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

Hello, and welcome to the Stillfront Press Conference 2021. [Operator Instructions] Today, I'm pleased to present CEO, Jörgen Larsson. Please begin.

Thank you very much, and good morning, dear listeners dialing in. So with me today, I have Andreas Uddman, CFO; and Marina Andersson, Head of M&A. I will start, we'll present some general facts about Jawaker and the possibilities we see and the quality we see in this new member of the Stillfront family. Jawaker is a leading, highly profitable mobile gaming company in the Middle East and they have built a very exciting app or game that consists of actually more than 30 games in a classical board game genre. And that is a genre, which is very attractive for us because it has a longevity, which we will comment on in a few minutes. And it -- but it also allows not only to play, it allows the users to connect with friends, join clubs and socialize. Socializing is one of the most important drivers behind gaming. What we think is very exciting is that they attract not only sort of gamers, but these nongamers. So we are broadening our footprint in the region with new types of games and a new type of audience. What is also interesting when you have this 1-app approach is that you build an ecosystem and that is something which is highly strategically important for us and for other gaming companies to do the next coming years. And Jawaker has been excelling in doing that, not only talking about it, but also making it happen. And that supports -- one of the benefits is obviously that it supports cross-promotion and that you keep the users being able to enjoy many different games and socialize within -- without shifting a game. Very, very strong, obviously, in the region where they are located. But they also have a significant audience in the Arabic diaspora in Europe and North America. They are headquartered in Abu Dhabi, UAE. They have some 3.8 million unique users currently -- or in July and they are rapidly growing. Turning to next page. Some comments on the company. They have this asset on classical evergreen games with high retention -- exceptional retention and premium profitability and very high growth. So -- and again, what we now get into, our presence that we've had since 2016 in the MENA region is that we have this much, much wider audience. We have a leading position within strategy games, but now we get the leading position within the culture is so important in the region, classical games or the board games and card games. And what they have done exceptionally well besides this 1-app approach, Jawaker, is that they have been able through that, but also through the way that they have developed their games and their social features is to achieve a very high retention. And high retention is a key for both being profitable, but also to be successful over a very, very long time. And also they have been able to -- due to this cleverly designed 1 approach -- 1-app approach, more than 50% currently are playing more than 1 game and 25% are playing more than 2 games. So they get players to really, step by step, play more of the some 35 games or so that are currently in that. So it's really working with this ecosystem approach, which is strategically and obviously operational, successful and important. Further, they have developed a reseller network or physical reseller where they can sell the in-game currency, which is an established and very important or a necessary way of getting users in several regions and countries and territories in the world, not the least in the Middle East. We have the same with -- or similar with Moonfrog in the Indian subcontinent. And by having that, you get an opportunity for mass market consumers to buy your in-game currency in the way that cash -- is natural for a cash economy. And it's also healthy for margins because the gross margins are obviously supported by that. In this slide, you can see also the cohort charts and that they are describing the exceptional strong retention and how the spend -- this is how spending comes from different cohorts of users coming in. Just look at the pre '15 cohorts, I mean that is obviously from 6 to 10 years ago, they are still growing and have been growing constantly. And then you can see each layer of new users coming in adding value. You can also note in this slide that they have approximately 100% growth from Q2 '20 to Q2 '21. It's very, very seldom you can see this quality of the cohorts. And that is not something that you're not just lucky with, that is a clear result of clever-built business and good execution. Moving to next slide, Slide 5. Our rationale behind it is multiple. There are many, many reasons for us. As a headline, we would say that we see excellent synergy opportunities and scaling potential for this company coming into Stillfront Group. And as we have already and since quite some time an ambition and strategy to get to more and more traffic generated within our own ecosystem, Jawaker have done that for -- from the beginning and really excelling in doing that. So I think that they should contribute to the group's development in achieving that, but also in other ways to cross-promote. We have a significant scaling potential in the MENA region and also by addressing the Arabic-speaking population worldwide, or for that sake, Arabic region people that speak English for that sake as well. And for doing that, you need also to have an expertise in user acquisition and performance marketing, which is one of Stillfront Group's absolute strength, I would say, and the market reach that we have developed through the years. And when Jawaker had looked at also at Babil Games, which we acquired in 2016, they can see -- we can conclude that we have been able to scale that company in a very good way together with obviously the team at Babil, but also our center of excellence for marketing has been able to jointly -- by joint efforts to scale up that business, and we see similar great opportunities to do this for Jawaker as well. Also, there are collaboration potential with Moonfrog regarding further develop the -- and how to work with reseller network and both these studios have heavy -- what we intend to do with reseller networks. So these are some of the most important synergy opportunities and scaling opportunities, but there are more to it. So we are really happy to take us -- take on this journey of creating synergies and scaling together with the guys at Jawaker. And with that, I will hand over to Marina on the next slide, Slide 6.

The transaction structure. We pay upfront consideration of USD 205 million on a cash and debt-free basis where our cash consideration is approximately $152 million and share consideration approximately $52 million -- USD 53 million. Earn-out consideration is for 2021 the maximum USD 20 million if Jawaker reaches a certain EBIT target for the year. And such consideration will be 0 for the midpoint of the communicated EBIT range. All of consideration for 2021 would be payable in cash. For 2022 to 2026, the earn-out is 1x EBIT for each respective year and it will be payable 70% in cash and 30% in newly issued shares.

And I will move over to the finance consideration. In total, in fact, the transaction is approximately SEK 1.8 billion, of that, SEK 1.3 billion is cash. And we have also published we did an accelerated book building yesterday over 16 months since we raised equity -- cash equity the last time. So we are using that time to go to market as well, and we were backed by all our main -- big main shareholders and we raised a total of SEK 1 billion. So this is sort of a part of our financing strategy to continue to have our balance sheet in a good position and keep our leverage target around our communicated financial target. And then looking to the next slide and at Page 7, looking a bit what Jawaker would have added for the first half of 2020 (sic) [ 2021 ] would have been consolidated. Our net revenues would have increased by 5% with SEK 132 million. But especially as Jörgen was alluding to as well is a very strong profitability. So that would have increased our profit or EBIT with SEK 82 million or 9%. So it is a very profitable company, partially driven by the retail networks where we don't have platform fees in the same extent. And also, they haven't -- they are using UA, but not to the extent that we think and Jawaker thinks we can do in the future. So they have a very strong underlying margin business, and we do think we can continue to keep a strong margin, but of course, focus on new [ extent ] going forward as well. So underlying, a strong profit-generated business. We did also as we are coming close to the years, turning to Page 8, provide where we see Jawaker for the full year, would have been consolidated for 2021. And we expect them to deliver between SEK 270 million and SEK 310 million on net revenues and an adjusted EBIT of SEK 180 million to SEK 210 million. So that would be -- using the mid-range imply an upfront multiple of 8.9. And with that, I hand back to Jörgen.

Thank you, Andreas, and thank you, Marina. So to conclude this, I would just like to emphasize that we are continuing our growth journey. Through this transaction, we have rapidly growing revenue with premium sustainable profitability. And this is very important that they have this retention -- uniquely strong retention also that underpin the sustainability and the profitability and that is very important. And bundling the players in 1 ecosystem is state-of-the-art and will be very, very important as they are for any company that would like to be leading in the next coming years, we think. Also this solidifies our position in the MENA region, and that is a very attractive region and Arab-speaking or the Arab population in the world is almost 450 million people. So it's a massive market mainly on mobile. So we think it's very, very good that we're not only now are present in strategy but also in classical game. And this brings substantial, as mentioned, scaling opportunities as being part of Stillfront Group. So with this, we're not over and done with. We will continue with -- working with our pipeline for making more -- find deals in the future and take further step towards our financial targets 2023. That was all from us. So we open up for questions.

[Operator Instructions] We have a question from the line of Nick Dempsey from Barclays.

I've got 3 questions. So first of all, did you say that revenues were 100% higher in Q2 '21 than Q2 '20? Or was that a different measure you were talking about? And baked into that, did they get a positive effect from the pandemic? So did they have very strong growth in 2Q '20 over 2Q '19? Second question. Can you give an example of how Jawaker monetizes its games? Is advertising part of the mix there? Or just kind of describe how that works? And the final question, would you perhaps lower margin initially by spending more on UAC to drive good revenue growth over time? Or do you think you can manage all of that without initially lowering the high margin?

Yes. Thank you. So first of all, yes, I said -- that was what I meant and what you read. So approximately, as you can see on the cohort graph, obviously, in the -- on the y-axis is revenue. So you can see that it's approximately, not exactly, about 100% increase from Q2 '20 and -- to Q2 '21. And then it's much higher even if you look Q2 '19 to Q2 '20. So I mean they have been on a very, very impressive growth trajectory in the last 2 years. And it's -- as you also can see in that graph, they had a very little but still some kind of COVID-19 effect in Q2 '20. You can see that it steps up there. But since -- I mean, these kind of games, just as it is for Stillfront in general, we don't have games that we play intensely for hours and spend more as you play or something or buy more games or download or whatever because they are not built for that purpose basically. So the way -- the effect that Stillfront Group had in general was that we could market our products in a completely different way, but the engagement levels and the cohort behaviors are very similar. And that is also the case for Jawaker. You can see some effects in that, but it's very little and you can see how they continue to grow because their main means of achieving growth is through organic, almost a viral effect amongst the users because, I mean, the Jawaker app, one should recall it, one of the largest classical apps for classical games globally already. That's quite impressive. So -- and it generates a lot of traffic within the ecosystem. So we can continue to grow, but hence, they didn't get this since they don't conduct so much UA they didn't get that fantastic boost in the UA returns that we saw in the group otherwise. So -- but on the other hand, they have seen no slowdown either. So that's very, very solid development performance. And that ties into your next question. Their market is very limited today through UA. These guys are clever in many ways. Obviously, they have been a fantastic high-quality company. They have a very clear vision of how they have come to this point, but in many years to come how they should continue to build their position. So they also are clever in the way that they know and see what they are not mastering that well, and that is UA. And it's exceptionally difficult to build from a small studio's perspective the kind of market reach that we have built in the group for many, many years now. So they can tap into the formidable market reach that we have with channels -- more than 50 channels in more than -- almost 100 countries worldwide. So definitely and maybe -- yes, both in the MENA region and the Gulf states and so on, but also in many of the other territories where there are their target audience does exist, but then you need to master UA. So that is definitely something we can add. And doing that, as you rightly are into, would mean that potentially margin goes down, but then it goes down for the very good reason that we further fuel higher growth. So I think that to what extent we will work with UA is, of course, a bit premature to say. But we hope, we think and we are convinced that we can add that to the marketing plans and not only rely on the -- which works quite well then the organic development of cross-promotion within the app. I hope that answered your question.

Can I just clarify one thing? I meant, do they generate revenues through advertising or is it all in-game spending? That was one of my questions, sorry.

Sorry. No -- well, very limited, I should say. Very limited ad revenues.

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

First of all, I don't know if you mentioned that, but could you discuss what growth rate that Jawaker grew in Q1 and Q2? And also, how much have they spent on UA? I mean is it 5%, is it nothing or just would be interesting to hear that.

Thank you, Oscar. Well, as you can see on the Slide 4 with the cohort graph that its revenues on the y-axis. So you can pick any month to any month basically and see approximately the growth. So I think that's -- you have the answers on the growth. And as I said, it's approximately 100% growth if you take April to April or May to May. So they have been growing by 100% that. And if you look '19 to '20, it's more than 100%. So I think that's a very impressive number. So when it comes to UA...

When it comes to UA, it's below 10%, it's around Page...

Yes.

Okay. Great. And then a question for you, Jörgen, and maybe Marina can help as well. The structure of the deal with an upfront payment, obviously, to different earn-outs. The longer-term earn-outs with 1x EBIT in 2022-2026, my take is sort that the -- you obviously expect the upfront multiple to be significant be lower in 2022, 2023 given strong growth here. And you also paid earn-out in 30% shares at the VWAP at the time. But how do you think about the structure of the deal, which is quite interesting.

Yes. There are always many factors that comes in when you figure out what kind of the structure is suitable for certain transactions. So in this case, we -- it's a balance between that we would like to have a very clear incentive over long time for the guys to really do what they are convinced they will do and more by having a longer earn-out than we usually have. At the same time, from our perspective, on the buying side perspective, of course, if they double, triple, quadruple their profits over a certain time or a longer time period, 6 years from now, then, of course, the value of that company at that point in time is much higher. And if you sum all the earn-out we have paid and the upfront we have paid on the lower profitability, the actual total multiple that we will have paid, I think, will be very, very attractive. But it also will be good because the seller rightly have been paid a good price for a top quality company. And we -- so basically, we share the risk of over a longer time. I think that is one of the key elements of the construct in this case.

Excellent. And I mean the company seems super interesting, not least the cohort behavior here. So I mean what can you take from this and sort of incorporate and learn from for the rest of your group in a quite interesting time in mobile gaming here with low value in CPM users in your own ecosystem. If you could elaborate on that a little bit further, it would be really interesting.

Yes, that is true. They are an exceptionally high-quality company, for sure, you can see that, and you have read that in the cohort thing. We have said for quite some time that we are conducting a work internally in Stillfront beside this transaction on how to establish our own ecosystem, so to speak. So that we basically can -- we're not -- as we traditionally have done, we buy 1 user of 1 game. We buy another user to another game. That has been convenient, profitable and straightforward in every way. So -- but at some point in time, you can, and at some point, you must buy 1 user to 1 game and get that user to play not only that game, but several games in your portfolio. And to get to that point, you need to have a lot of things in place. It's not as easy as it might sound. And you have -- you need mechanisms, processes and a lot of supportive software to get this happening. And -- but I think it's very encouraging to see someone that thought -- with that mindset could achieve that with 50 people over these 10 years in a really, really perfect way for that kind of product. So I think that we will learn from -- we will see learnings from that and they will be able to contribute with their experiences, obviously. So that is definitely the case. But I think also the way that they work with the reseller network for other cash economies, they can share their learnings and they can learn from Moonfrog and others. So that is an important thing. And the cash economies will be around for many years and they create tremendous moats for competition. So in mass markets in such cash economies, you need to have a reseller network and that is also something which is -- it's very tricky to build and will then take some time and it takes -- requires knowledge. So I think with this acquisition, we get a much wider footprint. We are strong on strategy. Now we are strong on classical games and more mass market, nongamer products and then you need it. So I think there are several areas where we can learn mutually from Jawaker and they can learn from other studios.

And then just to add to that on UA again. So UA has been a very limited historically, which I mentioned, below 10% is like on the upper end. I would say it has been historically lower 5% to 10%. And there, we see a lot of potential within the group where we can scale and add our competence and our knowledge.

Great. And then I mean just one follow-up here. Just interested to hear your rollout plans ahead. You mentioned, I think, in the press release, India as a region that likes these types of games and similar dynamics, of course, with cash economies. What -- where is Jawaker not today and where do you plan to -- out head?

I mean they have a 3.2 million unique players today, which is significant number. But again, there are 4 -- between 430 and 450 apps globally. So the -- obviously, they have a fantastic market to go with. And the reason why I'm emphasizing that is this is culturally interwoven, strongly interwoven games. They are so specific for the cultures and there is a culture of playing these kind of games, which is very, very strong. So I think they have a massive market still to go for. So they are definitely not nearby having reached the potential growing there. But I think classical games and board games is an area that we have set up as strategically very important for Stillfront since several years back. So now we have a top quality studio in the region where board games also is very important and strong. So I think that we should add other board games into Stillfront's portfolio as well. And in India -- the Indian subcontinent is also important, but also in Western countries. So I think and hope that their experience of how we optimize and how we fine-tune and add social features and other features into -- apply that to these kind of games is really applicable for other regions as well. But you cannot take all of these games and market them to Western community because they are culture-specific which is -- yes, they are country-specific basically. But their generic knowledge we can use.

[Operator Instructions] We have another question from the line of Martin Arnell from DNB Markets.

I want to ask you about the customer base and how much is Europe and U.S. so far.

First of all, we look -- we're checking that. So...

Is it minor or is it like...

Yes. Just a second. So first of all, the user base is there is no -- you're not allowed to play if you're beneath 18, so this is for as -- for Stillfront in general, we are addressing people that are typically 25 to 45. So that goes for these games as well. And the revenue distribution for 2021 Marina will mention.

Yes. So primarily in Europe and also U.S. and Turkey its diaspora who is playing those games because they are cultural games, so cultural-specific games. So for Turkey, U.K., Germany, U.S. and France in total, we have approximately 30% -- a bit more than 30% for 2021.

Okay. Excellent. And when you look at the ARPDAU in these classic board games, how does it compare to your other genres?

Now we haven't gone out with ARPDAU, so that is not a public number yet. We can come back to that. But importantly, the more we have dug into the product-related and game-related KPIs, the happier we've been because it's really solid and they have been able to step by step by step for 10 years, include those numbers, including ARPDAU. But of course, these games are not strategy games where you have much higher numbers, but they are improving and they're working very systematically with listing tourist community, adding attractive content and thereby increasing the ARPDAU. But we will come back to that when we have consolidated Jawaker into our books.

Excellent. And then just on the margin and growth expectations here going forward, given sort of how to calculate those forecasts trying to get the full picture of what price this will be. How should we look at the higher margins in this business? And will it be growth above the average here going forward, do you think?

Yes. We don't give forecast for several years ahead for 1 single studio. So -- but I mean, if you look at the cohort graph on Slide 4, you can see how they have been able to grow and how they have been able to grow not the least the last -- during Q2 this year. So I think that this is a high-growth company, that we can easily conclude. And they're not like -- if they would have had 80% of the target audience already that will, of course, have limited opportunities. But again, they have 3.2 million MAUs out of, in theory, a couple of hundred million that would be in their audience. So I think that they definitely have -- even though they are the leading one by far and one of the largest classical game apps globally already, but still they have so much more to grow. So I think we will see a very strong growth for a very long time. And if we also can add to that the UA, they can more easily grasp the -- even though, as Marina pointed out, they have actually over 30% in the diaspora, I mean, Arabs not being in the Arab region, that would be more easily grasp that pocket -- or not only pocket, but that area of growth with UA that they don't master today, but we can add from our center of excellence. So I think this -- without giving any forecast, we don't do that, but this is the high-growth company for many, many years to come. And when it comes to margins, just to clarify that, if we don't add any UA, they will grow at high numbers and as they have done for 10 years just through the fact that they have this 1-app approach and cross-promote between this and a viral marketing that is really, of course, very, very profit-oriented since you don't pay any UA. If we add UA, I mean, we accelerate growth further. But of course, the margins percentage-wise will go down. But in absolute numbers, the company will earn more money. So that is the dynamic as we probably already had understood.

And as there are no further questions, I'll hand back to the speakers for closing remarks.

Thank you for dialing in, and we are thereby concluding this presentation. Thank you all.

This concludes the conference call. Thank you all for attending. You may now disconnect your lines.