Zordix reported revenue of SEK412.6m for Q4 2022 which was slightly above our forecast of SEK400m. EBITDA was somewhat lower than expected coming in at SEK35.9m (margin of 8.7%) compared to our forecast of SEK41.7m (margin of 10.4%). Operational EBIT was also below our estimate of SEK29.7m coming in at SEK21.3m. The reported EBIT of SEK-29.9m was impacted by write-downs of SEK22m from deprioritized projects.

On the positive side, Zordix saw strong cash flow from operations after working capital which amounted to SEK85.4m as working capital was released after the seasonal build during Q3 2022. The company ended the year with SEK100.5m in cash while the net debt stood at SEK85.6m compared to SEK144m in Q3 2022.

While the Q4-report was softer than expected, the main news from Zordix was the recent announcement of its new corporate structure and the launch of Maximum Entertainment as a new global entertainment group. This comes after the acquisitions of Just for Games, Merge Games and Maximum Games which were carried through during 2021 and transformed Zordix from a small studio focused on work-for-hire to a larger gaming group with global reach covering the whole value chain. With this, the company has built a large and diversified gaming portfolio where the largest individual game contributes with around 5% of revenue while the top ten contributes with less than a third of total revenue (the total portfolio consists of c300 games and 35 own IPs). Coming to geographic mix, the company also has a global reach where North America and Europe are the two largest markets (c. 46% and 35% respectively).

On the back of this major change, the company has also reorganized during 2022 following the appointment of Christina Seelye (founder of Maximum Games) as new CEO, who has focused on creating synergies between the acquired companies. With the announcement of Maximum Entertainment the new group is now structured in two segments: Modus Studios (Mane6, Invictus, Dimfrost, Modus Bucharest) and Publishing Labels (Just for Games, Merge Games, Maximus Games and Modus Publishing). With the new structure, the companies in the group will be more integrated where the studios will be jointly led by a global studio director creating efficiency and improving synergies while the publishing labels has been differentiated towards the segments where they are strongest. The chart below illustrates the new group structure.

In connection with the launch of Maximum Entertainment, the company also announced that it aims to increase revenue contribution from its own IP’s to 30% of revenue by 2025. While the current mix of revenue from own IP’s is not known, we believe it is likely in the low-to-mid single digit range suggesting this could yield a big improvement in profitability. The strategy will also be reflected in future M&A, where the company is likely to focus more on smaller acquisitions that strengthen its own IP development rather than large transformative acquisitions.

Maximum Entertainment will remain focused on the indie and AA segments which we view as attractive as these are areas that have strong profitability but is underserved. The company’s activities span from light-touch publishing to licensed IP’s as well as in-house studio development of games. Currently, the company mainly does light-touch publishing (c70% of publishing revenue) which have low the risk as the required investment is small (around USD0.5m) albeit with a low gross margin (25-35%). The high-touch publishing realizes a higher gross margin of around 20-55% while investments are larger at USD0.5m-5m. For the own studio development, investments are larger while returns can be strong as the gross margin is 100%. With the increased focus on own IP’s we expect the company to gradually increase high-touch and own studio development which should result in higher profit margins in the coming years.

While 2022 was a year with fewer releases than we forecasted, the release schedule for 2023 looks strong. In the near-term, Smalland will be released in early access on 29 March and Bramble will be released on PC and consoles on 27 April. Additionally, the rhythm-fighting game God of Rock will be released on 25 April and Morbid: The Lords of Ire (a 3D sequel to Morbid: The Seven Acolytes) is planned for release in 2023. Zordix has also announced that Maximum Football will be released as a free-to-play title coming in early access for PC during the spring, while Playstation and Xbox launches will come at a later stage.

The pipeline also includes Projekt Z (co-op zombie FPS), Pixelshire (sandbox RPG), Afterimage (a metroidvania game), How 2 Escape (a co-op escape simulation game) and more. Longer term, the roadmap includes Big Truck Country: Mudfest and a teaser of a new unnamed IP ("project Velos") focused on the sniper genre in collaboration with Brandon Tyler Webb. In total, the company has more than 100 games in its pipeline, of which 15 are from own IPs.

In addition to a growing pipeline of own IP’s, the company's live service games Super Animal Royal and Them's Fighting Herds continues to perform well. Super Animal Royal launched season 6 in December which surpassed season 5 in revenue driven by strong season pass revenue while Them’s Fighting Herds was released on consoles in October increasing the player reach of the game. With the upcoming release of Maximum Football, the live service game portfolio is set to expand and increase Zordix recurring revenue base. Furthermore, the company also continues to build a growing revenue base from back catalogue games which will improve stability of revenues going forward.

Overall, we believe the outlook for Zordix looks positive on the back of the new strategy with increased integration and focus on own IPs. Although the company performed weaker-than-expected during 2022 we also consider that 2019-21 was years of strong growth as illustrated in the pro-forma financials in the chart below. While we lower our 2023-24E EBITDA-estimates with 8-10% we expect the company to move back to a growth trend and improve profitability in the coming years.

We update our valuation range on the back of the trimmed estimates and our new base case stands at SEK25 (SEK28) while the new bull case is SEK51 (SEK58) and the bear case SEK9 (SEK12). The table below summarize the assumptions for the three scenarios.

At the current valuation, Zordix trades at c. 4x 2023E and 3x 2024E EV/EBITDA which is lower than both large international gaming groups (c. 10-12x) as well as Nordic listed peers (c. 5-7x). 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.