Q2 Report – 30 June 2023

Flexion achieves H1 revenue growth of 12% to GBP 31.8m despite decline in Q2 revenue. General slow-down in mid-core segment and unfavourable FX are contributing factors. The company sees a positive outlook for second half of the year with many new growth drivers.

April-June 2023 performance

• Total revenue decreased by 12% to GBP 15.5m (17.7)*
• Gross profit decreased by 19% to GBP 2.4m (2.9)
• Adjusted EBITDA^‡ decreased by 63% to GBP 0.5m (1.4)
• Operating Profit grew to GBP 70k (-380k)
• EPS amounted to GBP -0.43 pence (-1.45 pence)
• Operating cash flow amounted to GBP 0.9m (1.0)
• Cash and cash equivalents grew to GBP 12.7m (8.4)

January-June 2023 performance

• Total revenue increased by 12% to GBP 31.8m (28.3)*
• Gross profit increased by 11% to GBP 4.9m (4.4)
• Adjusted EBITDA^‡ decreased to GBP 1.3m (1.7)
• Operating result remained at GBP -0.1m (-0.1)

Important events during the quarter

• Launch of Hill Climb Racing and Hill Climb Racing 2 from Fingersoft
• Announcement of strategic partnership with Xiaomi. Integration of GetApps to our suite of alternative marketplaces
• Participation in Samsung Game Launcher project
• Audiencly won the exclusive marketing and sponsorship contract for 7vsWild in all German speaking countries.

Important events after the quarter

• Launch  of Monopoly Go! - most successful launch to date
• Launch of several titles on DT Hubs – Digital Turbine’s new carrier distribution platform
• Launch of several top games on GetApps. This new platform contributed with the most new users to our platform in July
• New distribution channels represented 40% of total new users in July
• The 2022 audit is still ongoing and presented 2022 numbers are therefore unaudited. The Company is not aware of any material changes to what was presented in the Q4-2022 quarterly report.

* Comparison figures for the year-earlier period in brackets
‡ The Group defines adjusted EBITDA as earnings before interest, tax, depreciation, amortisation, finance costs, impairment losses, foreign exchange gains/losses and corporate acquisitions costs. The definition was updated in June 2022 with the exclusion of foreign exchange gains/losses and, therefore, historical adjusted EBITDA figures have been updated accordingly.

Q&A with the CEO

Q: How would you describe the quarter?

A: The second quarter was a “consolidation” quarter for us, a quarter where we worked intensively to assimilate last year’s 100% hyper growth and to lock in the next growth drivers that will kick in during the second half of the year. Such drivers include the new Monopoly GO! game, already one of the strongest mobile games worldwide.  We launched the game in our channels on the 25th of July, and it has been our strongest launch to date.

While we are totally confident that the business is already returning to growth levels exceeding the 12% we have already experienced in H1 2023 versus H1 2022 (and 120% versus 2021), the year-on-year decline in the second quarter was naturally disappointing. It stemmed from a combination of two main factors: a general slow-down in spend on mid-core games and negative foreign exchange effects. To put the effect of foreign exchange simply: Total Q2 Revenue measured in our reporting currency GBP was down 12% year-on-year, while GBP has strengthened some 8% against our main trading currency USD this quarter. That accounts for a significant part of the year-on-year decline.

Secondly, some of our best-selling games were impacted by an industry-wide downturn before revenue from new games kicked in, thus resulting in a temporary decline. The market boost from Covid is over, changes to privacy rules have made user acquisition more complex and, of course, weak global macro data has also adversely impacted the games we distribute – and we are not alone in this regard. Revenue for the same games on the market leading platform, Google Play, was down 28% in this quarter compared with 2022.

Q: What were the big positives you mentioned for the quarter?

A: We have delivered several successful and ground-breaking new projects, which make me excited about the future. I have outlined them separately below to provide some needed visibility in terms of what I believe will continue to drive our growth and to strengthen our market position. They also showcase the strength in our model as we continue to build market share despite the macro environment. 

Increased Distribution – We see the best return on investment by growing distribution for our existing portfolio, and we achieve that by strengthening relationships with existing channels and/or adding new channels to our platform. The more the traffic, the stronger is our offering in terms of existing and new games. This quarter has been characterised by new distribution projects. In July, 40% of our total monthly new users (1.6 million) came from channels we only launched in Q2. This is a big achievement and will set us up nicely for the rest of the year but more importantly for 2024!

Xiaomi – Many have asked me why we announced this partnership last month when we were already working with Xiaomi, the world’s second-largest android smartphone manufacturer. Allow me to explain. GetApps, Xiaomi’s Appstore, had until this year only been rolled out in a few markets and had no own payment platform. Early partners had to bring their own integrated payment service while Xiaomi offered some limited marketing. Flexion was one of the early adopters - we launched a few titles in a couple of markets. This year, on the back of the strong tailwinds for alternative distribution, Xiaomi decided to go all-in with a full global rollout of GetApps including their own payment platform offering favourable terms to developers and strong marketing support. We have since completed the full integration and launched a handful of titles, and by July, this channel was already contributing the largest number of new monthly users to our games. There is still work to be done on monetisation, but we believe Xiaomi could over time become one of the leading alternative mobile games stores, and one where Flexion has an important part to play.

Digital Turbine – in Q1, we announced our strategic marketing partnership with Digital Turbine, the leader in mobile game user acquisition services in the USA, and we have since integrated and launched a few of our strong titles on DT Hubs – a new distribution platform for mobile carriers and OEMs. So far, four of the biggest US carriers have gone live with DT Hubs. When this is fully rolled out during the second half of the year, we expect millions of new users from this channel in the US.

Samsung Game Launcher – this is a new and super exciting cloud-gaming service by Samsung. It is in beta launch in the US and Canada and Flexion is supporting the project with some of our best games. It will be fully rolled out through Samsung Game Launcher – their service which is preloaded on all Samsung devices. The new service lets consumers play a game instantly as it is streamed, and no downloading of files is necessary. It significantly improves conversion and is perfectly suited for user acquisition. This could become a game changer for Galaxy App Store.

Amazon Fire TV – this is a new and exciting channel opportunity which brings our games to smart TVs. So far, we have only launched Hill Climb Racing, but we have noted significant volume and quite strong monetisation.

Windows 11 – Amazon and Microsoft have joined forces and are bringing mobile games to PCs through Windows 11. The project is now starting to gain real traction with users. During this quarter, we have launched a few games including Monopoly Go. It is a highly strategic project both for Microsoft and for Amazon.

New Scopely Titles – We expanded our Scopely contract earlier this year to include their two big new titles Monopoly Go and Stumble Guys. Following its global launch, ”MONOPOLY GO!” quickly became the #1 mobile board game in the world and was the biggest casual mobile game launch of the last five years in the west. We have only been live with this title for four weeks but so far it is our strongest launch to date. If we manage to generate 10% of the revenue the game is achieving via Google Play, it will be the strongest title in our portfolio. With such a strong title, the question is only – how many users we can drive to the game through our channels. Needless to say, we are aiming high and have managed to secure the best possible marketing commitment for this purpose. Expanding our distribution and reach is therefore critical to make the most of this and similar growth opportunities.  We aim to launch the second title, “Stumble Guys”, later this quarter. “Stumble Guys,” is already enjoyed by tens of millions of players every week and was also one of the top ten most downloaded apps in the world in 2022. With games like this in our portfolio we become a very attractive partner for most distribution channels.

Audiencly – 7vsWild project. The first six months of the year are usually slower for marketing agencies and this year has been no exception. It is, therefore, a real pleasure to announce that Audiencly has won the exclusive rights to sell all sponsorship and advertising for the third series of the hugely popular German online event 7vsWild, where several famous influencers are placed out in the wild on a survival mission. The series will be live streamed and available on YouTube and Amazon Freevee during Q4 -2023 and Q1-2024. The first two seasons have averaged over 100 million views per season. Our 2023 revenue forecast for the project is EUR 5m and we already have approx. 50% of the budget committed from advertisers. It is worth mentioning that the participants in the show are some of the biggest gaming influencers in Germany and this will surely lead to incremental business for Audiencly in 2024 and beyond. Being part of Flexion was one of the decisive points in winning this bid and it could accelerate their growth for years to come.

On the tech side, we worked intensively on upgrading our systems to adapt to last year’s 100% hyper growth and to prepare for the next growth drivers. Our teams succeeded in developing and soft-launching a new, significantly enhanced, version of our distribution-enabling software, and we’ve made good inroads into streamlining the settlement and reporting platform to cope with the vast increase in the numbers of transactions we expect to support.

Lastly, on game-sourcing, we have a strong sales pipeline and are in negotiations with several leading developers. These include takeovers of existing revenues and users in some alternative channels for certain games. We are now looking at converting these leads to boost our revenue in Q4 and beyond. I think it is fair to say that it has been a challenge to recruit strong salespeople who can close these complex deals in key markets. Our business development team currently only consists of four fulltime employees. Recruitment is ongoing and I am confident that we will add strong members to the team very soon. To date this year, we have added NetEase and Fingersoft as well as expanded our Scopely partnership but we can do better and that is one of our focus areas for the remainder of the year.

Q: Your Gross Margin and EBITDA is down more relative to your revenue, please can you expand on this?

A: Looking at the gross margin within distribution, it was impacted negatively due to lower sales but also due to relatively more substantial declines on key titles with higher margins. We expect a partial recovery in Q3 and onwards. With a reduced margin and continued investment in future growth our EBITDA was impacted negatively in the first half of the year. However, Flexion is a growth company with a strong cash position and our current priorities are balanced revenue growth and investing to ensure we can support future profitable growth. 

Q: How do you see Flexion’s position in the current market?

A: The games market is going through a transition phase, with several factors playing a role. First, we all benefitted from stronger demand during and after Covid. With the weaker financial climate and inflation at peak levels this phase is now over. Moreover, Apple, which is still the most important platform for game developers, has introduced changes to user tracking (IDFA), so the biggest User Acquisition (UA) companies found that they could not operate in the same way, and this has led to less spend on traditional UA services.

All in all, these factors have accelerated the need for change. Over time, game design may change and favour more casual games on mobile that take a page out of mid-core game monetisation. Games like Monopoly Go and Stumble Guys are typical of the new breed of mobile games. These games may have to rely on new user acquisition strategies, including creator programmes, better virality and sharing (this is where cloud gaming may play a future role). All this makes the landscape for marketers more challenging, and we see distribution with higher margin channels coming into play already. These winds of change are good for us. Flexion is very well positioned in all of this. Not only do we represent some of the biggest games in the market, but we also know all the important players that are driving this change. 

Q: Where are you on M&A and investment strategies?

A: Due to the general slowdown both in tech and now also in gaming we have been cautious in our recent approaches. Valuations of private companies are still lagging the public market. We are having several strategic discussions which may materialise in transactions over time.

Q: Your guidance indicated have guided on 20-40% growth for the year, where are you on this?

A: Due to the market slow-down and delays in game signings as well as launching and activating new opportunities, our annual guidance is now more challenging. Having said that, we have, as previously explained managed to secure many significant projects this year and we are now working with 100% focus on execution and monetising them in 2023. We therefore still believe and feel confident in our ability to deliver at the lower range of our market guidance. It is accordingly interesting to conclude that alternative distribution channels are gaining market share. This is particularly interesting for Flexion given the pending break-up of Apple’s and Google Play’s oligopoly driven by regulatory changes during 2024.

Jens Lauritzson – CEO