Fantasma Games’ Q3 report showed softer sales figures, declining 6% y/y, and amounted to SEK8.2m, below our expectations of SEK11.8m. According to the company, the growth in the quarter was muted by a slower rollout of new games in the US. The number of game launches was four in the quarter, compared to two in the previous quarter. Launch gaming revenue amounted to SEK42m of the total gross gaming revenue (GGR) of SEK104m, while gaming revenues from games older than six months (long-tail gaming revenues) amounted to SEK62m. Long-tail gaming revenues increased 81% y/y and 9% q/q, while launch gaming revenues decreased 22% y/y and 5% q/q.

Looking at the profitability, Fantasma Games reported an EBITDA of SEK1.5m and EBIT of SEK-1m, below our estimates of SEK4.7m respective SEK2.1m. The lower profitability is due to the lower sales and higher Opex, which came in SEK2.7m higher than expected, mainly due to higher other external costs.

Overall, we think the Q3 figures are relatively soft, especially given the launch of four games in the quarter compared to two in the previous quarter. However, the company states that the majority of the launches took place with Light & Wonder in the US, where Fantasma Games usually launch with a limited number of operators initially. This means that revenues are distributed over a longer period of time as the games will be launched gradually. The tilted focus on the US market is evident in the figures, with the US accounting for 27% of total sales in the quarter. Additionally, a highlight of the quarter is the sustained and promising performance of the social casino segment, representing 13% of total sales. This achievement is particularly notable, considering that Fantasma has yet to launch its complete game portfolio. Furthermore, we are encouraged by the company's ongoing efforts to secure partnerships with new operators and aggregators for its own platform, which is poised to contribute to growth and margin enhancements in 2024.

In Q3, the gross gaming revenue amounted to SEK104m, representing a y/y growth of 18% and 3% q/q. 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 SEK62m from older games (long tail) and SEK42m from six games launched within the last six months (launch gaming revenues). While revenues from newly launched games were lower than our expectations, revenues from newly launched games are still up almost 4x from Q1 2022, showcasing Fantasma Games’ impressive growth in recent quarters. We are also glad to see that the company's older games continue to perform well, increasing 88% y/y and 9% q/q. The social casino expansion should also support these revenues, where Fantasma can re-launch older games into this segment. This is the seventh consecutive quarter with q/q growth in long-tail revenues.

After a softer Q2 report, Fantasma accelerated its game launches, with four releases in Q3. The launches were tilted toward the latter part of the quarter, where two were launched the last week of September, only contributing a few days to the quarter.

Among the new releases, “Divine Dynasty Princess” & “Lucky Otter” have received the highest ratings of 7.5 and 6.7 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.

Historically, Fantasma has launched its games through third-party distributors, a strategy that has proven effective in reaching numerous operators with just one integration. Moreover, establishing an in-house platform has traditionally demanded relatively large investments, making it hard for small players to develop one. However, recent technological progress has mitigated these hurdles. Leveraging these advancements, Fantasma has cost-effectively launched its proprietary platform. Fantasma initially launched the first set of games on a small scale to a selected group of operators, and the company is now gearing up to launch more games on its proprietary platform in 2024. We anticipate that the new platform will bolster both growth and margins in 2024 and the years to come. Below, we highlight the most significant benefits of the proprietary platform.

• Increased reach - By directly launching games to operators alongside third-party distributors, Fantasma can expand its overall market reach.

• Flexibility – By leveraging its proprietary platform, Fantasma can concurrently launch its games across multiple distributors, thus eliminating the need for gradual rollouts, enabling the company to reach a wider audience rapidly.

• Enhanced Autonomy – More effective game development and independence of launch dates, also speeding up the go-to-market process and enhancing margins.

• Improved margins – Leveraging its proprietary platform, Fantasma can minimize the costs associated with royalties paid to distributors. Moreover, by directly launching games to operators, the company completely eliminates royalty payments, boosting overall margins.

Following the Q3 report, we have revised our estimates downward, reducing sales by 17% 2023e and 23% 2024e-2025e. After reviewing Q2 and Q3 2023, it has become evident that the exceptional performance in Q4 2022 and Q1 2023 does not represent a reliable baseline for growth. Therefore, we are adopting a more cautious approach and adjusting our growth assumptions accordingly. Additionally, we have adjusted our cost assumption, where we have mainly lowered personnel costs 2024e-2025e. For Q4, we expect sales of SEK9.4m and an EBIT of SEK-0.8m.

We have used a WACC of 12% in all scenarios, derived from Redeye’s Rating model, and a tax rate of 20.6%. Due to higher interest rates, we have increased the risk-free rate from 2.5% to 3% and our WACC from 11.5% to 12%. 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.