In the next two years, we estimate gross margins slightly below 13%, and it will be interesting to see if our forecast is too conservative. We estimate Flexion will prioritize revenue growth which likely will result in a balancing act on margins, in future agreements with game publishers. Some alternative app stores however have lower distribution fees than Apple and Google, which can lead to better than expected gross margins overall in the future.
Flexion also communicated about a “loss-making multi-game contract expired December 31, 2020” unlikely will be renewed. We believe the company is talking about the contract that was communicated December 20, 2018. We have previously called this the “Scopely-contract”. The three games generate approximately 10% of revenues and less in terms of margin contribution. Scopely also owns Foxtnext and the high grossing game “Marvel Strike Force”. This contract, however, was signed before Scopely acquired Foxtnext, and is a separate contract with better terms we expect.
The Scopely-contract was a game-changer when it was signed for Flexion and required a minimum guarantee of USD 4.6 million when it was signed. In the latest quarterly report, the minimum guarantee only amounted to GBP 0.422 million. 12 months earlier it amounted to GBP 1.88 million, which means the minimum guarantee is expected to be fully paid in FY Q3.
Flexion communicated in the trading update that the contract unlikely will be renewed unless Flexion gets improved terms. We believe this is a sign of increased negotiation strengths for Flexion and consider the news a natural (not negative or positive). Flexion has also earlier communicated that the company will be less interested in minimum guarantees in future contracts.
The trading update does not change our view on the investment case in Flexion and we will not change our estimated revenue growth. Following the new agreement with Huawei and the successfully targeted rights issue in December last year, we raised our base case to SEK 26 per share.
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