• Total revenues amounted to GBP24.3m (21.7), an increase of 12% y/y, 4% above our estimate of GBP23.4m.
• Gross profit amounted to GBP5m (3.7), an increase of 35% y/y, 23% higher than our estimates, equivalent to a gross margin of 20%.
• OPEX amounted to GBP-4.7m (-1.8).
• Adj. EBITDA amounted to GBP2.1m (1.6), 28% higher than our estimates. Primarily due to higher gross margin.
• EBIT amounted to GBP0.2m (0.9).
• Operating Cash flow for the period amounted to GBP3.5m (1.2), positively affected by changes in working capital.
• Cash and cash equivalents for the ending period were GBP11m, with no interest-bearing liabilities.

All in all, the quarter was strong, as preliminary figures suggested, with sales and profitability ticking up after three consecutive quarters with negative q/q growth. With the Q4 numbers, Flexion Mobile once again demonstrates its operational scalability, as the adjusted EBITDA margin improved from 1% in Q3 to 9% in the quarter. Additionally, we observe solid cash conversion, indicating that the growth comes with high incremental returns.

Flexion provided revenue guidance for Q1 of USD21-24m (GBP16.5-19m) and plans to double revenues in the coming three years (a CAGR of 26%). The Q1 guidance was somewhat lower than our estimates while the ambition of double revenues in three years is above our long-term growth assumptions. Overall, we continue to see several tailwinds for Flexion with new game signings, expanding distribution reach, and regulatory frameworks that open up alternative distribution channels. With the overall landscape for mobile developers remaining muted and the potential for privacy changes in Google Play (similar to IDFA for Apple Play) in 2025, we think developers will be more determined than ever to seek out new revenue streams, thereby positively impacting Flexion Mobile for the coming years. On top of that, we are also encouraged to see that Audiencly has managed to renew the sponsorship contract for 7vsWild.

After having a weak cash flow in Q3, the cash flow rebounded as expected in Q4. Operating Cash Flow conversion on a LTM basis (OCF after changes in working capital divided by adj. EBITDA) amounted to 34%, up from -28% in Q3, while FCF conversion (OCF less investments in intangible assets and PPE, divided by adj. EBITDA) amounted to -45% up from -124%. In Q4 isolated, FCF conversion amounted to 170%. The high cash conversion aligns with historical patterns where 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. The deviation in recent quarters is due to the payment of distribution rights of GBP3.2m in Q3 2023. 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 incresed to 6% in Q4 2023 on an LTM basis, and the gross margin to 17%. LTM Q4 2023 sales amounted to GBP70.8m (74). Adjusted LTM EBITDA amounted to GBP4.1m in Q4 2023.

At first sight, it might seem that Flexion has decreased its pace in terms of new game signings. However, the company has stated for a while that it aims for the top titles on the market. With the success of MONOPOLY GO!, it is evident that one top-tier title has a much bigger impact than several mid-tier titles combined.

MONOPOLY GO! continues to set new records and exceed every initial goal set by the developer, Scopely. In February, the game surpassed USD2bn in lifetime revenues, achieving this milestone just 10 months after its launch and three months after reaching USD1bn, indicating accelerated growth in recent months. This achievement is even more impressive considering the challenges the mobile gaming market has faced in recent years.

Given that Flexion managed to secure this title, we believe it should bolster the company’s chances of signing more top-tier titles in the future. Therefore, we continue to expect fewer but larger game signings in the future.

Flexion’s games portfolio now contains 8 top-tier games. AMGR for top-tier games declined 5 y/y but increased 43% q/q. AMGR for mid-tier games declined 21% y/y and 2% q/q.

Flexion signed new titles from NEOCRAFT and Big Fish Games after the quarter, which is expected to go live in H1 2024.

The table below summarizes game signings since Q1 2021. In total, the games generated USD71.6m 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 USD110m. The growth is mainly attributed to Monopoly GO!.

Following the Digital Markets Act (DMA) imposed by the EU, Apple announced changes to iOS and the App Store to comply with the new regulation at the end of January. The unveiling of Apple opening up its ecosystem does not come as a surprise, as rumors have suggested this for a while. For instance, Redeye already commented on this development in December 2022.

In broad terms, the changes mean that developers will be able to distribute apps from alternative app stores on Apple devices. For example, this could imply that alternative app stores, such as ONE Store and the Amazon App Store, would become available on iOS. Since these changes are only applicable in the EU, Flexion should be able to increase its exposure to this region as Europe accounted for only 21% of total revenues in Q4 2023, compared to 34% in North America and 41% in Asia. For instance, Apple recently revealed that the App Store had 101 million active monthly users in Europe. Additionally, Apple users tend to have a higher Average Revenue Per User (ARPU) than Android users, suggesting significant potential for Flexion.

In conjunction with opening up its ecosystem, Apple also announced new pricing models. Developers can choose to stick to the current one (roughly a 30% commission) or adopt the new one of 10% or 17% commission fees (depending on size), with an additional fee of 3% if using the App Store’s payment solution. Alongside the lower commission fee, Apple has introduced a fee of €0.50 for each annual install per year over a 1 million threshold. It is worth noting that developers must adopt the new pricing model if they want to distribute their apps on alternative app stores. Therefore, Apple will also earn a commission from games on alternative app stores, something that has resulted in resistance in the market. As Apple’s fee calculator suggests a relatively unchanged total fee for large developers deciding to distribute their apps in alternative stores, we can understand the frustration.

However, whatever the final fee structure, opening up iOS for alternative app stores will undoubtedly increase Flexion’s market reach significantly, and we believe the company is in a pole position to benefit from this change. However, it is still too early to see how this will play out in the short to mid-term.

Following a setback in its legal battle with Apple in 2021, Epic Games, the developer of Fortnite, experienced a different outcome in its lawsuit against Google as a federal jury concluded in mid-December that Google had abused its power in the app distribution market. Epic Games brought the lawsuit as it accused Google of engaging in monopolistic practices by restricting alternative app stores on Android devices and blocking alternative payment methods while charging a commission fee of 30%.

The outcome may seem surprising, especially considering Epic’s unsuccessful lawsuit against Apple in 2021. However, a big distinction lies in the fact that Google lacks control over the hardware, unlike Apple. For instance, Epic Games means that Google has engaged in strategic partnerships with phone manufacturers like Samsung and LG and major telecom companies such as AT&T and T-Mobile to pretend new players are entering the distribution market.

While the outcome is a positive development for alternative distribution platforms and, consequently, Flexion, it is important to note that the final chapter in this case is yet to unfold as Google said it will appeal the decision. Given the ongoing pressure on Apple and Google from both developers and regulators, we think some adjustments will be made. However, the key uncertainty lies in the timing and terms of these anticipated changes.

Following the Q4 report, make limited changes to our sales forecast, increasing FY 2024e-2025e by 2-4%, implying a growth rate of 21-18%. This can be compared to Flexion’s ambition of having a CAGR of 26% 2023-2026e. In terms of Opex, we have increased our estimates regarding personnel expenses by 25-28% 2024-2025e, which came in higher than expected in the quarter. The company also stated that it intends to continue investing in the organization as it sees more commercial opportunities in the market. Regarding Q1 2024e, we estimate Flexion to be in the upper range of its revenue guidance of USD21-24m (GBP16.5-19m), as we expect sales of GBP18.8m.

We have used a WACC of 11% in all scenarios, derived from Redeye’s Rating model. The discount analysis extends to 2038, and the key financial assumptions for the scenarios are summarized below. Flexion currently holds GBP14.3m in cash. After deducting earn-outs of GBP8m, the company has a net cash position of GBP6.3m, resulting in an enterprise value of approximately SEK370m and an EV/EBIT (2025e) multiple of 5x. In our view, an attractive multiple for a company with high cash conversion and a scalable business model.