We had expected Q3 to be a somewhat transformational quarter in terms of ramping up UA spending. Instead, Sozap remained cautious about user acquisition costs which resulted in sales of SEK3.1m in the quarter, corresponding to a y/y decline of 20% and 17% q/q. This was lower than our estimate of SEK4m. The deviation is attributed to lower DAU (Daily Active Users) as ARPDAU (average revenue per daily active user), came in higher than expected.

In terms of profitability, Sozap reported an EBITDA of SEK-0.1m and EBIT of SEK-1.6m, which is better than our estimates of SEK-0.4m respective SEK-1.8m. The deviation is mainly explained by lower opex than expected.

ARPDAU (average revenue by daily active users) came in at USD0.075, 15% higher than our estimate of USD0.065, and DAU (daily active users) landed at 51,000, -22% lower than our estimates of 65,000.

Overall, Sozap's investment in user acquisition (UA) appears to have been more muted than initially anticipated, leading to decreased sales and lower costs for the quarter. This aligns with the company's historical approach, prioritizing the optimization of net contribution from Armed Heist while preparing for the expansion of Questopia and Fishing Tour. Looking specifically at Armed Heist, the title seems to hold up impressively, maintaining a solid position on gross charting lists and reporting sound revenue numbers despite limited UA. However, it is clear that the company does not deem the game scalable, and the new titles (Questopia and Fishing Tour) must scale for the company to grow. On that note, it is evident that Sozap has ramped up user acquisition (UA) for Questopia towards the quarter's end and into Q4, where the title has begun to climb on gross charting lists and started to generate meaningful revenues when looking at external data from Appmagic. We, therefore, expect sequential top-line growth in the coming quarter.

Looking at ARPDAU (average revenue per daily active users) and MAU (monthly active users), we can see an uptick in ARPDAU while MAU declined q/q. While it is common for ARPDAU to lag when a new game is introduced, MAU serves as a more reliable leading indicator. Therefore, in the forthcoming quarters, we will closely monitor the MAU metric as it will provide valuable insights into the new titles’ performance.

Since our initiation report, Sozap has streamlined its game portfolio from seven games to three. We believe the reduced portfolio is a positive development as it enables Sozap to focus its resources and attention on its most promising game titles. Given the importance of achieving a healthy return on investment for the new games, we believe that it is essential to concentrate resources on the company's best ideas, rather than spreading them across multiple titles.

Sozap’s quarterly sales peaked at SEK5m in Q2 2021 and have since been around SEK3-4m per quarter. The lower sales are primarily due to lower UA spend, where the focus has been on games in soft launch instead of scaling Armed Heist. To increase sales, ARPDAU or MAU/DAU has to improve, preferably both. Ahead we see the upcoming global launches as the primary growth drivers.

The main growth driver in the coming quarters is new game releases. This is also the most important, as the company needs to diversify its revenue stream to more games. In the beginning of the launch phase, the primary focus lies on achieving strong user retention and a quick payback window from user acquisition, which are crucial indicators of success.

As mentioned in our earlier research updates, we are especially excited about Fishing Tour, and in our initiation report, we demonstrated the potential outcome of the game by looking at Fishing Clash, a similar fishing game from Ten Square Games. Fishing Clash has 50+ million downloads on Google Play Store.

Assuming Fishing Tour achieves 5% of Fishing Clash’s MAU in 2023 (115,000) and 10% of its ARPU (Average Revenue Per User) (SEK2.6), the game will generate revenues of SEK3.3m in 2024. Looking at 2027 and assuming Fishing Tour reaches 20% of Fishing Clash’s current MAU (460,000) and 50% of its ARPU (SEK11.8), there is a potential for the game to generate revenues of SEK65m in 2027. An ARPDAU of SEK0.4 does not appear unrealistic since this is relatively low compared to similar games. Although the assumptions in the table below can look conservative, the game is not even in global launch yet, so there is considerable uncertainty about the outcome. This implies a high-risk premium. We are thus more conservative in our estimates. It is also worth highlighting that since we started to track Fishing Clash, the game has had a tough period with lower MAU and ARPU.

After Voodoo’s evaluation period of Questopia ended in the quarter, Sozap took on the global launch responsibility, excluding China where Voodoo continues to evaluate the game. It is evident that Sozap started ramping up the UA spending at the end of the quarter and into October as the game has started to climb on gross charting lists while generating meaningful revenues, according to data from Appmagic. In the report, the company also stated that it was satisfied with the performance and continues to evaluate the KPIs. We are encouraged by the early data and will continue to follow the title closely going forward.

On 24 October, Sozap announced that it is initiating a cost-cutting program with full effect in the second quarter of 2024, reducing costs of SEK8m annually. The primary objective is to streamline the company’s structure and align its organization more closely with the development and expansion of its games, Questopia, Armed Heist, and Fishing Tour. As Sozap has entered a new phase, marked by the consolidation of its game portfolio in recent quarters and the focus on its two fully launched games (Armed Heist and Questopia), and with the imminent full release of Fishing Tour, we believe the company’s current organizational size exceeds operational requirements. Therefore, overall, we believe that the organization's downsizing will have a limited impact on the existing business and game titles. On the contrary, this will enable a more concentrated allocation of resources towards monetizing the recently launched three titles in the portfolio.

However, it's worth noting that the downsizing increases the game concentration as this means a de-prioritization of the development of new titles and potentially impacting long-term growth. Given Sozap's current financial position, the decision to prioritize the current titles appears rational. As a result, we deem news as a positive step for the company in the short to mid-term.

Following the Q3 figures and the modifying agreement with Voodoo, leading to Sozap self-publishing both Questopia, we have made some downward estimate revisions. Firstly, we have trimmed the cost base in line with the annual cost reduction of SEK8m from the cost reduction program. Secondly, we have reduced our sales estimates for 2024e-2025e by 35%-40%. All in all, we make relatively small adjustments on an EBIT level where the lower cost base offsets the softer growth rates.

We have used a WACC of 13% in all scenarios, derived from Redeye’s Rating model, and a tax rate of 20.6%. The discount analysis extends to 2036, and the key financial assumptions for the scenarios are summarized below.