Fantasma Games’ Q4 report showed softer sales figures than expected, declining by 7% y/y and amounting to SEK8.1m, consistent with the previous two quarters and below our expectations of SEK10.2m. However, the underlying performance is stronger than the P&L indicates, with GGR reaching SEK135m, a 20% y/y increase, and 30% q/q. Hence, the lower sales figures stem from reduced margins due to FX and higher gambling taxes. Notably, gambling taxes in the US (Fantasma’s largest market) are typically higher than the average. Excluding FX impact, the margin (Net sales/GGR) (was 5.3%, compared to 5.7% in Q4 2023. Additionally, Fantasma’s subsidiary, Wiener Games, experienced a cSEK2m decrease in sales compared to Q4 2023, as the company is investing more in in-house games instead of work-for-hire. We believe this strategic shift is the right move and should contribute to both sales and margins in 2024. Adjusting for the lower sales in Wiener Games, sales aligned with our estimates.

Looking at the profitability, Fantasma Games reported an EBITDA of SEK0.2m and EBIT of SEK-2.6m, below our estimates of SEK2.5m respective SEK-0.1m. The lower profitability is due to the lower sales, while Opex was in line with expectations.

Overall, we believe the report is stronger than it might suggest at first glance, as the company is transforming the work-for-hire business in Wiener Games. Moreover, we observe that the company maintains good cost control. With the expected increase in game launches in 2024 and strict cost control, we do not expect the need for additional capital before the company attains positive cash flow.

After the quarter, Fantasma announced its intention to release the existing game portfolio (that is available in the US) with FanDuel in Q1. On that note, we observe that several titles, such as Goat Rush, Divine Dynasty Princess, and 24 Stars Dream, have good visibility on FanDuel’s website, which is encouraging. We also note that Wicked Kitty, which was exclusively launched with BetMGM in February, has good visibility. Hence, the company seems to be off to a good start in Q1, setting up for a strong 2024.

In Q4, the gross gaming revenue amounted to SEK135m, representing a y/y growth of 20% and 30% 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 SEK100m from older games (long tail) and SEK35m from games launched within the last six months (launch gaming revenues). While launch gaming revenues fell below expectations, long-tail revenues did the opposite, increasing by 127% y/y and 61% q/q. This marks the eighth consecutive quarter of q/q growth in long-tail revenues. This consistent growth indicates that the games continue to contribute to sales long after their initial launch. As these revenues are more sticky, they could also be seen as recurring revenues, giving Fantasma stability in the times ahead.

We think 2024 will exceed 2023 both in terms of growth numbers and incremental margins, as the company still has plenty of room for growth, and its operation enables efficient scaling of game development. Below, we highlight the main growth and margin drivers for 2024 in our view:

• Proprietary distribution platform
As we wrote in our previous research report, we are excited about Fantasma’s proprietary distribution platform, which we think will enhance growth and margins due to increased reach, flexibility, and lower royalty fees to aggregators. In the Q4 report, the company revealed that 4% of Q4’s GGR came from its own platform, a number that should increase in 2024.

• Increased number of game launches
Fantasma launched 12 new games in 2023; we expect this number to increase in 2024, supporting growth. However, it is worth noting that increasing the number of games does not automatically mean higher sales. Success depends on gaining visibility and traction from operators, which becomes increasingly difficult with more game releases. Hence, it will be important for Fantasma to succeed in managing the increased number of game launches.

• Increased reach
After the quarter, it became clear that Fantasma continues to attract prominent operators, going live with FanDuel in Q1 2024. Beyond launching with new large operators, we also believe that Fantasma has yet to fully unlock its potential with operators it has already gone live with.

• New markets
We think the company has plenty of opportunities left to expand into new markets. In conjunction with the Q3 2023 report, the company stated that it has begun to see good growth in new markets such as Greece, Brazil, and Italy. These markets are likely to support growth in 2024, along with the company’s largest market, the US.

All in all, we expect 2024 to be a strong year for Fantasma Games, although we acknowledge that it can be volatile between quarters, as was the case in 2023.

Following the Q4 report, we have revised our estimates downward, reducing sales by 4% for 2024e and 6-5% for 2025e-2026e. The downward sales adjustment in 2024e is primarily due to lower sales contribution from Wiener Games and a somewhat more conservative view for H2 2024. Thereafter, we anticipate growth from a lower baseline. In terms of costs, we are maintaining our estimates for 2024e roughly unchanged while revising them downward by 3-4% for 2025e-2026e. In total, we are adjusting our margin assumptions by 3pp in 2024 and 2-1pp in 2025e-2026e. We expect Fantasma to come back to positive EBIT in Q2 2024.

We have used a WACC of 12% 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 30%.

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 40%, 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.