Q4 Report - 31 December 2022

Flexion closes its strongest year to date with another record quarter. Total revenue grows by 108%, gross profit up 147% and adjusted EBITDA hits GBP 1.6m

October-December 2022 performance

• Total revenue increased by 108% to GBP 21.7m (10.5)*
• Gross profit increased by 147% to GBP 3.7m (1.5)
• Adjusted EBITDA^‡ increased to GBP 1.6m (0.4)
• Adjusted profit before tax^# increased to GBP 1.1m (0.6)
• EPS amounted to GBP 2.78 pence (1.28 pence)
• Adjusted EPS amounted to GBP 1.88 pence (1.32 pence)
• Operating cash flow amounted to GBP 1.2m (0.5)
• Cash and cash equivalents amounted to GBP 13.8m (14.5)

January-December 2022 performance

• Total revenue increased by 110% to GBP 68.5m (32.6)*
• Gross profit increased by 159% to GBP 11.1m (4.3)
• Adjusted EBITDA^‡ increased to GBP 4.8m (0.4)
• Adjusted profit before tax^# increased to GBP 1.8m (0.5)
• Operating cash flow amounted to GBP 6.1m (1.9)

Important events during the quarter

• Signing of Age of Apes from tap4fun
• Launch of Kiss of War from tap4fun
• Closed a directed issue of shares to the public with proceeds of SEK 25.3m from more than 2,300 subscribers.

Important events after the quarter

• Signing of Hill Climb Racing and Hill Climb Racing 2 from Fingersoft
• Signing and launch of Vikingard from NetEase Games
• Strategic partnership announcement with Digital Turbine
• The 2022 audit is still ongoing and presented 2022 numbers are therefore unaudited

* 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.
# The Group defines adjusted profit before tax as profit before tax excluding foreign exchange gains/losses, amortisation of intangible assets from corporate acquisitions & corporate acquisition related costs. This quarter, the adjustment amounted to GBP -0.5m.

Q&A with the CEO

Q: How would you describe the quarter?

A: We closed the 2022 financial year on another high, posting our seventh consecutive quarterly revenue record. Since the listing in 2018, quarterly revenue has grown more than 30 times, which is amazing. In 2022, we reported growth of 110% and over the last three calendar years, we have averaged annual growth of 105%.

The strong Q4 performance came on the back of a gaming market that is experiencing a temporary slowdown in growth and margins, partly due to a structural change for paid user acquisition triggered by Apple’s privacy policy. Flexion sailed unaffected through this turbulent period and we are seeing growth in all areas of the business. This makes me very bullish about the future. While everyone is talking about reducing staff and overheads due to weaker performance, we see an opportunity to accelerate growth and attract key talent, while investing in new business areas and making new acquisitions.

Q: What specifically drove this very strong growth in Q4?

A: We are in a great position and we continue to benefit from the shifting market trends. The fourth quarter is traditionally a strong period for us and this year was no exception. I am very pleased with how well we executed the important Q4 promotion and marketing campaigns in both business areas.  As a result, we saw quarterly growth in Distribution by 76% and in Group by 108%.

Q: You are also reporting very strong EBITDA growth, can you explain why?

A: As I previously pointed out, we have now reached critical mass within Distribution, meaning that we have covered our platform investment costs and can therefore leverage economies of scale in the business. We are benefiting from low marginal costs going forward and that is why our annual adjusted EBITDA is growing faster than our revenue – by more than 300% compared to 110%. Influencer Marketing is also contributing to the growth in EBITDA.

Q: Your cash flow generation is very good. Why is that?

A: Yes, we have a very strong cash EBITDA. In simple terms, when we increase EBITDA, we also increase cash, unlike most game publishers who tend to have highly capitalized game development projects that boost EBITDA before generating positive cash flow. Our strong model is quite unique and helps us to invest in future growth.

Q You have provided guidance of 20-40% growth for 2023, can you please shed some light on this?

A: We expect our strong momentum to continue and estimate annual revenue growth to be in the span of 20-40% in 2023. This is following on from our amazing 110% growth in 2022. Starting from a much higher revenue base it is of course much more challenging to grow with the same percentage pace, but annualised over two years, this means over 60% per year. The guidance is based solely on organic growth, meaning it does not include acquisitions.

Q: You have just announced a strategic partnership with Digital Turbine. Please explain what this will mean for Flexion?

A: First and foremost, it means new and exciting distribution opportunities for our current and future games with some of the biggest mobile carriers in the US. Digital Turbine (DT) is a Nasdaq (US) listed company in the mobile adtech space with focus on app distribution and monetization. It works with many of the large game developers, most of the major American carriers and several of the biggest device manufacturers. There are clear marketing synergies and with DT’s move into the alternative app store space, we have now formed a strategic partnership focused on bringing some of the top game developers to alternative app stores. Starting immediately, DT will promote the Flexion suite of services to their game customers, and it has just announced its first game store with US Cellular, and there are many more in the pipeline. We expect the marketing partnership to start having an impact towards the end of this year. It is worth mentioning that Digital Turbine recently invested in Aptoide, which provides the white-label app store platform used by DT. We are already integrated with Aptoide and have been evaluating its platform since last year.

Q: Have you been affected by the recent turbulence caused by Silicon Valley Bank?

A: For some time now, our policy has been to keep cash in two separate global banks, and we are not affected by this development. However, indirectly, it improves our position as the impending cash squeeze in tech should provide opportunities for growth companies like us with strong cash positions.

Q: You raised SEK 25m through a public offering in December, please can you explain why?

A: There were three principal reasons for the issue of shares.  First of all, we do see more and more companies with squeezed cash positions, so it is very useful to sit on a strong cash position when we are looking at investments and acquisitions. Secondly, we wanted to expand our retail presence on the Swedish stock market, so it was great to see that the capital round doubled the numbers of the shareholders in the company.  Thirdly, we wanted to improve the underlying liquidity of the share which we accomplished with this round.

Q: Finally, how do you view Flexion’s growth beyond 2023?

A: Given the current momentum of the alternative market and the strong growth in influencer marketing, we are pushing ahead on all fronts. We are gaining more traction with the top game companies and the synergies with Audiencly are starting to materialize. As an example, NetEase was already a long-standing customer of Audiencly when it signed with Flexion Distribution in Q1 2023. In addition, we have successfully secured the long-term commitment of most of our large customers, which in turn means that we have a high and stable revenue base to grow from. Investing in new sales is a priority for us as is creating incentive programs to attract more top game developers. Alongside of this, we are looking at new M&A opportunities and investments in new business areas. These are initiatives that will support growth in 2023 but will turbocharge the company in 2024 and beyond.

Jens Lauritzson – CEO