• Total revenue amounted to GBP14.8m (18.5), declining 20% y/y, in line with preliminary figures.
• Gross profit amounted to GBP2.5m (3.0), a decrease of 16% y/y, in line with our estimates, equivalent to a gross margin of 17%.
• OPEX amounted to GBP-3.0m (-3.3).
• Adj. EBITDA amounted to GBP0.7m (1.5), coming in lower than our estimates. Primarily due to higher personnel costs.
• EBIT amounted to GBP-0.4m (-0.3).
• Operating Cash flow for the period amounted to GBP-1.9m (1.9), negatively affected by changes in working capital.
• Cash and cash equivalents for the ending period were GBP7.5m, with no interest-bearing liabilities.
• Top-tier game’s average monthly gross revenue (AMGR) past the ramp-up period amounted to USD0.54m (0.61) in the quarter and USD0.64 in October. The number of live top-tier games was 10 titles.

Overall, Flexion had a challenging quarter, with sales coming in at GBP14.8m compared to our initial sales forecast of GBP21.7m. The lower revenues were primarily due to the overall weaker mobile gaming market and delayed game launches where Monopoly GO! and Stumble Guys went live in the latter part of Q3. However, the company saw a gradual improvement throughout the quarter and with a strong start to Q4, where October showed a solid y/y growth of 26%, and sustained momentum in November.

Except for the solid start in Q4, we think the key highlight in the report is the new information, which we believe is related to the 2022 audit. The company estimates a potential maximum P&L adjustment of GBP1.4m and GBP0.6 in future cash flow. The potential P&L impact of GBP1.4m can be compared with the reported adjusted EBITDA for the full year of 2022 of GBP4.8m, and the adjusted profit before tax of GBP1.8m. While GBP1.4, may initially seem relatively high compared to the full-year figures of 2022, we think this reduces the uncertainty surrounding the audit. Moreover, the focus should be on the potential cash flow impact of GBP0.6m rather than the P&L effect of GBP1.4m. Our understanding is that the negative impact is primarily tied to the insolvency of a specific customer, constituting a one-time occurrence rather than systemic issues in the company's overall revenue recognition. This distinction is crucial as it mitigates concerns that would be more alarming if the issue extended beyond an isolated incident.

Flexion had weak cash flow in the quarter due to changes in working capital and payments for distribution rights. Operating Cash Flow conversion (OCF after changes in working capital divided by adj. EBITDA) amounted to -28% in the current quarter and 69% in the previous quarter. FCF conversion (OCF less investments in intangible assets and PPE, divided by adj. EBITDA) amounted to -124%. Flexion usually has a low need for reinvestments and thus generates a lot of free cash flow. Due to the low investment need, OCF and FCF typically 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 5% in Q3 2023 on an LTM basis, and the gross margin remained flat at 16%. LTM Q3 2023 sales amounted to GBP68m (57), growing 24% y/y. Adjusted LTM EBITDA amounted to GBP3.5m in Q3 2023, flat from GBP3.5m a year earlier.

Although the overall mobile gaming market remains muted, we continue to see players taking positions in the emerging alternative distribution market. In our previous updates, we have written about the Digital Market Act (DMA), where the European Commission is committed to eliminating monopolistic strongholds (Google Play and App Store) within the EU. This paves the way for the emergence of alternative app stores, fostering a more diverse ecosystem for distributing mobile games. On the back of these regulatory changes, developers’ eagerness to have direct user interaction and reducing Google’s and Apple’s app store fees of 30%, 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.

On this note, we also see existing industry players intensifying their efforts in the space. For instance, Digital Turbine, a US-listed platform company that Flexion Mobile partnered with in March 2023, disclosed its intention to allocate more capital in this space to capture future growth opportunities while referring to its partnership with Flexion in its recent earnings call. Furthermore, in addition to alternative app stores for game distribution, Digital Turbine underscores the significance of direct distribution, a territory that rumors suggest Meta is also exploring. This involves users downloading a game directly through an ad, presenting an additional dimension and complexity that Flexion can take advantage of. As the distribution of games becomes more complex, the value proposition of Flexion's solutions increases. Once again, this underscores Flexion's potential for enhanced value and profitability as the gaming distribution landscape evolves in complexity.

Besides, we have also noted Digital Turbine’s increased ownership of Aptiode, an alternative distribution company, reaching speculations regarding a potential investment in Flexion. Digital Turbine has a market cap of USD515m but is also loss-bringing with a relatively high net debt level, potentially limiting a potential investment (although Flexion is a relatively small company in this context, and a transaction with shares could be possible). Overall, we think it is positive news for Flexion that prominent players in the industry are intensifying their efforts in the space, and we believe that Flexion is well-positioned to take advantage of this in the coming years.

Flexion’s games portfolio now contains 10 top-tier games, in line with previous quarters. AMGR declined 33% y/y and 11% q/q. AMGR for mid-tier games declined 30% y/y and 18% q/q.

Top-tier games past the ramp-up period are still 8 (out of 10 games). Flexion signed a new title after the quarter, which is expected to go live in Q4 2023.

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. The two new games are Stumble Guys and MONOPOLY GO!, whereas MONOPOLY GO! was launched by Flexion Mobile on 25 July (contributing roughly 2 months in the quarter) and Stumble Guys at the end of the quarter. 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! has continued to grow in recent months and now generates >USD35m in monthly revenues on Google Play, up from USD25m in August, making it one of Flexion’s largest titles ever signed. Stumble Guys has also continued to grow from USD3m in monthly revenues in August to USD4m in October. 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 USD71.5m 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 USD78m. The growth is mainly attributed to Monopoly GO!.

The European Commission has recently unveiled the latest development concerning the Digital Markets Act (DMA) by identifying six major technology players (Alphabet, Amazon, Apple, ByteDance, Meta, and Microsoft) as gatekeepers. These industry leaders have been granted six months to ensure complete adherence to DMA obligations concerning their core platform services. Put simply, this implies, for instance, that Google and Apple, through their respective platforms, Google Play and App Store, are now required to allow third-party integration within their respective stores. This mandate paves the way for the emergence of alternative app stores, fostering a more diverse ecosystem for the distribution of mobile games. Our understanding is also that the new framework will impact the pre-installment of alternative stores, eliminate technical barriers, and open up new payment opportunities for developers.

As previously discussed in our research updates, the forthcoming fragmentation in the distribution channel is expected to play to Flexion Mobile's advantage. This shift should make Flexion’s services increasingly appealing to developers, thereby enhancing the company’s overall value proposition. Additionally, it is poised to extend Flexion's market reach as more alternative app stores come into play, leading to a more diversified distribution of gaming revenues across various platforms.

Following the Q3 report, make limited changes to our sales forecast, lowering FY 2024e-2025e by 4-5%, implying a growth rate of 21-16%. We leave our gross margin assumptions roughly unchanged while increasing personnel costs and D&A somewhat. We expect Flexion to report a solid Q4 with GBP23.4m in sales, compared to guidance of GBP22-29m.

We have used a WACC of 11% in all scenarios, derived from Redeye’s Rating model. Due to higher interest rates, we have increased the risk-free rate from 2.5% to 3% and our WACC from 10.5% to 11%. The discount analysis extends to 2038, and the key financial assumptions for the scenarios are summarized below.