Earnings call transcript: Stifel Financial Q4 2024 beats EPS forecast

Stifel Financial Corporation (SF) reported its fourth-quarter 2024 earnings, surpassing analyst expectations with an earnings per share (EPS) of $2.23, compared to the forecasted $1.96. This 13.78% positive surprise was accompanied by a revenue achievement of $1.36 billion, exceeding the $1.29 billion forecast. The company’s strong performance is part of a broader trend, with InvestingPro data showing impressive 53.79% returns over the past year. Despite an initial pre-market stock price rise of 2.07%, shares have since declined by 0.66% to $111.70, reflecting mixed investor sentiment.

Key Takeaways

• Stifel Financial’s EPS and revenue exceeded forecasts, showcasing robust financial performance.
• The company reported significant cash flow growth and cost reductions.
• Market reaction was initially positive but tempered by broader market conditions.
• Strong performance in MENA/APAC regions with high EBITDA margins.
• Challenges persist in North America and the mobile gaming UA environment.

Company Performance

Stifel Financial demonstrated resilience in the fourth quarter of 2024, with a notable improvement in adjusted EBITDA and cash flow. Despite a 5% year-on-year decline in net revenue, the company managed to optimize costs and enhance cash flow by 170% quarter-on-quarter. The consolidation of operations from 22 to 16 studios and a reduction in management layers contributed to SEK 50 million in annualized cost savings.

Financial Highlights

• Revenue: $1.36 billion, surpassing the $1.29 billion forecast.
• Earnings per share: $2.23, exceeding the $1.96 forecast.
• Cash flow: SEK 1.05 billion for the full year, with a 170% quarter-on-quarter increase.

Earnings vs. Forecast

Stifel Financial’s actual EPS of $2.23 outperformed the forecast of $1.96 by approximately 13.78%. The revenue beat of $70 million further underscores the company’s strong financial execution this quarter.

Market Reaction

The stock initially rose by 2.07% in pre-market trading following the earnings announcement, reflecting investor optimism. However, the price later declined by 0.66% to $111.70, suggesting a cautious market sentiment possibly influenced by broader economic factors or profit-taking.

Outlook & Guidance

Looking ahead, Stifel Financial anticipates progressive organic growth improvement in the second half of 2025. With a strong market capitalization of $11.46 billion and consistent dividend growth of 27.78% over the last year, the company demonstrates financial stability. The company is focusing on key game franchises and reducing dependency on performance marketing to drive growth. New product launches, such as a game for the Supremacy franchise, are planned for H2 2025.

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Executive Commentary

"We are focusing on key game franchises to drive organic growth," stated Alexis Bond, Interim CEO. Andreas Hunman, CFO, emphasized, "We are in a phase where we are redeploying capital," highlighting the strategic focus on optimizing resources and investments.

Risks and Challenges

• The mobile gaming UA environment remains challenging, with increased competition.
• Negative organic growth in North America presents a turnaround challenge.
• Market saturation and macroeconomic pressures could impact future performance.

Q&A

During the earnings call, analysts inquired about the challenging UA environment and variations in working capital. Executives addressed the potential for continued cash flow generation despite revenue challenges and provided insights into the company’s strategic initiatives.

Stifel Financial’s strong earnings performance in Q4 2024 reflects effective cost management and strategic focus, though the market remains cautious amid broader industry challenges.

Full transcript - Stifel Financial Corp (NYSE:SF) Q4 2024:

Alexis Bond, Group President and Interim CEO, Stillfront: Good morning, and welcome to the Stifel front Q4 report. I am Alexis Bond, Group President and Interim CEO of Stifel front, and I will be joined later by Andreas Hunman, who’s our Group CFO. We had strong cash flows and adjusted EBITDAK in the fourth quarter. This in spite of net revenue being down by 5% year on year organically. Cash flow was up by 170% year on year sorry, on a quarterly basis and for the full year of 2024, it totaled SEK1.05 billion.

So very strong cash flows in the fourth quarter in spite of the organic growth being slightly lower than we would have liked. We had overall a normal Q4 in terms of UA, but I mean really overall because it was harder to place it for certain games, and we had to shift around the investments more than usual during the quarter. So lots of kind of moving UA from game to game depending on the results that we saw. So normal overall, but challenging in terms of placing it depending on the games. We improved our adjusted EBITDA quarter on quarter, but also significantly compared to Q4 of twenty twenty three.

This was driven mostly by lower fixed costs, lower UAC in the strategy product area and lower capitalization as we focus our product investments on our key franchises. In the quarter, the overall decline in MAU and DAU was offset by higher harpDAU. We also had solid growth in our direct to consumer year on year. This is something, as you know, that we’ve been focusing quite a lot on, and it not represents more than a third of our total bookings. And that is more than any individual app store, just to give an idea of the size of it.

And ad bookings were stable. We’ve been trying to kind of push ad bookings more, but it is a difficult environment at the moment to increase ad bookings, but that’s something that we’re looking into for the future. In our strategy product area, we had lower levels of marketing for the Supremacy franchise. This resulted in lower bookings, but stronger adjusted EBITDAK in the franchise. We are also making significant product investments in this franchise, and that includes a new game that will be soft launched in the second part of twenty twenty five.

This should allow us to unlock future growth in the franchise and also in the product area. Furthermore, the higher level of UAC in Q4 twenty twenty three boosted boosted the strategy bookings in that quarter, but also then in Q1 twenty twenty four, as well as MAU and DAU in Q4 twenty three, and that all of that kind of explains the decline in Q4. Here in this in this product area as well, direct to consumer to continue to grow and now represents close to half of the bookings in the product area. In the simulation RPG and action product area, we also had lower levels of UEC in the quarter compared to last year. But Sunshine Island was able to grow its bookings year on year, and that’s despite in reduced investments in UA as we focus on product improvements to unlock further growth into that game.

And Shakes and Fidgets, as you remember, we had some issues with Shakes and Fidgets in the previous quarter in terms of some UX user experience issues. The game has now slightly recovered to compare to Q3 twenty twenty four as we’ve kind of been fixing those issues. In this product area as well, we have this lower level of UA year on year, and we are really kind of focusing our investments in terms of where we think there will be the most difference. If we look at the casual and mashup product area, we had continued strong growth within the Joe Walker franchise, while we continue to see product challenges with the Home Design Makeover franchise and a high dependency also on UAC investments for that franchise and in particular for the World franchise that we have from from our studio, SuperFree. The team at Stormate is working on a large player experience improvement from Design Makeover.

We have not defined some clear fixes that we need to do to that user experience. So we hope that will allow us to turn around that franchise. And the team at SuperFree is also looking at ways to improve the word franchise from a product point of view, and we want to see how we can kind of have that franchise be less dependent on UA and to have sustainable levels of UA for the world franchise. So bit of a mix story here in casual mashups with obviously Joe Walker performing extremely strongly. And with that being said, I’m going to pass on the word to Andreas.

Andreas Hunman, Group CFO, Stillfront: Thank you, Alexis. Good morning, everyone. I will we have a bit of an extended presentation today. So I will go through the cash flow of the quarter to start off with. We had a strong cash flow, as Alexis also mentioned in the quarter and also Dukin in the last twelve months of cash from operations of before net working capital of SEK374 million.

We had positive effects of working capital that we almost generated then 500,000,000. Even if we’re in that, we did pay taxes of 63,000,000. We did pay interest of almost 90,000,000 or 89,000,000. In that interest, obviously, it’s coming down versus the with the reference rates going down and our margins that we pay to banks going down, but it’s still we are paying almost CHF 90,000,000 of interest in the quarter. So we ended up with almost CHF 500,000,000, so CHF $491,000,000 of cash flow from operations in the quarter.

We did we have taken down our investments. So we invested CHF 138,000,000 in Product Development or 8.3% of the net revenues in the quarter. So we have taken down our investments. We are improving our operative cash flows. And that allows us then to utilize one, to pay off some debt in this quarter as well.

So we paid off almost SEK230 million of debt in the quarter and we did a buyback as we announced also of SEK40 million. Then of course looking at cash flows, it’s always in quarters, etcetera, we always look at an LTM perspective and I’m very pleased to see that we have from a free cash flow, I. E. Our cash flow from operations minus any leasing costs for offices, etcetera, and minus product development. We are now back to above a billion in terms of our cash flow.

And that is, of course, driven by some of the cost initiatives and optimizations we’ve done in the last sort of twelve months or even longer than that. That is now starting to show also in the margin where we even if we have a disappointing top line performance in the quarter, we can still deliver both healthy very healthy margins and resulting in a very healthy cash flow. We have taken down our investments, and I think that’s very clear on the light blue bar here to the right on the slides. But so we are just below million, so million in the last twelve months. That has been an intention choice.

And you can say, okay, have we taken it down too much? Now we believe that between 810%, there will be a good investment pace. It will differ between quarters. It will differ between years. But I think we’re still investing million into our portfolio.

So then moving to the next slide, which is the our debt portfolio. Here, we actually did a lot of activities in the quarter. First, we issued a new bond, so the $850,000,000 which is now maturing in four point seven five years. That was an intentional choice to have a good distribution on our in our bond structure. For some of you don’t remember, we did reduce the outstanding bonds earlier in 2024 and now we’ve sort of now we’ve got a much better maturity profile on that.

So that’s we’re very pleased. Following that, we also negotiated or we completed a new RSF for two point five years with existing banks. We took down the amount from three point seven five billion to 2,500,000,000.0 since we don’t actually need that much. We still pay for an outstanding amount of debt. So a lot of things happened on that one, and I think it’s important that to remember that Stefan is always focused on the maturity profile because that gives us the flexibility.

And I think now the next maturity is in June 2027. So we have a good flexibility and a solid balance sheet and solid financing structure in terms of our debt portfolio. In addition to that, we had, as I mentioned on the cash flow, we did reduce some of our debt. On the reported numbers, the FX, especially the dollar debt, closes a higher level. But we are still around our financial targets of 2.2x in terms of leverage ratio.

And we have still unutilized cash position of SEK1.2 billion or credit facilities, and we have almost SEK1 billion of cash on our balance sheet. So rounding off the year in terms of our cash flow and balance sheet positions, we have strengthened our margins, we have strengthened our cash flow from operations and reduced our investments slightly, and that is yielding strong cash flows. And we have significantly, in 2024, improved our maturity profile in terms of our debt portfolio. So we enter 2025, and we will speak more about how about this business in a very, very short time to give you a bit more flavor in terms of the financial performance of our new business areas, how we will run the business going forward. And with that said, I will hand back to Alexis.

Alexis Bond, Group President and Interim CEO, Stillfront: Thank you very much, Andreas. So, yes, we’ll be taking questions at the end of this slightly extended presentation because we obviously have been doing a bigger organization of the company, and so we wanted to basically explain to you what we’ve been doing, what has been realized, and where we’re going with this organization and why we’re doing it as well. So really what we’re focusing is on simplifying the organization to increase that accountability and streamline the decision making. We’re focusing on the key game franchises to drive organic growth, and we’ll explain how we define those key game franchises and what they are. And we want to slow the bookings decline and optimize costs within our legacy games, the games that are not part of these key game franchises, but drive a lot of cash flow to the business.

So this is quite a busy slide to explain the kind of the new operating way. You have on the left, you have kind of how our previous organization was working, and on the right, kind of, you know, the new organization. But I think, you know, it’s a bit busy, but it illustrates well how we operated in the past, the changes that we’ve made over the past few weeks and how we will operate now in 2025. So we had, first of all, two layers of HQ management with 11 execs. That is now being reduced to just one layer with six execs.

We also had before four senior vice presidents that were coordinating 20 studios and working with these studios to optimize resources across 70 games, well, actually more than 70 games, in the active portfolio. We’ve now reduced that to 16 studios and 10 key game franchises, and we’ve divided that into three business areas, each with its own Executive Vice President that is part of the group executive management and has P and L responsibility and authority of its over their business area. We then had several hubs that provided services to the studios and to the group that are now all under shared services, and we’re also taking a very pragmatic approach in terms of, you know, what are the hubs that provide significant value, doing a lot of cost benefit analysis about what makes sense. And some of the hubs clearly are providing massive value such as, you know, the payments hub that’s behind direct to consumer, the marketing hub, all that. But some other hubs, you know, we we think that we can improve and optimize.

The previous structure was really focused on scaling quickly via M and A, rather than on the integration, and it was quite complex to operate. This new structure of having three business areas, focusing on key game few key game franchises results really in more focus, a common direction, and really more operational simplicity with less layers of management. It’s just quicker, it’s just more efficient. Focusing our resources will make us more efficient. It will make us more competitive.

And as you can see in the new org, our 10 key franchises are divided across our business area. So, you know, each business area doesn’t have that many things to focus on. We have five key game franchises in Europe. Those are Albion, Big, Empire, Narrative, and Supremacy. We have three in North America.

Those are BitLife, Home Design, Makeover and Word. And we have two in MENA, APAC, which is one is Board and the other one is Joe Walker. And then, although we have reduced the number of studios significantly from 22 to 16, we still have more studios than key franchises in each business area. And that’s because some of the studios such as the Imperia, for instance, for instance, are focusing on legacy games, and others such as the Republic, you know, have part of their resource that is now working on non franchise games, live ops, and then another part of their resources that is supporting, the big franchises operated by New Moon. So that’s also another important thing that we’re doing here with this new organization is not only are we kind of investing our UA where it makes the most impact, where we get the most bang for our buck, but we’re also, you know, making sure that our talent is working, where it makes the most, the most impact.

So that’s really a a big fundamental shift in how we, in how we operate. That creates a lot more alignment, and then we think in time will pay off. So how how, you know, what how did we kind of, you know, how these key franchises work? What are the main criteria? So the main criteria that we have selected to to to define these key game franchises, that we will focus our resources our resources and intention on are the fall are the falling one are the falling.

So the first one that you see there is about, you know, having sufficient size and impact. We are now in a market where you need to have a certain scale to be successful long term. So a key game franchises needs to be of a certain size. So in our case, we’ve decided it needs to be driving at least SEK 200,000,000 per year or more. And all 10 key franchises that we’ve just outlined of more than SEK 200,000,000 in bookings per year.

So that’s the first one, size and impact. The second one is the consistency of the core experience. Each game in the franchise should maintain a consistent core gameplay style or fit within a particular genre that aligns with the franchise’s identity, and the franchise should be aimed at a clearly defined audience with, you know, consistent preferences, teams, or experiences that resonate across the game. It needs to make sense. Right?

A good example is, our supremacy franchise where, you know, games such as Conflict of Nations or Supremacy nineteen fourteen have a similar core experience and appeal to the grand strategy player demographic. So that’s, you know, very clearly defined there. A third one is, you know, technology and game mechanics. Games within a same franchise would have a common technological framework and game systems that can be reused and, integrated on. A good example of that is our Home Design franchise where many game systems and game mechanics are used across Home Design Makeover, Property Brothers, and then Ellen, what we used to call, you know, the game engines.

And then the final point is a recognizable and evolving IP. A good example of that is Jerwalker, which is one of the most recognized game IPs in the MENA region and is the umbrella brand for more than 50 games when it’s when it’s out for a very really super app for cultural and classical games. Another good example of that is Albion Online, which has a very strong IP and brand recognition. So we are starting with, with with with with with these franchises. This is kind of, you know, the the criteria, that we have for for those, and we’ll be happy to answer to any questions you have on this.

Then what about the other games? So we also have a clear definitions of what is not a key franchise, and we divide this into three areas. The first area is active live ops, and this is a non franchise, but these are non franchise games, but these are games where more than 5% of bookings are invested in, in UA. An example of that would be Shanks and Fidgets that you can see there. It’s one of my favorite games.

It’s a game that we have mentioned several times, but at this time does not meet all the criteria. Although right now, it is self launching a mobile dungeon game, spin off game based on the same IP and addressing the same audience. And if that is successful, that could be a candidate one day to become a key franchise. So that’s that kind of explains well what we have in terms of inactive live ops. In legacy live ops, that’s defined as non franchise games as well, but that have less than 5% of bookings invested in UAE.

So that’s really the games that are, I would say, in maintenance mode or or the games that where we we really know that, you know, it’s the product there’s no way to invest UA in a profitable way, but in many cases, they’re very cash flow positive. An example of this would be work of Madaraug Assault that we recently moved from Kicksai in Canada to Imperia in Bulgaria. As Imperia, we’ve turned that studio into a legacy live ops hub, and Imperia will receive more legacy games in 2025. So that should allow us to, ideally, not only improve the cash flows around those games, but also kind of reduce their decline. And then the last category is external partnerships.

And here, these are basically games where Stillfront does not have, the user data, where Release Stillfront is not the publisher. And a good example of that are the games that Nanobit develops and that are published by Netflix (NASDAQ:NFLX). So that’s really kind of the main ways that we define this. So how what does that mean? How are things have performed?

So if you look at 2024, although we had negative organic growth as a group of minus 2%, actually, our key game franchises who represent 72% of our bookings grew by 2%. And we believe that is in line or slightly better than our addressable market. So an increased focus on them will allow us, of course, with the inevitable quarter on quarter variations to make sure that long term, this continues to be, that this continue to be the case. And and we believe that their proportion of our overall portfolio as we focus more of our resources and our talent on them will grow. In terms of our active LiveOps games, they had a negative organic growth of 8%, and the legacy LiveOps that represent about 9% of our bookings at 20% negative organic growth.

So I hope this, showing you kind of these different things allows you to better understand the dynamics that are happening within our portfolio. And with that being said, I’m going to let Andreas explain and go into each of the business areas.

Andreas Hunman, Group CFO, Stillfront: Thank you, Alexis. Yes, as part of the in conjunction with the report, we also released the numbers for each of the business areas this morning. And there’s a lot of numbers. There’s a lot of new numbers. And the purpose of my part of this presentation is to give a bit a sense of how is Europe, North America and MENA and APAC doing and what’s the dynamics in that.

Of course, this is the way we will also report going forward. So we will be following up on this when we in Q1, etcetera, where we can give even more flavor. But I think it’s quite important to remember that when we have we have three business units. That’s how we run the business, so that’s the geographical spread. And then we have what we call also the shared services.

So and they have quite different unique characteristics and look quite different from our financial performance. It’s also important to remember when we break down the group as a whole, some of the dynamics when we see when we shift user acquisition spend or costs and the growth between within quarters is more visible. And that’s fine because if you break something bigger down into smaller and you have a very dynamic business, you will have those fluctuations. But if you first look at Europe, we classify it as a stable business with solid margins. They are very focused on in terms of revenues.

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Andreas Hunman, Group CFO, Stillfront: the key franchises, and they have the most key franchises in terms of both the big franchise, Supremacy, Empire, Albion and the Narrative franchise. So a lot of the revenues actually come from that. They’re well established fairly. Some of them have of these, franchise been around for many, many years, but it’s a very, it’s a stable and solid margins. Then it can fluctuate between time.

So for example, looking at here, looking at Q1, we did spend more in this particular case in supremacy in 2024. And of course, then the margin goes down when we had higher growth, etcetera. So it will fluctuate between quarters, but it has been consistently stable and solid business.

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Andreas Hunman, Group CFO, Stillfront: think one other dynamic to have is that this business area has the strongest gross margin. We have a lot of the games and the key franchises are more strategy and simulation and RPG. And there we have come much further in terms of our direct to consumer. You can also see that the direct to consumer share is above 40% in this business area. So that is something that is driving a higher gross profit.

And this is also an area where we actually invest more. We have shifted, and you can see that in terms of how much we spend on Product Development, but also in terms of some of the other fixed costs here. We have shifted some of the investments from, especially North America, which you will see in a few slides, into Europe. So we have taken that conscious decision to reallocate some of the investments. And then this is the largest France the largest business area.

It’s five seventy five people working in this as of year end. So it’s the biggest business area that we actually have. So yes, Bittak, very similar to the group, 25% on the full year, but remember that we also have these seasonality swings. That is more visible when you break down on a business area. Then North America.

Alexis mentioned that earlier as well. I mean, here, the focus is very much on a turning around the business. I mean, we have two main franchises. It’s the Home Design Makeover franchise and we have the World franchise. And they make up 70% of the bookings in this business area.

So it’s been a lot of there’s been a fairly

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Andreas Hunman, Group CFO, Stillfront: is a fairly big push to both reduce the cost base, which we can clearly see that we have reduced the cost base by and the number of people here by almost 25% q one twenty twenty four versus q four twenty twenty four. We still believe in these in these two key franchises, but there there are some fixes that needs to be done from from from home design, especially around the game dynamics and the player mechanics and in terms of the world franchise, they actually get profitable user acquisitions or you have profitable user acquisition costs. So that is one thing. Here we have also a fairly good margin in terms of gross margin, and that is primarily in The U. S.

Or North America driven by actually the ad revenues, something that we haven’t done yet. But what we’re targeting to do is just that we haven’t really rolled out direct to consumer in our North America business. So you can see it’s only 1% of our revenues that come from the direct crypto consumer part. So that is an initiative that will also strengthen the gross margin over time in that region. And with sort of the business and being fairly dependent on UA, this has been a business where we have only a 5% EBITDAQ margin.

We’re still making money in North America. It’s important to remember it’s not negative, but we are not happy with the result. And that’s what we’re saying. We need to turn around this business. And this was also one of the reasons that we actually took a goodwill right down in as part of the year end accounts as well.

But we have hoped that we have we have two strong franchises in there and then we have a plan to execute on during 2025. Should always end on a happy note, so I end on so MENA and APAC. I mean, these are I mean, we have two key franchise, the Board and also the Joerwacker franchise in here. Very consistently strong growth in terms of those two key franchises. They’ve been it’s been very fun and interesting to see how they can continuously grow in these strong markets, in these growing markets with a very strong marketing sorry, very strong underlying margin.

So that’s something that is very has very much impressed us. Just a few things around this is that we actually have here a lower gross margin than we have across the group. And that is mainly driven that we also in the MENA and APAC, we have two of our third party publishing, Subabila and Six Waves, and that takes down the gross margin because we give some of that royalties. They go to third party pub the people that actually are the game companies that actually make the game. So that’s one dynamic.

As you can see, we are hoping that we can increase the DTC and maybe also some of the ad bookings in this business. But that is a dynamic, not to miss that it is below the rest of the groups. But we also have very low user acquisition. I mean, if we look at the full year, we only spend 6% of our net revenues on user acquisition costs. And and that is just that both your walker, but also in terms of Moonfrog, have very strong communities, very strong brands within their genre, in their geographical region.

And that, of course, ensures that we can generate a very, very healthy EBITDA margin of 48 for the full year. And that is has been improving during the whole each of the quarter because we are growing very healthy on the top line. We also have allocated MENA, Imperial here. They will take over, and they have started already. We have started to move games from North America, but also looking from other where we can actually have that in our, what we call, the legacy portfolio and having that run as one hub where you focus on reducing the type of the decline in legacy portfolio at a much lower underlying costs.

So before I hand back to Alexis, just to summarize, we have in Europe, we have a solid business with stable margins. Of course, can be a bit volatile between quarters. We have big franchises here in terms of we have the actual big franchise, but we also have bigger franchise. We have a lot the most focus in terms of general revenue generation into these key five key franchises. And we have been able within these franchises to innovate, release new games, and supremacy is, of course, one very clear, evident of that.

We also have here in Europe the NanoBit collaboration, which, of course, gives us another dimension of our revenue streams. North America, as we pointed out and we have pointed out before, not maybe in this detail, is a turnaround case. We have a plan. It is the lowest margin for 2024 in the business, but we have a plan to fix that going forward. It is still a sizable business, but it has not been performing the way we have wished it to be.

Then we have the last one, so MENA and APAC, solid growth and very, very strong margins. And it will also be interesting to see now when Empiria can start taking over some of the legacy games, how we can improve or reduce the drop of those kind of impacts. So it’s important to think about we are breaking down the portfolio into these geographical areas and, of course, making $1 in MENA and APAC has a 48% margin return versus making $1 in The US, which had a 5% return at least in 2024. So it is it is a more dynamic business when you break it down into this perspective. But we have solid foundations in Europe, we have a growth case in the EMEA and APAC, and we need to fix North America.

And with that, I will hand back to Alexis, and I think I will stay.

Alexis Bond, Group President and Interim CEO, Stillfront: Thank you very much, Andreas. I hope that showing to you how this business areas work and how our portfolio is divided across key franchises, active live ops and legacy live ops really allows you to, you know, see, you know, what is working very well and what we need to improve and gives you, you know, a view a little bit about under the hood about what really are the dynamics that are driving, you know, the overall numbers that you see, for still front. So I think that gives you kind of more transparency than what you had before. In this slide, I just want to kind of show you what the actions are that we’ve done in terms of driving operational efficiency and kind of what is coming. So we started with this transition a few weeks ago, well, a little longer, actually a few months, And we’ve already achieved SEK 50,000,000 in annualized cost savings as a result of that.

Six studios were consolidated in 2024. And this also kind of feeds into our growth initiatives. So for example, you know, you know, merging, consolidating Baetro and Dorado, which are two studios that are working on the Supremacy franchise, is an example of how aligning our resources and team towards common goals around the game franchise, you know, should should allow us to, you know, perform perform better. Also, you know, focusing on our core game franchises will allow us to benefit from scale effects from our marketing and have more impact from product marketing initiatives and reducing our dependency on performance marketing. As Andreas was saying, you know, some of our games have strong some of our key franchises have strong IPs, other, you know, can benefit from community or network effects and all that, and we want to relay into that, so to reduce kind of the dependency on performance marketing across the portfolio.

We are also kind of, you know, concentrating our product investments on these key game franchises. Is just more efficient in terms of growth impact, and this gives a clear route to return to organic growth later this year. So that’s really kind of the main things in terms of the efficiencies that you can see and how this kind of reorg is is is helping us. So to summarize what Andreas and I have said and before we we we stop for questions, In terms of the business areas, for Europe, I know we expect some fluctuation between negative and positive organic growth in general and across our key franchises, but it is a very, very stable business. We are in a kind of product investment phase for several of the franchises.

One of them was mentioned is supremacy, and we kind of expect to keep solid cash flows during that period. For North America, we are in a turnaround situation. We are likely to continuing being very economical with UA or more economical with UA short term, and that will have a negative impact on organic growth, but should be neutral to positive on EBITDAQ. As we invest in product improvements, we should be able to then rescale UA and kind of improve these KPIs. And also in North America, we have new leadership that has come in with Todd, which is a twenty year venture in the games industry, which would really kind of allow us to boost this turnaround.

For MENA and APAC, we have strong performance by Jay Walker that is carried by the excellent work the team is there doing there, but also by the break the brand recognition, the SuperHAB network effects, some strong monetization improvements, and then constant new game launch in its app, as well as a fast growing mini market. The mini market is growing by double digits, not the strongest Joe Walker, but growing by double digits yearly. And then Moon Frog, also in that area is supported by similar effects in terms of the market. The Indian market is a is a fast growing market. And in addition to the board franchise is investing in emulating what we’re doing in the Joe Walker Super App approach with with with Tin Patty Gold.

So, you know, this new storefront operating system, you know, with a leaner and fast organization, growth through key game franchises, balancing growth with good cash flow, and just having stronger group capabilities and industry talent gives us the solid foundation to build into the next quarters and years. So with that being said, thank you very much for your time, and we’re ready to take questions.

Conference Operator: If you wish to ask a question, please dial 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial 6 on your telephone keypad.

Nick, Analyst: I’ve got three questions. So first of all, in the release, you talk about organic revenue growth improving for the group through the year. On the call, I think you referred to aiming for positive organic revenue growth during the year. Just wondered if you could clarify that a little bit in terms of whether you expect during the second half the group to move into a positive organic revenue growth situation? Second question, can you maybe give us a bit more color on what is driving the more difficult UA environment that you have flagged in the first weeks of twenty twenty five?

Is it how can we be confident that this is a temporary thing? Perhaps there’s a bit more information there. And the third question, we’ve seen other video games groups sell single franchises, which aren’t necessarily a very large part of the group, and those show the market that it is undervaluing the group. Do you think that there are any corners of Stiltron where you could get an interesting price, which would make investors reevaluate the rest?

Alexis Bond, Group President and Interim CEO, Stillfront: Should I take the organic growth one?

Andreas Hunman, Group CFO, Stillfront: Yes. That’s the second one.

Alexis Bond, Group President and Interim CEO, Stillfront: Yes. So thank you, Nick. So in terms of the organic growth, so as you saw, we had kind of minus 5% organic growth in Q4. Entering into Q1, we kind of explained that we expected that organic growth to continue to having negative organic growth and slightly worse and worse organic growth in Q1. Strong comparables are behind because of that.

We know we had some strong game launches last year in Q1. We also had Easter in Q1, which this year is in Q2 and there’s a few other factors. Also the fact that with some of our franchises such as Supremacy, we’re kind of in an investment phase in terms of product, but we’re kind of in terms of UA. We’ve kind of taken it down a notch and increased the EBITDA. We have to be dynamic in this case depending in terms of what we see.

So that’s kind of what we’re seeing for Q1. And then we think that from Q2 onwards, that would progressively improve. We think Q2 will likely continue to be negative. And then from Q2 to Q4, we will see kind of progressive improvement, and we do think that we should be able to reach positive organic growth at some point in the second part of the year. So that’s for the first question.

For the second question

Andreas Hunman, Group CFO, Stillfront: That was the UA question as well.

Alexis Bond, Group President and Interim CEO, Stillfront: In terms of the UA, what were we seeing in terms of the UA environment? Nick, it’s just very, very dynamic and constantly changing. As you know, we work with many, many different channels. And what we’re seeing is, we have different games and with different channels that will work well for for for a few weeks. And then all of a sudden, you know, that channel will no no longer work and we have to change.

We’ve done, you know, massive improvements in terms of, you know, the our creative output in terms of what we do. So we think that in Q4, the U. S. Elections that obviously always have an impact. We also had a kind of a shorter period between Black Friday and Christmas, so we weren’t really able to you know, use a little bit of leeway there to invest.

We are able to push in Q5 in terms of the UA. And then normally, what we usually would see is January is usually a very good month to invest UA. UA. What we’ve seen this year is that it was good just for a few days at the beginning of the month, and then it became expensive quite quickly. So it is something that we’re monitoring on a permanent way.

Obviously, we don’t want to be dependent on market situations in UAE. That’s one of the reasons we’re focusing on key game franchises. And yes, we need to continue to be excellent and world class in terms of our performance marketing, and that’s something that we’re continuing to invest. But we do want to reduce our dependency on it.

Andreas Hunman, Group CFO, Stillfront: Yes. And then in terms of your last question, Nick, I mean, it’s obviously, I mean, difficult to comment on individual assets. I think we are taking quite good steps now in terms of breaking down our business. So of course, you can see even if we don’t present the P and L per studio or per franchise down to the bottom line, we are showing now that we have three very different financial profiles in our different business areas. If things are for if we would divest something, etcetera, that’s something we will comment on when we get to that.

But I think just the way we report it, or we’ll be reporting it going forward is obviously, shows some of the positive and some of the things that we are struggling with in a more transparent way. And that’s also one of the reason we are breaking down the reporting in much more of a granular way going forward.

: Can I just follow-up on the

Nick, Analyst: UA question? That became expensive quite quickly. Do you have a theory as to why that happens? Is it to do with other mobile games, other factors out there in the mobile market? Or what do you put that down to?

Alexis Bond, Group President and Interim CEO, Stillfront: Yes. I think it’s a mixture with stronger competition in certain markets from particularly in Match three, which is the own design makeover market, as you know. We have some very, very strong players, privately funded players that have come in and taken a lot of market share, such as Green Games. So you need to make some massive product improvements to compete with them. And also kind of the marketing side is difficult.

So that’s kind of one side of the things. And another side is you’ve got large providers such as Applovin and IronSource, where it’s kind of a black box what kind of margins they take. And if you look at their results, their results have been improving constantly. And then if you look at the ad revenue from the game companies, those have increased at the same level, and the costs in terms of The U. S.

Side have increased. So one of my theories, but it is just a theory, is that more of that, they’re basically capturing more of the value from that market. Obviously, that’s not something they can do forever because then it’s not economical to do UA with them. So I think this will balance out over time. But at the moment, it does feel there’s been a bit of a squeeze there.

: That will. Thank you.

Conference Operator: The next question comes from Martin Arnel from DNB Markets.

: Hi, guys. My first question is, you had a comment there in the report that you had positive organic growth for the key franchises last year. Was that the case also in Q1? Or were you negative so far in Q1 in January?

Andreas Hunman, Group CFO, Stillfront: In terms of the January 2025,

: we’ve

Andreas Hunman, Group CFO, Stillfront: I think we will refer to what Alexis just said. That’s that we’ve seen we have struggled a bit in the beginning of the place in terms of the UA deployment. How that is impacting the key franchises? I mean, it’s a bit premature to state that in this call.

: Okay. And when I look at the strong cash flow, there is this big working capital effect in the quarter. Is that can you comment a little bit on that? Is that something that will be a negative reversal in the coming quarters or?

Andreas Hunman, Group CFO, Stillfront: As you know, I mean, working capital always fluctuates between the quarters. I think then especially when we get the receivables from especially Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) or Apple, This one, it was positive. I think we if you look at a longer over the cycle, our working capital has been fairly, fairly stable. Then, yes, in 2023, Q3, we had a negative effect and now we have a positive effect. I think the fact is that we are shown that even if we had some we have been struggling a bit on the top line, we have been able to improve our cash flow generation because we are actually improving our margins, both in terms of DTC, also our gross margin, but also in terms of some of the fixed cost reductions that we’ve done in the last year.

So yes, you have a working capital. You always have any working capital impact, but I think the fact is that there are some underlying drivers in terms of margins, but also that we also see that interest rates actually are coming down and that has been negatively impacting our cash flows historically. And we will see that with the reference rates coming down, if it takes a while to flush out, that would also improve our operative cash flow going forward.

: Okay. And when you look at the top line trend, it’s negative right now. But when you look ahead, for how long do you think that you can offset that with the cost optimization and the lower CapEx in order to have free cash flow, say, above SEK 1,000,000,000 where you are now on an annual basis? For how long can you offset the negative revenue trend, assuming that it could move on for a little bit longer than you think?

Andreas Hunman, Group CFO, Stillfront: Yes. I think if I just I can just take I think if we go back now to our three business areas, I mean, we have if we take MENA and APAC, it’s growing, very strong margins. We don’t see any signs that, that business area anyway deviating significantly. I mean, they are not as dependent on UA. And what we’re hoping there as well is to move some of the legacy games into to Imperial and improve the margins there.

So so that’s that business area. I think and then if we look at Europe, Europe has, was a what we shall be showing as well, a stable business. I would say in Q1, especially in Q1 twenty twenty four, there we had more UA deployment, especially in the supremacy franchise, which you see in the margins, but we had better growth. We don’t see as much of that this year. But it’s a stable business that has shown that it can deliver not tremendous growth and over time, but a stable business that has been a strong cash flow generator.

And then we have North America, and North America is a turnaround case. And we have a plan. But of course, if we can improve the North America cash flow, we have been deploying a lot of U. A, as you can now see. Of course, that will improve cash flow if we redeploy that into more profitable markets like the Europe or MENA and APAC.

So I don’t want to give a time line, but I do think that if you look at break it out in those three components, then I do think there are things that we can do and especially in terms of cash flows where we have both North America direct to consumer share can go up and also a more profitable user acquisition. But I know

Alexis Bond, Group President and Interim CEO, Stillfront: Yes, I mean to build on Andreas and very simply, negative organic growth in North America doesn’t mean worse cash flows necessarily. We could eventually we could actually even improve the cash flows from there. And it’s not worth the same as the positive organic growth that we get in MENA and APAC, for example, where we have much stronger margins and therefore much stronger impact to cash flow. So we’re fine.

: Okay. Thanks for that. And my final question, I don’t know if you can reply to it, but I have to ask you, how is the recruitment process going when it comes to new CFO and also solution for permanent COC? Is there any update from the board on this that maybe you could share?

Alexis Bond, Group President and Interim CEO, Stillfront: Yes. I think as you put it correctly, that’s for the board to respond to and to and to update you on. So there’s there’s there’s no there’s no imminent updates at the moment.

: Okay. Thank you, guys.

Alexis Bond, Group President and Interim CEO, Stillfront: There’s a process.

Conference Operator: The next question comes from Rasmus Enberg from Kepler. Please go ahead.

: Good morning. Two questions or three maybe. So you’re saying that capitalized development is in the 8% to 10% range also going forward. So we are kind of at the lower end of that. Or can you reduce that further?

I didn’t quite pick that up. That’s the first question.

Andreas Hunman, Group CFO, Stillfront: I can yes, I said I mean, we have I think well, I think in Capital Markets Day two years ago, we stated that we will take down CapEx in product development. I think what we then stated, we would take it down a few percentage points. We’ve started at 14% and we have come down. I think, of course, when you go through the changes that we’ve done and that Alexis elaborated, you put you take out some things, but then you also start investing in some things more. So for example, in Europe, in our key franchises, there you can see now in the numbers that we have actually started to deploy more of that investment.

So but we still think and we stated this before that between 8% to 10% of our net revenues is a healthy number. Will it be like that every quarter? No. Can it go down below that some quarter? Yes.

But I think it’s all about we are in the phase where we are redeploying capital and, of course, investing with less in U. S. And one man hour in U. S. Is more expensive than in our other business areas also has an impact, of course.

And I would say that 8% to 10% is a healthy level.

Alexis Bond, Group President and Interim CEO, Stillfront: Yeah. And I think focusing those investments on the key franchises also makes a difference because there’s a lot of things, a lot of games where maybe we would have potentially dumped some investments that there aren’t we’re now moving to kind of legacy live ops. So that also kind of helps with the process. But it really in we’re a games company, we make games, and we will continue to do so, and that’s what we’re doing. We’re just focusing on what kind of games we’re making and why we’re making it more than we did in the past.

: So have you benchmarked that? It looks to me still to be quite high number. I mean, the 8% to 10% of sales, there are companies substantially below that.

Andreas Hunman, Group CFO, Stillfront: Yes. Then you’re correct. Then of course, it depends where you benchmark that. If you benchmark that into a U. S.

Company where you don’t have the same accounting rules and you don’t activate in the same way, but we think it’s and you see some game companies that have a lot higher investment, I think, from our perspective, and that’s why we think it’s a healthy level. We also one of the reasons we changed our profitability metric two years ago to EBITDAK to take away the discussion how much do you activate. It’s what we I mean, it’s an accounting principle. What you invest, you need to put on the balance sheet. From a profitability and how we steer the business, it is still EBITDAK that is our key profitability mark.

: Yes. And then the same question for UA. It was relatively low now. And I guess, if I read you correctly, we shouldn’t expect it to pick up in Q1 either. What kind of range do you see for UA perhaps for this year, if you have any thoughts on that?

Andreas Hunman, Group CFO, Stillfront: We haven’t I mean, we haven’t guided in terms of the UA deployment this year as well. So it will, as normal, fluctuate between the quarters. Alexis was saying how the Q1 will look, but give a range for the full year. It’s not something

Alexis Bond, Group President and Interim CEO, Stillfront: And I think there’s an important thing about U. A. Is you also need to be quite opportunistic. You need to be opportunistic in terms of when you see that the costs are too high, you need to pull back and get your EBITDAK up. But when you see that there is an opening, then you need to be very quick in terms of reacting and investing.

So I think to give guidance on there would be naive. Okay.

: Very good. Final question. With regards to North America, do you anticipate further restructuring and charges there? Or is it smoother from here that we there is some massage to do, but no charges or similar things? Or how should we think about that restructuring?

Alexis Bond, Group President and Interim CEO, Stillfront: I’ll let you answer the financial side of it. But in terms of what we’re doing in North America, so obviously, we have new leadership with Todd. I know he’s executing on a plan there. We do expect to transfer more games from North America to our legacy live ops at Imperia. We’ve already done a few and we’ll do some more.

So that’s kind of is an ongoing process. In terms of the financial aspect, I’ll let Andreas answer.

Andreas Hunman, Group CFO, Stillfront: Yes. I mean, we have, as you point out, Rasmus, we had a few of quite a bit of our restructuring costs in the last year has been relating to the reductions. I mean, reduction is of course almost 25% in North America. So it would be less of that, I would say, because we have taken out quite a lot of the fixed cost base. Exactly how Todd will organize his team, we’ll get back to you.

I mean, we’ll be more details around that going forward as well. But we it’s not we have done a lot in North America in terms of our cost base.

: Right. Thank you so much.

Conference Operator: On your telephone

Nick, Analyst: keypad. There

Conference Operator: are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Alexis Bond, Group President and Interim CEO, Stillfront: Perfect. So thank you very much for your time again. I hope that we’ve been able to explain the new organization that we have at Stillfront in a way that is understandable with the three business areas by geography Europe, North America, MEAN and APAC, the different dynamics within those business areas and also that we’ve been able to explain our key franchises and the dynamics around that. Thank you very much for your time and we will see you next time. Thank you.

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