Stifel Financial Corp. Price & Performance (SF)

In the quarter, the overall decline in MAU and DAU was offset by higher HARPDAO. We also had solid growth in our direct to consumer year on year. This is something, as you know, that we've been focusing quite a lot on. And it not represents more than a third of our total bookings [indiscernible] that is more than any individual app store, just to give an idea of the size of it. And ad bookings were stable. We've been trying to kind of push ad bookings more, but it is a difficult environment at the moment to increase that book, but that's something that we're looking into for the future. In our strategy product area, we had lower levels of marketing for the Supremacy franchise. This resulted in lower bookings. But stronger adjusted EBITDA in the franchise. We are also making significant product investments in this franchise and that includes a new game that will be soft launch in the second part of 2025. And this should allow us to unlock future growth in the franchise and also in the product area. Furthermore, the higher level of UAC in Q4 twenty twenty three boosted boosted the strategy bookings in that quarter, but also then in Q1 twenty twenty four.

As well as MAU and DAU in Q4 twenty twenty three and that all of that kind of explains the decline in Q4. In this product area as well direct to consumer continue to grow and now represents close to half of the bookings in the product area. In the simulation RPG and Action product area, we also had lower levels of UAC in the quarter compared to last year. But Sunshine Island was able to grow its bookings year on year. And that's despite in reduced investments in UA. As we focus on product improvements to unlock further growth into that game. And shakes and fidgets, as you remember, we had some issues with shakes and fidgets in the previous quarter in terms of some UX user experience issues. The game is now slightly recovered to compare to Q3 twenty twenty four as we've kind of been fixing those issues. In this product area as well, we have this lower level of UA year on year and we are really kind of focusing our investments in terms of where we think there will be the most difference. If we look at the casual and mash up product area, we had continued strong growth within the Joe Walker franchise.

While we continue to see product challenges with the home design makeover franchise and high dependency also on UAC investments for that franchise and in particular for the world franchise that we have from our studio Super Free. The team at Stormate is working on a large player experience improvement for our design makeover. We have identified some clear fixes that we need to do to that user experience. So we hope that will allow us to turn around that franchise. And the team at SuperFree is also looking at ways to improve the word franchise from a product point of view and we want to see how we can kind of have that franchise be less dependent on UA and to have kind of sustainable levels of UA for the world franchise. So bit of a mix story here in casual mash ups. With obviously Joe Walker performing extremely strongly. And with that being said, I'm going to pass on the word to Andreas. Thank you, Alexis.

Morning, everyone. I will we have a bit of an extended presentation today, so I will go through the the cash flow of the quarter to start off with, with a strong cash flow as Alex has also mentioned in the quarter. Also looking in the last twelve months of cash from operations of before working net working capital of SEK $374,000,000. We had positive effects of working capital that we almost generated then €500,000,000 Even if we're in that, we did pay taxes of €63,000,000 We did pay interest of almost $90,000,000 or €89,000,000 in that interest is obviously is coming down versus with the reference rates going down and our margins we pay to the banks going down, but it's still we are paying almost €90,000,000 of interest in the quarter. So we ended up with almost €500,000,000 so €491,000,000 of cash flow from operations in the quarter. We did we have taken down our investments. So we invested €138,000,000 in product development or 8.3% of the net revenues in the quarter. So we have taken we have taken down our investments. We are improving our operative cash flows. And that allows us then to utilize one, to pay off some debt debt in this quarter as well.

So we paid off almost €230,000,000 of [indiscernible] debt in the quarter and we did a buyback as we announced as also 40,000,000 Then of course looking at cash flows, it's in quarters, etcetera, we always look at an LTM perspective, and I'm very pleased to see that we have from a free cash flow, I. E. Our cash flow from operations minus any leasing costs for offices, etcetera, and minus product development. We are now back to above SEK 1,000,000,000 in terms of our cash flow. And that is of course driven by some of the cost initiatives and optimizations we've done in the last [indiscernible] twelve months or even longer than that, that is now starting to show also in the margin where we even if we have a disappointing top line, the performance in the quarter, we can still deliver both healthy very healthy margins and then resulting in a very healthy cash flow. We have taken down our investments and then I think that's very clear on the light blue bar here to the right on the slides. But so we are just below €600,000,000 so $5.98 in the last twelve months. That has been an intentional choice.

And you can say okay, have we taken it down too much? We believe that between 810%, that will be a good investment pace. It will differ between quarters, it will differ between years. But I think we're still investing €600,000,000 into our portfolio. So then moving to the next slide, which is the our portfolio. Here, we actually did a lot of activities in the quarter. First, we issued a new bond so the €850,000,000 which is now maturing in four point seven five years. That was an intentional choice to have a good distribution on our in our bond structure. For some of you, they remember we did reduce the outstanding bonds earlier in 2024 and now we sort of now we've got a much better maturity profile on that So that's very pleased. Following that, we also negotiated or we completed a new [indiscernible] two point five years with existing banks. We took down amount from €3,750,000,000 to 2,500,000,000.0 since we don't actually need that much, we still pay for an outstanding amount of debt. So a lot of things happened on that one. I think it's important that to remember that Ziffrin is always focused on the maturity profile because that gives us the flexibility.

And I think now the next maturity is in June 2027. So we have a good and a solid balance sheet and solid financing structure in terms of our debt portfolio. In addition to that, we had as I mentioned on the cash flow, we did reduce somewhere of that. On the reported numbers, the FX, especially the dollar debt, closes at a higher level. But we are still around our financial targets of 2x in terms of leverage ratio. And we have still credit facilities and we have almost €1,000,000,000 of cash in our balance. So rounding off the year in terms of our cash flow and balance sheet positions, we have strengthened our margins. We have strength in our cash flow cash flow from operations and reduced our investment slightly. And that is yielding strong cash flows. We have significantly in 2024 improved the maturity profile in terms of our debt portfolio. So we enter 2025. And we will speak more about how this business in a very, very short time. To give you a bit more flavor in terms of the financial performance of our new business areas. How we will run the business going forward. And with that said, I will hand back to Alexis.

Thank you very much, Andreas.

So yes, we'll be taking questions at the end of this slightly extended presentation because we obviously have been doing a bigger organization of the company. And so we wanted to basically explain to you what we've been doing, what has been realized, and where we're going with this organization and why we're doing it as well. So really what we're focusing is on simplifying the organization to increase We're focusing on the key game franchises to drive organic growth and we'll explain how we define those key game franchises and what they are. And we want to slow the bookings decline and optimize costs within our legacy games, the games that are not part of these key game franchises. But drive a lot of cash flow to the business. So this is quite a busy slide to explain the new operating way. You have on the left, you have kind of how our previous organization was working. And on the right kind of the new organization. But I think it's a bit busy, but it illustrates well how we operated in the past. The changes that we've made over the past few weeks and how we will operate now in 2025.

So we had, first of all, two layers of HQ management with 11 execs that has now been reduced to just one layer.

With six execs. We also had before four Senior Vice Presidents that were coordinating 20 studios and working with these studios to optimize resources across 70 games, well, actually more than 70 games in the active portfolio. We've now reduced that to 16 studios and 10 key game franchises. We've divided that into three business areas, each with its own Executive Vice President that is part of the group executive management and has and L responsibility and authority of its over their business area. We then had several hubs that provided services to the studios and to the group. That are now all under shared service and we're also taking a very pragmatic approach in terms of what are the ups that provide significant value, doing a lot of cost benefit analysis [indiscernible] such as the payments hub that's behind direct to consumer the marketing hub, all that. But some other hubs, we think that we can improve and optimize. The previous structure was really focused on scaling quickly via M and A. Rather than than on the integration, and it was quite complex to operate. This new structure of having three business areas of focusing on key game few key game franchises results really in more focus a common direction really more operational simplicity with less layers of management, just it's just quicker, it's just more efficient.

Focusing our resources will make us more efficient. It will make us more competitive. As you can see in the new org, our 10 key franchises are divided across our business area. So each business area doesn't have that many things to focus on. We have five key game franchises in Europe. Those are Albion, big Empire, Narrative and Supremacy. We have three in North America. Those are BitLife, OnDesign, Makeover and Word.

And we have two in MENA, APAC, which is one is Board and the other one is Joe Walker. And then although we have reduced a number of studios, significantly from '22 to 2016, we still have more studios than key franchises in each business area. And that's because some of the studios such as Imperium for for instance are focusing on legacy games. And others such as the Republic have part of their resource that is now working on non franchise games LiveOps and then another part of their resources that is supporting the big franchise is operated by New Mutt. So that's also another important thing that we're doing here with this new organization. You know investing RUA where it makes the most impact, where we get the most bang for our buck, But we're also, you know, making sure that our talent is working where it makes the most impact. So that's really a big fundamental shift in how we operate that creates a lot more alignment and then we think in time we'll pay off. So how we know what how did we kind of how this key franchises work? What are the main criteria? So the main criteria that we have selected to define these key game franchises that we will focus our resources resources and attention on are the following one.

These are the following. So the first one that you see there is about having sufficient size and impact We are now in the market where you need to have a certain scale to be successful. Long term. So a key game franchise needs to be of a certain size. So in our case, you know, we've decided, you know, it needs to be driving at least SEK200 million per year or more and all 10 key franchises that we've just outlined have more than SEK 200,000,000 in bookings per year. So that's the first one. Size and impact. The second one is the consistency of the core experience. Each game in the franchise should maintain a consistent core gameplay style. Or fit within a particular genre that aligns with the franchise's identity. And the franchise should be aimed at a clearly defined audience with consistent preferences, teams or experiences that resonate across the grain. It needs to make sense. Right? A good example is our supremacy franchise where games to Conflict of Nations supremacy in 1914 have a similar core experience and appeal to the grand strategy player demographic. So that's very clearly defined there. The third one is technology and game mechanics.

Games within a same franchise would have a common technological framework and game systems that can be reused and integrated on. A good example of that is our home design franchise where many game and game mechanics are used across home design makeover, property borders and and then Allen, what we used to call the game engines. And then the final point is a recognizable and evolving IP. A good example of that is Jare Walker. Which is one of the most recognized game IPs in the MENA region. And is the umbrella brand for more than 50 games when it's when it's up for really super app for cultural and class classical games. Another good example of that is Albion Online, which has a very strong IP and brand recognition. So we are starting with these franchises. This is kind of the criteria that we have for those. And we'll be happy to answer to any questions you have on this. Then what about the other games? So we also have a clear definitions of what is not a key franchise and we divide this into three areas. The first area is active live ops. And this is a non franchise, but these are non franchise games, but these are games where more than 5% of bookings are invested in UA.

An example of that would be Shanks and Fidget, that you can see there. It's one of my favorite games. It's a game that we have mentioned several times, but at this time does not meet all the criteria. Although right now it is self launching a mobile dungeon game, so spin off game based on the same IP and addressing the same audience. And if that is successful, that could be a candidate one day to become a key franchise. So that's that's that kind of explains well what we have in terms of in active live ops. In legacy live ops, that's defined as non franchise games as well, but that have less than 5% of bookings invest in U. S. That's really the games that are, I would say, maintenance mode or the games that where we really know that it's you know, the product, you know, there's no there's no way to invest UA in a profitable way, but in many cases they're kind of they're very cash flow positive. An example of this would be Workman Arouaga Salt, that we recently moved from Kixi in Canada to Imperial in Bulgaria. As Imperia, we turned that studio into a legacy live ops hub and Imperia will allow us to ideally not only improve the cash flows around those games, but also kind of reduce their decline.

Then the last category is external partnerships. And here these are basically games where Stillfront does not have the user data, where Release Still Front is not the publisher. And a good example of that are the games that Nanobit Nanobit develops and that are published by Netflix. So that's really kind of the main ways that we we define this. [indiscernible] So how what does that mean? How are things have performed? So you look at 2024, although we had negative organic growth as a group, of minus 2%, Actually, our key game franchises who represent 72% of our bookings grew by 2%. And we believe that is in line or slightly better than our addressable market. So an increased focus on them will allow us of course with the Invete [indiscernible] long term this continues to be that this continue to be the case. And we believe that their proportion of our overall portfolio as we focus more of our resource and our talent on them will grow. In terms of our active LiveOps games, they had a negative organic growth of 8%. And the legacy live ops that represent about 9% of our bookings at 20% negative organic growth.

So I hope this showing you kind of this different things allows you to better understand the dynamics that are happening within within our portfolio. And with that being said, I'm going to let Andreas explain and go into each of the business areas.

Thank you, Alexis. Yes, as part of the in conjunction with the report, we also released the numbers for each of the business areas in And this morning, And there's a lot of numbers. There's a lot of new numbers. And the purpose of my part of this presentation is to give a bit a sense of how is Europe North America and MENA and APAC doing? And what's the the dynamics in that? Of course, this is the way we will also report going forward. So we will be following up on this when we in Q1, etcetera, where we can give even more flavor. But I think it's quite important to remember that when we have [indiscernible] Business units, that's how we run the business. So that's the geographical spread. And then we have what we call also the shared services. So and they have quite different unique characteristics and look quite Stillfront from a financial performance. It's also important to remember when we break down the group as a whole, Some of the dynamics when we see when we shift user acquisition spend or costs and the growth between within quarters is more visible. And that's fine because if you break something bigger down into smaller and you have a very dynamic business, you will have those fluctuate.

But if we first look at Europe, we classify it as a stable business, with solid margins. They are very focused on in terms of revenues, 84% of the revenues actually comes from the key franchises and they have the most key franchises in terms of both the big franchise, the Premisely Empire, Albion and the narrative franchise. So a lot of the revenue is actually come from that. They are well established, fairly some of them have of these franchise been around for many, many years. But it's a very it's a stable and solid margins. Then it can fluctuate between time. So for example, looking at here, looking at Q1, we did spend more in this particular case in [indiscernible] in 2024, And of course, then the margin goes down when we had higher growth, etcetera. So It will fluctuate between quarters, but it has been consistently stable and solid business. I think one other dynamic to have is that This business area has the strongest a lot of the games and the key franchises are more strategy and simulation and RPG. And there we have come on much further in terms of our direct to consumer, you can also see that the direct to consumer share is above 40 sound in this business area.

That is something that is driving a higher gross profit. And this is also an area where we actually invest more. We have shifted and you can see that on terms of much we spend on product development, but also in terms of some of the other fixed costs here. We have shifted some of the investments from especially North America, which you'll see in a few slides, into Europe. So we have taken that that conscious decision to reallocate some of the investments. And this is the largest France the largest business areas five seventy five people working in this as of year end. So it's the biggest business area that we actually have. Total EBITDAK, very similar to the group, 25% on the full year, but don't remember that we also have the seasonality swings. There is more visible when you break down on a business area. Then North America, Alexis mentioned that earlier as well. I mean, here the full a turning around the business. I mean, we have two main franchises. It's Home Design makeover franchise and we have the word franchise. And they make up 70% of the bookings in this business area. So it's been a lot of there's been a fairly or it is a fairly big push to both reduce the cost base, which we can clearly see that we have reduced the cost base by and the number of people here, but almost 25%.

Q1 twenty twenty four versus Q4 twenty twenty four. We still believe in these two key franchises, but there are some fixes that needs to be done from home design, especially around game dynamics and the player mechanics and in terms of the world franchise, we actually get profitable user acquisitions. Or you have profitable user acquisition costs. So that is one thing. Here we have also a fairly good margin in terms of gross margin. And that is primarily in The U. S. North America driven by actually the ad revenues, something that we haven't done yet. But what we're targeting to do is that we haven't really rolled out direct to consumer in our North America business. As you can see, it's only 1% of our Our revenues that come from the direct to consumer part. So that is an initiative that will also strengthen gross margin over time in that region. [indiscernible] with sort of the business being fair dependent on UA, has been a business where we have only a 5% EBITDA margin. We're still making money in North America. It's important to remember it's not negative. But we are not happy with the results. And that's why we are saying we need to turn around this business.

And this was also one of the reasons that we actually took a goodwill write down in as part of the year end accounts as well. But we have hopes that we have we have two strong franchises in there. And then we have a plan to execute on during 2025. Should always end on a happy note. So I end on so Min and APAC. I mean, these are I mean, we have two key franchise, the Board and Also the York Walker franchise in here very consistently strong growth. In terms of those two key franchises. They've been it's been very fun and interesting to see how they they can continuously grow in these strong markets in these growing markets. Marketing sorry, very strong underlying margin. So that's something that is very has very much impressed us. Just a few things around this is that we actually have here a lower gross margin. Than we have across the group. And that is mainly driven that we're also in the MENA and APAC. We have two of our third party publishing, Subabile and six waves and that takes down the the gross margin because we give some of that that royalties, they go to third party the people actually own the game.

Companies actually make the game. So that's one dynamic. As you can see, we are hoping that we can increase the DTC. Maybe also some of the ad bookings in this business. But that is a dynamic, not to to miss that it is below the rest of the group. But we also have very low user acquisition. I mean, if you look at full year, we only spent 6% of our net revenues on user acquisition costs. And that is just that both your Walker, but also in terms of MoonFrog have very strong communities, very strong brands within their genre in their geographical region. And that, of course, ensures that we can generate a very, very healthy EBITDA margin of 48% for the full year. And that has been improving during the whole each of the quarter. Because we are growing very healthy on the top line. We also have allocated the Mina Imperia here. They will take over and they have started already. We have started to move games from North America, also looking from other where we can actually have that in our what we call the legacy portfolio and having that run as one hub [indiscernible] you focus on reducing the type of the decline in the legacy portfolio at a much lower underlying costs.

So before I hand back to Alexis, just to summarize, we have in Europe, we have a solid business with a stable margins, of course, can be a bit volatile between quarters. We have big franchises here in terms of we have the actual big franchise, but we also have bigger franchise. We have a lot the most focus in terms of general revenue revenue generation into these key five key franchises. And we have enabled within these franchises to innovate and release new games and supremacy is one very clear evidence of that. We also have here in Europe the Nanobit collaboration, which of course gives us a a another dimension of our revenue streams. North America, as we pointed out and we have pointed out before, not maybe in this detail, is a turnaround case. We have a plan. It is the lowest margin for 2024 in the business. We have a plan to to fix that going forward. It is still a sizable business, but it has not been performing the way we have wished it to be. We have the last one, so I mean and APAC. Solid growth. And very, very strong margins. And it will also be interesting to see now when Impira can start taking over some of the legacy games, how we can improve or reduce the drop of those kind of impact So it's important to think about we are breaking down the portfolio into these geographical areas.

And of course, making $1 in MENA and APAC has a 48% margin return versus making $1 in U. S, which had a 5% return at least in 02/1944. So it is a [indiscernible] The more dynamic business when you break it down into this perspective but we have solid foundations in Europe, We have a growth case in the I mean and APAC. We need to fix the North Mark. And with that, I will hand back to Alexis, and I think I will [indiscernible] Thank you very much, Andreas.

I hope that showing to you how this business areas work and how our portfolio divided across key franchises active live ops or legacy live ops, really allows you to see what is working very well and what we need to improve and gives you a view a little bit about under the hood about what really are the dynamics that are driving the overall numbers that you see for SteelFront Stillfront. So I think that's that gives you kind of more transparency than what you had before. In this slide, I just want to kind of show you what the what the actions are that we've done in terms of driving operational efficiency and kind of what is coming. So we've started with this transition a few weeks ago, well, a little longer, actually a few months. And we've already achieved SEK 50,000,000 in annualized cost savings as a result of that. Six studios were consolidated in 2024. And this also kind of feeds into our growth initiatives. So for example, merging by Toronto and Dorado, which are two studios that are working on the supremacy franchise is an example of of how aligning our resources and team towards common goals around the game franchise should allow us to perform better.

Also focusing on our core game franchises will allow us to benefit from scale from our marketing and have more impact from product marketing initiatives and reducing our dependency on performance marketing. As Andres was saying, some of our games have strong some are key franchise have strong IPs, other can benefit from community or network effects and all that. And we want to relay into that to reduce kind of the dependency on performance marketing across the portfolio. We are also kind of concentrating our product investments on these key game franchises. It's just more efficient in terms of growth impact. And this gives a clear route to return to organic growth later this year. So that's really kind of the the main things in terms of the efficiencies. That you can see and how this kind of reorg is helping us. So to summarize what Andreas and I have said and before we start for questions, In terms of the business areas for Europe, I know we expect some fluctuation between negative and positive organic growth. In general and across our key franchises, but it is a very, very stable business. We are in a kind of product investment phase for several of the franchises, one of them was mentioned is Supremacy.

And we kind of expect to keep solid cash flows during that period. For North America, we are in a turnaround situation. We are likely to to continuing being very economical with UA. Or more economical with UA short term and that will have a negative impact on organic growth, but should be neutral to positive on EBITDA. As we invest in product improvements, we should be able to then rescale UA and kind of improve these KPIs. And also in North America, we have new leadership that does come in with Todd which is a twenty year venture in the games industry, which would really kind of allow us to boost this turnaround. For MENA and APAC, we have strong performance by Jaw Walker that is carried by the work the team is doing there, but also by the brand recognition the Superhub network effects, some strong monetization improvements and then constant new game launch in its app, as well as a a fast growing Mini market. The Mini market is growing by by double digits, not the strongest Joe Walker, but growing by double digits. Yearly. And then MoonFrog, all the Indian market is a fast growing market.

And in addition to the board franchise is investing in emulating what we're doing in the Walker Super App approach with with Tin Patti Gold. So this new Stillfront operating system with a leaner and fast organization growth through key game franchises balancing growth with good cash flow and just having stronger group capabilities and industry and the talent gives us the solid foundation to build into the next quarters and years. So with that being said, thank you very much for your time and we're ready to take questions.

If you wish to ask a question, please dial 5 on your telephone keypad, to enter the queue, if you wish to withdraw your question, please dial 6 on your telephone keypad, The next question comes from Nick Dempsey from Barclays. Please go ahead. Yes. Good morning, guys. I've got three questions. So So first of all, in the release, you talk about organic revenue growth improving for the group through the year. On the call, I think you referred to aiming for positive organic revenue growth during the year. Just wondering if you could clarify that a little bit in terms of whether you expect during the second half the group to move into a positive organic revenue growth situation. Second question, can you maybe give us a bit more color on what is driving the more difficult UA and environment that you have flagged in the first weeks of twenty twenty five? Is it how can we be [indiscernible] And the third question we've seen other video games groups sell single franchises, which aren't necessarily a very large part of the group. And those show the market that it is undervaluing the group. Do you think that there are any corners of Stillfront where you could get an interest Should I take the organic growth one?

Yes. Yes, that's the second one.

Yes. So you, Nick. So in terms of the organic growth so as you saw, we had kind of minus 5% organic growth in Q4. Entering into Q1, we kind of explained that we expected that organic growth to continue to having negative organic growth and slightly worse and worse organic growth in Q1. Strong comparables are behind because of that. We know we had some strong game launches last year. In Q1, we also had [indiscernible] in Q1, which this year is in Q2 and there's a few other factors. Also the fact that with some of our franchises such as Supremacy we're kind of in an investment phase in terms of product but we're kind of in terms of UA, we've kind of taken we've taken it down a notch and increased EBITDA. We have to be dynamic in this case depending in terms of what we see. So that's kind of what we're seeing for Q1. And then we think that from Q2 onwards, that would progressively improve We think Q2 will likely continue to be negative. And then from Q3 to Q4, we will see kind of progressive improvement and we do think that we should be able to reach positive organic growth at some point in the second part of the year.

That's for the first question. For the second question, have a UA question as well. In terms of the UA, what were we seeing in terms of the UA environment? Nick, it's just very, very dynamic and constantly changing. As you know, we work with many, many different channels. And what we're seeing is, we have different games and with different channels that will work well for a few weeks. And then all of a sudden that channel will no longer work and we have to change. We've done massive improvements in terms of our creative output in terms of what we do. So we think that in Q4, the elections that obviously always have an impact We also had a kind of a shorter period between Black Friday and Christmas. So we weren't really able to use a little bit of a leeway there to invest. We are able to push in Q5 in terms of the UA then normally what we usually would see is January is usually a very good month to invest UA. And what we've seen this year is that it was good just for a few days at the beginning of the month and then it became expensive quite quite quickly.

So it is something that we're monitoring on a permanent way. Obviously, we don't want to be dependent on markets to fluctuations in U. A. That's one of the reasons we're focusing on key game franchises. And yes, we need to continue to be excellent and world class in terms of our performance marketing and that's something that we're continuing to invest But we do want to reduce our dependency on it.

And then in terms of your last question, Nick, I mean, it's obviously I mean, difficult to comment on individual assets. I think we are taking quite good steps now in terms of breaking down our business. So of course, you can see even if we don't present the P and L per studio, per franchise, down to the bottom nine, we are showing now that we have three very different financial profiles in our different business areas. If things are for if we would divest something, etcetera, that's something we will comment on when we get to that. But I think just the way we report it, or we'll be reporting it going forward is obviously shows some of the You know, The positive and some of the things that we are struggling with, in a more transparent way. And that is also one of the reasons we are breaking down the reporting in much more granularly way going forward.

Can I just follow-up on the UA question? Quite quickly. Do you have a theory as to why that happens? Is there is it to do with other mobile games, other factors out there in the the mobile market? Or what do you put that down to?

Yes, I think it's a mixture with stronger competition in similar markets from particularly in Match three, which is the home design makeover market as you know, we have some very, very strong players, private Privately funded players have come in and taken a lot of market shares such as Dream Games. So you need to make some massive product improvements to compete with them and also kind of the marketing side is difficult. So that's kind of one side of the things. And another side is, you've got large providers such as Applov and IronSource where it's kind of a black box. Kind of margins they take. And if you look at their results, their results have been improving constantly. And then if you look at the ad revenue from the game companies, those avenue increase at the same level and the costs in terms of the UX side have increased. So I'm not so we my one of my theories, but it is just a theory is that more of that they're basically capturing more of the value from that market. Obviously, that's not something they can do forever because then it's not economical to do UA with them.

So I think this will balance out over time. But at the moment, it does feel there's been a bit of a squeeze there. The next question comes from Martin Arnell from DNB Markets.

Please go ahead.

Hi, guys. My first question is you had a comment there in the report that you had positive organic growth for the key franchises last year. Was that the case also in Q1? Or were you negative so far in Q1 in January? In terms of the January 2025, Yes.

We've I think we will refer to what Alexis just said. That's that we've seen we have struggled a bit in the beginning, but place in terms of the UA deployment. How that is impacting the key franchises? I mean, it's a bit premature to state that in this call.

Okay. And when I look at strong cash flow, there is this big working capital effect in the quarter. Is that can you comment a little bit on that? Is that something that will be negative reverse in the coming quarters? Or As you know, I mean, working capital always fluctuates [indiscernible] then especially when we get the receivables from especially Apple and Google or Apple. This one, it was positive. I think we if you look at a longer over the cycle, our working capital has been fairly, fairly stable. Then yes, in 2023, Q3, we had a negative effect and now we have a positive effect. I think the fact is that we are Some of the fixed cost reductions that we've done So yes, you have a working capital you always have any working capital impact I think the fact is that there are some underlying drivers in terms of margins. Also that we also see that interest rates actually are coming down and that has been negatively impacting our cash flows historically. We will see that with the reference rates coming down, if it takes a while to flush out, will also improve our operative cash flow going forward.

Okay. Thanks. And when we look at the top line trend, it's negative right now. But when you look ahead, for how long do you think that you can offset that with the cost optimization and the lower CapEx in order to have free cash flow, say, above SEK 1,000,000,000 where you are now on an annual basis? For how long can you offset the negative revenue trend assuming that it could move on for a little bit longer than you think?

Yes. I think if I just I can just like I think if you if we go back now to our three business areas, I mean, we have we take Mina and APAC, it's growing. Very strong margins, We don't see any signs that that [indiscernible] I mean, they are not as dependent on UA. And what we're hoping there as well is to move some of the games into to Imperial improve the margins there. So that's that business area. I think and then if we look at Europe, Europe has [indiscernible] stable business I would say in Q1, especially in Q1 twenty twenty four, we had more U. Deployment, especially in the supremacy franchise, which you see on the margins. We had better growth. We don't see as much of that this year. But it's a stable business that has shown that it can deliver not tremendous growth and over time, but stable business that has been a strong cash flow generator. Then we have North America. And North America is a turnaround case. We have a plan But of course, if we can improve the North America cash flow we have been deploying a lot of UA, as you can now see.

Course, that will improve cash flow as we redeploy that into more profitable markets like the or I mean an APAC. So I don't want to give a timeline I do think that if we look at break it out in those three components, then I do think there are things that we can do and especially in terms of cash flows where we have North America direct to consumer share can go up.

And also a more profitable use acquisition. But I know Yes, I mean, to build on Andreas and very simply negative organic growth in North America doesn't mean worse cash flows necessary. We could actually eventually we could actually even improve the cash flows from there. And it's not worth the same as the positive organic growth that we get in MENA and APAC, for example, where we have much stronger margins and therefore much stronger impact to cash flow. So So we know we we're fine.

Okay.

Thanks for that. And my final question, I don't know if you can reply to it, but I have to ask you, how is the recruitment process going? Solution for permanent COC. Is there any update from the Board on this that maybe you could share?

Yes. I think as you put it correctly, that's for the Board to respond to and to update you on. So there's no imminent updates at the moment.

Okay. Thank you, guys.

It's the process.

The next question comes from Rasmus Enberg from Kepler, Please go ahead.

Good morning. Two questions or three maybe. It's So you're saying that capitalized development is in the 8% to 10% range also going forward. So we are kind of at the lower end of that. Or can you reduce that further? I didn't quite pick that up. That's the first question.

I cannot yes, I mean, we have I think well, I think Capital Markets Day two years ago, we stated that we will take down CapEx. In product development. I think what we then stated, we would take it down a few percentage points. We've started at 14% and we have come down. I think Of course, when you go through the the changes that we've done and that Alexis elaborated, you put you take out some things, but then you also start investing in some things more. So for example, in Europe, in our key franchises, there you can see now in the numbers that we have actually started to deploy more of that investment. [indiscernible] but we still think and we stated that before that between 8% to 10% of our net revenues is a healthy number. Will it be like that every quarter? No. Can it go down below that for some quarters? Yes. But I think it's all about we are in the phase where we are redeploying capital of course, investing with less in U. S. I think it's one man hour in The U. S. Is more expensive than in our other business areas.

Also has an impact, of course. I would say that 8% to 10% is a healthy level.

And I think focusing those investments on the key franchise [indiscernible] we would have potentially dumped some investments that there aren't we're not moving to kind of legacy helps with the process But it really in we're a games company, we make games. And we will continue to do so and that's what we're doing. We're just focused Have you benchmarked that? It looks to me still to be quite high I mean, 8% to 10% of sales, there are companies substantially below that. [indiscernible] you're correct. Then of course, it depends where you where you benchmark that. If you benchmark that into a U. S. Company where you don't have the same accounting rules and you don't activate in the same way, but we think it's and you see some game companies that have a lot higher MSR investment, I think from our perspective and that's why we think it's a healthy level We also that one of the reasons we changed our profitability metric two years ago to EBITDAK to take away the discussion how much do you activate I mean, it's an accounting principle. What you invest you need to put on the balance sheet. From a profitability and how we steer the business, it is still a bit tack that is [indiscernible] Yes.

And then the same question for UA. It was relatively low now. And I guess if I read you correctly, we shouldn't expect to pick up in Q1 either. What kind of range do you see for you a perhaps for this year, if you have any thoughts on that?

We haven't I mean, we haven't guided in terms of the UA deployment this year as well. So it will, as normal, fluctuate between the quarters. Alexis was saying how the Q1 will look, but give a range for the full year, it's not something. And I think there's an important thing about UA is you also need to be quite opportunistic. You need to be opportunistic in terms of when you see that the costs are too high, you need to pull back and get your EBITDAK up. But when you see that there is an opening, then you need to be very quick in terms of reacting and invest Okay. Very good. Final question. With regards to North America. Do you anticipate further restructuring and charges there? Or is it smoother from here that we there is some massage to do, but no charges or similar things. Or how should we think about that restructuring? Let you answer the financial side of it. But in terms of what we're doing in North America, so obviously, we have new leadership with Todd. I know we are he's executing on the plan there. We do expect to transfer more games from North America to our legacy LiveOps at Imperia.

We've already done a few and we will do some more. So that's kind of is an ongoing process in terms of the financial aspect. I'll Andreas answer.

Yes. I mean, we have, as you pointed out, Rasmus, we had few of quite a bit of our restructuring costs in the last year has been relating the reductions. I mean, reduction is, of course, almost 25% in North America. So it would be less of that, I would say, because we have we have taken out quite a lot of the fixed cost base. Exactly how Todd will organize this team, we'll get back I mean, we'll be more details around that going forward as well. But it's not we have done a lot in North America in terms of our cost base. All right. Thank you so much.

As a reminder, if you wish to ask a question, please dial pound key, 5. On your telephone keypad, There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Perfect. So thank you very much for your time again. I hope that we've been able to explain the new organization that we have at Stillfront in a way that is understandable with the three business areas by geography, Europe, North America, and also that we've been able to explain our key franchises and the dynamics around that. Thank you very much for your time, and we will see you next time. Thank you.