where we're going with this organization and why we're doing it as well. So really what we're focusing is on simplifying the organization to increase the accountability and streamline the decision-making. We're focusing on key game franchises to drive organic growth, and we'll explain how we define those key game franchises and what they are. And we want to slow the bookings decline and optimize costs within our legacy games, the games that are not part of these key game franchises, but drive a lot of cash flow to the business. So this is quite a busy slide to explain the new operating way. On the left, you have how our previous organization was working, and on the right, the new organization. But I think it's a bit busy, but it illustrates well how we operated in the past, the changes that we've made over the past few weeks, and how we will operate now in 2025. So we had, first of all, two layers of HQ management with 11 execs. That is now being reduced to just one layer with six execs. We also had before four senior vice presidents that were coordinating 20 studios and working with these studios to optimize resources across 70 games. Well, actually more than 70 games in the active portfolio. We've now reduced that to 16 studios and 10 key game franchises, and we've divided that into three business areas, each with its own executive vice president that is part of the group executive management and has P&L responsibility and authority over their business area. We then had several hubs that provided services to the studios and to the group that are now all under shared services. And we're also taking a very pragmatic approach in terms of what are the hubs that provide significant value, doing a lot of cost-benefit analysis about what makes sense. And some of the hubs clearly are providing massive value, such as the payments hub that's behind direct-to-consumer, the marketing hub, all that, but some other... you know, we think that we can improve and optimize. The previous structure was really focused on scaling quickly via M&A rather than on the integration, and it was quite complex to operate. This new structure of having three business areas focusing on few key game franchises results really in more focus, a common direction, and really more operational simplicity with less layers of management. It's just quicker, it's just more efficient. Focusing our resources will make us more efficient. It will make us more competitive. And as you can see in the new org, our 10 key franchises are divided across our business area. So each business area doesn't have that many things to focus on. We have five key game franchises in Europe. Those are Albion, BIG, Empire, Narrative, and Supremacy. We have three in North America. Those are Bitlife, Omdesign, Makeover, and Word. And we have two in MENA, APAC, which is one is Bored, and the other one is Joe Walker. And then, although we have reduced the number of studios significantly from 22 to 16, we still have more studios than key franchises in each business area. And that's because some of the studios, such as Imperia, for instance, are focusing on legacy games. And others, such as The Republic, have part of their resource that is not working on non-franchise games, live ops. And then another part of the resources that is supporting the big franchise is operated by New Moon. So that's also another important thing that we're doing here with this new organization is not only are we kind of investing our UA where it makes the most impact, where we get the most bang for our buck, but we're also making sure that our talent is working where it makes the most impact. So that's really a big fundamental shift in how we operate that creates a lot more alignment and then we think in time will pay off. So how did these key franchises work? What are the main criteria? So the main criteria that we have selected to define these key game franchises that we will focus our resources and attention on are the following. The first one that you see there is about having sufficient size and impact. We are now in a market where you need to have a certain scale to be successful long term. So a key game franchise needs to be of a certain size. So in our case, we've decided it needs to be driving at least 200 million sec per year or more. And all 10 key franchises that we've just outlined have more than 200 million SEC in bookings per year. So that's the first one, size and impact. The second one is the consistency of the core experience. Each game in the franchise should maintain a consistent core gameplay style or fit within a particular genre that aligns with the franchise's identity. And the franchise should be aimed at a clearly defined audience with consistent preferences, teams, or experiences that resonate across the game. It needs to make sense, right? A good example is our Supremacy franchise, where games such as Conflict of Nations or Supremacy 1914 have a similar core experience and appeal to the grand strategy player demographic. So that's very clearly defined there. A third one is technology and game mechanics. Games within the same franchise would have a common technological framework and game systems that can be reused and iterated on. A good example of that is our home design franchise, where many game systems and game mechanics are used across home design makeover, property brothers, and what we used to call the game engines. And then the final point is a recognizable and evolving IP. A good example of that is Jer Walker. which is one of the most recognized game IPs in the MENA region and is the umbrella brand for more than 50 games when it's really super apt for cultural and classical games. Another good example of that is Albion Online, which has a very strong IP and brand recognition. So we are starting with these franchises. This is kind of, you know, the criteria that we have for those. And we'll be happy to answer any questions you have on this. Then what about the other games? So we also have the clear definitions of what is not a key franchise, and we divide this into three areas. The first area is active live ops. And this is a non-franchise, but these are games where more than 5% of bookings are invested in UA. An example of that would be Shanks and Fidgets. that you can see there. It's one of my favorite games. It's a game that we have mentioned several times, but at this time does not meet all the criteria. Although right now it is self-launching a mobile dungeon game, a spin-off game based on the same IP, and addressing the same audience. And if that is successful, that could be a candidate one day to become a key franchise. So that kind of explains well what we have in terms of inactive live ops. LiveOps, that's defined as non-franchise games as well, but that have less than 5% of bookings invested in UA. That's really the games that are, I would say, in maintenance mode or the games where we really know that the product, there's no way to invest UA in a profitable way, but in many cases, they're very cash flow positive. An example of this would be War Commander Rogue Assault, that we recently moved from Kixai in Canada to Imperia in Bulgaria. As Imperia, we've turned that studio into a legacy LiveOps hub, and Imperia will receive more legacy games in 2025. So that should allow us to ideally not only improve the cash flows around those games, but also kind of reduce their decline. And then the last category is external partnerships. And here, these are basically games where Stillfront does not have the user data, where really Stillfront is not the publisher. And a good example of that are the games that Nanobit develops and that are published by Netflix. So that's really kind of the main ways that we define this. So what does that mean? How are things performed? So if you look at 2024, although we had negative organic growth as a group of minus 2%, actually our key game franchises who represent 72% of our bookings grew by 2%. And we believe that is in line or slightly better than our addressable market. So an increased focus on them will allow us, you know, of course, with the inevitable, you know, quarter-on-quarter variations to make sure that long-term this continues to be the case. And we believe that their proportion of our overall portfolio as we focus more of our resources and our talent on them will grow. In terms of our active LiveOps games, they had a negative organic growth of 8%, and the legacy LiveOps that represent about 90% of our bookings had 20% negative organic growth. So I hope this, you know, showing you kind of the different things allows you to better understand the dynamics that are happening, you know, within our portfolio. And with that being said, I'm going to let Andreas explain and go into each of the business areas.

Thank you, Alexis. Yeah, in conjunction with the report, we also released the numbers for each of the business areas this morning. And there's a lot of numbers. There's a lot of new numbers. And the purpose of my part of this presentation is to give a bit a sense of how is Europe North America and Median APEC doing and what's the dynamics in that. Of course, this is the way we will also report going forward. So we will be following up on this in Q1, etc., where we can give even more flavor. But I think it's quite important to remember that when we have three business units that's how we run the business so that's the geographical spread and then we have what we call also the shared services so and they have quite different unique characteristics and look quite different from a financial performance so also important to remember when we break down the group as a whole the the some of the dynamics when we see when we shift user acquisition spend or costs and the growth between within quarters is more visible. And that's fine because if you break something bigger down into smaller and you have a very dynamic business, you will have those fluctuations. But if we first look at Europe, we classify it as a stable business with solid margins. They are very focused in terms of revenues. 84% of their revenues actually comes from the key franchises. And they have the most key franchises in terms of both the big franchise, Supremacy, Empire, Albion, and the narrative franchise. So a lot of the revenues actually come from that. They're well established. Some of these franchises have been around for many, many years. But it's a stable and solid margins. then it can fluctuate between time. So for example, looking at here, looking at Q1, we did spend more in this particular case in supremacy in 2024. And of course, then the margin goes down where we had a higher growth, et cetera. it will fluctuate between quarters, but it has been a consistently stable and solid business. I think one other dynamic to have is that this business area has the strongest gross margin. We have a lot of the games and the key franchises are more strategy and simulation and RPG. And there we have come much further in terms of our direct to consumer. You can also see that the direct to consumer share is above 40% in this business area. So that is something that is driving a higher gross profit. And this is also an area where we actually invest more. We have shifted, and you can see that in terms of how much we spend on product development, but also in terms of some of the other fixed costs here. We have shifted some of the investment from especially in North America, which you see in a few slides, into Europe. So we have taken that conscious decision to reallocate some of the investments. And this is the largest business area. It's 575 people working in this as of year end. So it's the biggest business area that we actually have. So we have Bitdaq, very similar to the group, 25% on the full year, but Remember that we also have these seasonality swings that is more visible when you break down on a business area. Then North America, Alexis mentioned that earlier as well. I mean, here the focus is very much on turning around the business. I mean, we have two main franchises. It's the home design makeover franchise and we have the word franchise. And they make up 70% of the bookings in this business area. So it's been a fairly big push to both reduce the cost base, which we can clearly see that we have reduced the cost base and the number of people here by almost 25%, Q1 2024 versus Q4 2024. We still believe in these two key franchises, but there are some fixes that need to be done from home design, especially around the game dynamics and the player mechanics. And in terms of the world franchise, we actually get profitable user acquisitions. Or you have profitable user acquisition costs. So that is one thing. Here we have also a fairly good margin in terms of gross margin. And that is primarily in the US or North America driven by actually the ad revenues, something that we haven't done yet. But what we're targeting to do is that we haven't really rolled out direct-to-consumer in our North America business. You can see it's only 1% of our revenues that come from the direct-to-consumer part. So that is an initiative that will also strengthen the gross margin over time in that region. With sort of the business being fairly dependent on UA, this has been a business where we have only a 5% EBITDA margin. We're still making money in North America. It's important to remember it's not negative. But we are not happy with the results. And that's why we're saying we need to turn around this business. And this was also one of the reasons that we actually took a good build right down in North America. as part of the year-end accounts as well. But we have hopes that we have... We have two strong franchises in there, and then we have a plan to execute on during 2025. I should always end on a happy note, so Mina and APAC. I mean, we have two key franchises on the board and also the Joe Walker franchise in here. very consistently strong growth in terms of those two key franchises. It's been very fun and interesting to see how they can continuously grow in these strong markets, in these growing markets with a very strong marketing, sorry, very strong underlying margin. So that's something. that has very much impressed us. Just a few things around this is that we actually have here a lower gross margin than we have across the group. And that is mainly driven that we're also in the Milan APAC. We have two of our third party publishing, so Babil and Six Waves, and that takes down the the gross margin because we give some of that royalties, they go to third party, the people actually or the game companies actually make the game. So that's one dynamic. As you can see, we are hoping that we can increase the DTC and maybe also some of the ad bookings in this business. But that is a dynamic not to miss that it is below the rest of the groups. But we also have very low user acquisition. I mean, if you look at the full year, we only spend 6% of our net revenues on user acquisition costs. And that is just that both your Walker, but also in terms of Moonfrog have very strong communities, very strong brands within their genre, in their geographical region. And that, of course, ensures that we can generate a very, very healthy EBITDA margin of 48% for the full year. And that has been improving during each of the quarter because we are growing very healthy on the top line. We also have allocated the MENA Imperia here. They will take over and they have started already. We have started to move games from North America, but also looking from other where we can actually have that in our, what we call the legacy portfolio and having that run as one hub where you focus on reducing the decline in the legacy portfolio at a much lower underlying cost. So before I hand back to Alexis, Just to summarize, we have in Europe, we have a solid business with a stable margins. Of course, can be a bit volatile between quarters. We have big franchises here in terms of we have the actual big franchise, but we also have bigger franchise. We have the most focus in terms of general revenue revenue generation into these five key franchises. And we have enabled within these franchises to innovate and release new games. And supremacy is, of course, one very clear evidence of that. We also have here in Europe the Nanobit collaboration, which, of course, gives us another dimension of our revenue streams. North America, as we pointed out, and we have pointed out before, not maybe in this detail, is a turnaround case. We have a plan. It is the lowest margin for 2024 in the business, but we have a plan to fix that going forward. It is still a sizable business, but it has not been performing the way we have wished it to be. Then we have the last one, so MENA and APAC, solid growth and very, very strong margins. And it will also be interesting to see now when Imperia can start taking over some of the legacy games, how we can improve or reduce the drop of those kind of impacts. So it's important to think about, we are breaking down the portfolio into these geographical areas. And of course, making $1 in MENA and APAC has a 48% margin return versus making $1 in the US, which had a 5% return at least in 2014. So it is a... more dynamic business when you break it down into this perspective, but we have solid foundations in Europe, we have a growth case in the Amina and APAC, and we need to fix it in North America. And with that, I will hand back to Alexis, and I think I will stay.

Thank you very much, Andreas. I hope that showing to you how these business areas work and how our portfolio is divided across key franchises, active live ops and legacy live ops, really allows you to see what is working very well and what we need to improve and gives you a view a little bit under the hood about what really are the dynamics that are driving you know, the overall numbers that you see for Stillfront. So I think, you know, that gives you kind of more transparency than what you had before. In this slide, you know, I just want to kind of show you, you know, what the actions are that we've done in terms of driving operational efficiency and kind of what is coming. So, you know, we started with this transition, you know, a few weeks ago, well, a little longer, actually a few months, and we've already achieved 15 million SEC in annualized cost savings. As a result of that, six studios were consolidated in 2020-24. And, you know, this also kind of, you know, feeds into our growth initiatives. So, for example, you know, merging, consolidating Baitro and Dorado, which are two studios that are working on the Supremacy franchise, is an example of how aligning our resources and team towards common goals around a game franchise, you know, should allow us to, you know, perform better. Also, you know, focusing on our core game franchises will allow us to benefit from scale effects from our marketing and have more impact from product marketing initiatives and reducing our dependency on performance marketing. As Andres was saying, You know, some of our games have strong... Some of our key franchises have strong IPs. Other, you know, can benefit from community or network effects and all that, and we want to relay into that to reduce kind of the dependency on performance marketing across the portfolio. We are also kind of, you know, concentrating our product investments on these key game franchises. It's just more efficient in terms of growth impact, and this gives a clear route to return to organic growth later this year. So that's really kind of the main things in terms of the efficiencies that you can see and how this kind of reorg is helping us. So, to summarize what Andreas and I have said, and before we stop for questions, in terms of the business areas for Europe, I know we expect some fluctuation between negative and positive organic growth. in general and across our key franchises. But it is a very, very stable business. We are in a kind of product investment phase for several of the franchises. One of them was mentioned is Supremacy. And we kind of expect, you know, to keep solid cash flows during that period. For North America, we are in a turnaround situation. We are likely to, you know, continuing being very economical with UA or more economical with UA short term. And that will have a negative impact on organic growth, but should be neutral to positive on EBITDA. As we invest in product improvements, we should be able to then rescale UA and kind of improve these KPIs. And also in North America, we have new leadership that has come in with Todd, which is a 20-year venture in the games industry, which should really kind of allow us to boost this turnaround. For Mini and APAC, we have strong performance by Jay Walker that is carried by the excellent work the team is doing there, but also by the brand recognition, the SuperHab network effects, some strong monetization improvements, and then constant new game launch in its app, as well as a fast-growing mini market. The mini market is growing by double digits. Not the strongest, Jay Walker, but growing by double digits yearly. And then MoonFrog also in that area is supported by similar effects in terms of the market. The Indian market is a fast-growing market. And in addition to the board franchise is investing in emulating what we're doing in the Joe Walker super app approach with Tinpati Gold. So, you know, this new Stillfront operating system, you know, with a leaner and faster organization, growth through key game franchises, you know, balancing growth with good cash flow, and just having stronger group capabilities and industry talent gives us the solid foundation to build into the next quarters and years. So, with that being said, thank you very much for your time, and we're ready to take questions.

If you wish to ask a question, please dial 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial 6 on your telephone keypad. The next question comes from Nick Dempsey from Barclays. Please go ahead.

Yeah, good morning, guys. I've got three questions. So first of all, in the release, you talk about organic revenue growth improving for the group through the year. On the call, I think you referred to aiming for positive organic revenue growth during the year. So if you could clarify that a little bit in terms of whether you expect during the second half the group to move into a positive organic revenue growth situation. Second question. Can you maybe give us a bit more color on what is driving the more difficult UA environment that you have flagged in the first weeks of 2025? How can we be confident that this is a temporary thing? Perhaps a bit more information there. And the third question, we've seen other video games groups sell single franchises, which aren't necessarily a very large part of the group. and those show the market that it is undervaluing the group. Do you think that there are any corners of Stiltron where you could get an interesting price which would make investors reevaluate the rest?

Should I take the organic growth one? Yeah, the second one. Yeah, so thank you, Nick. So in terms of the organic growth, so as you saw, we had kind of minus 5% organic growth in Q4. Entering into Q1, we kind of explained that we expected that organic growth to... to continue to having negative organic growth and slightly worse organic growth in Q1. Strong comparables are behind because of that. We know we had some strong game launches last year in Q1. We also had Easter in Q1, which this year is in Q2, and there's a few other factors. Also, the fact that with some of our franchises, such as Supremacy, you know, we're kind of in an investment phase in terms of product, but we're kind of, in terms of UA, we've kind of, you know, we've taken it down a notch and increased the EBITDA. You know, we have to be dynamic in this case, depending in terms of what we see. So that's kind of what we're seeing for Q1. And then we think that from Q2 onwards, that would progressively improve. We think Q2 will likely continue to be negative. And then from Q2 to Q4, we will see kind of progressive improvement. And we do think that we should be able to reach positive organic growth at some point in the second part of the year. So that's for the first question. For the second question. I have a UAE question as well. Oh, in terms of the UA, what we're seeing in terms of the UA environment. Nick, it's just very, very dynamic and constantly changing. As you know, we work with many, many different channels. And what we're seeing is, you know, we have different games and with different channels that will work well for a few weeks. And then all of a sudden, you know, that channel will no longer work and we have to change. We've done, you know, massive improvements in terms of, you know, our creative output in terms of what we do. So we think that, you know, in Q4, the elections that obviously always have an impact. We also had a kind of a shorter period between Black Friday and Christmas, so we weren't really able to, you know, use a bit of a leeway there to invest. We are able to push in Q5 in terms of the UA. And then normally what we usually would see is January is usually a very good month to invest UA. And what we've seen this year is that it was good just for a few days at the beginning of the month, and then it became expensive quite quickly. So it's something that we're monitoring on a permanent way. Obviously, you know, we don't want to be dependent on market fluctuations in UA. That's one of the reasons we're focusing on key game franchises. And yes, we need to continue to be excellent and world class in terms of, you know, our performance marketing. And that's something that we're continuing to invest. But we do want to reduce our dependency on it.

And then in terms of your last question, Nick, I mean, it's obviously, I mean, difficult to comment on individual assets. I think we are taking quite good steps now in terms of breaking down our business. So, of course, you can see, even if we don't present the P&L per studio or per franchise down to the bottom line, we are showing now that we have three very different financial profiles in our different... business areas. If things are for, you know, if we would divest something, etc., that's something we will comment on when we get to that. But I think just the way we report it, or will be reporting it going forward, is obviously show some of the, you know, the positive and some of the things that we are struggling with in a more transparent way. And that's also one of the reasons we are breaking down the reporting in much more of a granular way going forward.

Can I just follow up on the UA question? That became expensive quite quickly. Do you have a theory as to why that happened? Is it to do with other mobile games, other factors out there in the mobile market? Or what do you put that down to?

Yeah, I think it's a mixture with stronger competition in certain markets, particularly in Match 3, which is the home design makeover market, as you know. We have some very, very strong players privately funded players have come in and taken a lot of market share, such as Dream Games. So you need to make some massive product improvements to compete with them. And also kind of the marketing side is difficult. So that's kind of one side of the things. And another side is, you know, you've got large providers, you know, such as Applovin and IronSource. where it's kind of a black box, what kind of margins they take. And if you look at their results, their results have been improving constantly. And then if you look at the ad revenue from the game companies, those haven't increased at the same level, and the costs of the U.S. side have increased. So one of my theories, but it is just a theory, is that they're basically capturing more of the value from that market. Obviously, that's not something they can do forever because then it's not economical to do UA with them. So I think this will balance out over time. But at the moment, it does feel there's been a bit of a squeeze there.

Thank you.

The next question comes from Martin Arnell from DNB Markets. Please go ahead.

Hi, guys. My first question is you had a comment in the report that you had positive organic growth for the key franchises last year. Was that the case also in Q1 or were you negative so far in Q1 in January?

In terms of the January 2025. Yes. I think we will refer to what Alexis just said, that we have struggled a bit in the beginning in terms of the UA deployment, how that is impacting the key franchises. I mean, it's a bit premature to state that in this call.

Okay. And when I look at the strong cash flow, there is this big working capital effect in in the quarter is that can you comment a little bit on that is that something that will be a negative reversal in the coming quarters or

As you know, I mean, working capital always fluctuates between the quarters. I think, especially when we get the receivables from especially Apple and Google or Apple. This one, it was positive. I think if you look at a longer, over the cycle, our working capital has been fairly, fairly stable. Then, yeah, in 2023, Q3, we had a negative effect and now we have a positive effect. I think the fact is that we are shown that even if we have been struggling a bit on the top line, we have been able to improve our cash flow generation because we are actually improving our margins, both in terms of DTC, also our gross margin, but also in terms of some of the fixed cost reductions that were done in the last year. So, yes, you have a working capital. You always have any working capital impact. But I think the fact is that there are some underlying drivers in terms of margins, but also that we also see that interest rates actually are coming down. And that has been negatively impacting our cash flows historically. And we will see that with the reference rates coming down, if it takes a while to flush out, that will also improve our operative cash flow going forward.

Okay. Thanks, Sande. When you look at the top-line trend, it's negative right now, but when you look ahead, for how long do you think that you can offset that with the cost optimization and the lower CapEx in order to have free cash flow, say, above one billion where we are now on an annual basis? For how long can you offset the negative revenue trend, assuming that it could move on for a little bit longer than you think?

I think if we go back now to our three business areas, I mean, if we take MENA and APAC, it's growing, very strong margins. We don't see any signs that that business area anyway deviating significantly. I mean, they are not as dependent on UAE. and what we're hoping there as well is to move some of the legacy games into to imperia and improve the margins there so so that's that business area i think and then if we look at europe um europe has a was a which we were showing as well a stable business i i would say in q1 especially in q1 2024 there we had more ua deployment especially in the supremacy franchise which you see on the margins But we had better growth. We don't see as much of that this year. But it's a stable business that has shown that it can deliver not tremendous growth over time, but a stable business that has been a strong cash flow generator. And then we have North America. And North America is a turnaround case. we have a plan um but of course if we can improve the north america cash flow we have been deploying a lot of ua as you can now see of course that will improve cash flow if we redeploy that into more profitable markets like the europe or or or or i mean an apac so i don't want to give a timeline but i do think that if you look at break it out in those three components then I do think there are things that we can do, and especially in terms of cash flows, where we have both North America, direct-to-consumer share can go up, and also a more profitable user acquisition.

But I don't know... Yeah, I mean, to build on Andreas, and very simply, you know, negative organic growth in North America doesn't mean worse cash flows necessarily. We could actually, eventually, you know, we could actually even improve the cash flows from there. And it's not worth the same as the positive organic growth that we get in... in MINA and APAC, for example, where we have much stronger margins and therefore much stronger impact to cash flow. So we're fine.

Okay, thanks for that. And my final question, I don't know if you can reply to it, but I have to ask you, how is the recruitment process going when it comes to new CFO and also solution for permanent COC? Is there any update from the board on this that maybe you could share?

I think, as you put it correctly, that's for the board to respond to and to update you on. So there's no immediate updates at the moment. Thank you, guys. It's a process.

The next question comes from Rasmus Engberg from Kepler. Please go ahead.

Good morning. Two questions or three maybe. So you're saying that capitalized development is in the 8% to 10% range also going forward. So we are kind of at the lower end of that. Or can you reduce that further? I didn't quite pick that up. That's the first question.

Yeah, I said, I mean, we have, I think, well, I think Captain Marcus Day two years ago, we stated that we will take down CapEx in product development. I think what we then stated, we would take it down a few percentage points. We've started at 14 and we have come down, I think. Of course, when you go through the changes that we've done and that Alexis elaborated, you take out some things, but then you also start investing in some things more. So for example, in Europe, in our key franchises, there you can see now in the numbers that we have actually started to deploy more of that investment. But we still think, and we stated this before, that between 8% to 10% of our net revenues is a healthy number. Will it be like that every quarter? No. Can it go down below that for some quarters? Yes. But I think it's all about we are in the phase where we are redeploying capital. And of course, investing less in the U.S. One man hour in the U.S. is more expensive than in our other business areas. Also has an impact, of course. But I would say that 8% to 10% is a healthy level.

And I think focusing those investments on the key franchises also makes a difference because there's a lot of things, a lot of games where maybe, you know, we would have, you know, potentially dumped some investments that, you know, we're now moving to kind of legacy live ops. So that also kind of helps with the process. But it really in, you know, we're a games company, we make games and we will continue to do so. And that's what we're doing. We're just focusing on what kind of games we're making and why we're making it more than we did in the past.

So have you benchmarked that? It looks to me still to be quite high number. I mean, the 8-10% of sales, there are companies substantially below that.

you're correct and of course it depends where you where you benchmark that if you benchmark that into a u.s company where you don't have the same um accounting rules and you don't activate in the same way but we think it's and you see some game companies that have a lot higher investment i think from our perspective and that's why we think it's a healthy level um we we also that one of the reasons we changed our profitability metric two years ago to EBITDA to take away the discussion how much do you activate it's what we I mean it's an accounting principle what you invest you need to put on the balance sheet from a profitability and how we steer the business it is still EBITDA that is our key profitability market yes and then the same question for UA it was relatively low now and I guess

if I read you correctly, we shouldn't expect it to pick up in Q1 either. What kind of range do you see for UA, perhaps for this year, if you have any thoughts on that?

We haven't guided in terms of the UA deployment this year, so it will, as normal, fluctuate between the quarters. Alexis was saying how the Q1 will look, but give a range for the full year, it's not something...

And I think there's an important thing about UA is, you know, you also need to be quite opportunistic. You need to be opportunistic in terms of, you know, when you see that the costs are too high, you need to pull back and get your EBITDA cap. But when you see that, you know, there is an opening, then you need to be very quick in terms of reacting and investing. So I think to give guidance on there would be naive.

Okay. Very good. Final question. With regards to North America, do you anticipate... further restructuring and charges there or or is it smoother from here that we there is some massage to do but but no charges or similar things or how should we think about that restructuring i'll let you answer the financial side of it but in terms of what we're doing in north america so obviously we have new leadership with todd um i know we are he's executing on a on on a plan there

We do expect to transfer more games from North America to our legacy live ops at Imperia. We've already done a few and we'll do some more. So that kind of is an ongoing process in terms of the financial aspect. I'll let Andreas answer.

Yeah, I mean, we have, as you point out, Rasmus, we had a... few or quite a bit of our restructuring cost in the last year has been relating to the reductions. I mean, reductions of force almost 25% in North America. So it will be less of that, I would say, because we have taken out quite a lot of the fixed cost base. Exactly how Todd will organize his team. We'll get back to you. I mean, there will be more details around that going forward as well. But we have done a lot in North America in terms of our call space.

All right. Thank you so much.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Perfect. So thank you very much for your time again. I hope that we've been able to explain the new organization that we have at Stillfront in a way that is understandable with the three business areas by geography, Europe, North America, Meen and APAC, the different dynamics within those business areas, and also that we've been able to explain our key franchises and the dynamics around that. Thank you very much for your time, and we will see you next time. Thank you.