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

Hello, and welcome to Stillfront conference call. [Operator Instructions] I am now pleased to present Jörgen Larsson, CEO. Please begin your meeting.

Thank you very much, and welcome to this morning's presentation. With me is also Marina Andersson, Head of M&A; and Andreas Uddman, CFO, who will be available both for questions and some comments in general. We are very happy and enthusiastic about presenting the acquisition of Moonfrog, a leading card and board game business in India, a very exciting market for us. This is a very important building block for us towards our vision of creating a leading free-to-play powerhouse. Initially, a few words about Moonfrog and their track record. As said, it's an India-based market-leading company within, primarily, at this point in time, social games and board games, which is very popular in the region. There are 160 employees and professionals, primarily based in India and Bangladesh -- or they are primarily in India but also have an office in Bangladesh. And it's one of the fastest-growing gaming companies. And they have currently or by September, approximately 9 million daily active users and 38 million monthly unique users, which is, of course -- which are impressive numbers to be compared to what we had in Stillfront at that point in time, which was 4.1 million daily unique and 20 million approximately monthly unique. So we take a really leap in terms of the user base that we have jointly. Further, we are happy to see the portfolio that they have developed, which fits very well, and it is really culturized and adopted for the local market. It's a portfolio with a couple of really top-tier games, which we will look into, Ludo Club and Teen Patti Gold. And they also have built an impressive, in our view, proprietary tech stack, which is built and adopted for the very specific requirements on the local market, which is quite -- differs quite a lot from many other markets. So that constitutes a good mode for competition and is something which is not so easy for anyone to do. So we are very impressed and happy with that. And it's also built in a way so we can -- they can adopt it and we can adopt as the market is changing, which we expect will happen for quite some time. And also, one very specific thing on the sub-Indian -- the Subcontinent of India is the fact that a lot of the in-game currency is sold through a wide reseller network, and that takes very much knowledge, experience and time to build. It's thousands of resellers that sell since the online payments are quite -- not as well-developed yet as it is in many of the Western countries. So that is also something which is very, very hard to establish. So besides Ludo Club and Teen Patti Gold, it's also a game called Jalebi, which is part of the 3 top games of the approximately 20 that they have in their portfolio. The first 3 quarters, they had year-to-date revenues of approximately USD 21 million, with an EBITDA adjusted of approximately $12 million. We will come back to the numbers in a few minutes. If we turn to next slide, Slide #4, a few more words about the Indian market. It's a fantastic exciting market from our perspective. It's one of the fastest-growing mobile markets globally, and it's already substantial. It represents -- this year it's expected to represent not less than $4.5 billion in revenues in this area of the world, and it's growing significantly faster than the global market on average with an expected CAGR of 7 -- almost 18%. So that means that in 2024, it's expected to be close to USD 7 billion market. And that is, of course, fantastic numbers. And also, there are already 230 million people playing mobile games, expected to be 2021, which is, however, only 12.8% of the total population. So the penetration rate is not that high despite it's such large market. So in terms of looking globally, it's already the fifth largest game -- mobile gaming market in terms of revenues and it's the #1 in terms of downloads with more than 9 billion mobile game downloads in 2020, which is almost the double of the U.S. market. So we are -- this is what envisions and describes the enthusiasm we have -- to have a very strong reach-out and position in this exciting and rapidly growing market. If we turn to Slide 5, some of the most important milestones as the company that was founded in 2013 has developed. And through a very professional leadership of the experienced team, management team of founders and management team of Moonfrog, they are taking impressive steps from very fast getting out Teen Patti Gold in May '14. They raised external capital in '15 and scaled up to 50 employees. And then they were scaling their games significantly during '16. Released Ludo Club in '17 and reached the milestone of approximately 10 million monthly uniques. And then they added Jalebi and other games and constantly, during this period developing their tech stack and developing the retailer network, which is a prerequisite to be a significant player in the Indian market all over. Also in '19, which is something that we have aimed for improving ourselves for quite some time is that they added ad monetization as a very important thing, especially in Teen Patti Gold. And that is an area which we think is very exciting for gaming in general and hence for us as a company and where we are systematically trying to improve our performance as a group as we have untapped potential for sure in the group. So that is also something that I would like to add and comment on. Also in 2020, the growth continued, and we think that is only the beginning of a very -- several more years of high growth. Turning to Slide 6, a few more words about the 2 largest games in their portfolio. Ludo Club, which is not only addressing the Indian subcontinent, it's a worldwide large title which is extremely successful, both as a mobile game on many markets as well as on Facebook, where it has been the #1 board instant game. You can also see that it's not less than 60 countries where it has the top position worldwide, including countries like Brazil, Germany and Malaysia. And that is, of course, something which is pointing in the direction that we are not only talking about an isolated new geography that we're adding to the footprint and the reach that we have in Stillfront. It works both ways. So games from -- developed by Moonfrog could have obviously success in many territories and vice versa. And as mentioned, strong ad-monetization mechanisms have been in -- successfully introduced in the game. And of course, they have social features, chat leagues and leader boards and things which improve their stickiness in the games. And if we take some numbers of Ludo Club, 5 million DAUs, 25 million monthly uniques and they have 7% of the revenues come from in-app purchases. So you can see that ad monetization is really delivering. What is also something which is quite unique and open ups the new opportunities is the fact that 100% of the traffic into Ludo Club is organic, it's not wired. So that also shows the power of the product in itself and how it's operated, and it shows also the potential if we add the state-of-the-art paid marketing capabilities that we possess globally at Stillfront going forward. Looking into Teen Patti Gold, which, by the way, stands for Three Cards Gold, which is a very established card -- traditional card game. It's actually the #1 social card game in India all over. So that's impressive. And they have built a product which is -- has been refined since it's launched, as I pointed out. And many state-of-the-art features added into the game so that the KPIs are -- when we have dug into the product data have impressed us. Currently, or by September, they have 3 million daily uniques, 10 million monthly uniques, 94% in-app purchase monetization and organic traffic also here, very high, however, not 100%, but 82% organic traffic, which is tremendously strong numbers. Turning to Slide 7. As you already have heard me mention, but I would like to emphasize the rationale, which we consider to be very, very strong in this specific transaction. So we're entering into the very fast-moving mobile market of India and related countries. So not only that we add more than 25 million looking at the first 9 months into our business with a high -- they have shown a high and consistent profitability, which is impressive. So the strong footprint and the fantastic add-on in terms of user base that will get into the total family and portfolio of Stillfront is for us a very exciting opportunity. And the expertise they have proven in organic player acquisition, I'm sure we will gain in other studios as well -- gain from in other studios as well. And again, the tech stack that they have developed for successful operations in the very specific conditions on the Indian Subcontinent is also something which is not so easy to get in place. And they also had, what we have seen so many times entering into Middle East and to other territories, the importance of the regional and local specifics of the market, not only for distribution and marketing but also for localizing and culturizing the games, and I think that, that is really, really exciting. So both for resellers and distribution but also the knowledge that they have been the very experienced people in the market opens up for us to make add-on acquisitions in the Indian subcontinent with the support from the management and the founders and the team at Moonfrog. So that is also something which is looking, down the line, an exciting opportunity. And as mentioned, you can see on the right side, substantial scaling and collaboration opportunities we see with other Stillfront studios, localizing and scaling the Moonfrog games geographically and potentially to expand other Stillfront titles into the Indian subcontinent where Moonfrog then can add -- could act as the bridgehead for other products and other studios. It's important -- I would say, very important to understand where the Indian market is in development. It looks like other territories maybe 5, 6, 7 years ago and already Tanay, who is the Founder and CEO, and his colleagues have a knowledge and have built already strategy games and other types of games that not yet constitutes any majority or significant traction in the market, but that will happen. If it takes 1 year, 2 years, 3 years or 5 years, it's hard to say, but it's very, very, very likely that the consumers of the Indian market will expand their demand into territories where we are strong already; simulation, RPG, action, strategy, et cetera. So that is maybe the most exciting area we see at this point. And also, it's a good access to very skilled -- not the least development, talent in India and also business and gaming experience, of course. And as I mentioned, finally, the ability to leverage the Stillfront marketing expertise and increased UA spend is an obvious thing that we see could add value besides what they already do so very well as the existing business. Before going into financials, I would like to ask Marina to comment a bit about the process of how we have worked with from identifying to signing this transaction. Please, Marina.

Thank you, Jörgen. As already mentioned by Jörgen, entering the Indian subcontinent is a very important strategic move for us. So we've been, quite for a while, looking for good potential new family member in the Indian subcontinent. So in this case, we were very happy when Moonfrog was introduced to us in summer 2020. So as always, we spent a lot of time in summer with the management team, with the Founder and CEO, Tanay; and the COO, who is very operationally active, the right-hand of Tanay, Anand. We've been spending a lot of time to evaluate the cultural fit and the team who is going to be our leading team in the Indian subcontinent. So now it's about 6 months, and we really feel confident that this team will be leading our expansion in the local market. So great fit. And as always, for us, the most important part will be due diligence process is evaluating people who are going to join the Stillfront family.

Thank you, Marina. So going into the financial highlights, and I'm sure there will be some questions on financials, which Andreas will be happy to answer during the Q&A session. But just some highlights. So on Slide 9, we have, in similar fashion as we did with -- in conjunction with the SuperFree and Sandbox acquisitions in December, we have a pro forma statement year-to-date Q3, which is the latest reported numbers for Stillfront. You can see that we increased by SEK 199 million in revenues year-to-date Q3, which is a 7% addition to what we reported as Stillfront Group on revenues. And also, as they have an impressive 54% adjusted EBIT margin at Moonfrog, it adds more than 7%, namely 10% in terms of adjusted EBIT. And we are optimistic about that the growth will continue at Moonfrog, based both on their skill, their experience, their portfolio and not the least, the market. But something that we often talk about and we think is very, very important for a continuous creating a stronger, stronger Stillfront is that we add new geographies to the portfolio we have. We strengthen our portfolio and widen our portfolio and diversify our portfolio further, and not the least that we have new revenue streams which we didn't have previously. So all in all, diversification is a very, very important thing for us. And as you can see, don't through Moonfrog, but also as you can see in the table here, we significantly [ increased ] volumes from SuperFree and Sandbox as well. So in total, we -- through these 3 acquisitions, we have added 29% compared to our reported Q3 numbers. So from SEK 2.910 billion to SEK 3.749 billion. And also, we add 21% for all these 3 acquisitions in adjusted EBIT. So we are happy with that, not only the numbers but even more what drives the numbers and the diversification that we have in -- as a consequence of these acquisitions and not the least, Moonfrog. If we turn to Slide 10. So the transaction structure that we have is -- looks the following that we are acquiring Moonfrog in 4 tranches. We have an agreement about 100% acquisition. But the first tranche, we acquired 91% for a consideration of $90 million on a cash and debt-free basis. And the first tranche is payable in cash, 100% in cash upon completion of the -- of this step. So -- and then the remaining 9% of the shares in Moonfrog are acquired through a maximum of 3 additional tranches in which the consideration payable in cash as well should be a second tranche based upon 1x the EBITDA for '21; the third tranche, which is 1x EBITDA if the EBITDA is up to $20 million and 1.25x if it exceeds $20 million for the year of 2022; and the potential fourth tranche then of 0.5x EBITDA for the full year of 2023. We think this is an attractive structure for us, whereas we have -- the upfront consideration is equal approximately to 6x the preliminary and unaudited adjusted EBITDA for 2020. And considering this being a growing business, we think that's a very attractive good -- fair multiple, basically. The consideration will be fully financed with available cash and credit facilities. And we continue to be within our leverage ratio target of 1.5 post this acquisition. So I think we are sticking to our ambition to be -- have a leverage but still be quite conservative. So finally, I would just like to connect what we now have spoke about before opening up for Q&A on Slide 11 that this acquisition, just as the 2 ones that we made in December, significantly supports us in our ambition to take us to our '23 target of SEK 10 billion in revenues with 35% EBIT margin and with a conservative leverage ratio being at maximum 1.5x. So I think that we are taking significant steps, but we still have the ambition, we have the hunger, the willingness and the determination to get at least to what we have set that target in 2023. And we are very happy to see that Moonfrog in itself but also as a bridgehead into one of the largest markets in the world. The India subcontinent will support us in the efforts by -- for sure. So that was basically what I intended to present and also Marina. Please, you're welcome with some questions for me, Marina and/or Andreas, our CFO. Please.

[Operator Instructions] We have a question from the line of Jesper Birch-Jensen from ABG.

Congrats on the acquisition. A couple of questions from me. Just first, in terms of growth, I was wondering if you could give some type of guidance on what type of top line growth we're seeing in Moonfrog maybe in relation to the Indian market overall and maybe also going forward, is it should we penciling growth exceeding the market? Is it below the market? Where -- if you could give us any guidance on that, that would be appreciated.

Thank you. We don't, at this point, give a firm guidance. But as you can easily read from the numbers, they have been growing significantly faster than the market, established themselves the way that they've done. So we think that it's good opportunities for them to continue to grow. And not the least since we can add components from the family of Stillfront and the knowledge in not also as we -- as I mentioned in user acquisition, which is one of our prime strengths. And what I think also is very exciting, and we didn't expect to be honestly, is the strength that not the least Ludo Club has shown in many other markets, 60 other markets. So I think that we do add new components, but we don't, at this point, give a forecast. But I think we have a very natural situation to come back to talk more about the numbers since we are only presenting up until Q3, since we haven't launched Q4 yet as we present the year-end on the 17th of February. So it's not so long time to -- until we can talk about that again. But we do see them as -- definitely as a growth studio, for sure.

My second question is in terms of user acquisition in India. I mean is this mainly done through the resellers network that you mentioned or is it through more traditional western digital channels as well? And also how could this affect, I mean, user acquisition and the profitability of it and how you mean -- are you -- I mean, how it differs maybe from your traditional channels and the methods or is it similar?

It differs for sure, as you can see. But I think that we're convinced that we can do more on the user acquisition side. And just as we have stated, which might sound a bit odd, but just as we have stated in several other acquisitions that we would like the profitability to be slightly lower than now they have 54% the first 9 months because we think the assets that they have, the channels and the market positions that they have are -- could be exploited even more. So we would like it to go down short term because then we will increase our organic growth and over time, as you know, it's -- volume provides you with high-margin opportunities over time. But we hope and think that we can increase the UA in both the sub Indian -- sorry, the Indian subcontinent as well as on the other markets and also bring other Stillfront products into that market and support both with incredible strong organic growth opportunities and knowledge that they have but also through user acquisition. So I think we hope and believe that the margins will be not dramatically lower but lower than the 54%. But we will never compromise with the highly profit-oriented UA spend that we always have had at Stillfront returning money net in short time, always lower than 180 days, in some cases, much, much shorter time. So I think we have all the opportunities to leverage from that.

And my last question is in regards to your product portfolio or game portfolio. Just looking at the genres preferred in India, is there any specific games that comes to mind in terms of your previous portfolio which you could see launching in India and trying to leverage there?

I think we have a very strong portfolio that fits perfectly well, but I think it will be in several different steps. I think that Tanay and Anand and their skill team have been trying and see how the market has developed and what readiness there is in the market for strategy games. Some of them have been launched. They have some traction. But I think that some of the games that we have in the portfolio will take on maybe from 2022, 2023 and onwards for many years to come. Just as it has been in many other countries, you start with board games, then card games and then you develop other games after some time. So we have definitely ideas on what we should try out first. But for many reasons, I don't want to go into our more detailed rollout plans, but they exist for sure.

Our next question comes from the line of Edward James from Berenberg.

I've got 2. I might have missed this earlier in the presentation, but can you just provide us with your current sort of presence in the subcontinent in terms of daily active or monthly active users, at least relative to Moonfrog and just to understand the increase in presence there? And then secondly, you stated that the acquisition is all in cash. So I was just wondering why haven't the owners of Moonfrog taken shares in the Stillfront group? And is that part of the reason for the earn-out of 2023? And does that give you any concern whether the owners are keen to stay for sort of the medium to long term to grow that area of the business?

Yes. So our volume today in the Indian subcontinent is very, very, very low. So that is just an add-on. And it's not a small add-on, as we stated. It's 38 million monthly uniques that we add through this, not all of them in India, but a significant portion and 9 million daily actives. So that is more than double -- well, it's more than double than the daily actives that we had on average in Q3 in our -- when we last reported, Stillfront Group, of course, not included Sandbox and SuperFree. And monthly uniques, we had approximately 20 million in Q3 and we add 38 million. So it's a tremendous add-on. It's a leap add-on when it comes to total user base that we have in our games or playing our portfolio. And we think that is something which is increasingly important that heading towards a situation where we can have a -- in our own ecosystem, could offer our users more than one game. And that's why we constantly talk about this diversification and widening of our portfolio and widening of our total user base because, obviously, if we had users in our own system, we can offer them interesting and good and strong products to play without going to yet again acquire them from external marketing sources. Obviously, the ecosystem lifetime value of such a user increased significantly. So we think this would not be a major thing in 2021. We think the value of having a wide and broad portfolio of games, be active on many markets and know the specifics of many markets throughout the world with a presence and the reach and finally, to have a significant existing user bases. The combination of these 3 will be extremely important for any gaming company that has an ambition to be a leading gaming company in the next coming years. So that's why we are emphasizing the importance of this. So as we start to report the acquisitions that we have made, of course, we will be more explicit about the current -- at that point in time, current split between the different games and geography, as we always do when we report our numbers. But now we are -- it's a bit back in time to be in September, it feels like So we will come back to that naturally. But it's good that you asked the question because it's really strategic values to add these 3; more presence, better reach, more product diversified portfolio and not the least, to take this leap in terms of global user base.