Overall, Flexion's performance in Q2 fell short of expectations, primarily due to lower-than-expected sales, which were negatively affected by the overall weakness in the mobile gaming market and unfavorable FX rates. We can also see AMGR continue to decline, impacting the gross margin negatively. Additionally, Flexion faced challenges in the market, including the impact of IDFA on user acquisition. While the quarter’s profitability was significantly lower than our estimates, this deviation can be largely attributed to the lower sales. Consequently, we anticipate an improvement in profit margins in H2 as sales begin to recover. In addition to a robust second half driven by the late July release of MONOPOLY GO! and the anticipated launch of Stumble Guys in Q3, we expect a solid revenue contribution from Audiencly, which has secured exclusive rights to manage all sponsorship and advertising for the third installment of the German online event, 7vsWild. The project is estimated to be valued at EUR5m and is expected to contribute positively throughout H2 2023.

While the underlying market is challenging with lower IAP spending, Flexion continues to build for the future with new distribution channels and building up a pipeline of new games. However, it's worth noting that in this environment, the process of signing new games also appears to be more time-consuming. This should gradually ease as developers actively pursue new revenue streams, especially in the current challenging economic climate, and as new distribution channels continue to emerge.

Operating Cash Flow conversion (OCF after changes in working capital divided by adj. EBITDA) amounted to 175% in the current quarter and -179% in the previous quarter. FCF conversion (OCF less investments in intangible assets and PPE, divided by adj. EBITDA) amounted to 163%. Flexion has a low need for reinvestments and thus generates a lot of free cash flow. Due to the low investment need, OCF and FCF do not deviate materially from one another. We believe it is best to view cash conversion over longer periods of time, as working capital movements can differ materially from quarter to quarter.

Adj. EBITDA margin declined to 6% in Q2 2023 on an LTM basis, and the gross margin remained flat at 16%. LTM Q2 2023 sales amounted to GBP72m (46.5), growing 55% y/y. Adjusted LTM EBITDA amounted to GBP4.3m in Q2 2023, up from GBP2.1m a year earlier.

Operating cash flow after changes in working capital and FCF amounted to GBP3.0m and GBP2.7 on an LTM basis in Q2 2023. Corresponding to an LTM OCF and FCF conversion of 69% and 63%, up from 60% and 54% in the previous quarter.

Flexion’s games portfolio now contains 10 top-tier games, in line with previous quarters. AMGR declined 22% y/y and 4% q/q. This can be compared with Flexion’s games on Google Play which was down 28% y/y. Hence, Flexion’s platforms continue to take market shares from traditional stores.

Top-tier games past the ramp-up period are still 8 (out of 10 games). There were two games pending launch, MONOPOLY GO! and Stumble Guys from Scopely.

Flexion signed a publishing deal with Scopely in September 2021, and an expansion to that publishing deal was announced on 23 March 2023, extending the agreement to encompass nine games, up from seven. Redeye has speculated that the games could be Stumble Guys and MONOPOLY GO!, which were confirmed by the company on 8 August 2023. This is encouraging as MONOPOLY GO! is one of the most successful game launches in recent years, becoming the number one board game in the world with a current number one position in the top-grossing mobile game in the US on the Apple App Store and Google Play. Stumble Guys is also a good-performing game that Scopely acquired in 2022, a party battle royale game with a good trend on top-grossing chart rankings, according to Appmagic. 

Looking at SensorTower data, it seems that MONOPOLY GO! is still in a significant growth phase and generates >USD25m on Google Play, making it one of Flexion’s largest titles ever signed. Stumble Guys is also a solid title and has revenues of over USD3m, according to SensorTower. MONOPOLY GO! went live in August, while Stumble Guys is expected to go live later in Q3 2023. In addition to the incorporation of these two top-rated mobile games, it is equally promising to witness Flexion's ongoing commitment to expanding its collaboration with Scopely—a prominent powerhouse within the mobile game industry.

The table below summarizes game signings since Q1 2021. In total, the games generated USD70m in GGR, based on figures from Flexion and Sensor Tower at the time of the announcements of the game signings. However, if going by the most recent data, the games generate roughly USD71m.

After the quarter, Flexion Mobile unveiled a strategic partnership with Xiaomi, integrating GetApps, Xiaomi's exclusive app store, into its diverse portfolio of alternative distribution channels. Notably, Flexion announced that it has already released a number of games on the platform, including titles like Vikingard and Hill Climb Racing 2. Xiaomi is a prominent global smartphone manufacturer and secured a top three position in smartphone shipments during Q1 2023. With a presence in over 100 countries and a user base exceeding 500 million monthly active users, the partnership with Xiaomi should significantly expand Flexion's reach.

Following the new partnership, Flexion’s ecosystem of alternative Android ecosystems continues to expand, and it now reaches alternative app stores such as Samsung Galaxy Store, Huawei AppGallery, Amazon Appstore, and the ONE store. With the addition of Amazon Appstore on Windows 11, DT Hub, and GetApps, Flexion now reaches seven channels. As we highlighted in previous research, the addition of more distribution channels enhances Flexion's value proposition, enabling higher revenue generation for developers.

The recent introduction of new distribution channels is evidently yielding positive results, with 40% of new players in July originating from channels launched in Q2 2023. Nevertheless, it is important to view this development through a broader, long-term perspective, acknowledging that not all new players hold equal value.

In addition to adding GetApps to its portfolio, we also continue to see potential new channels coming to the market. For instance, there are speculations that Meta is planning to let players download apps directly through Facebook ads, challenging Google Play and App Store in the distribution market. This strategic move by Meta aligns with the prevailing trend in the market, characterized by a growing fragmentation of the distribution chain, as a result of the implementation of the Digital Market Act (DMA) proposed by the EU. As outlined in our earlier research updates, the emergence of a more fragmented distribution channel is expected to favor Flexion Mobile, making its services increasingly appealing to developers. As we anticipate that Google Play and App Store will remain dominant as clear market leaders, we believe that developers will seek out third-party solutions like Flexion for distributing their apps on alternative app stores. This development also serves as a testament to the impact of the DMA, indicating that major industry players are recognizing the potential to challenge the existing oligopolies and actively engage in the ongoing battle for a more competitive distribution market. Moreover, in mid-December, we commented on the rumors surrounding Apple's potential decision to allow alternative app stores on iPhones and iPads, in response to the European Union's Digital Market Act. The expected implementation of the DMA in spring 2024 suggests that we will witness further developments in the distribution market. While the exact details and outcomes are yet to unfold, Flexion Mobile is likely to benefit from these changes.

All in all, Flexion is undoubtedly capitalizing on multiple favorable trends in the market, and when combined with its internal momentum, it emerges as a compelling and exciting player in the somewhat turbulent mobile gaming market.

We lower our FY 2023e-2024e sales estimates by 12-9% and 2025e by 3%, implying a growth rate of 18%, 23%, and 18%, respectively, somewhat lower than Flexion’s 2023e guidance of 20-40%. We expect Flexion to have a solid second half of the year and come back to y/y and q/q growth. Overall, we leave margins roughly unchanged.

We have used a WACC of 10.5% in all scenarios, derived from Redeye’s Rating model. The discount analysis extends to 2038, and the key financial assumptions for the scenarios are summarized below.

Base Case SEK 25
Avg Sales growth 2024-‘28e: 14%
Avg EBIT margin 2024-‘38e: 7%
Terminal growth: 2%
Terminal EBIT margin: 9%.

Bull Case SEK 37

Avg Sales growth 2024-‘28e: 15%
Avg EBIT margin 2024-‘38e: 9%
Terminal growth: 2%
Terminal EBIT margin: 12%.

Bear Case SEK 8

Avg Sales growth 2024-‘28e: 6%
Avg EBIT margin 2024-‘38e: 3%
Terminal growth: 2%
Terminal EBIT margin: 3%.