Top News

#1: Stillfront’s Earnings Beat Expectations, but Its Acquisition Engine May Be Stuttering 

Stillfront Group
Source: Stillfront Group

Stillfront Group, a mobile free-to-play publisher, developer, and distributor, issued their full-year 2022 earnings report on February 15th, including Q4 results as well. Bookings from the October to December period were 1,760 MSEK ($168 million), up 22% from Q4 2021 and down less than -1% Q3. Adjusted EBITDA for the quarter was 672 MSEK ($64 million), representing an EBITDA margin of 38%. For the full year, bookings were up 29% while EBITDA increased 22%. Both the top and bottom line hit a quarterly record despite the current challenge facing the slumping mobile market. Shares surged 13.7% on the results, though Stillfront stock is still down roughly 35% year over year. 

Stillfront Group
Source: Stillfront Group

Most of Stillfront’s growth is via acquisitions, including companies it opportunistically scoops up from larger publishers. For example, in January 2022, Nexon divested from strategy games publisher Six Waves, and put its 34.8% stake on the market. This divestiture allowed Stillfront to wholly acquire the publisher for $201 million in cash and equity considerations and the company with a sizable presence in the Japanese and East Asia markets. 

Mobile game spending fell by about 5% globally in 2022, according to the recent “State of Mobile” report from our partner Stillfront saw an organic decline of about -1.4% over the period, below what overall mobile trends indicated for the year.  Note that organic growth is measured as the change in consolidated net revenues excluding the impact of foreign currency movements and net revenues from acquired studios during the trailing twelve month period. The large delta between the year’s organic decline and overall top line growth is reflective of the large Six Waves acquisition. 

Stillfront’s enterprise value of $1.38 billion means Six Waves comprises 15% of the company’s valuation. This acquisition took place in January, when interest rates across the developed world were nearing zero, reflecting easy monetary policy following the pandemic. Sweden’s Riksbank has raised rates from zero to 3%, the highest since before the Global Financial Crisis. While this deal did not include any debt considerations, the company still has $375 million in net debt as of the quarter, a debt-to-enterprise value ratio of 27%. 

For reference, peers EG7 and Embracer Group have debt to enterprise value ratios of 21% and 18%, respectively. Going forward, growth-at-any-cost will not have the same viability as it did for Stillfront, even though valuations for many of the studios it may contemplate acquiring have fallen meaningfully. Any further debt taken out to fund acquisitions might increase the leverage ratio to more dangerous levels, while equity transactions will be scrutinized for their dilutive nature during a time when other gaming companies are exercising prudence. 

Contributing to Stillfront’s expectation-beating results were efficient user acquisition and organic growth in key franchises. While UA increased by 16% compared to the same period last year, it declined slightly from equaling 26% of net revenue to 25%, owing to stricter payback requirements on its ad spend. However, note that the gross increase in UA was still not enough to counter the decline in DAU and MAU growth. The active portfolio saw DAU fall 8% year-over-year, while MAUs declined by 5%. MPUs (Monthly Paying Users) declined even more substantially, falling 15% over the period. 

Stillfront Group
Source: Stillfront Group

Apps including Supremacy, Albion Online, and BitLife showed significant organic growth, despite a decline at the group level. BitLife is a life simulation game developed by Candywriter, a studio  Stillfront acquired in April 2020 for $74.4 million in cash and stock. This acquisition proved fruitful for the company, as BitLife had a combined 3.8 million downloads across Google Play and Apple’s App Store in 2022 alone and generated $12.6 million in IAP revenue (not including advertising). BitLife’s gameplay is inherently sticky, facilitating high retention among players. In the game, players make various decisions throughout the life of their character, including building relationships, managing finances, and making crucial health choices. Once a character’s personal goals are fulfilled, players are encouraged to experience all the different outcomes and possibilities the game has to offer. 

BitLife’s revenue
BitLife’s revenue. Source:

As a reminder, Stillfront operates through 23 subsidiaries, including Sandbox Interactive, Kixeye, Super Free Games, and Playa Games. Studios are given operational autonomy when it comes to creative control of their titles, with Stillfront encouraging its developers to maintain unique identities. At the same time, however, Stillfront maintains a centralized platform called “Stillops,” which the company believes allows its studios to synergize with one another. Stillfront claims that by pooling data from hundreds of millions of users, Stillops allows studios to share key insights. The Stillops platform spans five pillars to facilitate organic growth in its acquired studios. The initiative has likely helped Stillfront’s margins at the edges, but ultimately studios are more disparate than they are similar, and it’s questionable whether they can draw substantive insight from each other. 

Stillfront Group
Source: Stillfront Group

The most significant event in the quarter was related to the company’s Bangladesh operations. One of Stillfront’s studios, Moonfrog Labs, has a subsidiary called Ulka Games, one of the top developers for card, board, and casual mobile games in Bangladesh and India. The company communicated in a press release in November that Bangladesh authorities are cracking down on the use of virtual chips in online gaming, potentially considering them a form of illegal gambling. 

Stillfront’s EBITDA for the quarter was negatively affected by this regulatory scrutiny, and the company is evaluating whether to wind down operations in the market entirely. Bangladesh was the company’s fifth largest market by downloads between October and December 2022, representing 1.38 million app downloads according to This equates to 3% of the quarter’s total. 

During its annual Capital Markets Day on February 15th, Stillfront increased its adjusted pro forma leverage ratio target to <2.0x, up from its previous target of <1.5x. The company hit its previous upper bound at the end of the fourth quarter, and likely raised the target to give it more leeway were borrowings to increase for whatever reason. This likely isn’t a huge deal, but it’s worth noting nonetheless. 

Stillfront remains an impressively profitable company. But given the ongoing challenges in the mobile market, Stillfront’s negative organic growth, and the fact that the stock is still in a recovery phase, it’s not clear the company’s heavy M&A strategy created as much value as was originally hoped. And even though there are clearly some synergies, it’s debatable how needle-moving they really are. Going forward, we should expect Stillfront to engage in more M&A, but investors should look on with scrutiny. After all, Stillfront still has room to improve operational excellence within its existing portfolio, and management needs to prove its capital allocation chops in this more difficult market environment.

#2: Sony’s Upbeat PS5 Forecast Signals Supply Chain Breakthrough

Tech Advisor
Source: Tech Advisor

Sony lifted its full year forecast for PlayStation 5 sales during its fiscal third quarter earnings announcement on February 3rd. For its current fiscal year, which ends March 31st, the Japanese gaming and technology giant projects it will ship 19 million PS5 units, up 1 million units from the prior forecast. The overall sales forecast for the Game & Network Services Segment (G&NS) is unchanged, while operating income was adjusted upwards by ¥15 billion, to ¥240 billion ($1.78 billion). 

The supply chain shortage is ending, which has positive repercussions for all console manufacturers. PS5 shipments nearly doubled the previous quarter, as 7.1 million units were shipped in FY22 Q3 versus 3.9 million in Q2. There were also a handful of more idiosyncratic factors that Sony attributed to its business for the increased forecast. 

For one, the company reported that nearly 30% of PS5 monthly active users were new to the ecosystem, having never owned a PS4. This influx of new users increases Sony’s total addressable market, reflecting a demographic unique from “upgraders” that have existed in the ecosystem for far longer.  Furthermore, among users who did transition from PS4 to PS5, their “gameplay time and average spending amount [were] significantly higher” than before they transitioned. This may reflect the positive impact of new game releases in the quarter, which could encourage gamers who couldn’t purchase a console during the holiday season to do so in the current quarter. 

Research from Ampere in January illustrates the consumer loyalty unique to the PlayStation ecosystem. In the UK, 71% of PS5 owners (disc version) indicated they used the device as their main console. The 30% figure of unique PS5 MAUs who never owned a PS4 thus likely comes from owners of the Xbox One, Microsoft’s eighth-generation console offering that debuted in 2013. These buyers, who were unable to procure an Xbox Series X/S during the height of the shortages (or wanted to move over to a more first-party-rich platform), plausibly decided their next-generation console would be the PS5 when the dearth of consoles abated. 

Ampere Analysis
Source: Ampere Analysis

In terms of broader trends, the supply of consoles across all three manufacturers has increased dramatically compared to the beginning of 2022. Last November, Xbox chief Phil Spencer said Microsoft was “seeing supply strengthen,” despite headwinds at the time due to China’s COVID-Zero strategy. Then in January, Sony Interactive Entertainment CEO Jim Ryan announced at CES 2023 an end to the PS5 shortage, saying “everyone who wants a PS5 should have a much easier time finding one at retailers globally” this year. 

More recently on February 7th, Nintendo proclaimed that its hardware supply shortages were “largely resolved, and shipments generally went according to plan.” Nintendo specifically called out the broader availability of semiconductors, which is also evidenced by the recent earnings of GPU manufacturers Nvidia and AMD who are now facing demand shortfalls rather than supply side constraints.

Despite the positive supply chain outlooks from Microsoft and Nintendo, they have not fared as well as Sony this quarter. Indeed, one of the negative spots in Microsoft’s recent earnings was Xbox hardware revenues, which were down 13% for the quarter ending December 31, 2022. Sony has beaten Microsoft thus far in the ninth-generation console wars, primarily due to its breadth of exclusives and strong momentum from the PS4 era. High-profile exclusive launch titles like Spider-Man: Miles Morales and Demon's Souls helped drive launch sales, while franchises like God of War Ragnarök have contributed to the platform’s continued sales momentum thanks to holiday bundles and other marketing pushes. 

This is precisely why the Activision-Blizzard acquisition is so critical to the Xbox product strategy, and why Sony vehemently opposes the possibility that its competitor may surpass it in AAA exclusive output. Xbox Game Pass is saturated with back catalog titles, and the PlayStation’s success this generation has emphasized the importance of a steady cadence of high-quality new releases. 

As far as Nintendo is concerned, while the company has no shortage of loyal fans hooked to its original IP, Switch hardware sales are showing their age. The original Switch console was launched in 2017, three years before its peers, and has sold a staggering 123 million units in less than six years. Nintendo has attempted to invigorate sales via the launch of the handheld-only Switch Lite in 2019, targeting more price sensitive consumers, and the Switch OLED model in 2021, aimed at the premium crowd. 

Both models have sold well, but the new lineup has not offset declining growth each quarter. During the nine-month period ending December 2022, Nintendo sold 14.9 million total Switch units, down -21% from the same period in 2021. The Switch has contributed to one of the most prosperous periods in Nintendo’s history, as sales have increased more than threefold since its launch. Future growth will come from Nintendo’s unannounced next-generation console, which we predict will debut during the 2024 holiday season. 

This is Nintendo’s No. 1 catalyst, so we can expect when the company decides to officially confirm the device and begin the ramp up to launch that investors will react positively to the news (assuming it’s not too large of a diversion away from the original Switch).

Top Movers

Weekly Top Gainers
  • For the week ending 2/17/2023: the median return for gaming companies tracked by Naavik with a market capitalization exceeding $500 million was 0.84%.
  • Wemade was the top gainer for the week, surging 33.9% after the company reported Q4 F2022 earnings. Quarterly revenue increased 2% sequentially, while operating losses narrowed by -13% driven by new license contracts. (Link)
  • Roblox stock jumped 17.4% following the company’s Q4 F2022 earnings announcement, which exceeded Wall Street expectations. The company’s user base grew to 65 million DAUs, up 19% from a year prior. Revenue also grew 2% year over year despite challenging comparables. We covered this in a recent issue of Naavik Digest. (Link)
  • There were no notable losers for the week. Broad market weakness was driven by increases in rates and hawkish remarks from the Fed which indicated the next FOMC meeting may result in a 50 basis point hike.

Most Notable Strategic Investments

Savvy games Group
Source: Esports Charts
  • Savvy Gaming Group, the gaming arm of the Saudi Public Investment Fund, acquired a majority stake in Chinese esports company VSPO worth $265 million. VSPO coordinates tournaments and handles event production and logistics, similar to Savvy’s own ESL. The company specializes in esports for games like PUBG, League of Legends, and Honor of Kings. According to Bloomberg, Tencent was the company’s largest shareholder prior to the deal, owning about a 13.5% stake. (Link)
  • The Saudi Public Investment Fund increased its stake in Nintendo to 8.26%, up from 5.01% in May 2022 and 6.07% just last month. It is now the largest outside investor in Nintendo. The fund holds sizable positions in most publicly traded gaming companies, including Activision, EA, and Take-Two Interactive. The last reported 13-F showed the fund holding $30.9 billion in reportable securities. (Link)

Most Notable Venture Financings

Source: Superplastic
  • Mobile slots and iGaming startup Betty raised $5 million in seed funding to expand its online casino business. This is the company’s second funding round, after raising $1.8 million in pre-seed funding in March 2022. Betty is based in New York and is working towards accumulating gaming licenses in the U.S. and Canada. (Link)
  • Superplastic, a creator of vinyl toys and digital NFT collectibles, raised $20 million in Series A funding. The round was led by Amazon’s venture capital fund called the Alexa Fund. Superplastic CEO Paul Budnitz plans on expanding its virtual character offerings and bringing its celebrity avatars to fans. (Link)


Embracer Group
  • Embracer Group, which released earnings on February 15th, announced ambitious plans to launch 94 projects before March 2024, the conclusion of its fiscal year. This schedule includes four AAA titles, including new installments in the Dead Island series under its publishing subsidiary Deep Silver and a new Payday game developed by its studio Overkill. Embracer is one of the largest video game holding companies, with over 15,000 employees across twelve large operative groups. (Link)
  • According to a new report from InvestGame, which Naavik helped produce, 2022 was an active year for games industry deals. The year saw 222 M&A deals (totaling $41 billion, 538 private investments (worth $10.1 billion), and 22 public offerings (worth $4.6 billion). Of those numbers, M&A deals were up 7% year over year, private investments were down 12% year over year, and public offerings (including IPOs) collapsed 82% year over year. (Link)
  • Tencent plans on releasing its mobile MOBA title Honor of Kings outside of China for the first time. According to PocketGamer, the first international market for the game will be Brazil. There was no announcement on plans for the game’s international adaptation, Arena of Valor, though a merged version of the games will be created for the 2022 Asian Games, which will be hosted later this year after pandemic related delays. (Link)

    A big thanks to Mario Stefanidis, CFA for writing this update! If Naavik can be of help as you build or fund games, please reach out.

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