Beyond Frames delivered a solid report. Sales were stronger than expected, while profitability levels were aligned with estimates.

Net sales grew 361% y/y and came in at SEK36m (7.8) versus our estimates of SEK24m. Positively affected by continued good momentum in Ghost of Tabour and the recent two signed publishing deals (we estimate that contributed with cSEK1.9m), as well as from the release of Outta Hands, yet being launched by the very end of the quarter. We argue this is a solid print given the otherwise seasonal soft Q3.

The gross margin came in at 19% versus our estimate of 30%, yielding a gross profit of SEK6.7m (3.7). The lower gross margin in the quarter is to our understanding mostly based on the strong performance of Ghost of Tabour, where related platform fees and royalty payments to developers are included in COGS.

Looking at the profitability, EBITDA came in at SEK2.2m (-3), for a margin of 6%, slightly below our estimates of SEK2.5m. EBIT reached SEK-2.2m (-6) and saw some higher D&A than expected related to recent game releases.

EBITDA-Capex (underlying free cash flow) came in at SEK-5.1m versus our estimate of SEK-3.2m. Beyond Frames has no interest-bearing debt and ended the quarter with a net cash position of SEK34.5m, illustrating there are still plenty of opportunities to use their cash position, internally or for external projects.

The fourth quarter is generally the seasonally strongest quarter, given the holiday season. This year is no exception with the PSVR2 now available on the market and the Meta Quest 3 headset.

Ghost of Tabor, developed by the external studio Combat Waffle Studios, has been the shining star so far during 2023 and saw continued high player activity in the third quarter based on a major update in July. According to Steamcharts, the player activity saw a slight decline in October but has picked up again in November from a released DLC. Ghost of Tabor is planned to go into full launch by Q1 2024e on the Meta Quest Store, PSVR2, and SteamVR.

By the end of September, the game Outta Hand was released, entered the top 7th list on Meta Quest store and received positive reviews from critics and players. We expect the material sales from this release to be collected as revenues in Q4 2023e.

In Q4 2023e, we estimate sales of SEK35m (4) and the gross margin to improve somewhat versus Q3 2023 and to reach 23.6% (41) based on a broader mix of revenues across its product portfolio.

Earlier in November, Beyond Frames announced that they secured a licensing agreement with an undisclosed global media and entertainment conglomerate to develop a VR action title for one of the biggest franchises in the world. The related IP spans over generations and generated more than USD1bn in 2023 from its lineup of films, TV, and licensing.

The game will be developed by the internal studio Cortopia and published by Beyond Frames. The project started in November, and we believe it could be ready for release in 2026e. Beyond Frames will partially finance the project but is also evaluating the possibility of external project funding, which we believe is likely to occur. In that case, Beyond Frames (cortopia) will likely collect some milestone payments during the development phase, improving visibility and cash flow until launch. Post the release, a potential rev-share structure between Beyond Frames and the potential external project funding partner is likely. In addition, some licensing fees or minimum guarantees are likely to be paid to the licensing holder. We believe this is a very good deal for Beyond Frames, as it is likely that Beyond Frames will take the lion's share of the rev-share structure post the release.

Although the financial contribution is highly uncertain at the current stage, a potential clarification regarding the external project funding could act as a catalyst in the near term as it reduces some of the risks with the project.

Following the Q3 2023 report, we raise our 2023-2025e sales estimate but leave our profitability estimates largely unchanged, considering the lower gross margin profile.

Peer valuation

On the back of our revised estimates and by penciling in some financial contributions from the coming game release related to the major IP in 2026e, we update our valuation range. Our new valuation range is between SEK13-46 (13-43), with a base case of SEK27 (26). Our base case of SEK27 corresponds to 15x EV/EBITDA (25e). It is a premium to peers, but we note that the VR industry is expected to grow rapidly in the coming years and that its expansion into PC/console provides vast optionality.