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

Hello, and welcome to the Stillfront Press Conference Call. [Operator Instructions] Today, I am pleased to present CEO, Jörgen Larsson; CFO, Andreas Uddman; and Marina Andersson, Head of M&A. Please begin your meeting.

Thank you, and good morning. This is a great day. We are most happy and very enthusiastic to announce that we have acquired and that Nanobit will join our group, and we are even more enthusiastic on what that could bring for many years to come. Going to Slide 3, that will provide an overview of Nanobit. We are very impressed with what the founders, Alan and Zoran and the whole 125 strong team have built during the years. So it was founded in 2008, based in Zagreb, Croatia. They have had a very systematic ambition and being very successful in building and focusing on the female audience, typically 18 to 35 years old, building narrative, lifestyle simulation and RPG games. They have lifetime, a track record of 145 (sic) 145 million downloads and installs to the games. And currently, in September, they have approximately 5 million monthly uniques and 500,000 daily uniques playing their games. In total, they have released 29 titles wherein 19 games, completely focused on mobile. And there are several very successful titles like Tabou Stories, Hollywood Story, My Story, but also Chef Town, Superstar, Fashion City, Fashion Design World, et cetera. So it's a long record of very successful titles. As I said, 125 full-time equivalents, and they have a very professional and lean organization, agile organization, working in a very impressive way from what we have seen. And also judging from the results, working very -- in a very good way. You can also see illustrated here some of the titles on this slide on its lower left side. The numbers are also very strong in Q1. We will come back to that, but had SEK 325 million in revenue first half this year with SEK 60 million in adjusted EBIT. And I should also add that more than 90% of the revenues come from in-app purchases, and the rest is then ad revenues. Turning to Slide 4, you can see a time line of the development from the inception of the company in 2008. You can see from 2011 and onwards, they have been very consequent and systematic in the way to release titles from Fashion City in 2011 and now in soft launch, it's Fashion Nation and a number of titles in between. And I think that the [indiscernible] what really is appealing for us to have the Nanobit team joining the group and the family of Stillfront and that is the [indiscernible] really being systematically, very professional in addressing the female audience, and you can see your [indiscernible] though the titles are Fashion, of course, and they have really been developing skills and understanding of how will you present games in these -- of these types towards this audience, but also that developing the narrative lifestyle, RPG and sim games. And also not the least, how you produce such games. And in a data-driven way, also understand how to optimize the game experience and the user experience, both from a technical perspective and interface perspective, but not the least, a content perspective. So they have a very impressive ability to produce top-quality content for their audience, as you can see on this Slide 4. Continuing to Slide 5, you can see both our rationale, why we are so enthusiastic about what this is today and not the least what it can bring in the future. And also the synergies that we see at this point as very likely that we can realize going forward. First of all, it adds to our portfolio, both further additional volume, of course, new titles that goes into our active portfolio. And also, of course, we add additional 145 million downloads to date. And the [indiscernible] that I mentioned in September. So it's a significant addition to our portfolio. And also with impressive growth that the current portfolio -- active portfolio of Nanobit have shown and show currently, and we hope and we are convinced, I should say, that it will continue to grow for many years to come, both based upon the data and the analysis we've done of the current portfolio, but not the least, the team and the capabilities of Nanobit looking forward, both with the product in the current soft launch, but also with the pipeline and ideas and the thinking they have of further titles coming for many years in the future, all that makes a very -- it's very impressive to us, and I think it will be impressive to many of us going forward. Fashion Nation is a very strong product. It's in soft launch. So of course, we cannot say how much it can scale, but it's a very -- from a product perspective, very impressive how they have combined and learned and refined what they have done in the fashion genre for nearly 9 years. So I think that is a very exciting opportunity going forward. And as mentioned, with this -- with Nanobit joining the family of Stillfront, we add another genre to our portfolio. So that is, of course, have a structural and strategic value to Stillfront, not only the numbers for Europe, so to speak. So I think that's very important. We will add this into our vertical simulation RPG games. And also, not the least, is that what we initiated in November last year was that we should broaden both our genre footprint, which obviously is further added by Nanobit, but also that we increase our offering towards the growing female audience, which has constituted approximately or even above 40% of the global demand. However, the supply of games globally has been significantly lower. So it's only a fraction of the games coming out to the market that actually are focusing on female audience and the seeming audience in argue, will be growing faster than the male audience. So this is very exciting and also very unique to the studio that has focused on this audience for nearly 10 years. So we think that adds also strategic value to our portfolio and our market position in Stillfront. Looking at the synergies, we think that there are many development and synergy opportunities here. First of all, again, the know-how and unique experience of targeting female players is a strategic value that adds to the group, collective knowledge of Stillfront. Also, we think that since we have a very, very strong reach in marketing and distribution through all the now 15 studios in the group and also all the data that we have collected and that we have in a very accessible way and with very significant analytics experience throughout the group, of course, that will add mutually as we grow the group, both with analytics and insight and experience from none of it serving and being available for the other studios and vice versa, all the experience that we have in the group prior to Nanobit will be available for Nanobit to further excel in what they're already doing very well. We think also that -- and that comes for the group in general. But as I know that many of you have heard us saying for some quarters now that we are step-by-step improving our capabilities within ad revenues and ad monetization. And that goes also for Nanobit. So I think that fits very well into what we have already started in the group to increase that and work very systematically with -- will be very applicable also to the Nanobit team and the Nanobit product. And since we have this reach and knowledge about many markets globally, that will also add, of course, growth opportunities for the Nanobit products compared to what it is today and further localization, which we have been working with for many years, and to a large extent, in Stillfront. We also really like the way that Nanobit has been working with engines to leverage already taken investments and how they really can leverage their own collective and increasing knowledge about certain types of game through engines. So we can procedure and they can produce and we jointly can produce several games based upon existing engines. And that is, of course, a very capital-efficient way of growing our business and also with a lower risk, basically a better risk-reward model, and that will really like -- the way that Nanobit has proven their capability, and that has been a cornerstone in the Stillfront strategy for many, many years, and that also fits well. And then also, we are, as I said, really impressed with the professionalism and skill in the -- what we've seen as the complete 125 strong Nanobit team. And the access and both in the existing team, but also in the market in Croatia, it's really impressive. So we are really in -- we really like to be represented in that region as well and that country as well. So that is something which we value significantly, of course. Further, there is an increasing thing, and that is cross-selling potential. I think today, it's -- we have a certain extent of cross-selling between products, but that is increasing significantly for every new studio that joins the group. So I think in a future point in time, cross-selling will represent a significant portion of traffic much more than it is today. And then, of course, with Nanobit into our portfolio further increases that potential. So these are some of the rationales and the reasons why we are so enthusiastic about what it is today and even more what it will be tomorrow and also some points and some synergy area where we are convinced that we can increase the performance of our group, including Nanobit. Turning to Slide 6, here you see some financial highlights, a tremendously impressive growth, to grow a business by -- organically by 170% from second half of '19 to first half of '20 is -- well, it stands for itself, it's just super impressive numbers. And you can see that the EBIT levels are increasing faster percentage-wise. So -- and here's a very important thing. The UA level, the UAC level during this period has been or during the first half of last year has been 44%, fueling this very high growth, and the combination of being able to scale up the game and grow by 170% with 44% UAC and still have close to 20% adjusted EBIT margin is really, really strong. That is not very often you can see that in any studio. So we are super happy. And well, it's basically just very impressive. And that also shows that if it would come into a situation where the UA is not scaling up -- being able to scaling up with such a tremendous profitability result that has been the case the last year, then, of course, it will be significantly higher margin than the current 19%, 20%. So the easy math of that would be, if the UA will be at levels that we have had in the group last 12 months, which is 19%, then, of course, the margin will be some 25% stronger. So that means that the potential margin capability of their portfolio and business is about 40%, which is very strong numbers and definitely supporting the group's profits. You can also see on the right graph there how this would have looked, pro forma, non-EBIT being in the group for -- on the first half. So it added -- would have added in first half of this year, some 17% to top line and 9% to our adjusted EBIT. Whereas, this transaction represents a dilution of 0.8%. It's very clear that this is value-accretive significantly to our group. And also you can see that the implied Q2 leverage ratio is not higher than 0.7%, significantly lower than our target, 1.5. And of course, these numbers are preliminary and unaudited. But the combination of UA and this growth is exceptionally strong, I would say. Turning to Slide 7. You can also see our guidance for full year. So we expect the net revenue to be between SEK 600 million and SEK 640 million with somewhere between 17%, 18%, up to 22% in adjusted EBIT margin. This correlates, as I touched upon, very strongly with how much you scale the game. So if the growth is lower, then the margin will rapidly increase. The implied valuation here is 6.4x multiple on EBITDA. And what is also important to mention here is that the total deal that we're doing now, in logical terms, is very close to the deal levels that we have done and the multiples level that we've had the last 4, 5 deals. So -- but we have -- for different reasons, we have a slightly different technical solution on how we do this deal, I will come into that in a second. But the levels, also considering the very rapid growth, so if we would look at the '21 multiples, it will -- of course, we expect those to look significantly different. But all in all, we think it's a very attractive deal terms and very close to how we usually do our deals. So turning into Slide 8. You can see the deal summary and transaction structure. So it's made in 2 tranches. The first tranche, we acquire 78% of the shares from Nanobit for consideration of USD 100 million on a cash and -- as always, cash and debt-free basis. So 70% will be paid in cash and 30% in newly issued Stillfront shares. We expect the completion of the deal, the last of September so that we can consolidate Nanobit from the 1st of October this year. Tranche 2, where we acquire the remaining 22% of the shares, that will be based upon the EBITDA development for Nanobit for the fiscal years of '21 and '22. And the consideration for tranche 2 is capped to a maximum of $48 million on the cash and debt-free basis. And that whatever amount it will be at the end will be paid in 70% cash and 30% newly issued stock -- Stillfront stock. And it will be paid in 2023, when we have the numbers for fiscal year 2022. The upfront consideration is financed from existing cash on hand from front end available credit facilities we have. And we are confident that this transaction will not limit our capacity for further M&A neither in the near or mid or even long term. So we are in a good shape, continue to building our group. And finally, on Slide 9, as I think many of you know that we have a high ambition with Stillfront, we are building a leading free-to-play powerhouse. We have put a lot of efforts into creating platforms, Stillfront is a platform for the best talent and the best studios to elevate their business. So it fits perfectly well into Nanobit coming in with their proven track record to elevate the business further. And I think they will find it very useful and valuable to use the different parts in our platform that we have created. Also, we focus on cross -- high-quality cross-platform games. And here, we have also broadened our audience that I -- which I have elaborated on already. But that fits perfectly into our strategy. And I think not the least, the proven operational excellence that Nanobit has, fits also very good into the ambition that we have to be really excelling in operations in many different areas: marketing, live operations and development and creativity to create first-class entertainment to the audiences that we're addressing, but not the least to provide predictable, high-profitable growth in our business for many years to come. So that was what I had to present. Now I'm available just as Andreas and Marina for Q&A. So please forward any questions that you might have.

We have a question from Hjalmar Ahlberg of Kepler Cheuvreux.

Okay. Perfect. So yes, maybe first -- just the first question on the growth. I don't know if you can add any more information on this or any specific game or if all these games, you mentioned that's behind the strong growth in 2020, first 6 months?

So we -- all we can say is that it's several games contributing to this. The flagship product, Hollywood Story, My Story and Tabou Stories are propelling this growth, but it's important that it's several growing games. And that puts this impressive number 170% growth in the different life. Because usually, if they have that high growth, it's coming from one game, but now they -- and basically you're one-game company. And they have shown that they managed to keep the already successful game even to grow as well as they have new games coming into the market and also have games in soft launch. So I think it's a very good composition of the Nanobit portfolio.

Got it. And maybe a question on the revenue streams. I mean you just said that 20% were in net purchases. I just briefly looked at some of the games and also, some had subscriptions, I think. Could you say something about mix there? Is it similar to current portfolio or is there anything to add there?

Nothing much to add, but I think, as I mentioned that there is a clear potential in adding further revenues because the nice thing with ad revenues is that it's not cannibalizing with -- in that purchases and further, it's a high-margin revenue stream because you don't have platform fees and so on. So I think that, that is -- represents an opportunity just as it does for Stillfront at large or for the whole group, but also for Nanobit, so that's the only comment on the revenue composition.

And you mentioned they're high focused on this lifestyle games, along with them female audience. Can you say anything about the competition in this genre? I mean as you said, there were a few games developed for this audience, but something more to add there -- are the unique with these kind of games? So what's the competition there?

There's always competition. So there are other games out there, but compared to many other of our genres, it's less competitive, I would say, and I think it's unique with 9 years' experience of targeting this audience, for what I know, we haven't seen anyone with that kind of track record. Potentially, there is someone. But of course, it is competition. But compared to other genres, I would say, less competition in the perspective of the female audience is growing fast and the supply of games is not growing that fast. But looking forward, of course, it would be an increase in supply, but that's also from the perspective, the value of the experience and the focus that they've had for so long time will be -- the value of that will be even larger as the market grow for female gaming.

And maybe just a last one for me, on the geographic mix is generally a large market that is -- the majority of the revenue? Or is it a good mix and this trend in market where you see a growth over the next 2 years for these kind of games?

They have a strong presence in -- or volumes in U.S., but also in parts of Europe. But I think without going into every detail of that, as we mentioned, we see great opportunities in leveraging the global capacity for marketing and distribution and the global collective knowledge that we have of different kinds of marketing and regional channels and so on, that will definitely be something that has a value and hopefully, will drive further growth for the Nanobit portfolio.

Our next question comes from the line of Edward James.

Great. Just a couple of questions from me. So firstly, would it be possible to sort of get some information or commentary on sort of the retention rates and the ARPU of the [ ends ] within Nanobit and is it more towards these sort of store-made Candywriter, it's a Casual and Mash-up? Is it more towards sort of the more traditional sort of RPG strategy games, just trying to get a feel for the interaction with the user base there? And then secondly, clearly, this is -- as you said, it's a new genre, quite a different type of player base than the existing [ cellphone ] portfolio. Does this in any way make reaping the synergies more difficult? Or actually, do you think that this will generate more learning and actually open up more doors, so to speak, down the line? So just any commentary on that would be great.

Yes. Thank you. So looking at the cohorts, what we always have as a criteria is that the games have a long life cycle. And that we are -- well, you can see that one of the growing games are -- was released in 2015. So it's 5 years, but also you have growth from younger products. So I think that only that conclusion that 2015 game is growing shows that the game has a longevity inbuilt. And also, we look at, of course, much more than just looking at -- to how the games actually is performing, so -- are performing. So I think that we are very certain about that. Looking on the other hand, and it's important to separate the longevity of the game and what capacity the game has to carry profits for a long time and particular cohorts, what kind of longevity user cohort has. So the user life cycle is one thing and the game life cycle is another one. So game life cycle, very, very long. The cohorts' just female, as we can see in store-made games are shorter, but I would say they are less short, the each cohorts, than you can see in Storm8 games. I would say there are somewhere in between. And there are definitely parts of the audience that play these games for quite some time, for years. So I think that also with the type of content that is represented here, where you can add on new chapters and new scenarios and new things in the games in a completely different way than you do in a nonnarrative game. So that experience and that expertise on how to work with narrative games is something that we really value because there are elements in that, that we can use in other portfolios. So I think that it's definitely very attractive longevity in the games, but then the cohorts are shorter in life cycle compared to strategy games, but they are -- but a higher degree becomes loyal users then again. So the same dynamic that we have discussed previously, but this will be in between mash-ups and strategy games in its characteristics. When it comes to synergies, so we have a very -- we would like to be able to provide our entertainment and types of game we have within the 3 verticals to both the female and male audience. So I think that, that is not limiting our -- the opportunities for synergies. It's opening new opportunities, I think, because even though it's a new audience, the craft of how to market, how to distribute is very similar. So I think that the experience that they have would also add to cross-selling opportunities that I mentioned earlier on. So I think that it's definitely adding more synergy opportunities when someone comes in that has a slightly different footprint in the genre and audience perspective compared to if it will be perfectly fitting what we already had in our portfolio.

Our next question comes from the line of Oscar Erixon of Carnegie.

Some good questions already, but I have a few more, starting with the market a bit. If you could just describe sort of the developments and trends in the female narrative lifestyle simulation RPG genre, what do you see in terms of trends? And do you think Nanobit is well positioned?

Oscar, so thank you. I think -- or I should say, we are convinced that this is a stronger with a high-structural growth. I cannot imagine the gaming market over time not be representing societies' demographics at large, which means that, just from that perspective, the female audience will likely grow faster than the male audience. And this is a very well-established genre targeting that audience and they excel in doing that. So we think that they are being -- I mean, just look at the numbers, they are able to grow because they have strong product, they know the market, they can scale up the marketing. But if the market would have been declining, it would have been almost unlikely to show this growth. So we really are confident that this market will grow. And just the fact that, again, the supply of games is counted in singular percentage that are targeting primarily female audience and it's 40-plus percent of the players. So of course, that also -- that imbalance is, of course, very exciting when you have an expert knowledge in targeting such an audience in such an unbalanced situation.

Excellent. And I will ask also on the cross-selling of games, I mean, which should have a big potential as we grow the sale and increase the portfolio. But could you elaborate a bit on that, sort of how you work with cross-selling? And perhaps how it impacts conversion, LTV CAC differences versus performance marketing? Just elaborating a little bit on how you work with that and what you see in terms of margin potential and -- yes, potential overall?

As I touched upon, when I presented, these volumes, the cross-selling volumes today are not very large in Stillfront. So it's representing a smaller portion. And since we have had -- just as Nanobit, we have had an opportunity to grow very profitable with performance marketing. Over time, however, I think it's not a quick change. But over time, coming 2, 3, 4, 5 years or something, I think that if you have the combination of a wide portfolio and a significant audience that combination allows you to cross-promote in different ways. That could be by targeting existing users directly, it could be by having in-game advertising for our own games and so on. So I think that it fits very well into the big picture of how we think this will develop. And I think that -- or it's clearly that if you, at some point, get a strong traction, the whole ecosystem of games and audience will, of course, increase and fuel further profitability. You don't have to pay, say that we will have a balance between in-game -- or sorry, marketing within our own ecosystem, we will not pay for that marketing and whereas performance marketing, of course, is associated with an external cost. So there, you have something supporting higher margin. And also, I think that knowing your audience, and you can look at data, so when, for instance, now this come into detail, but if you can see a pattern of someone that actually has a tendency or there's a risk that a user is churning, then you can go in with more clear marketing towards someone playing Big Farm. We know that many of them play both narrative games, and they play also puzzle games or mash-up games. So of course, then we can try to -- if they should churn, they churn to one of the other group products. I think that there's a lot of things to do here. Today, it's not large volumes, but I think in the future sometime, it will be significant volumes coming from that, which will support our margins for a long time.