Fractal Gaming Group AB (publ) (5HS.F) Earnings Call Transcript & Summary

Welcome to the Fractal Gaming Group QT 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to speakers CEO, Jonas Holst; and CFO, Karin Ingemarson. Please go ahead.

Hi, everyone, and welcome to today's presentation of the Q2 2025 report for Fractal Gaming. In this call, we'll walk you through the key highlights from the quarter focusing on our business status, our financial performance and the strategic progress that we have made so far this year. We are pleased to report that Fractal has maintained strong momentum throughout the second quarter, resulting in the strongest half year in our history. At the same time, we continue to navigate an uncertain macroeconomic environment, but we have a clear plan in place to mitigate the effects. Today, we'll talk both about our achievements and the challenges that we are facing. And as always, we're happy to answer your questions at the end of the call or individually afterwards. Starting by looking at the highlights. Q2 was another standout quarter for Fractal. It was marked by continued strong performance driven by our strategic initiatives in combination with an increased end consumer demand. We are really pleased with the results, proud of the momentum that we have built and how we are able to strengthen our global presence during the year. Our total net sales reached SEK 215 million, which is an increase of 50% year-on-year with an organic growth in U.S. dollars of 66%. Looking at USD sales, it is the third consecutive quarter that we are reporting the second highest net sales figure in a single quarter in our history. All regions contributed to the strong growth, but America stand out with over 60% growth, driven by strong consumer demand, record sales on Amazon and successful product launches. Sales out to end consumers grew by 40% in the quarter with robust performance across all regions. This was fueled by consumer demand, particularly following the spring launch of new GPUs, which accelerated the upgrade cycle amongst gamers. Our strategic initiatives, with the successful launches of Scape and the Meshify 3, combined with a sharpened focus on channel management and disciplined price management in the American market also boosted this development. Further, we worked hard to replenish the low inventory levels that we saw at the end of Q1. This contributed further to our strong top line growth and positioned us well for the fall. So all in all, these achievements underscore the effectiveness of our strategy and our ability to adapt to market opportunities and operational challenges. EBITDA rose to SEK 20 million with a margin just over 9% compared to SEK 7 million and just below 5% in the same quarter last year. Our product margin for the quarter was 36%, impacted by external headwinds from tariffs, higher freight costs and currency situation. We aim to improve these margins in the coming quarters as to the measures we put in place to address the macroeconomic channel and just begin to deliver results. Finally, we closed the quarter with a strong net cash position of SEK 66 million, and we continue to invest in future growth by driving innovation, winning design and international expansion. In Q2, we introduced several important additions to our product portfolio, and they have already made a significant impact on both brand and financial results. The launch of Meshify 3 marked the next chapter for this important series, and it has quickly earned phrase from the media for its exceptional airflow, total engineering and easy assembly. Meshify 3 is reinforcing our leadership in the high-performance case segment. We've integrated subtle lighting directly into the case, and the series is offering a range of configurations, lighting options and colors that caters to a wide spectrum of gamers. In combination with our new high-performance momentum fans, it enhances cooling performance and allows users to personalize their builds. We have also launched Adjust Pro and Adjust Pro Hub, a combined software and hardware solution that enable users to control lighting and fan settings on various Fractal products through a web-based tool without any installation. These products strengthen our position as a leader in the market. It's setting a standard for what modern gaming setup can be, and it ensures that Fractal remains a brand of choice for today's gamers who increasingly value both their performance and design. The quarter also marked a major milestone for Fractal as we entered the audio category with the launch of our first gaming headset, Fractal Scape. With Scape, we brought our Scandinavian design philosophy and focus on core functionality into yet another product segment. It is designed to blend into modern gaming setups, offering minimalist aesthetics, discrete lighting and wireless charging. Scape was developed in collaboration with our community, and the market response has been outstanding. It quickly became a top seller at major retailers, reaching the #1 spot at Newegg in the U.S. and Inet here in the Nordics, and it has received excellent reviews from both media and early adopters. With Scape, we are reinforcing our commitment to enhance the entire gaming experience, and it demonstrates, just as Refine did last year, our ability to challenge norms in the market and to deliver products that resonates with both enthusiasts and mainstream gamers around the world. Now let's also take a look at the broader market development. This quarter -- in this quarter, we saw a clear lift in demand, thanks to the launch of new, more affordable graphic cards. These new GPUs have made advanced features accessible to a much broader group of gamers as prices have started to stabilize and availability improve. This is great news for consumers and for the industry as it's boosting the upgrade cycle for the entire PC market. Further, major new game releases like Elden Ring Nightreign or Doom: The Dark Ages are further driving the need for next-generation hardware. And as we predicted, we're also seeing a shift in what gamer wants. Today's gamer is older and more design conscious than before. And we see a trend that the direction that Fractal has been leading for years is growing. These developments reinforce our strategy, and is proving that Fractal is well positioned to capture the growing demand of premium design-driven gaming gear. And with that, I'm handing over to Karin to take us through the specifics and the details of the Q2 financials.

Thank you, Jonas. Let's take a closer look at our second quarter performance, starting with net sales. In Q2 2025, we achieved the second highest net sales in Fractal's history at constant currency, surpassed only by Q2 2023. Net sales reached SEK 215.4 million, which is an increase of close to 50% compared to the same period last year. Organic net sales growth in U.S. dollar was strong at 66.1% and sales out through our track partners increased by 39.5%. This strong performance was primarily driven by continued robust demand for our core products, our PC cases, which remain the main growth engine for the company. We also saw positive contributions from our expansion into new product categories, the launch of our first gaming headset, Scape, and the Refine gaming chair. It's also worth noting that we entered the quarter with low inventory levels in our channels. Throughout Q2, we actively worked to replenish channel inventory, which not only supported our strong sales performance this quarter, but also positions us well for the second half of the year. As we enter Q3, we do so with healthy and normalized inventory levels across our channels, ensuring continued momentum. Another important driver was the ongoing launch of new PC components, particularly graphics cards, which continued into Q2 and further increased consumer demand for upgrades. Sales out remains at high level, and we have now delivered yet another quarter of strong growth in sales out to end consumers. This is a clear sign that our products continue to be well received in the market, and that underlying demand remains healthy. All these factors contributed to a very strong quarter for Fractal, and we are well positioned to build on our strong performance going forward. Let's walk through our segment and regional performance for Q2, starting with the product categories. Sales of case amounted to SEK 192.6 million compared to SEK 128.3 million last year, a growth of 50.1% year-over-year. Cases continued to be a strong growth driver, supported by the launch of Meshify 3. The other product category, which includes fans, power supplies, water cooling, and not least our new product categories, chairs and headsets, contributed SEK 22.8 million, a 47.9% increase year-over-year. Looking at the product mix. Cases accounted for 89% of total net sales, slightly up from last year. The other product category represented 11% with continued growth in absolute terms. We expect the other category to expand further as our new product categories gain traction. Now to regional performance. The Americas delivered the strongest year-over-year growth, with net sales increasing by 60.9%. The region's share of total revenue increased to 35.1%, up 2.4 percentage points year-over-year, driven by solid momentum. EMEA remained our largest market, contributing SEK 109 million in net sales, a 43.2% increase year-over-year. EMEA accounted for 50.6% of total revenue, down 2.4 percentage points compared to last year. APAC delivered SEK 30.8 million in net sales, representing a 49.4% growth rate. The region maintained a stable share of 14.3% of total revenue. So let's move on to the product margin. In Q2 2025, product profit amounted to SEK 76.7 million, corresponding to a product margin of 35.6% compared to 41.4% in the same quarter last year. The decline in margin was mainly driven by external factors. U.S. tariffs reduced the margin by approximately 3.5 percentage points. To mitigate some of the impact of tariffs, we increased prices in the U.S. market starting mid-July. This did not affect the Q2 results, but they are expected to have positive effects in the coming quarters. We have also continued our strategic relocation project to enable shifting parts of our production out of China, aiming to reduce exposure and risk. Currency fluctuations primarily related to U.S. dollar exposure had a negative impact of 3 percentage points, which is an effect of 100% of our sales and manufacturing costs being in U.S. dollars. Freight costs reduced margin by 1.8 percentage points. These costs are split between handling, which is recognized in the month containers arrived in the U.S., and freight, which is recorded when the goods are sold. The high number of shipments during the quarter was partly driven by increased demand, but also by a strategic inventory buildup ahead of the expiration of certain tariff exemptions, which remain uncertain. As the result, more containers were shipped than usual to the Americas. The margin impact was partly balanced by several positive effects: a stronger product mix with higher sales of premium margin cases added 1.3 percentage points; lower sales discounts contributed 1.2 percentage points. Discounts levels are typically lower in Q2 and tend to increase in Q3 and Q4, which may influence margin development in the second half of the year. While the product margin was lower than last year, it demonstrates our ability to manage a challenging external environment. We are advancing several initiatives, including price adjustments and relocating parts of our production that are expected to support margin recovery going forward. EBITDA increased to SEK 19.8 million during the quarter with a margin of 9.2%, representing a year-over-year improvement of 4.4 percentage points. As previously mentioned, the product margin in Q2 was negatively affected by external factors which puts pressure on overall profitability. In addition, operating expenses increased compared to previous year. First, kickbacks increased in absolute terms, primarily driven by strong sales growth. And second, warehousing and storage costs increased due to elevated inventory levels. To summarize, the EBITDA margin reflects the combination of pressured product margins and higher operating expenses linked to our growth and inventory strategy. Underlying profitability remains solid, although the quarter was impacted by both external and strategic factors. Turning to operating cash flow. We saw a decrease compared to Q2 2024. This was primarily the result of our strategic decision to increase inventory in preparation for anticipated tariffs and cost changes. While this inventory buildup had a temporary negative impact on cash flow for the quarter, it was a proactive measure to secure our supply chain and ensure our ability to meet customer demand going forward. As inventory levels normalize, we expect operating cash flow to recover. Our financial position remains very strong with net cash of SEK 65.7 million, even after paying our first ever dividend of about SEK 40 million in Q1. This shows that we are able to return value to shareholders while still maintaining the financial flexibility to invest in future growth and innovation. Moving on to the income statement. In Q2, total revenue reached SEK 221 million, representing a strong 50% increase year-over-year. This growth was driven by continued high demand and successful product launches. Goods for resale was negatively impacted by higher tariffs, currency effects and freight costs. However, this was partly offset by improved margins within cases, which contributed positively to the overall product margin. Operating expenses increased mainly due to higher kickback costs related to our strong sales growth, but also cost related to maintaining higher inventory levels as we proactively built up stock to secure our supply chain. Personnel expenses increased as a result of strategic hires and annual salary adjustments, supporting our long-term growth ambitions. Net financials were negatively impacted by the U.S. dollar-SEK exchange rate, but our interest expenses remained low as we maintained a strong net cash position and did not utilize our credit facility. Despite these effects on margins and costs, our underlying profitability and financial position remain solid. This gives us the flexibility to continue investing in future growth and to deliver value to our shareholders. With that, I hand over to Jonas again.

Thank you, Karin. So as we now wrap up the Q2 report, we are proud to conclude that we continue our strong momentum with another standout quarter. It is the second strongest organic sales in our history and with a growth of 66% year-over-year. Net sales in SEK grew by 50%, and sales out from tracked partners increased by 39.5%. This growth was driven by increased consumer demand and strong results from our strategic initiatives, in combination with successful efforts to replenish low inventory levels from Q1, ensuring we could meet rising demand across all regions. Our EBITDA margin landed at 9.2% and our product margin of 35.6%, both impacted by external headwinds, including freight costs, tariffs and currency fluctuations. We believe that we can gain back margin during the coming quarters as our mitigating actions take effect. On the product side, the refined gaming share along with the launches of Scape and Meshify 3 played a major role in expanding our brand footprint and strengthening our position in the global gaming market. Financially, we remain in a strong cash position, which enabled us to continue investing in strategic initiatives and long-term growth. While we do see continued uncertainty in the global business environment, particularly around the U.S. tariffs, we are actively managing these risks through pricing strategies and supply chain adjustments. And looking ahead, we are confident in our ability to drive profitable growth through innovation, design leadership and international expansion. Our updated financial targets towards 2030 reflect this ambition, and we remain committed to creating long-term value for our customers, partners and shareholders. So with that, we conclude the presentation today, and I'm moving over to the Q&A. Thank you.

[Operator Instructions] Question comes from Jacob Benon from Redeye.

Yes. So I would like to start with a question about sales in the other category. So in U.S. dollars, sales in the other categories seems to be down by some 20% if you look quarter-over-quarter, so it seems like an organic decline here despite the release of scale during the quarter as well. So firstly, is this development according to your expectations? And secondly, can you explain a bit more about the dynamics here? Like what is happening under the hood, if we look on a quarter-over-quarter basis?

That is a result of a multiple factors. First of all, if you remember, we did a quite a big push in Q1 to sell out all the inventory when it comes to water coolers and PSUs and others, that spans also under other categories. That same level of sales was then not repeated in Q2. So there you have a significant portion of the difference coming just by that point. Scape then is also launched quite late in the quarter. So even though it had impact, especially in the last part of Q2, it could have -- it's not sort of a full quarter effect for that product either. And then finally, we had a fairly good saving of Refine in the beginning of the year, allowing us to have a quite stable and good sales development out of that product through both Q1 and now Q2. So it's a combination of factors that is paying in, and it's not something that is surprising us. But especially the drop in sales of the old categories, which is definitely planned. That's the big reason.

Okay. And so could you say also that there were maybe some channel inventory-related effects when it comes to Refine that impacted like the net sales of shares in Q2 compared to Q1?

Not dramatically or so, but I mean it is -- we have the situation not through the end of last year, as we recall with the Refine out of stocks. We are a channel fill up in the beginning of the year of that product that we have not had to repeat here in Q2. So from that point of view.

Okay. And is it possible to talk a little bit about like sales dynamics and how your sales from a new category like develop labs after launch. For example, I mean, first, you produce and sell launch quantities for a selected number of resellers and you do a lot of marketing activities that drives demand at launch. But like after that, is it expected to see kind of like a slight drop of in demand for a couple of quarters before sales pick up again? Or how should you think about it in general terms?

Without going too much into details of that, of course, we have always a launch surge coming when launching a product, and then sales can slightly go down a bit before it gradually increases again. The long-term demand coming into effect. So there are these dynamics, and we talked about that before, where we find, I think, in these calls. And of course, it's similar when we're seeing other products. But of course, the interest of products at launch is, of course, driving an immediate interest and especially when it comes to the sell-in effect we export to have that stock available in the channel, but also then for the coming weeks and months before we have replenishment coming in. So sales out and sales in dynamics is slightly different.

Okay. Perfect. And -- so I have to ask a little bit about the Scape as well. And to me, it seems like a huge success when you look at reviews and also sales data from resellers. So can you give us some more color on the perception so far? Like, was this in line with your already high expectations or?

We are very satisfied and happy with the reception of Scape. We were hoping for this. We have seen indications of that previously when it comes to reactions all since Computex last year, and that the product now is hitting the market, and we're seeing the end consumers and the reviews coming in line with those early on -- that early on hope is fantastic to see. We are super satisfied with Scape. It's been a great launch and how we want to enter a category just as we did with Refine is coming in. It's reshaping how gaming headsets seen and what it should be and we are proving that the mix of design and functionality that we bring to the table is something different. So we're really happy with that.

Yes, that seems very encouraging. And what is the plan with Scape for the remainder of the year? Is it possible to talk a bit about that? Like what is the next phase and steps in growing sales from Scape?

Now we do see with Scape just as early on with the Refine and that we're selling out in many channels and that we need to work on replenishing, getting new stock into the market. So that's #1 priority in getting the quantities that we need in. And we're still in the early stages, meaning that we're focusing on the launch partners and then we know, just as with Refine and other products, that we can broaden our channel network with a product like this and now we have opportunities to look much broader than where we are today. But that's later on. So second half '25 and early '26, we should see that come off.

Okay. Perfect. And if we look at the other category as a whole, I think gross margin in the quarter amounted to 29%. And correct me if I'm wrong here, but I think you have previously stated that new product categories, which I believe is starting to make up the bulk of the other category, will have our product margins that are roughly in line with the overall group. Like what work needs to be done to increase the product margin here towards the group average?

Karin, you want to start or should I?

Yes. What I can say is that, yes, Jacob, you're right. We are having slightly lower margins on our new product categories. But we are, of course, continuously working to improve profitability across the portfolio. So the average margin of our business is the most important. But of course, we want to grow the margins on our new product categories. And I think we talked about this before when it comes to new product categories, in this Scape and Refine, there are a lot to do regarding margins going forward. There are new products, first time we sell them. So there will be possibility to negotiate with suppliers, find better ways to do things, et cetera, et cetera. So value engineering, more or less.

Okay, I see. And like how long after launch of a new product category like this do you expect it to take before categories generating your desired margin? Is it maybe a year, 2 years? Or is it even a longer work than that?

No, it's very hard to say. I can't comment on that, but that's a continuous work we're doing. I mean our main focus is profitability and right now, increasing our margins. So it's definitely on the table.