Fractal Gaming Group AB (publ) (FRACTL) Earnings Call Transcript & Summary

Welcome to the Fractal Gaming Group Q4 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to speakers, CEO, Jonas Holst; and CFO, Karin Ingemarson. Please go ahead.

Hello, everyone, and welcome to today's presentation of the Q4 2024 report for Fractal Gaming Group. Today, we will be presenting the key highlights from our just released Q4 report, focusing on the business status and the financial performance for the fourth quarter, but also to summarize the result of the full year of 2024. Further, we'll also provide insights into our strategic initiatives and the market outlook for 2025. As usual, we are, of course, happy to answer any questions that you might have either in the end of the call or if you reach out to us individually. We'll start to look at some of the Q4 highlights. 2024 ended on a high note for Fractal, setting a strong foundation as we move into 2025. Our net sales in Q4 was the second highest in a quarter ever, reaching an impressive SEK 205 million, which is an increase of 44% compared to the same period last year. The growth was fueled by our partners ramping up their inventory levels to meet increased sales and in anticipation of even stronger demand in the coming year. Information about GPU releases as well as strong awards for Fractal products by key media were among some key underlying reasons. Our sales-out from tracked partners saw a 12% increase following Black Friday, Cyber Monday, Christmas and other campaign events delivering exceptional sales figures. Q4 had the highest ever recording sales-out figure for Fractal in a single quarter. With this, we are ending the year with slightly lower channel inventory than normal, but we expect to balance this in Q1 as sell-in from Q4 hits the market. Our EBITDA surged to SEK 29 million in the quarter with a margin of 14.2%, up from 8.8% last year. This significant improvement is largely attributed to the increase in net sales. We did, however, experience a slight dip in our product margin coming in at 39.1% in the quarter compared to 40.8% during the same period last year. This was primarily caused by a write-off of older products within the water cooler category and should be seen as a one-off event. We ended the quarter with a robust net cash position of SEK 51 million, a significant increase from SEK 8 million last year. Moreover, the reception from our new Refine computer chair has been very positive during the quarter as availability in the channel has increased. Together with the Scape gaming headset that is targeted to launch in Q2, these products are marking a significant milestone in our growth and brand journey. As we move over to the market development and demand, we see several exciting trends that are driving our growth. Firstly, we are witnessing a significant upgrade demand driven by aging systems. The end of Q4 marks 5 years since the pandemic-driven upgrade boom, and many gaming PCs are now reaching the end of their life cycle. This creates a strong need for new hardwares as gamers look to refresh their setups with the latest technology. Moreover, PC gaming demand is also on the rise. Recent data shows that 35% of U.S. consumers that consider to buy tech products specifically plan to buy a desktop PC during the holidays. This was up 9 percentage points from last year and underscores an increasing demand for new hardware, linked to more consumers seeking to enhance their gaming experience. In addition, strong game releases are also driving growth in the market. Titles like Doom Dark Ages and Civilization 7 are expected to contribute to the growth of the games market and to further fuel hardware demand. Also, we were thrilled in November that our North and North XL case was awarded Best Overall PC Case 2024 by GamersNexus. This proves that North series continues to set industry trends with its innovative design that is solidifying Fractal's position as a design leader in gaming hardware. Lastly, regarding U.S. tariffs. Fractal's earlier exemption for computer cases is still valid until May 31, 2025. But as of February 4, we have a 10% tariff on all products imported to the U.S. We see tariffs on our product portfolio as competition neutral because it's affecting the entire industry equally. From Fractal, we have a plan with a mix of short- and long-term measures in place to mitigate the effect, but we estimate that the recently introduced 10% tariff will have a negative annualized effect on EBITDA of approximately 1 percentage point. Now with Q4 in the books, let's also take a look at the full year of 2024 and its performance in key financials. We see 2024 as a transformative year for Fractal. Throughout the year, we successfully launched several new products. In addition to new case models such as the Era 2, North XL and Mood, we expanded into 2 new product categories, the chairs and headsets. The Refine chair that was launched in the second half of 2024 is still in the ramp-up phase, but it's already delivering strong sales, whilst the Scape headset is targeted to launch in Q2 2025. Moving into the year, we faced very high comparative numbers from 2023. And despite the weaker market environment with delayed component upgrade cycles and external challenges such as the Red Sea conflict, leading to longer delivery times and increased freight costs, we achieved nearly SEK 700 million in net sales. Since our IPO, we have maintained an organic CAGR of 14%. Our product margin for the full year was 40.3%, slightly lower than 2023, mainly due to unfavorable currency effects and slightly higher sales discounts. However, lower purchasing prices and freight costs had a positive effect. EBITDA amounted to SEK 84 million with a margin of 12%. And compared to last year, it was impacted by lower sales, increased marketing expenses and higher personnel costs, but this is all in line with our mid- and long-term strategic growth plans. Finally, our net cash position improved to SEK 51 million, up from SEK 8 million last year, reinforcing our strong financial position, stability and flexibility. Operating cash flow totaled SEK 59 million, primarily driven by the EBITDA performance. And with that, we are summing up 2024, and I'm giving the word to Karin that will take us through the financials for the quarter more in detail.

Yes. Thank you, Jonas. So let's now take a closer look at our fourth quarter performance, starting with net sales. As Jonas said, we ended the year strongly with Q4 net sales reaching SEK 205 million, reflecting a year-over-year increase of nearly 44%. Since we sell exclusively in U.S. dollars, we also track performance in U.S. dollar terms, where net sales reached $19 million, representing an organic growth of 42%. Q4 2024 was the second strongest quarter in Fractal's history following the record set in Q2 2023. The campaign period, particularly around Black Friday and Cyber Monday was highly successful and significantly contributed to our strong sales growth. Our North and North XL cases were awarded Best Overall PC Case 2024 by GamersNexus, a testament to our ability to develop high quality innovative products that drive demand. Additionally, the Refine chair launched in the second half of 2024 delivered strong performance in Q4, further strengthening our overall sales momentum. Lastly, sales-out revenue in Q4, as reported by our key customers and tracked partners was the strongest in Fractal's history and increased by 12.2% year-over-year in U.S. dollar terms, demonstrating strong consumer demand. Moving on to the next slide and segment development. With a strong ramp-up in chair sales during the second half of the year, we see a clear shift where chairs are increasingly influencing the total sales mix. However, cases is still our largest product category with 86% of total sales compared to 91% last year. Sales of cases increased by 35% to SEK 176 million. The other product category saw an increase by 140%, reaching SEK 29 million. The overall growth was driven by a number of factors, including a strong market than previous quarters, successful campaigns, Best Case of the Year awards and strong sales of our Refine chair. The EMEA region was the strongest performer this quarter with net sales of SEK 112 million, representing an approximate 78% increase. EMEA share of total sales was 55%, up 11 percentage points from previous year. Strong sales on Amazon and of the Refine chair contributed to this growth. In the Americas, net sales amounted to SEK 74 million, an increase of approximately 26% year-over-year. The Americas share of total sales was 36%, which is 5 percentage points lower year-over-year, but remains within historical normal levels. Net sales in the APAC region were SEK 19 million with their share of total sales at 9%, a decrease of 5 percentage points compared to last year. Moving on to the next slide and product margin development. In the fourth quarter, the product result amounted to SEK 80 million compared to SEK 58 million last year, and the product margin was 39.1%, which was a decrease of 1.7 percentage points year-over-year. During the quarter, we conducted a one-off write-down of older products within our water cooling category, which reduced the margin by approximately 1.3 percentage points. We also had slightly lower margins in the case category, impacting the margin by 0.6 percentage points. Other factors such as currency effects, tariffs, shipping costs and sales discounts had a combined smaller effect on the product margin, resulting in a positive impact of approximately 0.2 percentage points. Let's have a look at EBITDA and cash flow. EBITDA increased to SEK 29 million in the quarter with a margin of 14.2%, an improvement compared to last year, primarily driven by increased sales. Operating cash flow in the fourth quarter was SEK 17 million, a significant improvement compared to last year. This was mainly driven by stronger EBITDA and positive net working capital where lower inventory and higher payables contributed positively, while higher accounts receivable due to strong Q4 sales had a negative impact. This improvement in operating cash flow reflects our ongoing efforts to optimize our financial performance and maintain a healthy cash position. Fractal demonstrates strong financial stability and flexibility with net cash growing to SEK 51 million and no utilization of the overdraft facility. This solid financial position allows us to invest in future growth opportunities, innovate our product offerings and navigate market fluctuations with confidence. Moving on to the next slide and the income statement. Revenue in the fourth quarter increased to SEK 210 million, representing a 43% year-over-year growth. Goods for resale amounted to SEK 124 million, which as a percentage of sales was slightly higher compared to last year. As previously said, this increase was mainly due to a one-off write-down of older products within the water cooling category. Other external expenses increased to SEK 31 million, primarily due to variable costs, including kickbacks. Strategic hires and annual salary revisions contributed to the rise in personnel expenses. Finance net improved, driven by a favorable U.S. dollar/SEK exchange rate and limited costs associated with the overdraft facility. As a result, the profit for the period was SEK 21.2 million compared to SEK 3.2 million last year. With that, we have walked through the financials, and I hand over to you again, Jonas.

Thank you, Karin. And so to summarize the quarterly report, we closed the year with a strong momentum, reaching the highest sales-out ever recorded from tracked partners. And consequently, our net sales increased 44% in the quarter, resulting in a 9.7% annual decrease compared to the record year of 2023, this despite of the challenges imposed during the year. We have seen the market continue to come back during the quarter and partners have taken action to increase their stock levels following strong momentum throughout the year-end sales and in anticipation of continued stronger demand in Q1. Our product margin decreased slightly but still stands strong over 40% for the full year. Negative effects from exchange rates and slightly higher sales discounts following a slower market in Q2 and Q3 has been partly compensated by lower purchasing prices and reduced freight costs. We are happy to see that the quarterly EBITDA margin is increasing year-over-year, leading to 12% EBITDA for the full year. During the quarter, we continued to see very positive reception for our Refine computer and gaming chair, and we are excited to see the strong interest for the Scape gaming headsets. These launches are driving the shift in Fractal's global position from a chassis to a gaming station brand. Our strong financial position gives us the opportunity to pursue our strategic initiatives to redefine the gaming station to elevate brand equity and strengthen our global access. We are committed to advancing our position in the market and expand our presence in both existing and new product categories. We, therefore, continue to invest in our long-term growth strategy to shape the future of gaming. Additionally, we are seeing positive trends for 2025, where new component launches and games releases will support market growth. And Fractal's growing product portfolio fits well into these market needs and offers opportunities for us to capture a broader audience. Finally, U.S. tariffs on products in our portfolio are competition neutral, and we have a plan with a mix of measures to mitigate the effect. But we estimate that the recently introduced 10% tariff will have a 1 percentage point negative impact on our annualized EBITDA. To summarize, we see good potential to drive profitable growth in 2025 and beyond. This will be supported by our new product launches, expansion in new product categories and increased marketing and channel initiatives. So with that, we've taken you through the last report for 2024, and we open up for your questions.

[Operator Instructions] The next question comes from Simon Granath from ABG.

Congrats on the strong results. Initially, sales clearly picked up well here in Q4, both sales in and sales-out. Is it fair to assume this was driven by a combination of slightly better market and market share gains, but with an even greater emphasis on market share gains given that NVIDIA's launch of the new GPUs will not hit stores until Q1?

Good question. It's definitely a combination of factors as we are pointing out here in the report. And we do believe that we have taken good strides in our, also, market development compared to competition during Q4. So our numbers here are both driven by the macro effects of the market, but definitely our own actions. We, for example, talk about the awards coming from GamersNexus driving North interest, for example, but also other parts of our portfolio. So big and good combination here.

And moving on, it looks like your gaming chair has had a particularly positive reception. And I think that is shown in the cases, in the other category here as well. Do you have any ballpark figure to give us on how much of revenue this accounted for in Q4? Could 10% be a decent assumption?

We're still not going into the split within other categories. But of course, if we see that over time, we see a significant growth in other categories compared to previous quarters in the year and chairs is, of course, the key driver of that. Refine is still, as we say, here in the ramp-up phase but is already contributing well to our overall revenue development. But yes, it's a majority of the other categories.

That's very helpful. And I do also appreciate the color you have given on the tariff situation, but I do have some follow-up on that given the importance of this topic. What type of actions could you do to mitigate increased costs if the current tariff exemption you have in cases is not extended further? And could this also etch such actions be taken already in 2025? And then finally, I'm also wondering, do you have any visibility on your current extension or exemption if they might be extended further?

If we start with the latter part of the question, of course, this is the hot topic this week and now. But of course, as of now, we don't know more about the exemption. So there is a status quo regarding that. And that's neither positive nor negative compared to what we have had previously similar to a couple of months ahead of previous exemption -- end of exemptions. So that's a similar situation as we have had before. We'll see during the spring if there is any other indications. But as of now, it is a status quo. The actions taken, as we talk about here, is a mix of short- and long-term mitigating actions, but we are also -- and that, of course, includes all aspects, both from the supplier side and discussions and negotiations with them, but all the way to the end consumer. If we see those tariffs coming back, it would also potentially hit the end consumer price. The combination of how all these factors play out is also what will impact the overall impact on our numbers, of course. So we have that already set. There is a plan in place. Whether that can happen in 2025, sure. If there is things moving in that direction, we would take the appropriate actions to mitigate the effect. So we are in a good position with having the plan there. But now we act on where we are today, and that's with the 10% tariff that has come in this week.

Very good. And the new headset, Scape, will be launched in Q2 based on the current updated plan. Is it reasonable to expect this to partly boost Q1 revenues on the back of inventory buildups for your resellers?

It's -- I mean with the Q4 launch, and we know that we are selling into resellers 2 to 3 months ahead of that, it's reasonable to think that we will have an impact on the Q1 numbers. But we believe it's going to be on, yes, full fledged from Q2 onwards.

And a final question for me. In recent years, we have discussed seasonality a lot, which was disrupted at least in comparison to historical patterns due to the pandemic. Is there anything on seasonality that you think we should take in consideration looking into 2025? Perhaps revenues will be more tilted towards H1 than historically, given the NVIDIA GPU launches, new product categories ramping up, et cetera?

As I think we guided and talked about a year ago, we see that we're more getting back to neutral seasonality or normal seasonality, and that's where we believe also 2025 lies. But -- and there are not really any major indications that would disrupt that at least as of now. So that would indicate a more stronger seasonality with our sales during the high season in the end of the year, as we have now seen in Q4. The launches of components, for example, of course, with the GPUs coming from NVIDIA, but we will also have a gradual probably facing unavailability of that during at least the first half of the year. So it won't immediately impact just one quarter. That's at least our understanding.

The next question comes from Jacob Benon from Redeye.

Congrats on a solid quarter. So my first question is if you have a figure on sales-out on cases specifically? Or is it roughly on the same 12% level as total sales-out?

We have -- we are not -- yes, we're not using a number directly in the report. But as we see Refine with the chairs ramping up, of course, it takes a slightly larger share of the growth. We see growth across the board. And then, of course, new categories, other categories, with the chairs just taking a slightly larger share than before.

Yes. Okay. I see. And a question of CapEx. You had capital expenditures of roughly SEK 17 million, SEK 18 million in the quarter, which is a rather large increase in the quarter. But if you look at the full year and compared to 2023, it's not such a large increase. So can you give us some color on how we should look at your CapEx need going forward and why you can have such large quarterly variations?

Good question. And it is what you said. We have had a higher amount in the last quarter of the year, but compared -- the full year compared to 2023 is SEK 31 million versus SEK 29 million, so more equal. And this can, of course, happen. It depends on when we start using the tools because nearly everything we have there is regarding our tools that we use in the production. We own the tools. Looking forward, I would say that we will not see any major changes to these numbers. So you can expect similar levels going forward for the full year.

Okay. Perfect. And what drove like the CapEx spend in Q4? You said it was due to investing in new products. Did this relate anything to Refine or Scape? Or have you already made all the investments necessary for those 2 specific products?

So it's visible in the balance sheet when we start mass production, which means, yes, we are doing a lot of things, as you know. We are launching other products, too. So it's a mix of things actually.

Okay. Perfect. And next question for me is regarding channel inventory. It seems like it has decreased somewhat since Q3 despite that it would be like rational for resellers to maybe stock up ahead of both Black Week and coming GPU launches that was expected in January. So what would you say is the reason that, that channel inventory decreased further during the quarter?

Simply put, the sales-out growth is stronger than the inbound and that has reached the channel inventory. As we're talking about here, we haven't -- going to have a lag effect of sales also that happened during Q4 that will be inbounded during Q1 that will take the channel inventory back up to normal. But we had a positive development and good momentum throughout the sales season with many of the campaigns, yes, beating the targets that was set out, which then takes down channel inventory slightly and then we take a few weeks or so to get them back up again.

Okay. Perfect. And final question here for me is about Refine. Can you say something about like what is the next step in your launch plan for Refine? And how should we look at the time line? For example, when do you expect Refine to reach other resellers than your primary launch partners?

There will be a gradual increase of the sales network of Refine now in the beginning of 2025 as availability stabilizes in the launch partners. So that next step will follow during '25. But as I say, we are in a ramp-up stage with Refine. We're seeing good momentum, good sales. So we have good potential to move it forward and expand.

The next question comes from Philip Woloszynski Tadayoni from MediumInvest.

Congratulations on the strong performance. I have several questions. Some of them correlate a little bit to the questions previously asked by the other analysts. But to get a little better understanding, you wrote in the report that the new year started with a positive sales trend and low customer stock levels, quite in line with the questions before. But as I see it, the sales-out in absolute numbers in USD was higher than sales in. So could you just help me understand the dynamic of channel inventory? How are they stocking up if sales out during Q4 were higher than sales in? And also on that, what the dynamic then could be in H1 as you see it in terms of reseller stock levels?

Correct. It's also a little bit market from market. So -- but if you're looking at it on a global level, those are the numbers as you see them. But of course, sales-out there is also taking sell in from previous quarter in consideration. But we are moving into the year, as we say, with that momentum. Sales-out is strong and channel inventory is on a slightly lower than normal level. But we have with that strong sales in and the growth that we were seeing there, a stronger than normal fill up coming for Q1 than what we've had seen in the previous year. So it's a significantly higher amount of channel inventory on the way to market than previously.

I see. In terms of the other external expenses, you expanded a bit on it that it was due to increased kickbacks. Could you explain maybe in more detail what this refers to?

But if we look at absolute numbers, that is one of the explanations. It's a percentage of sales. So it has definitely effect when sales increase. So in absolute numbers, kickbacks are one explanation. And also what Jonas said earlier in the call, we have had slightly higher cost for marketing due to launches and other things we've done also during Q4, extra marketing activities. So -- but it's mainly in absolute numbers, the kickbacks that is standing out compared to previous years.

Perfect. Then I have 3 questions on your products. Maybe we go through them one by one. In terms of Refine, are you having any production issues as of now in terms of the rolling out and ramping up? And have you seen any quality issues for Refine? Or is it simply a matter of getting production up to speed?

No, we don't have any concerns when it comes to the production. We are on full swing and getting as much as possible into the market right now. Of course, currently, we're in the middle of or at the end of Chinese New Year. So right now, there is no supply, but starting in a few days again. With that, we're also addressing some of those comments that has been reaching the market or the early -- on the earlier shipped products and getting fresh stock into the market. So we're really looking forward to the spring, we're seeing availability of Refine increase.

Sounds great. And then we can move to Scape. What are the main explanations for the delay moving it from Q4 to Q2 that you can share?

Yes. So what we previously, I think, in the last earnings call and presentation talked about a slight revenue effect in Q4. Now we will see that somewhere around a quarter later. And it is simply for us taking a little bit longer time than what we expected to get the product to the level that we wanted to be assuring that we have the perfect customer experience. And it's worth taking that time to make sure that the product is right when we get it to the market. We are now in the mass production stage and getting everything ready for launch, but we are accepting taking a little longer time to get there to make sure that we get everything right.

Yes. Great to hear. Completely agree. Nice to hear that you still have the customer focus as the #1 priority. In terms of case launches, we noticed that you had a new case coming up that was postponed/canceled from a review of one of the reviewers that are out there on YouTube. Could you take us through or actually anything you can comment on at that stage, what the issue was about, how it was discovered and so on?

Yes. We -- I mean first of all, we sell them talk about upcoming products and releases, right? So -- but at the same time, it's the same as with Scape there where the customer focus is #1 and the customer experience is #1. And if we are identifying a situation where we believe that the customer experience isn't what we want it to be, we're not afraid of stopping and looking into the concerns that are raised or the issues that are on the table. And that's where we are right now looking at what -- yes, the concerns that are on the table and what we can do about and how we can best address and make sure that we have the best customer experience. So simply at this point, we are aiming to set a new embargo date shortly and continue with our rollout during 2025. And then the market news hit or some information came out. But for us, it's -- yes, focus is on making sure that we have the right customer experience. So that comes first.

[Operator Instructions] There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions or closing comments.

Okay. So let's have a look at the first question. How should one look on your pipeline in each segment of fans, power supplies and water cooling? Which of those are relevant for your product road map in the future? Jonas?

I mean we are -- all of our product categories are relevant for our product road map in the future, and that includes fans and power supplies and water cooling as well. So they are all, yes, up there for our portfolio to have the right offer to our consumers.

Yes. Have you been able to produce and sell Refine at full capacity during Q4?

As I said, we are full stream ahead and make sure we get as much products out into the market as possible. And yes, right now, it's just Chinese New Year holding us back to ship out even more. So we have a good stream of Refines coming in out to the market and availability increasing from Q1 onwards.

Yes. Maybe this is repetition, but I read the question. You say that inventory levels are low, but that the sell-in during the quarter will increase during Q1. Is this sell-in included in the income statement for Q4? Maybe you answered that previously, Jonas.

But yes, it is in that sense. So it's part of the numbers for Q4.

Next question. Have your competitors also had the same tariff exemption as you? Do none of your major competitors have their production in the U.S.?

That's correct. We see the, as we say, the tariffs for goods to the U.S. as competition neutral. We are in the same boat as our competitors or our other brands in the market. None of them have production in the U.S. So we are all facing the same kind of situation.

We have a lot of questions. Most of them, I would say, we have already answered. So actually, I think we are more or less through them. But what we can do is that we can read them through as well, and we can answer the questions to the individuals as well. But the questions are more or less answered already. So that was that regarding the questions.

If that's the case, we close the call for today and thank everyone for listening in. And as usual, reach out to us if you want to have a follow-up conversation. Thank you all.

Thank you.