Stillfront Group AB (publ) (SF) Earnings Call Transcript & Summary

Good morning, and welcome to Stillfront's Q2 presentation. I am Alexis Bonte, and I'm joined by our CFO, Emily Villate today. Before we go into financials, I will start by taking you through the key franchise in the quarter, including the progress that we've made and key developments. Looking at the second quarter, we continue to make progress in building a more focused and franchise-led Stillfront. Net revenue amounted to SEK 1.323 billion, corresponding to an organic decline of 1.3%. This means that organic growth remained broadly stable despite the significant lower level of user acquisition investments compared with the first quarter. Profitability strengthened clearly in the quarter. Adjusted EBITDAC increased to SEK 387 million. That corresponds to a margin of 29%, which is up from 23% in Q1. This was mainly driven by the normalization of launch investments in Big Farm: Homestead as well as a broader reduction in user acquisition costs. We also saw continued double-digit growth in our key franchises, which grew organically by 10% in the quarter. This was the second consecutive quarter of double-digit organic growth in the key franchises. And this is a statement to our strategy to focus on our key franchises and the fact that, that strategy is working. Finally, cash generation was strong. Free cash flow amounted to SEK 519 million in the quarter, supported by the underlying businesses as well as the upfront settlement with Gameberry. This strengthens our ability to continue reducing debt while investing selectively in our key franchises. I will now go through the financial development in more detail, starting with Jawaker. So Jawaker delivered a strong quarter, returned to double-digit organic growth. Net revenue amounted to SEK 223 million, corresponding to organic growth of 11%. This represents a clear rebound from the slowdown in commercial activity you saw in the first quarter. Looking ahead, our focus remains on expanding Jawaker's presence in Syria and Iraq, supported by reseller partnerships and marketing initiatives. We continue to see long-term growth opportunities in the franchise, supported by its very strong local relevance, it's very loyal player base and a strong, established market position and brand. We move on to Supremacy now. Supremacy reported net revenues of SEK 214 million, corresponding to an organic decline of 2% in the quarter. This development reflected a more challenging user acquisition environment for the existing titles compared with the favorable marketing conditions that we saw in the first quarter. At the same time, the team continued to focus on technical improvements and on preparing Supremacy: Warhammer 40,000 for global launch. The game is now currently in soft launch, and the focus is on refining the player experience, improving technical performance and -- in order to ensure a high-quality global rollout. If you move on to BIG now. BIG continues to perform very strongly in the second quarter. Net revenues amounted to SEK 172 million, corresponding to organic growth of 79%. This was driven by the continued momentum in Big Farm: Homestead after a successful global launch as well as continued strong performance in Sunshine Island. So the franchise maintained positive momentum. This is despite significantly lower user acquisition investments compared with the launch-intensive first quarter when we launched Big Farm: Homestead. This shows that the investments made during the launch phase continue to deliver even as investments level normalized. So this is a definition of a successful launch. As we have said before, we do not expect the same pace of growth to continue quarter after quarter, but the performance in Q2 confirms that Big is developing well and that we've been able to build on the strength of the franchise through both new games development and strong live ops execution. We now move on to BitLife. BitLife reported net revenues of SEK 109 million. This corresponds to an organic growth decline of 19%. The year-on-year decline was mainly driven by challenging comparison figures and the more disciplined user acquisition approach in the franchise. If we look ahead, comparison figures are less challenging. At the same time, revenue actually improved sequentially compared with the first quarter and it was supported by strong live ops execution. Some of you may recall that we stated that we'll be investing in live ops kind of engine there. And actually, as a result during the quarter, BitLife released the Ultimate Fighter Mode feature, which actually became the franchise's best-selling expansion pack to date. So clear indications that the franchise is starting to head in the right direction. Empire. Empire delivered a strong quarter with net revenue of SEK 104 million and organic growth of 2%. This was the franchise's highest quarterly net revenue since 2024, which is a strong achievement for a game that has been live for 14 years. The performance was supported by strong monetization, live ops and a very good execution of in-game events. Empire continues to demonstrate the strength of long-lived player communities and the value of operating established games with discipline and consistency. At the same time, the team continued to invest in new game development within the franchise with the development of the new upcoming game, Empire: Titans and Dragons. So very excited about Empire and its future. If we move on to Albion. Albion returned to growth in the second quarter. Net revenue amounted to SEK 95 million. This corresponds to an organic growth of 10%. The growth was supported by the successful launch of the title on the Xbox Series X in April, which marked Albion's first expansion into console. This is an important milestone for the franchise as it broadens Albion's addressable player base and gives the game access to a new platform. The quarter was also supported by strong feature releases and player engagement. Albion continues to benefit from an established and engaged community and the console launch provide broader foundation for the franchise going forward. So with Albion clearly delivering on the strategy that we had set. In terms of Board. Board continued strong development in the second quarter. Net revenue amounted to SEK 71 million, corresponding to an organic growth of 24%. The performance was driven by strong development in Ludo Club, which remains an important contributor to the franchise. The team also continued to roll out live ops improvements, including greater automation of in-game events and offers. If we move on to Other games. Other games reported net revenue of SEK 334 million. That corresponds to an organic decline of 24%. The decline reflects the continued underlying development in the remaining portfolio, but also really a deliberate reduction in user acquisition as we continue to focus on profitability and disciplined capital allocation. In addition, we successfully divested OFM Studios during the quarter and the Gameberry settlement. And this, of course, impacts the reported net revenues in Other games from June onwards. And with that, I will hand to Emily to take you through the financials in more details.

Thank you, Alexis, and good morning, everyone. Let's jump right into the financial details. We reported net revenues of SEK 1.3 billion for the quarter, representing an organic decline of 1.3%. As Alexis noted, this was driven by strong performance by our key franchises, which grew organically by 10% year-on-year, offset by a decline of 24% in our Other games portfolio. On an absolute basis, net revenue was down 8% year-on-year, driven by negative FX impact of 3 percentage points as well as the recent divestments of narrative, OFM and the Gameberry settlement, together having a negative 3 percentage point impact. While organic growth was broadly stable compared to Q1 the last quarter, our strategic focus on our direct-to-consumer channel keeps yielding results, and our gross margin increased by 2 percentage points year-on-year, reaching a strong 84%. DTC,our direct-to-consumer revenue, now accounts for 46% of bookings, a proper step-up from the 39% we saw in Q2 of last year. And this is strengthening, not just our margins, but also our direct engagement with our player communities. On to UAC, which amounted to SEK 340 million in the quarter, down from SEK 436 million in Q2 of 2025. This corresponds to 26% of net revenue spent in UAC in this quarter compared to 30% last year. And the year-on-year decrease was driven by a more strict user acquisition approach. Sequentially, UAC decreased from SEK 447 million, driven by the investments in Big Farm: Homestead normalizing in Q2, following the trampoline launch in Q1, but also a broader reduction in UA costs, particularly towards the end of the quarter. Adjusted EBITDAC amounted to SEK 387 million, which is an increase of 3% compared to last year. And it is great to see that we're achieving this while our reported revenues and organic growth decline year-on-year. The adjusted EBITDAC increase was primarily driven by decreased UAC and higher share of DTC bookings driving a higher gross margin. The increase was partly offset by a decline in reported net revenues, primarily from recent divestments, together with a total negative FX EBITDAC effect of approximately negative SEK 23 million. And the adjusted EBITDAC margin increased to 29%, up 3 percentage points on the same quarter last year. Moving on to our cash flows. We reported SEK 644 million in cash flows from operations for the quarter. And this quarter's cash flows benefited from a total of approximately SEK 245 million related to the Gameberry settlement. SEK 196 million recorded within items affecting comparability and the remaining balance came from working capital movements. Working capital movement overall positively impacted cash by SEK 73 million in total which was underpinned by tax payments of some SEK 38 million in the quarter. Cash flow from investing activities was SEK 611 million, and this primarily reflects cash earnout settlements in the quarter of some SEK 515 million. In addition, we had product development spend of SEK 117 million, mainly relating to our key franchises in line with our strategy to focus capital and resources towards our key franchises. These costs were partly offset by the divestment of OFM as an impact of plus SEK 24 million in the quarter. Cash flow from financing activities was a positive SEK 206 million in the quarter, mainly relating to the drawn RCF in correlation with our earn-out payments, which took place in Q2. Free cash flow for the quarter increased to SEK 519 million, which was greatly impacted by the upfront Gameberry settlement of approximately SEK 196 million. Now on an LTM basis, we generated SEK 1.307 billion in free cash flow or SEK 841 million when adjusting it for the upfront element of the Gameberry settlement. Of this, SEK 469 million went towards earnout cash payments, minority buyouts and the divestment of OFM and the narrative portfolio. SEK 404 million was directed towards deleveraging. And additionally, we completed SEK 220 million in share repurchases, which went towards the settlement of earn-out. To summarize, our underlying cash-generating capacity remains very healthy. Now turning on to our financial position. We ended the second quarter of 2026 with total net debt of SEK 4.6 billion, including all earn-outs, a significant SEK 621 million reduction from the SEK 5.2 billion in the last quarter. This reflects our strong underlying cash generation in the quarter, further improved by the Gameberry settlement. In terms of our net debt and leverage ratio, including next 12-month cash earn-outs, it remained stable at SEK 4.4 billion and 2.2x leverage ratio, respectively. This is a mix effect of the strong underlying cash flow and the Gameberry settlement, offset by adding the next 12 months cash out earn-out obligations. And as noted by Alexis in his CEO letter for Q2, as the payments continue to absorb cash and as earn-out payments continue to absorb our cash in the near term, we are moving closer to the important inflection point we have in Q2 of 2027 when the remaining earn-out obligations will all be settled. The resulting release of a new cash flow will strengthen our capacity to deleverage, which remains our near-term capital allocation priority. During the quarter, we also successfully settled the SEK 1 billion bond refinancing secured during Q1, and we secured our revolving credit facility, now at SEK 2 billion through June 2028. And lastly, post the quarterly close, we extended our EUR 60 million term loan facility with the Swedish Export Credit Corporation, now maturing in 2028, continuing our diversified financing platform. With this, we improved Stillfront debt maturity profile with all debt now maturing beyond the final earn-out settlements taking place in Q2 of 2027, while maintaining a sound level of financial flexibility. In short, we're in a very good position to keep calm and carry on. Now handing back over to you, Alexis, to wrap up. Alexis. I believe you're on mute.

Thank you, Emily. Thank you very much as well for going over the financials. Before we open up for Q&A, I would like to summarize our recent events and priorities going forward. First, our focus on key franchises remains unchanged. The second quarter again demonstrated our key franchises are the main driver of Stillfront's organic development. with double-digit growth for the second consecutive quarter. This is a clear indication that our strategy to focus on these key franchises is working. Second, the strategic review remains ongoing. During the quarter, we completed Gameberry settlement and successfully divested OFM Studios. These transactions simplified the Group and allow us to focus resources on their franchise and studios with a stronger long-term prospects. . Third, as announced at the end of June, the Board and I have agreed to initiate a CEO succession process. I remain fully committed to leading Stillfront until the successor has been appointed and to ensuring continuity and an orderly hand over. Importantly, this transition does not change Stillfront's strategic direction. We will continue to focus on execution, profitability, cash generation, and long-term value creation through our key franchises. Our strategy is working, and I want to thank the teams for their strong execution again in Q2. With that, I want to thank you for joining today, and we are ready to take your questions. So please go ahead.

[Operator Instructions] The next question comes from Nick Dempsey from Barclays.

I've got 2 questions for you. So first of all, having followed Stillfront for a little while, it tends to be if the UAC has dropped, particularly when we're rolling towards the end of the quarter. That's because the environment is looking less attractive for deploying it. And therefore, we should watch out for a more negative rate of organic revenue growth in the coming quarter or quarters. Can you maybe just talk about the environment for deploying UAC? And I know you're not going to give us guidance, but help us understand whether we should be looking out for a weaker revenue growth trajectory as a result of that environment? The second question is just on the sort of decision for the -- related to the CEO. Can you maybe just give us a bit more background, Alexis, on -- is it something that you're moving on to that you have decided to go to or what the motivation is there because we don't have a lot of detail on that.

Thank you, Nick. I'll start with the first question in terms of the UAC. I think the main change in terms of UAC is obviously, we're moving away from the from the high-intensity launch of Big Farm: Homestead that we had in the first quarter, what we call, trampoline launches. And so now we're kind of -- we're still obviously aggressively investing in the title, but at a lower level. So that's what Emily explained. The second thing as well is what I mentioned to the Supremacy, we would have liked actually to allocate a bit more UA for Supremacy towards the end of the quarter. But the environment wasn't favorable for that in the quarter. But what we tend to see -- I wouldn't read too much into it either because the UAC environment, as you know, is very dynamic and tends to move sometimes in slightly unpredictable ways. So you might expect to have a very strong UA ability to allocate a lot of UA in a certain month, and then you're not able to do so, but then you're able to do so the month afterwards. So there's a lot of movements. But -- it's not completely incorrect to say that, yes, we're seeing weaker UAC allocation possibilities that we expected, at least, in particular for Supremacy. I don't know if you want to build on UAC point, Emily.

I think that's -- I mean, that's correct, particularly towards the end of the quarter, end of June. That environment weakened. But we apply, as you noted, Alexis, we apply very strict ROAS criteria to our UA, and we will continue to be very strict in how we assess our ROAS and our returns. But we will also take the opportunity to deploy UA where we have the abilities. And if we have a good global launch, such as the one we had with Big Farm: Homestead in the future, you can expect UA and revenues to increase. Of course, UA investment is taken upfront and the full revenue potential and profits are taken over time.

And as for the second part of your question, Nick, basically, when the Board asked me to step up as CEO a little under 2 years ago, my objective was really to set the group and the company out to a new strategy and really kind of see if that strategy, we were able to execute it, build a team, a new kind of exec team that was able to take the company to the next level and execute on that turnaround and start delivering on that turnaround. I think we've now had 2 successive quarters that demonstrate that the strategy is working. So I feel that when discussing with the Board, I feel that the group is now kind of well set with a strong strategy, strong execution, strong new team and it will be the right moment, I think, to pass on the baton to a new CEO when we find that person. But I remain fully committed until we do that transition.

[Operator Instructions] The next question comes from Rasmus Engberg from Kepler Cheuvreux. .