Zordix reported Q3-revenue of SEK259m which was around 6% lower than our forecast of SEK275m. Zordix comments that while it saw solid performance from releases in the quarter (including Soulstice and the season 5 update to Super Animal Royale, both released late in the quarter) it also experienced a slowdown in the retail segment which impacted growth negatively. Coming to EBITDA, the outcome was SEK18.9m while we had expected SEK30.2m impacted by the lower-than-expected revenue together with lower capitalization of development. On the positive side, gross margin was strong and opex was close to expectations (25% of sales vs our estimate of 26% of sales).

While the Q3-results came in below our expectations we still expect a seasonally strong Q4 2022, although we have lowered forecasts on the back of macro headwinds and a slower release schedule than expected. Our new forecast is for revenue of SEK400m (previous SEK515m) and an EBITDA of SEK42m (previous SEK85m) representing a margin of 10%. This represents a pro-forma decline of around 20% as 2021 was an exceptionally strong year for Zordix with pro-forma growth of 48% for the full year.

Ahead of the seasonally strong fourth quarter Zordix has built up its working capital where inventories increased sequentially from SEK135m in Q2 2022 to SEK215m in Q3 2022. While there is a limited history of Zordix group financials including the acquisition of Maximum Games we expect that the company will continue to tie up working capital during Q4 2022. This should then be gradually released during Q1 and Q2 2023 similar to the development during 2022. In the chart below we illustrate the development of inventories and account receivables from Q4 2021 and our estimates for Q4 2022E to Q2 2023E.

On the back of the increased working capital tie-up in Q3 2022 Zordix increased its liabilities where the long-term debt stood at SEK115m at the end of the quarter (up from SEK29m in Q2 2022). We expect the increased debt will be enough to finance the company's operations and we expect the net debt level to decline over the coming quarters as working capital is released. In addition to the net debt, the company also has provisions for earn-outs of SEK528m to be paid over 2022-25E in a mix of cash and shares (split of around 50% cash and 50% shares). We expect Zordic to yield an annual net cash flow of SEK100-150m in the coming years which should be enough to finance the cash part of the earn-outs.

While we have lowered our near-term expectations the growth outlook for 2023-24E remains positive for Zordix in our view. The company continues to build on its game portfolio where it added Projekt Z (a zombie FPS) and Yet Another Fantasy Title (an old-school gameplay RPG) in the quarter.

Looking at the release schedule for games from own IP's during 2023, these among other includes the rhythm-fighting game God of Rock and Maximum Football which continues to see strong interest from the gaming community. During 2023, we also expect Zordix to release the highly anticipated games Smalland and Bramble which are two titles with big potential in our view. While the two latter games have been delayed compared to our initial estimate Zordix has focused on increasing the quality of the games to make sure they live up to expectations. Our impression is also that future announcements of game releases will be done when they are close to their final version which should lower the risk of delays going forward.

In addition to an attractive release schedule of own IP's the company's live service games Super Animal Royal and Them's Fighting Herds continues to perform well where the latter was released on consoles in October increasing the player reach of the game. We also expect the company's publishing and distribution business which consists of a portfolio of more than 300 games (including own IP's) to continue growing and build back-catalogue sales. As such, we believe 2022 is a year in transition after above-normal growth during 2021 which will be followed by growth during 2023-24E where we estimate revenue to increase by around 15% annually. We also expect profitability to improve as the mix of publishing revenue and games based on own IP's increase, supporting our view of the EBITDA-margin expanding from 9% in 2022E to 12% in 2023E and 15% in 2024E.

Summarizing our new assumptions we have lowered our revenue forecasts with 10-11% for 2022-24E. Our EBITDA estimates are lowered with c. 35% for 2022E while 2023-24E estimates are down 16-28%. The table below summarizes key financials for 2018-21 and our updated estimates for 2022-25E.

Our valuation range is also lowered on the back of the reduced estimates where our new base case stands at SEK32 (SEK46) while the bull case is SEK58 (SEK69) and the bear case SEK12 (SEK25). We have also raised our discount rate from 11.0% to 11.5% on the back of higher risk-free-rate assumptions.

At the current valuation, Zordix trades at c. 2x 2023E EV/EBITDA which is lower than both large international gaming groups (c. 8-12x) as well as Nordic listed peers (c. 4-6x). We believe the high discount is likely due to uncertainty regarding future growth after growth has been lower than expected during 2022 coupled with a short history of the group.