Looking Back at Stillfront

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Crypto Corner: Treasure DAO — Building a Decentralized Nintendo

Big Brain Time! In this episode, we take a deep dive into Treasure - a DAO that’s building On-Chain bridges between Metaverses. Treasure Co-founder and Core team member John and Karel join you host Nico Vereecke to discuss:

Treasure and $Magic
On-Chain Economic Primitives
Incentivizing Game Builders
Managing a Gaming DAO

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#1: Stillfront — Then and Now

In the wake of a bear market, I figured we should take a look at a company that’s been impacted more than most: Stillfront Group. Stillfront is a Swedish-based holding company of mainly F2P mobile studios that has pursued aggressive M&A over the past few years and whose stock is down 80% from its highs (now trading at a 11.7B SEK / $1.2B USD market cap). Before diving into what happened and what’s next, let’s take a quick look back.

Two years ago, Naavik and Elite Game Developers co-wrote a deep dive on Stillfront (pretty close to the company’s peak). In short, we found the roll-up strategy and the decentralized entrepreneurial-driven operating model intriguing, appreciated the team’s focus on profitable long-lifecycle games, respected co-founder and CEO Jörgen Larrson’s thinking, and thought that the increasing diversification of assets across genres and geographies would help Stillfront build a more predictable business among an unpredictable market. We also noted the key risks:

Growth by acquisition takes extreme discipline
It gets harder with scale, organic growth is still critical
Tactics must adapt as market conditions change.

In some ways we were overoptimistic (note: we were focused on the business not the stock), but in others we hit the nail on the head. Stillfront continued to pursue meaningful M&A; since we wrote that original essay, employee count, games in the portfolio, revenue, and free cash flow all roughly doubled. Of course, debt meaningfully rose and shareholders have been increasingly diluted, too. Additionally, Stillfront has remained quite profitable, and it is tapping into minor synergies such as more efficiently building new titles on existing game engines. At the end of the day, this is still a good business, even if we underplayed some near-term risks.

Here’s a quick highlight of where the business is today:

So, if Stillfront grew nicely and still generates healthy profits, what went wrong? It can be distilled to three key concepts:

The first is macro. Nearly all gaming companies face COVID-whiplash, and Stillfront is wrestling with the aftermath of IDFA deprecation. Stillfront’s market headwinds aren’t unique. However, “building a more predictable business among an unpredictable market” falls apart when most genres and geographies become negatively affected at the same time.

The second is financial. The same positive feedback loop that turbocharged Stillfront’s expansion can also work in reverse. For example, if public market investors collectively agree that Stillfront has great growth potential, the company becomes priced at above average multiples and trades at a larger market cap. The company can then use its high multiple stock as a currency to purchase businesses at lower multiples (and then have those newly acquired revenues immediately trade at higher multiples, creating financially engineered value). The company can then also more easily raise money by selling stock in the public market, and optimism and size makes it easier to raise debt at attractive terms. However, if growth slows, then the stock goes down accordingly, which decreases the attractiveness of using shares as currency and makes it harder to strike as many competitive deals at attractive terms, placing further pressure on growth expectations. And if the company is already loaded with debt — of which Stillfront has a manageable yet sizable net debt of 3.1B SEK / $310M USD (some of which it can still tap into) — its financial flexibility decreases, too.

Third, when this happens in growth-by-acquisition businesses, it puts a larger spotlight on organic growth. The problem, in Stillfront’s case, has been that organic growth has been negative (partially due to macro issues). Not only does this put further downward pressure on the valuation, but it raises the question of whether Stillfront’s acquisitions were as high of quality as investors had hoped. The answer is probably not, and certain synergies were probably overrated.

As a result, Stillfront’s stock has been absolutely crushed and forward-looking expectations have significantly dwindled. The company now only trades at 2x sales, 14x earnings, and 10x free cash flow — essentially priced as if future growth will be minimal.

So what’s next?

For starters, it’s back to the basics — organic growth (in existing games and studios) needs to be positive and stable. Fortunately, after a year of -7.8% organic growth (including -6.8% in the latest quarter), management is guiding for positive mid-single digits organic growth for 2022. Strategy games have been a bright spot, and, in order to optimize spend, Stillfront is able to direct UA costs in a more centralized way. Additionally, management recently noted that it’s planning to have 30 games in soft launch this year. Obviously not all of these games are created or monetized equally (and many won’t go on to a global launch), but that’s approximately as many games that were in the full Stillfront portfolio two years ago, so it is progress.

Second, discipline in deal-making and financing is just as important as ever. The focus on diverse games with loyal players and long lifecycles will stay intact, and most profitable assets (even if not incredible) have a price at which buying is worth considering, but it’s now obvious that these acquired studios need to generate better organic growth post-purchase going forward. Also, now that Stillfront operates at a larger scale in terms of revenue it will take more deals and/or larger deals to move the needle the same way. Not only will this be more challenging due to competition and less financial flexibility, but there’s more room for error, and screwing up a large deal, especially, can be destructive to the entire inorganic growth model. Avoiding mistakes and doubling down on quality is more important than chasing inorganic growth for the sake of growth. Not all revenue growth is valued evenly.

Lastly, and somewhat related, it’s time to reevaluate whether the strategy should iterate or not — in big ways and small. For example, now that the stock is down, should raising money via selling stock be off the table? Perhaps. If the stock continues to fall, at what point does it actually make more sense to repurchase shares than chase more deals? Does the profile of F2P business targets (in terms of size, genre, pipeline) need to get refined now that Stillfront is larger and needs organic growth more than ever? And if certain teams outperform other teams, would empowering the best internal studio leaders to take on more studios/assets potentially increase organic growth?

All this said, I certainly wish the best for Stillfront, am a fan of a few of their games, and will probably be wrong on many details going forward. This write-up also excludes a lot of nuance about what genres and games are performing well right now (or not) and deserve more reinvestment (or not), topics which we explore more deeply in our Naavik Pro write-up on F2p roll-up businsess. If there’s any silver lining, it’s that low expectations can create the conditions for a comeback. It’ll be interesting to watch how Stillfront executes on organic growth, targets deals moving forward, and adjusts to the ever-evolving market. Even though I still have questions and concerns, now that the gap between expectations and reality has massively dwindled, perhaps counterintuitively, I think Stillfront is more interesting to pay attention to today than two years ago. (Written by Aaron Bush)

#2: InvestGame’s Global Gaming Deals Activity Report Q1 2022

2021 boasted a total value for both closed and announced transactions of $80.4B across 967 deals. And while this surpassed every record in the video games industry, Q1’22 proved that video games can continue pushing the boundaries further as an industry: the total value of both closed and announced deals for the period achieved the jaw-dropping amount of $100.3B (throughout 269 deals), beating the full deal value of FY’21!

Of course, the lion’s share of this record belongs to the sensational $68.7B Microsoft-Activision acquisition (which has yet to be approved); yet, 2022 promises to be yet another exciting year for the industry — even despite some slowing signs ahead.

M&A deals reached almost the same results as in Q1’21 in terms of the deal count (81 closed deals), while the deal value saw a notable decrease of 23% YoY ($11.4B)
There is a significant Public Offerings YoY decrease, with only 7 deals of $0.5B total value throughout Q1’22, against 38 deals of $8.7B back in Q1’21
Private Investments started off with a robust first quarter, with 174 deals of $3.2B total value; this represents the 36% growth YoY in deal value (vs. $2.4B in Q1’21), and 19% growth YoY in the deal count (vs. 146 in Q1’21). Blockchain gaming now dominates the Private Investment category, with 3 out of 5 top deals being related to the segment
Blockchain Gaming again shows highly impressive YoY growth metrics: the total number of deals was up 11x YoY, while the total deal value was even stronger at 19.4x YoY ($1.6B vs. $83m); 50% of all Private Investments deal value deployed in Q1’22 have been associated with Blockchain

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#3: Everdale — A Time-less F2P Game

This is the intro to a full deconstruction that drops in Naavik Pro tomorrow, written by Harshal Karvande. To read the full deconstruction, as well as receive a weekly stream of game deconstructions, research essays, and markets updates make sure to sign up!

Successful F2P games exist today as constantly evolving entertainment products with new content, features, and regular updates that keep them evergreen, relevant, and engaging for their audiences over many years. They are optimized around play-time invested and hence compete directly not only with other F2P games but also alternate entertainment products and services vying for players’ time.

With Everdale — a casual, social farming simulator — Supercell has taken on the challenge of building a F2P business model that isn’t optimized around play-time invested but rather maximizing check-ins. It has a unique relationship with time, which leverages unique engagement and monetization systems, and these decisions enable novel player routines. Through this lens, the following sections attempt to answer:

What is Everdale? What makes it a fresh take in its genre?
Everdale’s curious numbers: what metrics make it an outlier?
What sets its F2P business model apart? What can it improve?
And finally: How does Social-Collaboration bring it all together?

This research essay was originally posted on Naavik Pro - the #1 research portal for blockchain and F2P games! We serve both investors and developers with our premium research. Make us your remote games research department today!

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