Fantasma Games’ Q2 report showed softer growth figures of 7% y/y, and net sales amounted to SEK8m, below our expectations of SEK10m. The growth was muted by the lower number of game launches during the quarter, totaling two games as opposed to the three games in Q1 2023. Launch gaming revenue amounted to SEK44m of the total gross gaming revenue (GGR) of SEK101m, and gaming revenues from games older than six months (long-tail gaming revenues) amounted to SEK57m. Long-tail gaming revenues increased 16% q/q, which demonstrates that older games continue to perform well.

Looking at the profitability, Fantasma Games reported an EBITDA of SEK1.5m and EBIT of SEK-0.9m, below our estimates of SEK2.6m, respectively SEK0.0m. The lower profitability is primarily due to the lower sales as Opex came in SEK1m below our expectations. 

All in all, we think the lower-than-expected sales and profitability are mainly attributed to the diminished number of game launches within the quarter. However, the positive trend of increasing long-tail revenues quarter over quarter remains. The company clarifies that the decrease in game launches was a consequence of delays caused by Fantasma’s distribution partner. In response, Fantasma plans to launch four games in Q3 to offset the lower launch rate in Q2. As a result, we interpret the reduced sales as a matter of timing while the fundamental business performance remains robust. Additionally, it’s worth highlighting that out of the two game launches in the quarter, one was launched exclusively on 20 June (and globally launched on 4 July), contributing only a few days to the overall quarter. The company also states that this game (Rich Raptors) is the second-best exclusive release in the company’s history, hopefully continuing to perform well in the global launch.

We are pleased to note that Social Casino has already contributed 10% to the total revenues, even while being live with a limited selection of games and operators, and this segment should continue to contribute to the overall growth in the coming quarters. Moreover, it is also encouraging that the company’s latest game launch, “Payday Express” has had an impressive start in Q3 as it has set new records for the company. Hence, despite softer growth numbers during the quarter, we continue to see several tailwinds for Fantasma, and it is clear that it continues to improve its distribution by attracting more operators for its latest launches. Additionally, the prospect of launching its own platform is also exciting and should improve Fantasma’s distribution capabilities even further.

In Q2, the gross gaming revenue amounted to SEK101m, representing a y/y growth of 20% but a q/q decrease of 33%. This figure is a function of the gaming turnover and gaming margin, revealing how much the operator earns after deducting players' winnings. The gaming margin, in turn, is determined by the return to player (RTP), which is the amount players win relative to their total wagers and can differ between quarters.

The company's gaming revenue (GGR) was split between SEK57m from older games (long tail) and SEK44m from five games launched within the last six months (launch gaming revenues). While fewer launches negatively impacted the launch GGR, SEK44m was lower than our expectations, and we think this is primarily due to the second game launch in the quarter, which was only contributing a few days. However, it is noteworthy that the company's older games continue to perform well, increasing 78% y/y and 16% q/q. The social casino expansion should also support these revenues, where Fantasma can re-launch older games into this segment. This is the sixth consecutive quarter with q/q growth in long-tail revenues.

Fantasma Games has continued executing its strategy of releasing twelve games in 2023, as compared to Fantasma Games has continued executing its strategy of releasing twelve games in 2023, as compared to nine games in the previous year. During Q2, the company launched two games (compared to three in the previous quarter). However, it’s worth noting that new games are often launched gradually in different markets, which means that revenue generated from newly launched games may also occur gradually. For example, games are typically introduced in the European market first, as additional certifications are required in the US and within different states.

Among the new releases, “Rich Raptors” & “Wicked Kitty” have received ratings of 7.0 and 5.5 out of 10, respectively, from Aboutslots.com (a well-known casino game review site). These ratings can be compared to one of Fantasma Games' most popular games, "Fortune Llama," which set several records in Q1 and received a rating of 7.9 out of 10. Wicked Kitty was launched with Light & Wonder on May 16th, while Rich Raptors was launched with Relax Gaming on June 21st, where Entain had exclusivity for the first two weeks, hence only impacting the last days of the quarter.

After the quarter, on 27 July, the company exclusively launched "Payday Express," its latest game, in partnership with key operators like Paddy Power, Rush Street, and BetMGM across the US and Europe. In conjunction with the release, Fantasma Games remarked that the level of operator interest has never been more signAfter the quarter, on 27 July, the company exclusively launched "Payday Express," its latest game, in partnership with key operators like Paddy Power, Rush Street, and BetMGM across the US and Europe. In conjunction with the release, Fantasma Games remarked that the level of operator interest has never been more significant. Moreover, it is also encouraging that the game has had an impressive start in Q3 as it has set new records for the company, according to the company. Notably, this release also achieved a milestone as the first game to successfully launch in New Jersey right from day one. This achievement underscores Fantasma's dedication to promptly penetrating multiple markets and launching its games as fast as possible.

At the end of May, Fantasma Games entered the social casino space by partnering with Fortune Coins, a leAt the end of May, Fantasma Games entered the social casino space by partnering with Fortune Coins, a leading player in the US Social Casino Space. In contrast to traditional online casinos, social casinos are permitted and accessible in the majority of US states. In these platforms, players engage in slot games using coins provided by the operator, such as through registration and daily rewards. This means that slot games are essentially free to play. However, there's an added dimension to this experience, as players have the option to purchase extra coins using real money and convert virtual coins into tangible currency.

We believe that Fantasma's entry into the social casino space holds great potential. This move not only Fantasma's entry into the social casino space holds great potential, especially since the segment already accounted for 10% of total revenues during the quarter. This move not only offers new ways for monetizing its games but also presents an opportunity to generate higher long-tail revenues from games older than six months. Additionally, since social casinos are permitted in nearly all states, Fantasma gains access to a wide audience and the ability to establish a strong brand presence among players. Our understanding is that converting a traditional slot game into a social slot game requires relatively limited effort, making the process highly scalable. Fantasma has already successfully launched seven games with Fortune Coins, and we can observe that one of its most popular titles, "Fortune Llama," enjoys prominent visibility on the operator's website. Looking ahead, Fantasma plans to release more games in collaboration with Fortune Coins, and we anticipate the potential addition of further operators in the field.

All in all, we believe that Fantasma's entry into the social casino space is a logical move, providing the company with an additional scalable revenue stream. The relatively seamless conversion of games into the social casino format ensures that the associated revenues come with high profit margins. Considering that we already anticipate a high growth trajectory and expanded market reach, we maintain our current estimates and valuation unchanged for the time being. However, we are excited to see what this space has to offer.

Following the Q2 report, we have made slight adjustments to our sales estimates, taking into account the somewhat lower-than-expected growth during the quarter. Additionally, we have adjusted our revenue split for H2, anticipating that Q3 will stand out as the strongest quarter due to the launch of four games, compared to three game launches in Q4. Overall, our H2 sales projections remain largely unchanged.

In addition to the growth stemming from an increased launch rate, it's evident that Fantasma has recently enhanced its distribution. This involves executing multiple exclusive releases across numerous markets simultaneously, effectively amplifying the games' overall reach. On top of that, we think that Fantasma’s partnership with leading operators such as DraftKings and Rush Street has not yet reached its full potential, which the company also stated in the Q2 report, and can have a positive effect in H2 2023 and onwards. As we have mentioned in our earlier research updates, the company has plenty of room for growth since Fantasma Games is still a minor player. Although some markets are showing relatively lower growth, it should not impact the company’s growth chances. We also see significant potential in the social casino space, which should contribute to growth going forward.  

Despite making forward-looking investments in acquiring local licenses and developing its proprietary gaming platform, Fantasma continues to effectively control its costs. As a result, we have made adjustments to our opex expectations, reducing them by 4% in 2023e and by 12-14% in 2024e-2025e. These adjustments lead to EBITDA and EBIT estimates that remain relatively unaffected.

We have used a WACC of 11.5% in all scenarios, derived from Redeye’s Rating model, and a tax rate of 20.6%. The discount analysis extends to 2038, and the key financial assumptions for the scenarios are summarized below.

In our bear case, we anticipate a sharp decline in top-line growth due to poor performance of new games. This lower growth trajectory also negatively affects scalability, resulting in a lower terminal EBIT margin of 25%.

Our Base Case assumes that Fantasma Games will continue to gain traction in the market, supported by its scalable business model, which should enable the company to achieve higher margins. While we expect rapid growth in the coming years, we remain relatively conservative in our estimates of the company’s long-term EBIT margin as we expect a terminal EBIT margin of 35%, below many successful peers.

In our Bull Case, we anticipate a longer growth runway and improved scalability, resulting in a terminal EBIT margin of 45% for the company. We have not factored in any exceptional impact from a single slot game, and we believe the bullish scenario is achievable as long as the company continues to gain traction with prominent operators in the industry.