As expected, Q4 marked a transformative quarter with an uptick in sales and UA spending with the launch of Questopia. Net sales came in at SEK4.7m for the quarter, representing a y/y growth of 34% and 50% q/q, above our estimate of SEK4.2m. The deviation is primarily attributed to higher ARPDAU (average revenue per daily active user), which came in 34% higher than expected.

In terms of profitability, Sozap reported an EBITDA of SEK-1.6m and EBIT of SEK-3.4m, which is lower than our estimates of SEK-0.9m and SEK-2.5m, respectively. Higher UA mainly explains the deviation, while personnel costs came in lower than expected. Cash flow from operation came in at SEK-2.3m, negatively affected by changes in working capital of SEK-0.8m. The cash position at the end of the quarter was SEK6.3m.

ARPDAU (average revenue by daily active users) came in at USD0.089, 34% higher than our estimate of USD0.066, and DAU (daily active users) landed at 58,000, 5% higher than our estimates of 55,000.

The report also provided additional information regarding the UA spending and accumulated revenues for Questopia, indicating a solid ROAS (return on ad spend), which is encouraging. Additionally, it is evident that Sozap has maintained its lower UA spending in Armed Heist to mitigate the UA push in Questopia during the quarter. Furthermore, it is noteworthy that Voodoo continues to assess Questopia's performance in China, potentially serving as a positive trigger if the game gains traction.

Looking at ARPDAU (average revenue per daily active users) and MAU (monthly active users), we can see an uptick in both, especially in ARPDAU, which grew 48% y/y and 19% q/q.

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.

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. At 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 the game was globally soft-launched during the quarter. According to the company, both retention rates and conversion to paying customers surpass Questopia and Armed Heist. For instance, the retention rate after 30 days is approximately 19%, compared to 14% in Armed Heist and 7% in Questopia. Sozap intends to continue developing the game before scaling up user acquisition. We believe it would be positive news if Sozap were to secure a third-party publisher or other financing solution to support the upcoming UA for the game. This would also mitigate the necessity of bringing in additional capital to support the growth, a possibility the company mentioned in the report.

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 2024 (135,000) and 10% of its ARPU (Average Revenue Per User) (SEK0.1), the game will generate revenues of SEK3.7m in 2024. Looking at 2027 and assuming Fishing Tour reaches 20% of Fishing Clash’s current MAU (405,000) and 50% of its ARPU (SEK0.4), there is a potential for the game to generate revenues of SEK74m in 2027. An ARPDAU of SEK0.4 does not appear unrealistic as 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.

The highlight of the quarter is the launch of Questopia. According to data from Appmagic, it is evident that Sozap started scaling up UA at the end of Q3/beginning of Q4. The launch of Questopia is also the primary reason behind the impressive q/q growth of 50%. However, to evaluate the launch, we also have to take the UA spending into consideration. In the report, the company presented accumulated sales and UA spend for the game, revealing an impressively high ROAS (return on ad spend), where accumulated sales consistently surpass accumulated UA throughout the entire quarter. The management also expressed confidence in extending UA spend, which is encouraging. Furthermore, it is noteworthy that Voodoo continues to assess Questopia's performance in China, potentially serving as a positive trigger if the game gains traction. Although the game appears to perform well on a small scale, it is important for the game to maintain healthy ROAS levels despite increased UA spending.

Following the Q4 figures, we make limited revisions to our estimates. We increase 2024e sales by 6%, driven by stronger sales in the quarter while leaving sales for 2025e-2026e unchanged. Additionally, we are making some upward adjustments to costs in 2024e, as we expect somewhat higher UA spend. However, the full effect of the cost-reduction program is still not visible in the P&L, and we expect the program somewhat to offset increased UA spending in the upcoming quarters. Overall, we are taking down EBIT by SEK2m for 2024e and SEK1.3m for 2025e.

We apply a WACC of 13% in all DCF scenarios, derived from Redeye’s Rating model, and we use a tax rate of 20.6%. The discount analysis extends to 2036E. We take a cautious approach and estimate a capital injection of SEK10m in our scenarios. Below, we summarize the key financial assumptions for the scenarios.