EG7 reported revenue of SEK445m for Q3 2022 which was 11% above our forecast of SEK400m. The stronger-than-expected topline was driven by the Game segment which beat our revenue forecast with 18% while Service revenue was in line with expectations. EBITDA came in at SEK113m representing a margin of 25% which was much stronger than our EBITDA forecast of SEK75m and margin of 19%. The strong margin was also mainly driven by the Game segment with a continued strong performance from Big Blue Bubble which had an EBITDA-margin of 63% in the quarter.

The company saw strong cash flow from operations coming in at SEK118m before changes in working capital and SEK131m after changes in working capital. With capitalized development costs of SEK38m this also gave a strong cash flow after investments which was further boosted by the divestment of Innova resulting in a total cash flow for the quarter of SEK252m. On the back of this, the company had SEK654m in cash and a net cash position of SEK250m at the end of the quarter.

Coming to the outlook for Q4, the company reported revenue of SEK148m in October which implies a quarterly run-rate of around SEK450m. With strong seasonality in the year-end coupled with continued strong performance from Big Blue Bubble’s My Singing Monsters we have raised our Q4 revenue forecast to SEK510m (previous SEK475m). This yields a full-year revenue of SEK1.8bn which is in line with the company's updated guidance of SEK1.8bn (up from previously SEK1.6-1.7bn).

EG7 has seen a strong performance from Big Blue Bubble during 2022 driven by My Singing Monsters which saw strong growth from an easter campaign in Q2 followed by a 10-year anniversary campaign in Q3. The positive trend has continued into Q4 when the game has also gone viral on TikTok helping it to become a top 10 game in over 100 countries on iOS according to EG7. In the chart below we illustrate the overall grossing rank of the game according to Appmagic, showing a clear jump in November.

In Q2 and Q3 2022 before the recent jump in the rankings for My Singing Monster, Big Blue Bubble reported revenue of SEK43m and SEK48m respectively which represented a growth of c50-60% compared to the same period in 2021. We believe the studio will see another big step-up in revenue during Q4 2022 where we estimate that the current grossing rank suggests a quarterly run-rate revenue of around SEK100-150m or higher. Assuming that this run-rate will hold during the rest of Q4 we now forecast revenue of SEK90m with an EBITDA-margin of 65% (in Q3 2022 the EBITDA-margin was 63%) for Big Blue Bubble in Q4 2022. Still, this could prove to be somewhat conservative as the game continues to trend upward in the rankings.

Coming to the rest of EG7's Game segment the performance continued to be stable with Daybreak generating the majority of the revenue. Daybreak showed a sequentially improved EBITDA-margin which increased from 25% in Q2 2022 to 30% in Q3 2022 although it was still down from 38% in Q3 2021 when profitability was stronger-than-normal due to the covid-pandemic. Piranha saw strong profitability as well with an EBITDA-margin of 36% which was up both sequentially and YoY. Toadman and Antimatter remained loss-making focusing on the development of its game pipeline where Block N Load 2 and Evil v Evil are likely to be released in 2023 rather than 2022. The two studios are also evaluating work-for-hire business opportunities which together with game releases should improve profitability for the studios going forward.

In the Service segment, revenue was down sequentially as Q1 and Q2 2022 saw strong performance in Fireshine owing to the success of Core Keeper and the release of Sniper Elite 5 although the growth was strong YoY. It was positive to see Petrol moving back to profitability as well after it was loss-making in Q2 2022 due to a one-time strategic project that had a lower-than-normal margin. Looking into Q4 we expect a similar performance as in Q3 2022 with some growth potential as it is a seasonally strong quarter. The segment is also building for continued growth over the coming years where Fireshine now has ten digital indie games signed for 2023-24.

Overall, we raise our estimates on the back of the solid Q3-report where 2022E EBITDA is up 19% while 2023-25E EBITDA is increased by 7%. For 2022E we now forecast revenue of SEK1.8bn which is in line with management guidance while our EBITDA-margin of 24% is somewhat above guidance thanks to the current strong profitability in Big Blue Bubble. The increase for 2023-25E also mainly comes on the back of Big Blue Bubble and the strong performance of My Singning Monsters. Still, as it is uncertain how long the current strong interest in the game will remain we have assumed that revenue remains strong in Q4 2022 and Q1 2023 and then moves back to a level of around SEK50m from Q2 2023. As such we also assume that 2023-25E EBITDA-margin moves back to around 22% which is unchanged compared to our earlier margin assumptions.

Our valuation range is also increased on the back of the higher estimates where our new base case stands at SEK41 (SEK39) while the bull case is SEK74 (SEK70) and the bear case SEK30 (SEK26). We have also raised our discount rate from 11.0% to 11.5% on the back of higher risk-free-rate assumptions.