COMPANY ANALYSIS 9 December 2016

Summary

Stillfront (SFRG.ST)

List: Siege the opportunity Market Cap: 373 MSEK  Redeye initiates coverage of Stillfront Group which we view as a Industry: Gaming diversified bet on the Gaming industry. An investor gets a company CEO: Jörgen Larsson Chairman: Per Skyttvall with a strong portfolio of game titles, new releases with great promise and the added bonus of attractive acquisitions conducted

by a management team with a strong track-record. OMXS 30 Stillfront  We believe that the market has overlooked some major value enhancing triggers that will materialize in the near-term: 100 Simutronics upcoming title Siege: Titan Wars has blockbuster 90 potential according to us. Other triggers lie in the revenue boost for 80 Bytro’s titles when they are mobile compatible, development and 70 launch of the in-house title at Coldwood and more. An adoption to 60 IFRS would reveal the underlying profitability and show the 50 discount to peers more clearly. 40 08-Dec 07-Mar 05-Jun 03-Sep 02-Dec  Through our DCF using conservative assumptions we derive with an estimated fair value, in Base-case, of 105 SEK per share. Our valuation ranges from 32 SEK per share in Bear-case to 210 SEK in Bull-case. In conclusion, we find Stillfront conservatively valued and consider the company as an attractive risk-reward from an investment perspective.

Redeye Rating (0 – 10 points)

Management Ownership Profit outlook Profitability Financial strength

7.0 points 6.0 points 4.5 points 6.0 points 7.0 points

Key Financials

2014 2015 2016E 2017E 2018E Share information Revenue, MSEK 29 57 92 122 190 Share price (SEK) 66.8

Growth 41% 96% 61% 33% 55% Number of shares (m) 5.6

Market Cap (MSEK) 373 *uEBITDA 2 13 41 47 98 Net cash (MSEK) 57 uEBITDA margin 8% 23% 44% 38% 52%

EBITDA -8 4 6 17 61 Free float (%) 70 % EBITDA margin -28% 7% 6% 14% 32% Daily turnover (’000) 5000 EBIT -23 -4 -2 17 57 EBIT margin -79% -7% -2% 14% 30%

Pre-tax earnings -24 -4 -4 17 57 Analysts: Net earnings -23 -8 -8 11 42 Kristoffer Lindström 2014 2015 2016E 2017E 2018E Net margin -80% -13% -9% 9% 22% Dividend/Share 0.00 0.00 0.00 0.00 0.00 [email protected]

2014 2015 2016E 2017E 2018E EPS adj. -7.78 -1.50 -1.50 1.93 7.59 P/E adj. n.m. n.m. -44.5 34.7 8.8 Tomas Otterbeck EV/S n.m. n.m. 4.1 3.0 1.6 [email protected] EV/EBITDA n.m. n.m. 64.4 21.9 4.8 EV/uEBITDA n.m. n.m. 9.4 7.9 3.0 *uEBITDA = EBITDA before expensed investments

Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.

Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: [email protected] Stillfront

Redeye Rating: Background and definitions

The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.

Company Qualities

The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth.

We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 – Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.

Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points.

The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys.

Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 – Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.

Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.

Profit Outlook Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 – Competitiveness.

Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit margin or EBIT.

Financial Strength Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term. The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 – Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary events.

Company analysis 2 Stillfront

Table of contents Investment Case Summary ...... 4 Company Profile ...... 6 Background ...... 6 Product and Services ...... 8 Bytro Labs (Germany) ...... 8 Coldwood (Sweden)...... 11 Simutronics (USA) ...... 12 Power Challenge (UK) and Dorado (Malta) ...... 16 Business Model and Sales ...... 17 The PLEX strategy ...... 17 P – Portfolio of games ...... 18 L - Long life cycle games ...... 18 E – Engines for scalability ...... 19 X – Cross (x) plattform ...... 21 The acquisition strategy – A cherry picking game ...... 21 Team ...... 23 Ownership ...... 25 Market and opportunity ...... 26 The market ...... 26 Competition ...... 32 Opportunity ...... 33 Financial projections ...... 35 Group forecast ...... 35 Valuation ...... 46 Base Case scenario ...... 46 Bull and Bear-case Scenarios ...... 50 Triggers and risks ...... 51 Appendix ...... 52 Board of directors ...... 52 KPIs ...... 54 Terminology ...... 55 Summary Redeye Rating ...... 56

Company analysis 3 Stillfront

Investment Case Summary

A large and growing gaming industry The gaming industry has grown into one of the largest digital entertainment The gaming industry has markets globally. In 2015, total market size was $ 92 billion and growth is grown into one of the largest digital expected to remain strong which will bring the market to 119 billion USD in entertainment markets 2019. The gaming industry benefits from structural growth drivers like demographics, digital distribution and a strongly growing mobile market. Total number of players in 2016 amounted to 535 million in North America and Europe and more than 1 billion players in Asia-Pacific. The gaming industry is still young and constantly evolving due to technical shifts and rapid changes in consumer preferences. The industry is therefore entailed with risks but for a successful player, with a clear strategy and skillful execution, the opportunity is massive.

A platform to grow Stillfronts management is highly aware of the risks and opportunities in the Stillfront Group consists gaming industry. They have, based on their industry know-how and of five studios in five different countries extensive experience, defined a strategy to attain optimal risk-reward for their product portfolio. Today, Stillfront Group consists of five studios in five different countries with around 100 highly skilled and experienced game professionals. The company combines the indie studios’ agility with a professional public structure in order to attain synergies and efficiency. Stillfront has global reach with more than 300 000 monthly active users from over 100 countries and the studios Bytro Labs, Coldwood and Simutronics represent roughly 90 percent of the group’s revenue.

Stillfronts strategy for success Stillfront has a clear focus on delivering good results with limited risk and this idea permeates the entire organization and their working methodology. Company management has developed a strategy named PLEX which stands for; (P)ortfolio of games, (L)ong life cycle games, (E)ngines of Scalability and X (cross) platform. The purpose of the methodology is to reduce title and technology risks through diversification, generate stable revenues while keeping user acquisition costs low, focusing on proven game engines and cross platforms in order to create scalability and decrease risk. Stillfront’s management invests vast amount of time to source, screen, perform due diligence and meet company teams to make sure that the potential acquisition targets meet their criteria. To date, Stillfront has scanned over 1 000 companies and this finally resulted in 5 acquisitions after their thorough due diligence. We believe that this modus operandi distinguishes Stillfront from industry peers and makes Stillfront attractive from a risk/reward perspective for an investor.

Company analysis 4 Stillfront

Valuation – attractive risk/reward Base Case Scenario We believe Stillfront will continue to deliver significant growth as the company focus on bringing low-risk titles to the market. We also expect underlying growth in the gaming market and an increase in revenues from mobile. In the near-term, we believe the revenue uptake will be driven by Estimated fair value of Simutronics Siege: Titan Fall and mobile porting of Bytro’s game titles. In 105 SEK per share our Base Case scenario, we assume long-term average growth of 22% in 2016-2025. We expect margin to expand with an average uEBITDA-margin of 49% (EBITDA before expensed investments). In the terminal period, we assume a growth rate of 4% and an uEBITDA-margin of 52%, equivalent to an exit EV/EBIT multiple of around 9x. We use a WACC of 12.2% which is derived using Redeye's rating model. These relatively conservative assumptions leads to an estimated fair value of 105 SEK per share.

Bull Case and Bear Case scenarios In our Bull-case, we assume that Simutronics title, Siege: Titan Wars, becomes a success. We also model that the company launches new successful mobile games, within the franchise, in the coming years. This leads to long-term average growth of 32% during 2016-2025. We use an average uEBITDA-margin of 49% (EBITDA before expensed investments). Our Bull-case indicates an estimated fair value of 210 SEK per share.

Our Bear-case assumes a low pick-up in users from the mobile porting of Bytro’s games and a limited success for Siege: Titan Wars. This leads to long-term average growth of 19% during 2016-2025. We model an average uEBITDA-margin of 32% (EBITDA before expensed investments). Our Bear-case indicates an estimated fair value of 32 SEK per share.

Triggers and risks We believe a potential trigger is when Stillfront change reporting to IFRS. We find the final release of Siege: Titan Wars as a This will reveal the underlying profitability and show the discount to peers major trigger for the more clearly. Another major trigger would be if Siege: Titan Wars becomes share a success. We will have more visibility on this in H1 2017. Other potential triggers lies in the launch of Bytro’s mobile titles and launch of the in-house title at Coldwood. Finally, a potential trigger is when Stillfront makes additional acquisitions. The risks lies in the success of new launches. Stillfront has stable underlying revenue generation from existing titles but in order for the share price to appreciate significantly they have to deliver on at least some of these title launches.

In conclusion, we find Stillfront conservatively valued and consider the company as an attractive risk-reward from an investment perspective.

Stillfront: Fair value range 0 50 100 150 200 250 Last price 66

0 Bear-case: 5032 Base100-case: 105 150 200Bull-case: 210 250

Company analysis 5 Stillfront

Company Profile

Background The early formation of Stillfront began already in 2010 whereby the Sales CAGR of 52% in company merged with a number of companies over a period of two years. In 2012 - 2016 2012, this formation was completed and Stillfront Group was created. Since the creation of Stillfront Group, the game portfolio has expanded from 2-3 titles to a comprehensive portfolio consisting of more than 12 titles. We expect the company to report revenues of roughly 92 mSEK in 2016 which would imply revenue CAGR of 52% in 2012 - 2016. This is impressive to deliver high growth over such a long time period.

Sales development (msek) and game portfolio Net sales 100

90

80

70 Sales CAGR of 52% 60

50

40

30

20

10

0 2012 2013 2014 2015 2016E Source: Stillfront Group, Redeye Research

Below we highlight the most significant events in the history of Stillfront Group;

2010  Early formation of the company. Merged with a number of other companies including: Gamerock, VoiPLAY, Stillfront, Verrano and Coldwood Holding 2012  Formation finalized and Stillfront Group was created  Acquired 100% of shares in Power Challenge Holding which added two new games to the portfolio; ManagerZone and Power Soccer  Acquisition of two minority holdings in EPOS AB and Vexercise AB 2013  Acquired 51% of Bytro Labs with an agreement to acquire the remaining shares by 2016. Through this acquisition, the portfolio expanded with; Supremacy 1914, PanzerWars and Industry Tycoon  Stillfront assumed the current group structure

Company analysis 6 Stillfront

2014  Release of Bytro's Thirty Kingdoms  Acquired 100% of the shares in DOG Holdings 2015  Coldwood enters partnership with EA for developing Unravel  Release of Gladiator Online  Release of Call of War  Raised 75 mSEK during listing on Nasdaq Stockholm First North 2016  Coldwood releases Unravel  Bytro releases New World Empires  Acquisition of Simutronics Corp which added the titles GemStone and DragonRealms to the portfolio  Acquisition of remaining shares and full ownership in Bytro Labs

Stillfront Group today Today, Stillfront Group consists of five studios in five different countries Stillfront Group consists of five studios in five with around 100 highly skilled and experienced game professionals. The different countries company combines the indie studios’ agility with a professional public structure in order to attain synergies and efficiency. Today, Stillfront has a global reach with more than 300 000 monthly active users from over 100 countries. Bytro Labs, Coldwood and Simutronics represent roughly 90 percent of the group’s revenue. Below is an overview of the group structure and later in this report we will describe each subsidiary in further detail.

Millions of players have played the games from Stillfront and overall the titles have an above average player loyalty. The majority of the titles within the Group are free-to-play strategy games with both a long game and player life-cycle. It is important to note that more than 70% of the revenues are generated from Stillfront’s own and self-published brands.

Company analysis 7 Stillfront

Product and Services As mentioned above, Stillfront Group consists of five game studios where Bytro Labs, Coldwood and Simutronics represent roughly 90 percent of the group’s revenue. In this section, we present a more detailed description of each of these game studios and their respective game portfolios.

Bytro Labs (Germany) Bytro Labs was founded in 2009 in Germany by Felix Faber, Tobias Kringe and Christopher Lörken. The company has a strong focus on browser-based games but is now porting their most successful titles to mobile. Bytro currently employs roughly 40 people with their main office in Hamburg. Stillfront acquired 51% of Bytro Labs in 2013 and finalized the acquisition for the remaining shares during 2016 using proceeds from the IPO.

Key fundamental drivers we see for Bytro Labs in the near-term;

 A mobile version of Call of War is set to be released during Q1 2017. If the launch is successful Bytro will port more titles and make them mobile compatible since the development has been made on game engine level.  Newly released New World Empires is gaining traction. The new game was released as final version in September and generated 0.6 mSEK in revenue during Q3 2016. Since the game was in open beta for two months and final launch for only one month, this could indicate a release which is in-line, or even above, Call of War’s early revenue generation.  Bytro has been releasing new titles’ at an increasingly rapid rate during the last years and we expect this to continue to be a driver.

Game portfolio of Bytro Bytro has two core titles, Supremacy1914 and Call of War, which represent the majority of the company’s revenue. We will get into more detail about key KPIs for these games in our financial projection section. Bytro has also launched games that haven’t worked out well, such as Thirty

Bytro has two core titles, Kingdoms. However, the overall cash investment to develop these games is Supremacy1914 and Call low, so some minor failures is expected and “part of the business”. All of of War Bytro’s games have a freemium model where players can make in-game purchases of virtual goods. Below is a compilation of Bytro Labs game portfolio and developed titles. The long-tail games are managed by the Dorado, another subsidiary within the Stillfront Group.

Company analysis 8 Stillfront

Game portfolio of Bytro Labs Core titles

Q3'16 KPIs Q3'16 KPIs DAU: 19 035 DAU: 22 195 MAU: 67 812 MAU: 92 555

Newly released

Released Sept 16. SEK 0.6m in rev. during Q3

Long-tail

Source: Stillfront Group

Supremacy 1914 In 2009, Bytro Labs released their first game “Supremacy 1914”. It is a World War 1 game which quickly became popular among players in the real

Supremacy 1914 was time strategy games community. Development of the game began in 2006. released in 2009 The same year as the game was released it was awarded, “Browser of the Year award”. The game is still today a good cash cow for the company and has, since its launch in 2009, generated revenues exceeding SEK 90m. The game has a loyal fan base with over 19 000 DAU’s during Q3’16. The majority of the players come from Germany where the game is hosted. Second largest country by number of players is the United States. When creating Supremacy 1914, Bytro developed a game engine which is reusable when creating new titles with the same characteristic gameplay but in other settings.

Call of War 1942 In Q2 2015, Call of War was released. The game is based on the same game Call of War is the most successful launch yet engine as Supremacy 1914. The game is set around events of World War II. Like its predecessor, it is an online browser-based strategy game with role- playing elements. Since the game was developed using the “Bytro engine”, it was very cost efficient to produce. In total, the company invested only about 2 mSEK in development. In the first year, Call of War generated revenue of 34.7 mSEK which shows the massive return on investment attained by reusing the game engine. Call of War is today played in a browser setting but the company will release a mobile version during Q1’17. We believe the launch on mobile will increase the player base since many users prefer playing on a mobile/tablet device and the log in and accessibility is easier. For the players the login process is the same and a browser gamer will play against mobile users, but the company will avoid paying the standard fee of 30% of sales to Apple / Google. If the launch is successful, Bytro will port more titles and make them mobile compatible since the development has been made on the game engine level.

Company analysis 9 Stillfront

New World Empires New World Empires was released as final version in September 2016 and had been in open beta since June. The title generated 0.6 mSEK in revenue during Q3. Most likely the largest part of the income was generated in September after the final release which indicates yet another strong title. Call of War, which is the greatest hit so far, generated 0.1 mSEK during its first month.

Strategy games are good business Strategy games in general are one of the best genres when it comes to generating income from their users. Gamification techniques are essential in gaming design and they are used to improve user engagement. Gamification techniques strive to leverage people's natural desires for socializing, learning, mastery, competition, achievement, status and self- expression. Players have a high willingness to pay for this in order to improve their status in the social arena. A strategy game in particular, is a so-called skill game with a high learning curve and the first days are critical. If the game design is not appealing enough and the gaming mechanics are difficult to understand the players will leave fast. Bytro develops new games based on already successful game engines and this diminishes the risk.

Risk of cannibalization? As discussed earlier, Bytro’s games share the same engine and gameplay characteristics. This limits the development time and risk in new launches. Unfortunately, we are also wondering what negative impact it could have releasing a similar game under a new brand. There might be a risk of cannibalization of the older titles if players are more moving to the new games since most gamers want new value added in their games. This is however more important in games you actually pay for and Bytro’s titles are so called “freemium”.

However, the popularity of the company’s titles tells us that this has not been the case and should not be a problem in the short run and “why fix something that isn’t broken right”? Bytro also constantly add new elements such as new maps and features.

This being said, we also know that many game titles with a perfect formula and game balance has changed very little during the years. A change can often also have a negative impact in the gaming community. We think the most important lesson in this is not to upset the community on pretending they got something new when they actually didn’t. Too many new titles with too little new features can therefore be a problem in the long run.

Company analysis 10 Stillfront

Coldwood (Sweden) Coldwood Interactive AB was founded in 2003 in Sweden, Umeå. The five founders had earlier worked at Daydream Software which was a gaming company listed on the Swedish stock market but went bankrupt in 2003. The founders have educations in physics and computer science. During the first years, Coldwood focused on snowmobile and skiing games, often with a “work for hire” model, where the distributor took the financial risk. The games only had a limited success. The boxing game, “The Fight”, was the developers biggest commercial title released in 2010 with sales around 660 000 copies. In the summer of 2011, Coldwood was acquired by Stillfront Group. Cooldwood’s receives contracting fee’s, paid by EA, for developing the upcoming Unravel 2 and royalties based on sales for the first version Unravel.

Key fundamental drivers we see for Coldwood in the near-term;

 Unravel 2 development and release in late 2017 or early 2018. The title release will lead to higher royalties for the company and, if successful, another contract for Unravel 3. Sequels are often, given a quality title, more successful in terms of downloads, sales and profitability.  After the success with Unravel, Coldwood now is a name in the indie community. Stillfront has announced that Coldwood is setting up a second team to start to develop a new title which the company will “publish themselves and keep the IP rights”. If this upcoming title is a success it could create substantial value for Stillfronts shareholders. We expect a possible release in 2018.

“Unravel” saves the day In 2013, Coldwood released The Fight: Lights out and a fitness game for Playstation 3 designed for Sonys Move controller with the title “Move Fitness”. According to vgchartz.com, this title had sales of around 220 000 copies. In 2014 a large project was closed down. In this critical time one of the co-founders and creative directors Martin Sahlin came up with the idea of the game, “Unravel”. The company demonstrated the idea and sold it to the distribution giant Electronic Arts (EA). In 2015, at the Electronic Entertainment Expo (E3) which is the biggest event of the year in the gaming industry, Martin Sahlin presented Unravel and took the gaming community by storm. The launch of Unravel was one of the biggest surprises of the gaming event and it was listed as one of the most anticipated games of 2016.

Company analysis 11 Stillfront

Unravel - a high quality title Unravel has an average “metascore” of 78% on the three platforms where it was released (PC, PS4, XONE). For gamers who buy critically acclaimed games, this score is slightly below the usual metacritic score of 85–95% for the most anticipated games. However, Unravel is a digital downloadable game with a price tag of a mere 20 dollars so the player experience in relation to the low price is still is appealing.

Unravel 2 on the way In May 2016, EA announced that Unravel 2 will be released and that they Unravel 2 was announced in May 2016 will extend their support to Coldwood during the development. The royalty agreement with EA for Unravel 2 is similar to the terms of the contract for the first Unravel. We expect to see yet another quality release from Coldwood, likely during late 2017 or early 2018.

Development of an in-house title After the success with Unravel, Coldwood has become a name in the indie Working on an in-house title at Coldwood after the scene. Stillfront has announced that the company is setting up a second Unravel success team to start developing a new title that they will publish themselves and keep the IP rights. If this upcoming title is a success it could create substantial value for Stillfront’s shareholders. We expect a possible release during 2018 as the development usually takes 9-15 months and we believe the development will start in Q1 2017. In the gaming industry, a quality sequel often sells 2-5 times better than the preceding game.

Simutronics (USA) Simutronics was founded in the beginning of the ”computer age” in 1987. The company today has 30 employees and is located in St Louis, Missouri. David Whatley, which is the co-founder, president and current CEO, is the key person at Simutronics. He was the head developer and the creative mind behind all of the company’s products. David Whatley is one of the gaming industry’s big veterans with an impressive track record and resume. In 1987, at the age of 20, he co-founded Simutronics with Tom and Susan Zelinski and ran the company from his bedroom in his parent’s home. The company grew rapidly and by the year 1999 it had revenues of 5 mUSD. This placed the company in Inc. Magazines list of 500 highest grossing companies of the year. At this time Simutronics had 50 full-time employees.

In June 2016, Stillfront Group acquired 52 percent of the shares for 0.94 mUSD which was paid both in shares and cash. Through this important acquisition, Stillfronts management could add David Whatley’s competence to the Group but also a pipeline of games with great potential and with the added benefit of stable cash follows from the mature MUD-titles.

Company analysis 12 Stillfront

Game portfolio of Simutronics Simutronics has two core revenue generating titles, GemStone and We see substantial potential in the new title DragonRealms. These are RPG text based MUD-style games (Multi-User Siege: Titan Wars Domain) with an extremely loyal user base. Simutronics has also launched successful mobile titles like Lara Croft: Relic run. The company just recently soft-launched Siege: Titan Wars, a real-time strategy PVP (Player versus Player) game played on the mobile. We see substantial potential in the Siege title.

Game portfolio of Simutronics Core titles

Q3'16 KPIs Launched in 2015. Q3'16 KPIs DAU: 1 384 15 millon+ DAU: 1 175 MAU: 2 801 downloads MAU: 2 783

In the pipeline

Soft launch in Q4'16. Good reviews with 4.0 average rating in Google Play. Value adding features will be in place before launch. Redeye see a blockbuster potential.

Source: Stillfront Group

PC Simutronics strongest brand today was released in 1988 and is called ”Gemstone.” The latest version of the game is called Gemstone 4 which went live in November 2003. Gemstone 4 is like its predecessor’s, a text- based multiplayer fantasy game. In fact, the game is the longest running game of its genre with over one million players! In 1996,”DragonRealms” was released. The game is played in the same universe as Gemstone and is also a text based multiplayer game. Gemstone and DragonRealms today has a small but loyal player base and is generating substantial cash flows with high ARPU.

After the big success with Gemstone, Whatley innovated the concept of online 3D action games in 1993 with the game,”Cyberstrike.” Whatley was a pioneer at this time with Cyberstrike and somewhat created a new genre. To the extent that the game made the magazine ”Computer Gaming World” to create a new category, ”Online Game of the Year”, so it could be awarded to Cyberstrike.

Company analysis 13 Stillfront

At the beginning of the smartphone era, and the real breakthrough of mobile gaming, Whatley created the strategy game ”geoDefence” in 2009 followed by ”geoDefence Swarm” the same year. The game, however, is not owned by Simutronics since Whatley founded a separate company in 2009 called ”Critical Thought Games” (CTG) to develop his own line of iPhone- games. CTG is now a passive company and David focus his entire attention on Simutronics.

Mobile After Whatley's success with his ”geoDefence” games, he made his first mobile game at Simutronics. The high-quality title, “Tiny Heroes”, was released in 2011 and received a meta score of 85. ”Tiny Heroes” is a strategy game which was critically acclaimed by most critics; three of them gave the game a maximum score of 100.

In 2012, the game ”One Epic Knight” was released on mobile. The game is a so-called ”auto runner-game.” The game was released one year after the first ”Temple Run,” one of the most popular mobile game franchises in history and the game that created the auto runner-genre. ”One Epic Knight” has a metascore of 74 compared to the first ”Temple Run” with a metascore of 80.”One Epic Knight” was a pretty early ”Temple Run” clone with a flavor of quality, humor and charm and great looking graphics. It is worth mentioning that in the mobile game industry, it is common to release a clone of successful games.

In the beginning of 2015, Simutronics developed a mobile game based on ”Lara Croft – Relic Run” has been downloaded one of the world's biggest brands in video games, “Tomb Raider”. The more than 18 million game is called ”Lara Croft – Relic Run” and has the same gameplay times. design as ”Temple Run” (which is one of the most popular mobile game franchises in history). ”Lara Croft – Relic Run” has been downloaded more than 18 million times. The game is impressive in its presentation and game mechanics which is a sign that the studio can make technically advanced mobile games. The game has a metascore of 71 only based on reviews from 11 critics. On the popular website ”God is Geek”, the game scores 80 with the conclusion ”An innovative auto-runner with an AAA shine.” The more mixed reviews complain about a repetitive gameplay and an oversupply of similar auto-runners.

Siege: Titan Wars a potential blockbuster In September 2016, Simutronics entered a co-publishing agreement for Siege; Titan Wars, with the publishing partner Tilting Point. Simutronics will retain all rights to the IP related to the game. Tilting Point will invest in broadscale, global marketing and receive a revenue share, most likley on an equal basis with Simutronics.

Company analysis 14 Stillfront

In the beginning of November 2016, Simutronics soft-launched their new The game was soft- title “Siege: Titan Wars” on mobile. A so-called soft launch is standard in launche in November 2016 the mobile industry with a “freemium” revenue model.

The purpose of a soft launch is that the developer and publisher can collect information on the user behavior in the game. In this way, they can fine- tune the gaming mechanics so that loyalty and the willingness to pay is optimal. Siege: Titans Wars, uses the same monetization system, with in app-purchases and “Chests”, as the highly successful “Clash Royale” developed by Supercell. Clash Royale was released in January 2016. However, even though the monetization is similar to Clash Royale, the two games differ in terms of strategy thinking, game mechanics and graphic style.

Siege: Titan Wars

Source: Simutronics & Tilting Point

Expertise in mobile added to the Group Stillfront’s latest acquisition is important especially if you look at the The new mobile expertise will benefit the Group group’s whole ecosystem. Stillfront needs a portfolio in mobile games and personnel that understand mobile games. Our opinion is that Stillfront’s latest acquisition is favorable; the company gets solid cash flows, perhaps the most loyal player base in history mobile penetration and David Whatley. The new expertise in mobile will also help Bytro Labs to convert their highest grossing games to mobile.

Simutronics is a studio full of talent but that needs a better focus on profits. Likewise, Stillfront is a company that needs a better focus on mobile. We think both companies could help each other solving these issues. We also consider Simutronics a potential crown-jewel with their feeling for game design and creating quality over the years.

Company analysis 15 Stillfront

Power Challenge (UK) and Dorado (Malta)

Power Challenge: Loyal users and stable income Power Challenge develops and publishes mobile and browser-based social sports management games. This generates revenue through a free-to-play model with in-game purchase options. The core revenue generating title is called ManagerZone (MZ) with a Football (Soccer) version and Hockey version. MZ Football game gained recognition in 2005 as the first ever web- based football management game to feature a 3D game client. The company has its headquarters in Cambridge, UK. ManagerZones user base has not been growing during the last few years but the users are extremely loyal. Almost 50% of the MAU logins are on a daily basis. PowerChallenge stood for roughly 5% of the total Group’s revenues during Q3’16.

Game portfolio of PowerChallenge Core titles

Q3'16 KPIs DAU: 16 359 MAU:34 117

Source: Stillfront Group

Dorado Long-tail and new tail! Dorado manages Stillfronts long-tail games which include among other; Gladiator Online, Thirty Kingdoms, Playzeek, Wanted, Fast and Furious, Terminator, Pirates, and Hollywoodland. During Q3’16, Dorado represented around 2% of the Group’s total revenues. From an investor's perspective, the upcoming launch of Conflict of Nation’s is the most interesting and where we will have our focus.

Conflict of Nations: Modern War Conflict of Nations (CoN), will enter open beta in December and we expect to see a launch during Q1’17. The game is based on the Bytro engine with an increased depth of scenarios and strategy. Stillfront has noted that modern war is the most requested war scenario from the five million fans of Bytro Games. There is also less competition for players in the modern war themed games compared to WW1 and WW2.

The cross-promotion opportunities to Bytro’s titles should be extensive. We also expected that CoN will be launched on mobile by the end of 2018. That is, if the game generates sufficient revenue and is perceived as a success. In total, the company has invested about 2.5 mSEK in the title prior to open beta launch.

Company analysis 16 Stillfront

Business Model and Sales The gaming industry is still young and constantly evolving due to technical The gaming industry is shifts and rapid changes in consumer preferences. The industry is therefore still young and constantly evolving difficult to navigate for investors and game developers since a game launch could be a blockbuster with massive profits, a success where costs are covered or a disappointment which sometimes leads to bankruptcy. What everyone can agree on is that there are excellent opportunities in the gaming industry but also high risks. Stillfront’s management is highly aware of this and has, based on their industry know-how and experience, developed a strategy to attain optimal risk-reward. This strategy and modus operandi is relying on the three pillars displayed in the table below.

We will explain Stillfront’s business strategies in more detail below but will be most elaborate on the product strategy, PLEX. The reason is that we perceive PLEX to be the most important feature that distinguishes Stillfront from industry peers and the feature that makes Stillfront an attractive investment in terms of risk/reward.

The PLEX strategy PLEX stands for; Portfolio of games, Long life cycle games, Engines Scalability and X (cross) platform. The strategy is essential for Stillfront to be able to achieve their mission, which is; “Deliver leading risk/reward by acquiring and managing strong game studios that develop and/or publish attractive game titles”. Stillfront has a clear focus on delivering a good reward with limited risk and this idea permeates the entire organization and their working methodology.

Company analysis 17 Stillfront

P – Portfolio of games Stillfront operates a portfolio (P) of games which reduces title and technology risks through diversification. Today, Stillfront has seven core titles but also a large portfolio of long tail games. These games often have limited sales and/or are at the end of their life cycle but still generate cash flow and have very low investment needs. The main benefits of having a portfolio of games compared to just one or two titles are:

 Revenue stability: A portfolio of games, where the titles are in A portfolio (P) of games reduces title and different phases and maturity levels, leads to more predictable technology risks through revenues on a group level compared to single titles. diversification  The potential of a blockbuster: Each new release has a potential of becoming a blockbuster game and thus carries with it some upside potential.  Minimizing launch and title risks. Diversification (a portfolio) leads to lower risks. A larger base of current titles also leads to the possibility to analyze what actually have worked in the past and what hasn’t, thus enhancing the possibility of future successful launches.  Cross synergies: Synergies include cross-promotion and “code recycling” i.e. using some programing code from prior and current games in new games.

L - Long life cycle games Stillfront’s games should offer a long-term gaming experience (L). This will result in stable revenues while user acquisition costs can be kept low relative to the expected life cycle revenue per player.

We can use Supremacy 1914, one of Bytro Lab’s core titles, as an example. The game had roughly 100 thousand active players each month in 2014. As much as 40% of these players were also active players already in 2009. This is an incredible retention rate and loyalty from the player base.

2014 player base retention of Supremacy 1914

120% 100% 100%

80% 65% 60%

40% 37% 38% 40% 32%

20%

0% 2009 2010 2011 2012 2013 2014 Source: Stillfront Group

Company analysis 18 Stillfront

Stillfront is therefore looking for features like the ones mentioned below;

 Games and players with attractive attributes: Games that are high-quality, with social and challenging gameplay leads to a high level of player devotion.  Long life-cycle games: Quality and social aspects translate into games with long life cycles and a high level of returning players.  Revenues become recurring: The combination of a high grade of recurring players and long life-cycles leads to a fairly stable stream of recurring revenues, stable revenues leads to smaller financial risks and makes it possible for the company to use this cash flow in other value enhancing activities.

E – Engines for scalability Stillfront uses a technical structure based on game engines (E). By focusing on a proven engine, the title risk is reduced and scalability is achieved since cost is reduced for launching new products.

What is a game engine? A game engine is basically a software framework designed for the creation and development of video games. The core functionality provided by a game engine usually includes a rendering engine for 2D or 3D graphics, a physics engine or collision detection (and collision response), sound, scripting, animation, artificial intelligence, networking, streaming, memory management, threading, localization support, scene graph, and may include video support for cinematics. The process of game development is often economized, in large part, by reusing/adapting the same game engine to create different games.

Reduced time to market Engine development takes time. For Supremacy 1914, the majority of the time (24 months) to develop the game, was spent on the engine. For Call of war, almost all time was spent on developing the game itself leading to a 70% percent reduced time to market.

Company analysis 19 Stillfront

Time to develop Bytro's games (months)

30

25 Dev. time reduce by 70% 20

15

10

5

0 Supremacy 1914 Thirty Kingdoms Call of war

Engine dev. time Game dev. time

Source: Redeye Research, Stillfront Group

Time = costs for developing Time spent on game development also means costs. The total development Call of War cost 2 mSEK to create and made about cost for Supremacy 1914 was roughly 10 mSEK, for Thirty Kingdoms 3 35 mSEK mSEK and the latest game Call of War 1942 cost about 2 mSEK. The reduced time and cost leads to greater possibility to test new titles and see the market traction at launch. Thirty Kingdoms made roughly 1.5 mSEK during its first year in sales and given the fact that the game only cost 3 mSEK to develop; it was developed to a relative low risk. However, Call of War had a much higher market traction and focused their marketing efforts on the title. Call of War made about 35 mSEK during its first year which is a significant return on investment.

Development costs and sales first 12m for Bytro's games (msek)

40 40

35 Huge return on 35 Large part of dev. investment, due to 30 30 costs for engine, a engine in place investment for 25 25 future titles 20 20 Not a great release, 15 but at low cost and 15 10 risk 10

5 5

0 0 Supremacy 1914 Thirty Kingdoms Call of war

Engine dev. costs Game dev. costs Approx. Sales first 12m

Source: Redeye Research, Stillfront Group

Company analysis 20 Stillfront

X – Cross (x) plattform Stillfront provides games on several platforms (Cross-Platform - X). Stillfront does not expose itself to one platform only, thus reducing the risk of investing in a platform that later proves to be difficult from a profitability perspective.

The choice of platform affects the associated publishing costs. A browser game would mainly be subject to marketing and payment provider costs while mobile games would be subject to significant distribution costs e.g. distribution through Apple App Store. However, even though some platforms are associated with higher publishing costs, it may be compensated for by extra exposure gained in the App stores. These aspects are also taken into account by management when deciding upon platform.

The acquisition strategy – A cherry picking game As discussed earlier, one of the key responsibilities of Stillfront’s CEO and CFO is to allocate capital and make investment decisions about new projects, game titles and potential acquisitions. Acquiring new studios and developers is one of the core strategies and Stillfront’s management invests a vast amount of time to source, screen, perform due diligence and meet company teams to make sure that the potential acquisition targets meet their criteria. The figure below shows the number of companies which went through this thorough process and which finally resulted in five acquired companies.

Process and hit rate of acquisitions at Stillfront

Scanned about 1000 comapnies

200 qualifies to move on to next level

50 remains after looking at financials and core titles 20 remains to be contacted and meet

5 acquired comapnies

Company analysis 21 Stillfront

To date, Stillfront has scanned over 1 000 company’s through database Still front only makes quality bets after a deep searches and different leads generated by their network. After the initial due diligence scan and light due diligence, roughly 20% moves on to the next level. At this stage Stillfront examines financials, core titles and upcoming launches. At this stage, about 2% of the initially scanned companies’ remain. They are contacted and most often meetings are arranged to get to know the people behind the acquisition target. All in all, the roughly 1 000 companies that Stillfront has scanned and looked at have led to 5 acquisitions. This corresponds to a hit rate of about 0.5% which should ensure the shareholders of the company that their money are put to good use and the acquired companies’ are true quality bets.

More companies leads to a larger network The acquired companies do not only ad revenue and profits to the Group, they also add knowledge and expands the existing network. When doing their due diligence on new acquisition targets Stillfront is keen to utilize the existing expertise within the Group.

Company analysis 22 Stillfront

Team There are currently around 100 people working within the Stillfront Group. The whole group was created and is currently managed by the CEO, Jörgen Larsson, and the CFO, Sten Wranne. This tight team is of great importance There are currently to the company as they are responsible for crucial decisions such as around 100 people investment decisions regarding new projects and game titles, potential working within the Stillfront Group acquisitions, long-term strategy, capital allocation and monitoring of daily operations. Apart from the management team, the Managing Directors (MD) of the subsidiaries are also important for the success of the company and below is a brief overview of key managers for Stillfront Group.

Jörgen Larsson – CEO of Stillfront Group Jörgen Larsson was officially appointed CEO of the group in October 2015. Jörgen has extensive experience as an MD and before being formally engaged as CEO, Jörgen worked for the company on a consultancy basis. Jörgen holds a Master of Engineering from Linköping University and he is a member of the Stillfront Board since 2007.

Jörgen Larsson is also Chairman of the board in Abalon Holding AB and board member and MD of Mind Improvement Group Scandinavia AB. In addition, he is board member of Idecap AB, Sontagh & Larsson Investment Strategy AB, Coldwood Interactive AB, Stillfront Online Games AB, Bothnia Bay Capital AB, Deputy member of 4P Business Consulting AB and Sandhammaren Utveckling AB.

We estimate that Jörgen has an annual compensation of around SEK 1.5- 2m. The value of Jörgen’s shareholdings exceeds his annual salary by roughly 6x which, in our view, indicates that his focus will be on shareholder value and not maximizing his compensations package.

Sten Wranne – CFO of Stillfront Group Sten operates as CFO of the group. He has held the position since 2010, first on a consultancy basis, but full-time since September 2015. Sten holds a Master of Science in Engineering Physics from Chalmers University of Technology. Sten has previously been working as CFO for Voddler Group AB, Connecta AB, DigiDoc AB, Adcore AB and as a MD and partner of the venture capital firm Deseven Capital. Sten has an extensive experience as a strategy and management consultant. He has also been in the leadership team for a number of consulting businesses, e g Connecta AB and Accenture.

Sten Wranne is also a Board member of Black Ocean Development AB, Deseven International AB, Pamplemousse Holding AB, F2NS Holding AB and D702 Invest AB. In addition, he is a Deputy board member of Motion Value Grids AB, Influence AB and Deputy board member and MD of Deseven Capital Aktiebolag.

Company analysis 23 Stillfront

We estimate that Sten has an annual compensation around SEK 1.2-1,8m. The value of Sten’s shareholdings exceeds his annual salary by roughly 3,5x which should indicate a focus on shareholder value.

Christopher Holmberg - MD of Coldwood Interactive Christopher has been the MD of the subsidiary Coldwood Interactive since 2003. Other current positions are Board member of Aktiebolaget Norra Teknikinvest and Deputy board member of Bothnia Bay Capital AB.

Tobias Kringe- MD (Products) of Bytro Labs Tobias has held the positon as MD of Products at Bytro Labs since 2009. He holds a Master of Science in Cognitive Science. Other current position is MD of FKL GmbH.

Felix Faber – MD (Operations) of Bytro Labs Felix is the MD of operations at BytroLabs and has held the position since 2009. He holds a Master of Science in Computer Science. Other current positions are MD of FKL GmbH and he is also currently working as Advisor for 5DLab GmbH.

Christopher Lörken – MD (Technology) at Bytro Labs Christopher has been the MD of technology at Byro Labs since 2009. He holds a Master of Science in Cognitive Science. Other current position is MD of FKL GmbH.

David Whatley – CEO and founder of Simutronics David is the latest contribution to the management team of Stillfront Group. He is the founder and CEO of the newly acquired Simutronics. David Whatley is a highly respected industry veteran and acts as speaker regularly in different industry contexts such as GDC, iDEV360, Unite to name a few.

Company analysis 24 Stillfront

Ownership

Ownership structure of Stillfront Name Nr of shares (million) Share of capital FKL Holding Gmbh (Bytro management) 0.96 17.2% Acacia Asset Management 0.60 10.8% Swedbank Robur Ny Teknik 0.45 8.1% Fyrmax Limited 0.24 4.4% Nordea Liv & Pension 0.19 3.4% Christoffer Lundström 0.17 3.1% Nordnet Pensionsförsäkring 0.17 3.0% Niclas Eriksson 0.14 2.4% Avanza Pension 0.12 2.1% Strömberg Förvaltning AB 0.10 1.8% Other 2.45 43.8% Source: Holdings & Redeye Research

Stillfront has a strong ownership structure with large institutional investors and significant holdings by key personal. We consider this very positive and it renders a high rating in Redeyes category for Ownership. The retail spread is also good since the company has more than 1 500 shareholders.

Holdings by management Jörgen Larsson: Net number of shares directly and indirectly: 211 376 shares with an approximated value of SEK 14m (at share price of 66 SEK).

Sten Wranne : Net number of shares directly and indirectly: 87 242 shares with a approximated value of SEK 6m (at share price of 66 SEK).

Christopher Holmberg: Holds 44 000 shares with an approximated value of SEK 2,9m (at share price of 66 SEK).

Tobias Kringe: Net number of shares directly and indirectly: 319 676 shares with an approximated value of SEK 21.1m (at share price of 66 SEK).

Felix Faber: Net number of shares directly and indirectly: 319 676 shares with an approximated value of SEK 21.1m (at share price of 66 SEK).

Christopher Lörken: Net number of shares directly and indirectly: 319 676 shares with an approximated value of SEK 21.1m (at share price of 66 SEK).

David Whatley: Holds 18 851 shares in Stillfront Group with an approximated value of SEK 1.2m (at share price of 66 SEK). David will also be entitled with an earn-out consideration partly of cash and also equity. The earn-out will depend on the financial performance of Simutronics during 2017. The earn-out consideration will not exceed USD 1.8m.

Conclusion ownership Management controls a net number of shares of 1 320 497, corresponding to 24% of capital with an approximated value of SEK 87m (at share price of 66 SEK). The large ownership of the operational management implies a shareholder friendly environment as capital appreciation will most likely be the prime focus.

Company analysis 25 Stillfront

Market and opportunity

The market The gaming industry is one of the largest digital entertainment markets globally. In 2015, total market size was $ 92 billion and it is expected to have grown to approximately $ 100 billion in 2016. Industry growth is projected to remain strong at an average annual growth rate ("CAGR") of 7% in 2015-2019. As can be seen in the graph below, this will bring the total market to an estimated 119 billion USD in 2019.

Expected growth in the gaming industry The gaming industry is one of the largest digital entertainment markets 140 globally 119 120 113 107 100 100 92

80

60

40

20

0 2015 2016 2017 2018 2019 Source: New zoo

North America and Europe together account for around 43% of the global market and the growth between 2015 and 2016 is expected to amount to around 4%. The total number of players during 2016 in North America and Europe is estimated to 535 million, of which 198 million are in North America and 337 million are in Europe. Asia-Pacific represents the largest geographic market with about 47% of the global gaming market and over 1 billion total number of players. Between 2015 and 2016, growth of 11% is expected in this area.

Gaming revenue per capita in North America and Europe are the highest globally and is estimated to be around 70 dollars in North America and 43 dollars in Europe in 2016. Gaming revenue per capita in Asia and the Pacific in 2016 is estimated to amount to 12 USD.

PC and console games have a strong position in the Western world where players increasingly are interested in so-called hardcore games. In the United States, PC and console games generated around $ 17 billion in revenues in 2015, representing over 71% of the total gaming industry revenues in the US. Console games accounted for just over $ 11 billion or 48% of total revenue. The market for mobile games is much stronger in Asia than in the West. In 2015, mobile games accounted for 34% of the total

Company analysis 26 Stillfront

gaming market in Southeast Asia. This proportion is expected to grow to around 47% in 2018. Console games in Southeast Asia accounted for only 6% of the total gaming market.

Segments The gaming market can be divided into three main segments; PC, game console and mobile games. These segments generated 91% of total industry

PC, game console and revenues in 2015. As can be seen in the graph below, the traditional PC and mobile games Console segment together generated approximately $54 billion in revenues in 2015, representing 58% of the total gaming market. The PC segment is expected to grow on average 4% per year between 2015 and 2019, while the console segment is projected to grow by an average of 3% per year during the same period. This brings the PC and console market to around 62 billion USD in 2019, representing 51% of the total market.

Expected CAGR by segment

552015 53 50

45

40

35 32 30 30 30 28 26 25

20 Mobile Console PC 2015 2019 2015 2019 2015 2019 Mobile MobileConsolePC Console PC

Source: New zoo

The mobile segment accounted for 33% of the total gaming market in 2015 The mobile segment accounted for 33% of the which amounted to approximately $30 billion. Compared to the PC and total gaming market in console games, the mobile market is relatively young but growing strongly. 2015 Between 2015 and 2019, the mobile games segment is projected to grow by an average of 15% per year. This brings the segment to about $ 53 billion in 2019, equivalent to as much as 45% of the total gambling market.

The mobile segment consists to a large extent of casual games. This type of games can be developed in a much shorter time and with considerably scarcer resources than hardcore games in PC and console segment. The barriers to entry into this segment is, therefore, lower than in the PC and console segment. Mobile games are less advanced and not as engaging as PC and console games. The life cycles of mobile games are therefore often shorter and the number of mobile game developers who have managed to repeat their success is relatively limited.

Company analysis 27 Stillfront

Distribution The last few years have seen a clear trend of digitization where PC and console games are distributed digitally. In 2016, the expected digital distribution of PC and console games represent approximately 47% of the total gaming market while the physical PC and console games are expected to constitute about 16%. The trend towards digital distribution is largely driven by the emergence of pure digital platforms such as Steam, Playstation Network and Xbox Live.

Global game revenues: Distribution

Mobile 37% Digital PC/Console 47%

Physical PC/Console 16% Source: New zoo

Growth in mobile App Annie noted that China managed to generate nearly double the iOS App Store Games revenue it had just a year earlier in Q2 2015. The firm found that locally developed games in China dominated sales and were a large reason for the strong year-over-year growth.

IOS Games Revenue 200 180 160 140 120 100 80 60 40 20 0 Q2 2014 Q2 2015 Q2 2016

China US Japan

Source: App Annie

China will continue to present huge opportunities in mobile gaming. While foreign publishers have seen success in the country - as evidenced by Clash

Company analysis 28 Stillfront

Royale ranking at number 10 by iOS revenue in Q2 2016 - local publishers dominate the top iOS revenue chart," App Annie said.

The importance of the Asian markets to the mobile world cannot be overstated. "Foreign publishers may see more success in the market by The importance of the partnering with Chinese publishers to cater to local demand, secure Asian markets to the mobile world cannot be distribution and generate awareness. Together, China, the US, and Japan overstated are responsible for approximately 75% of gaming revenue on iOS," App Annie continued.

Browser game industry The browser-based games by Bytro Labs are currently Stillfront Groups highest grossing titles and they represent half of the company’s revenue.

Video game market (mUSD), Browser share of market (%)

100 8%

90 7% 80 6% 70 60 5% 50 4%

40 3% 30 2% 20 10 1% 0 0% 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total video games market Browser market

Source: PwC

Since 2011, the market for browser-based games has been stable globally but is not showing the same growth as the other segments. According to PwC, the expected CAGR up to 2020 is actually expected to decline. However, Bytro Labs games have outperformed the market since its first game launch in 2009. It is hard to grow in a declining market and Bytro Lab's blockbusters will therefore be ported to mobile. This will secure future growth for the titles and enable a higher engagement through cross- platform play.

The customers There are two distinct end-consumers in the game industry; hardcore gamers and casual gamers. The majority of the customers in the PC and console segment are hardcore gamers and the majority in the mobile segment are casual gamers. Hardcore gamers are often technically demanding and strive for a stunning experience while casual gamers want a

Company analysis 29 Stillfront

fun, easy and fast experience. Different kinds of revenue models are best suited for the various types of customers/users.

Revenue models The following section describe the most common revenue models for hardcore gamers and casual gamers in the two respective segments; PC/ console and mobile.

Full-priced games PC and console games are usually full-priced games which means that they are sold at a relatively high one-off price. High budget games are often priced at SEK 500-600 while low budget games can be priced as low as 150 SEK. The majority of the revenue from a new PC or console game is usually realized during the first 3-12 months after launch.

Add-ons In addition to revenues from sales of the original game there are ways to generate revenue from extra content. The increasing degree of digital distribution allows for sales of downloadable content ("DLC") as well as technical and graphical upgrades of already launched games (a so-called "remaster"). The add-on sales contribute to longer life cycles of the revenue streams.

“The Spotify model” Subscription-based game sales and streaming of games is a model that has so far been relatively unexploited. Some companies have launched services in subscription and streaming, such as Sony’s streaming service with “Playstation Now” and Electronic Art’s (EA) with “EA Access.” As in the case of add-ons and DLC’s, subscription sales of games is made possible due to digital distribution.

Freemium In mobile games, the most common revenue model nowadays is "free-to- Revenues for mobile games is generated play" or "freemium" meaning that the game is free to download or can be through advertisements downloaded to a very low payment. Revenues for mobile games is instead or "In-game purchases." generated through advertisements within the game or "In-game purchases." This revenue model requires a recurring customer base of paying players to be successful. KPI’s such as MAUs (Monthly Active Users), DAU (Daily Active Users) and ARPU (Average Revenue Per User) is often used to measure how well the game is performing when it comes to revenues. Investments in marketing and promotions are necessary to maintain a sufficient amount of paying players.

Company analysis 30 Stillfront

Value chain

Developers Game developers create game content, design the game and write the software code. A game developer can be divided into four different categories: independent (“indie”), first-, second- or third-party developers. First and second party developers were more common a couple of years ago when the gaming industry was more focused on high budget games on PC and console.

A first-party developer is part of a platform owner, such as Sony and Microsoft, and develops games exclusively for this platform. Second-party developers are game developers that are connected to a platform owner in making exclusive content. Unlike a first party developer, they can be an independently owned studio.

Third-party developers are platform independent and are either a games publisher as well, or develop the games for one or several games publishers. EA and Ubisoft are two examples of third-party developers.

Indie game developers can both develop games for a large game publisher or publish their games themselves. When collaborating with a game publisher, the publisher often assumes the intellectual property (IP) to the game while compensating the independent game developer with a contracting fee during game development and royalties on each sold copy of the game. Both the risk and the upside when it comes to revenue potential for the independent game developer are reduced when collaborating with a publisher.

Publishers A game publisher publishes video games that they have either developed internally or have developed through a video game developer. Usually, the publisher provides financing for the development of the game while also being responsible for the market research, pricing of the game and all aspects of marketing and advertising. In addition, the publisher supervises the development process, tests and adjusts the game as it is being developed and manufactures the product in case of physical distribution. Since the publisher often provides the financing and thus bears the financial risk of the project, it also retains a significant part of the IP ownership in case of outsourced development.

Distributors Distributors are usually game vendors, supermarkets and internet providers. Distribution via digital channels is becoming more common as gamers prefer digitally distributed games. All the console manufacturers have their digital platforms. Valve Corporation owns the most popular

Company analysis 31 Stillfront

platform for PC called Steam which represents the majority of PC game sales. On mobile, the dominant platform owners are Apple and Google.

As can be seen in the figure below, Stillfront’s different subsidiaries are part of different industry value chains as their games differ in character.

Stillfront’s position in the value chain

Coldwood is currently positioned as a traditional independent game developer, with ideation, creation and game development on contract for different large publishers, currently EA Games. In contrast, Bytro, Dorado, and Power Challenge develop, publish and distribute their games directly to the end consumer through a web browser or through Steam in Dorado’s case. In this way, neither Bytro nor Power Challenge are dependent on a game publisher, distributor or platform owner. However, some services are outsourced for the browser games, such as marketing and advertising.

Competition The global games market is becoming more consolidated. According to market research firm NPD Group, 10 companies account for nearly 90% of the physical game sales in the USA. The top 4 Western publishers (Activision Blizzard, Electronic Arts, Take-Two, and Ubisoft), account for over half of total sales.

High development budgets and high expectations from fans among PC and console games make the barriers to entry in the PC and console segment higher than that of mobile games.

A few global distributors dominate the gaming A few global distributors dominate the gaming market. In Asia publishers market such as Nintendo, Square Enix, Bandai Namco, Konami, Capcom and Koei Tecmo dominate. In USA and Europe, the four distributors Activision- Blizzard, Electronic Arts, Take-Two, and Ubisoft generate the majority of the revenues from games sales.

Company analysis 32 Stillfront

In the mobile segment, there are a few major players such as Swedish King, Swedish King and Finnish Supercell are the big Finnish Supercell and Chinese Tencent. Because of the low entry barriers whales in mobile and low development costs, there is a large number of smaller developers with only one or a few games. However, King nowadays is owned by Activision-Blizzard and Tencent has a majority stake in Supercell. And Mojang, the creator of Minecraft, is owned by Microsoft.

Stillfront’s position

Stillfront’s subsidiaries have a somewhat similar product positioning while Coldwood differ to some extent. Bytro Labs,Simutronics, PowerChallenge and Dorado focus on long tail games. The games require a relative high level of knowledge but if the games capture the players interest they usually stay loyal. The four game developers offer hardcore games on the web/mobile. Simutronics two largest revenue drivers, Gemstone 4 and DragonRealms, is however played on a PC-client. Coldwoods biggest title Unravel is more casual. The game has high production values but has a relative short gameplay. The dedicated platform for Unravel is PC and console.

Opportunity

Synergy creates mobile opportunity Stillfront’s latest acquisition, Simutronics, is important especially if you look at the group’s whole ecosystem. Stillfront both needs a portfolio in mobile games and personnel that understand mobile games, the mechanics, programming and design. Our opinion is that Stillfront’s latest acquisition is favorable. The company gets substantial cash flows, perhaps the most loyal player base in history, mobile penetration and David Whatley.

Company analysis 33 Stillfront

At first glance, it may seem like Simutronics glory days are behind them with revenues topping in 1999 at USD 5 million compared to revenues at USD 2 million in 2015. However, Simutronics is a studio of profound talent but that needs a better focus on profitability. At the same time, Stillfront is a company that needs more presence and competence in the mobile games segment. We think both companies can complement each other and we actually consider Simutronics a potential crown-jewel with their feeling for game design and extensive experience of creating quality.

A potential blockbuster – “Siege: Titan Wars” At the beginning of November 2016, Simutronics soft launched their new title “Siege: Titan Wars” on mobile. A so-called soft launch is standard in the mobile industry with a so-called “freemium” revenue model. With a soft launch, the developer and publisher can collect information on the user behavior in the game, so the gaming mechanics, loyalty and the willingness to pay is optimal.

“Siege: Titans Wars” uses the same monetization system, with in app- Siege has a more adult purchases and “Chests”, as the highly successful “Clash Royale” developed visual approach in by Supercell. However, Siege differs in terms of strategic thinking, game contrast to Clash Royal’s cartoonish-style approach mechanics and graphic style. Simutronics game has a more adult visual approach in contrast to Clash Royal’s cartoonish-style approach. It is inspired by “Dungeons and Dragons” and “The Lord of The Rings” and will therefore likely appeal to a different audience. It is in some ways more visually advanced and has similar reward systems as critical payment points.

Clash Royale was released in January 2016. Today, it is the fourth top- grossing game on mobile with daily revenue of SEK 41 million which add up to quarterly revenues close to SEK 1.3 billion. In June 2016, Tencent Holding signed a deal buying a majority stake in Supercell from Japans Soft Bank at a valuation of SEK 90 billion. The economic potential in a similar title to Clash Royale is therefore considerable but one should also be prudent when making comparisons to the hugely successful Clash Royale. However, even if “Seige: Titans Wars” would generate approximately 1 percent of Clash Royals revenues, this would mean a huge revenue boost for Stillfront Group and a considerable increase in company value.

Company analysis 34 Stillfront

Financial projections

To project the future net sales and profit levels for Stillfront Group you have to understand key drivers, upcoming game launches and the current development for the subsidiaries within the Group. Our financial projection will be based on cost levels and key KPIs such as DAU (Daily Active Users), MAU (Monthly Active Users), engagement ratio DAU/MAU and ARPDAU (Average Revenue Per Daily Active User)1.

Our forecast will be divided into six sections where we present a summary on the group level first and then Bytro, Coldwood, Simutronics, Dorado, and PowerChallenge. Stillfront has earlier, in conjunction with their listing, presented annual data dating back many years. On a quarterly basis, we have user statistics, income and profit levels since Q4 2015. Our forecast are based on organic development and not on more value adding acquisitions, despite Stillfront’s pronounced focus on acquiring companies.

uEBITDA, earnings before investments We want to highlight that we will be talking about uEBITDA which is Stillfront’s conservative accouting deflates the EBITDA before investments. Today, Stillfront put their investments in new current profitabillity game titles directly in the income statement. If they followed IFRS, the investments would be charged as intangible CAPEX in the cash flow statement and show up on the balance sheet. This is a conservative measure by the company but makes Stillfront’s reported EBITDA highly deflated and not comparable to other gaming companies.

Group forecast

Stillfront Group estimates, long term mSEK 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Net sales 29 57 92 122 190 212 266 305 342 373 403 Total OPEX -44 -51 -75 -91 -103 -140 -151 -169 -176 -210 uEBITDA 2 13 41 47 98 110 126 155 173 197 192

Net sales growth 96% 61% 33% 55% 12% 25% 15% 12% 9% 8% uEBITDA margin 8% 23% 44% 38% 52% 52% 47% 51% 51% 53% 48%

Source: Redeye Research

The key drivers for the group in the coming years will be the following: The release of Siege: Titan Fall for Simutronics, mobile porting for Bytro’s games, New World Empires gaining traction, Dorado’s Conflict of Nations, Unravel 2 release and in-house title development at Coldwood.

Long-term, we expect that the Group will continue their focus on bringing new releases with limited risk which will lead to a continued strong revenue growth. Furthermore, we assume to see a rise in the uEBITDA margin to the region of 40-50%. Each subsidiary is treated in detail in the sections below so the reader can understand the assumptions our projections are based on.

1 See our Appendix for explanations regarding the KPIs.

Company analysis 35 Stillfront

Financials for Bytro Bytro today have two core titles; Call of War and Supremacy 1912. The company also recently released New World Empires. We will focus our discussion on these games.

KPIs; Stable and loyal users

Call of War is the most successful launch to date for Bytro. As can be seen in the graph below, MAU has been dropping since Q1’16 but this is mostly due to the highly inflated acquisition prices during the spring and summer period. Stillfront has announced that a mobile porting of Call of War is under way and the game will be available on mobile by Q1’17. We believe that the mobile implementation will lead to an increased engagement ratio (DAU/MAU), as the accessibility of the game will increase. The potential customer base will also likely increase as many people prefer to use their mobiles compared to a browser. Another factor that will likely increase the player base is that Facebook ads are a primary player acquisition tool for CoW. Most Facebook users are on the mobile, and as the game will be more suited for the mobile the conversion ratio of gamers should increase.

Quarter, Bytro: CoW MAU (Ks) & CoW DAU/MAU (%)

180 35%

Going onwards we expect 160 30% a steady rise in MAU 140 25% 120

100 20%

80 15%

CoWMAU (Ks) 60

10% CoWDAU/MAU (%) 40 5% 20

0 0%

CoW MAU (Ks) CoW DAU/MAU (%)

Source: Stillfront & Redeye Research

Going onwards we expect a steady rise in MAU, and a steeper increase in DAU. We believe the DAU/MAU will gradually grow and reach about 32% by the end of 2017.

Company analysis 36 Stillfront

Supremacy 1912 has been around since June 2009. The game had its most successful year in 2015 which shows that player engagement has increased steadily over the games lifetime. As can be seen in the graph below, the drop in MAU was quite significant in Q3’16. However, this was expected due to seasonality and less marketing spend due to high customer acquisition costs during the spring. We assume that Supremacy will launch an mobile version but after seeing the initial customer responses after Call of War implementation. We believe a mobile porting will lead to increased engagement, higher DAU/MAU and to a steady growth of the MAU.

Quarter, Bytro: S1914 MAU (Ks) & S1914 DAU/MAU (%) We believe S1914 will also be launched on mobile 100 35% 90 30% 80 70 25% 60 20% 50 15% 40 S1914 S1914 MAU (Ks) 30 10% S1914 DAU/MAU (%) 20 5% 10 0 0%

S1914 MAU (Ks) S1914 DAU/MAU (%)

Source: Stillfront & Redeye Research

Another important factor affecting our forecast is the newly launched New World Empires (NWE). New World Empires is still in an early stage but

Q3 revenues indicate a new strong title from Bytro.

Quarter, Bytro: DAU (Ks) & ARPDAU (in SEK)

90 3.5

80 3.0 70 2.5 60

50 2.0

40

DAU DAU (Ks) 1.5

30 ARPDAU SEK) (in 1.0 20 0.5 10

0 0.0

DAU (Ks) ARPDAU (in SEK)

Source: Stillfront & Redeye Research

Company analysis 37 Stillfront

As can be seen in the graph above, we assume an uptake in active players for the new title which will drive the growth of income. We expect to see a rise in DAU for all of Bytro’s titles due to the mobile launch and NWE uptake. We expect the ARPDAU will decline to some degree because of the growth in users.

Total revenue and margin assumptions for Bytro in the coming quarters are shown in the graph below. We believe the new launch and mobile implementation will lead to an increased focus on marketing to fuel growth and also affect the margins negatively in the short-term. We model uEBITDA (underlying EBITDA before investments) margin between 40- 50% for the coming quarters.

Quarter, Bytro: Revenue (MSEK) & uEBITDA margin We model uEBITDA margin between 40-50% 18 60% for the coming quarters 16 50% 14

12 40%

10 30%

8 uEBITDA uEBITDA margin Revenue(MSEK) 6 20%

4 10% 2

0 0%

Revenue (MSEK) uEBITDA margin

Source: Stillfront & Redeye Research

Long-term estimates for Bytro As discussed earlier, we see the mobile launch for Call of War and, subsequently, more titles going for mobile in combination with the newly released New World Empires as the primary drivers for Bytro in the coming years.

Bytro estimates, long term mSEK 2015 2016E 2017E 2018E 2019E

Net sales 34 48 50 57 70 Total OPEX -24 -23 -26 -27 -33 uEBITDA 11 25 23 30 37

Net sales growth 41% 3% 16% 23% uEBITDA margin 31% 52% 47% 53% 53%

Source: Redeye Research

Company analysis 38 Stillfront

Financials for Simutronics Today, Simutronics have two main titles that generate their revenue, GemStone and DragonRealms. Simutronics also have some long-tail mobile games such as Lara Craft: Relic Run. The core titles have an extremely loyal fan base with significant cash flow generation. The Company utilizes these cash flows for investment in new titles, mostly aimed for mobile. The largest driver will be the newly soft-launched game Siege: Titan Wars. This could possibly be a blockbuster title as the game has, in our view, all the right ingredients for success. We will first discuss the MUD-style games and after that present our assumptions for Siege.

DragonRealms and GemStone The two MUD-titles have an extremely loyal user base where about 45% of the monthly user’s log in on a daily basis. GemStone was launched as early as in 1987 and DragonRelams was released in 1996.

Quarter, Simutronics: MUDs MAU (Ks) & MUDs DAU/MAU (%) The two games have extremely loyal users 6.5 50% 45% 6 40%

5.5 35%

30% 5 25% 4.5

20%

MUDs MUDs MAU(Ks) MUDs MUDs DAU/MAU (%) 4 15% 10% 3.5 5%

3 0% 2016-Q2 2016-Q3 2016E-Q4 2017E-Q1 2017E-Q2 2017E-Q3 2017E-Q4

MUDs MAU (Ks) MUDs DAU/MAU (%)

Source: Stillfront & Redeye Research

We see no reasons for a decline or any major change in user behavior as most of the players have been playing, almost on a daily basis, these games for ten years+. In the graph above, we project that the DAU/MAU will vary in the region of 45%, on an aggregated basis, for the two titles.

Company analysis 39 Stillfront

Quarter, Simutronics: MUDs DAU (Ks) & MUDs ARPDAU (in SEK)

2.75 18.0

16.0 2.7 14.0

2.65 12.0

10.0 2.6

8.0 MUDs MUDs DAU (Ks)

2.55 6.0 MUDs ARPDAU SEK) (in 4.0 2.5 2.0

2.45 0.0 2016-Q2 2016-Q3 2016E-Q4 2017E-Q1 2017E-Q2 2017E-Q3 2017E-Q4

MUDs DAU (Ks) MUDs ARPDAU (in SEK)

Source: Stillfront & Redeye Research

The players of GemStone and DragonRealms are not only loyal, they also spend a lot of money playing the game. As can be seen in the graph above, during Q2 and Q3’16 the average daily user spends about 15 SEK per day. When looking at more historical numbers, we find this level as stable and do not see any reasons for a change in player spend. We must also note that the reported numbers today are somewhat inflated by the strong dollar which might lead to a little lower ARPDAU in SEK the coming years.

Company analysis 40 Stillfront

Siege: Where the potential lies Siege is currently in soft-launch but will most likely go for a full release in Q1’17. When the game is released, and Tilting Point starts to market the We believe Siege go for a title, the download rate during the first months should be a good indicator if full release in Q1’17 we have a blockbuster on our hands or not. Top titles such as Clash Royale, Angry Birds 2, Farm Heroes Super Saga reached 10 million global downloads within one month. We will not assume that Siege will be a blockbuster with millions of users, but rather assume an “OK” release. However, if we see signs, after the full release, that the game is gaining traction, we will most likely have to adjust our forecasts upwards to a larger degree.

Quarter, Simutronics: Siege MAU (Ks) & Siege DAU/MAU (%)

600 30%

500 25%

400 20%

300 15% Siege MAU Siege MAU (Ks)

200 10% Siege DAU/MAU Siege DAU/MAU (%) Soft launch

100 5%

0 0%

Siege MAU (Ks) Siege DAU/MAU (%)

Source: Stillfront & Redeye Research

During the soft launch period, we assume that the game has about 50-80k MAU’s (today already about 100k have downloaded the game) as the game is fairly promoted and limited money are spent on acquiring players. In Q2, we model that the marketing starts and that the game reaches about 500k MAU’s by the end of the year. We assume an engagement ration, DAU/MAU, of about 15%. Top titles, like Clash Royal, have DAU/MAU of about 25%, so we believe our assumption is rather conservative.

Company analysis 41 Stillfront

Quarter, Simutronics: Siege revenue (MSEK) & Siege ARPDAU (in SEK)

12 4.5

4.0 10 3.5

8 3.0 To be conservative we 2.5 model a much lower 6 ARPDAU than 2.0 competitive games

4 1.5

Siege Siege revenue(MSEK) Siege Siege ARPDAU SEK) (in

1.0 2 Soft launch 0.5

0 0.0 2016-Q2 2016-Q3 2016E-Q4 2017E-Q1 2017E-Q2 2017E-Q3 2017E-Q4

Siege revenue (MSEK) Siege ARPDAU (in SEK)

Source: Stillfront & Redeye Research

As mentioned earlier, Tilting Point is a co-publisher and receives a share of the revenue which Siege creates. We will assume an equal split between the two partners. The ARPDAU is hard to estimate and at best will be an approximation. Overall, we can only use conservatism when in doubt. We assume an long-term ARPDAU of about 3 SEK, roughly 30 cents. This is far below what top titles earn. We also believe Siege will attract a somewhat more hardcore gaming audience due to the graphical nature which could indicate an even higher possible monetization rate.

ARPDAU in US for succesfull game titles ($) Game title ARPDAU Clash of Kings 2.64 Clash Royale 2.16 Vikings: War of Clans 0.90 Median 0.80 Lords Mobile 0.70 Clash of Lords 2 0.44 Castle Clash 0.25 Source: Surveymonkey Intelligence

Long-term estimates for Simutronics As discussed earlier, we assume small changes for the two older titles Gemstone and DragonRealms. The growth will be driven by Siege and possibly other new releases. Our assumptions for Siege, in terms of success, should be seen as highly conservative. Our projections will most likely change after the full release when we can analyze the initial download rate and user statistics. The uEBITDA (before investments) will be high and

Company analysis 42 Stillfront probably expand, due to the excellent scalability of the business characteristics.

Simutronics estimates, long term mSEK 2016E 2017E 2018E 2019E

Net sales 9 39 59 68 Total OPEX -6 -24 -31 -34 uEBITDA 3 15 28 33

Net sales growth 330% 53% 14% uEBITDA margin 35% 38% 47% 49%

Source: Redeye Research

Company analysis 43 Stillfront

Financials for Coldwood Coldwood develops games for consoles and PC on a contracting basis and receives fees for the development. The company is also paid in royalties which depend on the number of sold games.

Unravel, which was released in February 2016, is the primary driver behind the strong growth during the year as the company has been receiving royalty revenues. However, the lifetime of a game release on consoles and PC are rather limited, in strong contrast to titles from Bytro, but can bring in substantial revenue for a short period. The lifetime of the game can be extended by various DLC’s, bonus features and expansions.

Unravel 1, 2 & 3? Unravel 2 is already on its way and we anticipate to The royalties from Unravel will fade during 2017 and we expected to see a see a launch in 2018 drop in net sales compared to 2016. Unravel 2 is already on its way and we anticipate to see a launch in 2018. We also believe that the partnership with EA will continue and that the company will receive more contracting fees for new titles of the Unravel series.

In-house title Coldwood will also start to develop their in-house title which we expect will be released around Q2’18. As Coldwood will own the IP of the new title, the revenue generating possibilities will be far greater than Unravel’s contracting fees plus royalties. However, also less certain and to a higher risk. A strong release could generate revenues in the region of SEK 100m or more. However, before we know more about the upcoming title we will stay conservative and estimate that the game could generate revenues around SEK 30m during its first two years.

Coldwood estimates, long term mSEK 2015 2016E 2017E 2018E 2019E

Net sales 17 28 20 51 46 Total OPEX -11 -13 -15 -20 -21 uEBITDA 6 16 5 31 25

Net sales growth 70% -31% 160% -10% uEBITDA margin 34% 55% 23% 60% 55%

Source: Redeye Research

We expect to see a rise in costs as the company makes new hires for setting up the new team at Coldwood which will focus on the in-house title. According to current accounting practice, the new employees will be accounted for as costs and decrease margins somewhat. However, if Stillfront would follow IFRS, the development cost of the in-house title would be booked as investments. We believe we will see a margin expansion due to the release of the proprietary title and expect to see uEBITDA margin of 55-60% in the coming years when the company receives royalties.

Company analysis 44 Stillfront

Financials for Dorado The biggest driver for Dorado is the release of Conflict of Nations (CoN). Dorado now manages the long-tail games of the The game will enter open beta in December and we expect to see a launch group during Q1’17. As we have explained before, the title is based on the Bytro engine and modern war is the most requested war scenario from the five million fans of Bytro Games. We believe this bodes well for the release of CoN. We model a good release but not a “great” one like Call of War. Our assumptions will most likely be altered after the game is fully launched, when we can analyze the first user statistics. We also expect that the company will release a new game in 2019 which should generate some new revenue streams. We assume that the income from the long-tail portfolio remains stable and slowly growing.

Dorado estimates, long term mSEK 2016E 2017E 2018E 2019E

Net sales 1 8 15 22 Total OPEX -1 -5 -8 -11 uEBITDA 0 3 7 11

Net sales growth 588% 101% 42% uEBITDA margin 4% 35% 47% 51%

Source: Redeye Research

As can be seen above, we expect to see a margin expansion as the operational leverage kicks in. We believe Dorado will reach uEBITDA margins in the same region as Bytro in the long-term.

Financials for PowerChallenge For PowerChallenge, we model only modest changes as the player community is both stable and loyal. We believe the efficiency will rise, leading to somewhat higher margins in the years to come.

PowerChallenge estimates, long term mSEK 2015 2016E 2017E 2018E 2019E

Net sales 5.7 5.1 5.0 5.1 5.2 Total OPEX -6 -5 -5 -5 -4 uEBITDA 0.1 0.1 0.1 0.5 1.0

Net sales growth -11% -2% 2% 3% uEBITDA margin 1% 2% 3% 10% 20%

Source: Redeye Research

Company analysis 45 Stillfront

Valuation

Base Case scenario

DCF-valuation The required rate of return used in the DCF-valuation is 12.2% which is derived using Redeye's rating model. We believe Stillfront will continue to deliver significant growth as the company focus on bringing low-risk titles to the market. We also expect continued underlying growth in the gaming market and that an increased mobile focus is a tremendous opportunity for the company. In the near-term, we believe the revenue uptake will be driven by Simutronics Siege: Titan Fall and the mobile porting of Bytro’s game titles.

We estimate the long-term average growth to be 22% during 2016-2025. Estimated fair value of We believe that the margin will continue to expand during our forecast 105 SEK per share period with an average uEBITDA-margin of 49% (EBITDA before expensed investments). In the terminal period, we assume a growth rate of 4% and an uEBITDA-margin of 52%, equivalent to an exit EV/EBIT multiple of around 9x. Compared to peers this exit multiple should be considered as relatively conservative.

Based on our ratings and DCF-model this leads to an estimated fair value of 105 SEK per share in our Base-case scenario. Consequently, we see a substantial upside potential from current share price levels.

Stillfront: Base-case We see a substantial Assumptions 2016-25 DCF-value upside potential from CAGR Sales 22% WACC 12.2% current share price levels uEBITDA margin (avg) 49% Net presenst value FCF 251 ROIC (avg) 21% Net present value of Terminal 341

Terminal EV 592 Terminal growth FCF 4.0% Net debt 73 Terminal uEBITDA margin 52% Value assos. Companies 0 Exit EV/EBIT multiple 9x Value minorities -81

DCF-value 584 Estimated Fair value 105 Todays share price 66.0 Potential/Risk 58%

Source: Redeye Research

Relative valuation We have divided our peer-valuation into three peer groups: Swedish, Mobile/Casual, and International Gaming to better display valuation differences between sub-segments in the gaming industry. Our prime valuation metric is EV/EBITDA. In Stillfront’s case, we are using uEBITDA instead of the reported number. The reason is that peers depreciate

Company analysis 46 Stillfront

investments over several years while Stillfront expense investments immediately which depress their margins. Using uEBITDA will make for a better comparison with peers.

Swedish Gaming: Despite the size of these companies the analyst coverage is low. No projections are available for Paradox and for THQ we have used our internal estimates. Overall, the companies within this peer group are expected to deliver healthy profit growth in the coming years. Stillfront should be comparable to this group given their size and the expected future development of key drivers such as sales growth and uEBITDA margin.

Mobile/Casual: Companies with a distinct focus on mobile and casual Valuation is mostly gaming. Com2us valuation levels, due to a large cash pile, distort the effected by growth potential, margins, return average to some degree. Stillfront is expected to grow at a higher rate with on capital and investors better profitability than the peer group. risk preferences International Gaming: The companies in this peer -group are the “whales” of the gaming industry. Most of these enterprises act both as publisher, developers and platform owners. Most of them are also active in all sub-segments of the industry (cross platform in all genres). Due to their size, the direct comparability with Stillfront is relatively low but even so indicates overall valuation, profitability and growth levels for the industry as a whole.

Peer valuation SALES EV/Sales EV/EBITDA EBITDA margin CAGR EV Company (MSEK) 2016E 2017E 2016E 2017E 2018E 15-18E 2016E 2017E 2018E Swedish Gaming Starbreeze 5 414 11.3x 3.9x n.m. 9.5x 11.1x 105% 1% 41% 38% Paradox Interactive 5 144 n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. THQ Nordic 2 059 7.9x 3.9x 17.5x 8.1x 6.0x 47% 45% 48% 51% G5 Entertainment 698 1.6x 1.4x 10.4x 9.5x 8.0x 12% 16% 15% 16% Median 3 602 7.9x 3.9x 14x 9x 8x 47% 16% 41% 38%

Mobile/casual Zynga 15 996 2.3x 2.1x 30.4x 16.9x 13.2x 10% 5% 10% 13% Com2us 3 390 0.9x 0.8x 2.2x 2.1x 2.0x 11% 37% 38% 39% GLU 1 337 0.7x 0.7x n.m. n.m. n.m. 2% -24% -7% -2% G5 Entertainment 698 1.6x 1.4x 10.4x 9.5x 8.0x 12% 8% 8% 10% Median 2 364 1.2x 1.1x 10x 10x 8x 11% 7% 9% 12%

International Gaming Tencent 2 143 034 10.5x 7.9x 25.1x 19.6x 15.8x 36% 35% 34% 33% Activision Blizzard 264 180 4.4x 4.1x 11.9x 11.0x 9.9x 21% 34% 35% 37% Nintendo 235 546 6.0x 3.9x 67.1x 27.1x 18.2x 26% 7% 14% 16% EA 191 062 4.2x 3.9x 12.6x 11.5x 10.7x 16% 29% 31% 34% Bandai Namco 44 418 0.9x 0.9x 6.5x 6.1x 5.7x 12% 10% 11% 11% Ubisoft 34 901 2.1x 1.9x 5.6x 4.1x 3.5x 14% 12% 15% 18% Take-Two 32 105 2.0x 1.6x 12.6x 7.9x 7.5x 32% 16% 21% 26% CD-project Red 9 942 10.1x 14.9x 18.9x 43.4x 7.0x 9% 48% 31% 52% Median 117 740 4.3x 3.9x 13x 11x 9x 18% 22% 26% 30%

Peer Group median 3 602 4.3x 3.9x 13x 10x 8x 18% 16% 26% 30%

*Stillfront 375 4.1x 3.1x 9x 8x 4x 49% 14% 33% 25% Source: Bloomberg & Redeye Research *Based on uEBITDA for better comparability

Company analysis 47 Stillfront

As can be seen in the peer table, Stillfront trades at significantly lower multiples than the peer groups. We believe the discrepancy is due to the following reasons:

 Lack of understanding of underlying profitability Why; Differences in accounting practices We believe the valuation of Stillfront will increase  Lack of attention in the investment community to better reflect their Why; Short history as a publically traded company and small size underlying fundamental performance  Lack of understanding of potential in new launches; Siege: Titan Wars, the in-house title from Coldwood and mobile porting for Bytro’s games Why; Many game developers don’t deliver on expectations and “seeing is believing”.

The last point in the summary above is understandable in our view. The industry is full of game developers who don’t deliver on expectations. However, as discussed earlier, we find that the market doesn’t give enough value to the latest acquisition of Simutroncs and their potential blockbuster Siege: Titan Wars. The market also shows little understanding of the potential for Bytro’s titles when they are mobile compatible. We also believe that the potential in the in-house title at Coldwood is not reflected in today’s share price. This valuation gap will eventually close when and if Stillfront starts to deliver actual figures in line with our expectations.

The valuation gap due to lack of understanding of underlying profitability Adopting to IFRS will lead to better understanding of and lack of attention (the two first points above) should however close when Stillfront’s underlying the understanding of Stillfronts business model increases in the investment profitability community. The first clear trigger for this is when Stillfront changes their reporting to IFRS. This will reveal the underlying profitability and show the discount to peers more clearly. We also believe that the attention from the investment community will increase when Stillfront continues to deliver strong underlying results. Another potential trigger for the share price is when Stillfront makes additional acquisitions. Finally, as Stillfront grows in size and the market cap increases, this will enable larger institutional investors to add Stillfront to their portfolios.

Company analysis 48 Stillfront

Sensitivity analysis As can be seen in the table below, the valuation is sensitive to changes in the WACC and the assumed sales growth. An increase in sales growth during 2015-25 has a significant impact on valuation. Eg, an increase in CAGR to 32% would imply a fair value of roughly 203 SEK per share.

Fair value per share CAGR 2015-25 12% 17% 22% 27% 32% 105 -16% -8% 0% +8% +16% 10% 72 101 143 202 286 11% 62 87 121 170 239 12% 55 76 105 146 203

WACC 13% 50 67 92 127 176 14% 45 60 82 112 154

Source: Redeye Research

Changes in assumptions of WACC have a material impact on the valuation. An assumption of 10% would imply a fair value of 143 SEK per share.

Fair value per share uEBITDA margin avg (2016-2025) 26% 38% 49% 60% 71% 105 -30% -15% 0% +15% +30% 10% 90 116 143 169 195 11% 70 96 121 146 172 12% 55 80 105 129 154

WACC 13% 44 68 92 116 139 14% 36 59 82 105 128

Source: Redeye Research

The valuation is also sensitive to changes in sustained profitability. Increasing our margin assumptions by ten percentage points would render a fair value of nearly SEK 129.

Price implied expectations The sensitivity analysis can also be used to assess implied expectations in the share price. We find that a sustained margin of around 40% and CAGR of 13% are factored into current levels. We consider this conservative, given the prospects of Stillfront’s pipeline of new titles and the mobile porting of Bytro’s game portfolio.

Fair value per share uEBITDA margin avg (2016-2025) 26% 38% 49% 60% 71% 105 -30% -15% 0% +15% +30% 12% ### 14 34 54 73 93 17% -8% 30 53 75 96 118

15-25 22% 0% 55 80 105 129 154 27% 8% 89 118 147 175 203

32% 16% 139 173 206 239 271 CAGR Source: Redeye Research

Company analysis 49 Stillfront

Bull and Bear-case Scenarios

Bull-case In our Bull-case, we assume a larger success for Simutronics title Siege: Titan Wars. We also model that the company launches new successful Our Bull-case indicates an mobile games, within the franchise, in the coming years. In this scenario, estimated fair value of we predict the long-term average growth to be 32% during 2016-2025. We 210 SEK per share also model an average uEBITDA-margin of 49% (EBITDA before expensed investments). Our Bull-case differs from our Base scenario mostly on the assumed growth rates. Our Bull-case indicates an estimated fair value of 210 SEK per share.

Stillfront: Bull-case Assumptions 2016-25 DCF-value CAGR Sales 32% WACC 12.2% uEBITDA margin (avg) 49% Net presenst value FCF 422 ROIC (avg) 26% Net present value of Terminal 758

Terminal EV 1 180 Terminal growth FCF 4.0% Net debt 73 Terminal uEBITDA margin 53% Value assos. Companies 0 Exit EV/EBIT multiple 9x Value minorities -80

DCF-value 1 173 Estimated Fair value 210 Todays share price 66.0 Potential/Risk 218%

Source: Redeye Research

Bear-case Our Bear-case assumes a low pick-up in users from the mobile porting of Our Bear-case indicates an estimated fair value of Bytro’s games and a limited success for Siege: Titan Wars. In this scenario, 32 SEK per share we predict long-term average growth to be 19% during 2016-2025. We model an average uEBITDA-margin of 32% (EBITDA before expensed investments). Our Bear-case assumes a lower margin than our other scenarios as the lack of growth gives rise to lower operational scalability. Our Bear-case indicates an estimated fair value of 32 SEK per share. However, given that our assumptions in the Bear-case must be seen as highly conservative, we see a low risk given today’s valuation levels.

Stillfront: Bear-case Assumptions 2016-25 DCF-value CAGR Sales 19% WACC 12.2% uEBITDA margin (avg) 32% Net presenst value FCF 44 ROIC (avg) 9% Net present value of Terminal 155

Terminal EV 199 Terminal growth FCF 4.0% Net debt 73 Terminal uEBITDA margin 42% Value assos. Companies 0 Exit EV/EBIT multiple 9x Value minorities -94

DCF-value 179 Estimated Fair value 32 Todays share price 66.0 Potential/Risk -52%

Source: Redeye Research

Company analysis 50 Stillfront

Fair value range Our fair value range stretches from 32-210 SEK per share with a Base-case valuation of 105 SEK per share. We find Stillfront conservatively valued and consider the company as an attractive risk-reward from an investment perspective. The company has a distinct focus on controlling their risk but with no reduced possibility to produce a blockbuster title. In the near-term, we see great potential for Simutronics game Siege: Titan Wars that actually could be a huge success.

Stillfront: Fair value range 0 50 100 150 200 250 Last price 66

0 Bear-case: 5032 Base100-case: 105 150 200Bull-case: 210 250

As can be seen in the figure above, we consider the current valuation too low both, compared to peers and the projected fundamental performance, and see an attractive risk/reward situation.

Triggers and risks As outlined above, we believe that one potential trigger for Stillfront is when they change their reporting to IFRS. This will reveal the underlying profitability and show the discount to peers more clearly. Another major trigger would be if Siege: Titan Wars becomes a success. We will have more visibility on this in the beginning of 2017. Other potential triggers lies in the potential for Bytro’s titles when they are mobile compatible and the launch of the in-house title at Coldwood. Another potential trigger for the share price is when Stillfront makes additional acquisitions. Finally, as Stillfront grows in size and the market cap increases, this will enable larger institutional investors to add Stillfront to their portfolios.

The risks lies in the success of the new launches. Stillfront has stable New launches creates potential but also risks underlying revenue generation from existing titles but in order for the share price to appreciate significantly they have to deliver on at least some of these title launches. However, as we mentioned above, we believe the current share price doesn’t price in successful launches and the downside risk is therefore limited.

Company analysis 51 Stillfront

Appendix

Board of directors

Per Skyttvall - Chairman of the board since 2013 Per have been the Chairmen of the board since 2013. Per is the sole owner of the small consultant company PGS Sweden and has been the MD of many companies throughout the years amongst others; Dreampark AB and Zenterio AB (publ). Other current positions: Chairman of the board of Idea2Innovation Sweden AB. Board member of Acacia Asset Management AB, Acacia Finans AB, and PGS Sweden AB.

Number of shares in Stillfront Group: Per owns 16 648 shares in Stillfront Group through PGS Sweden with an approximated value of SEK 1,1m (at share price of 66 SEK).

Jörgen Larsson - Board member since 2007. See description earlier in the report (Ownership).

Alexander Bricca - Board member since 2008. Alexander holds a Master’s degree in business law and Bachelor of Arts in business administration and managerial economics. Alexander has previously been working as the CFO of Viaplay AB and Voddler Group AB and as Investment Manager in Deseven Capital AB. Other current positions: Deputy board member of Bet2aid Sweden AB, Octen AB and Coldwood Interactive AB.

Number of shares in Stillfront Group: Alexander owns 4 194 shares in Stillfront Group with an approximated value of SEK 0,3m (at share price of 66 SEK).

Fredrik Åhlberg - Board member since 2015 Fredrik holds an MBA and Master of Science in Civil and Environmental Engineering from Kungliga Tekniska Högskolan. Fredrik has experience from positions such as MD of Tradera Sweden AB, Head of Expansion for Ebay in Europe and a position in the management team at King.com Ltd. Other current positions: Board member of Aktiebolaget Stangus, Virtusize AB and 7h Dev AB.

Number of shares in Stillfront Group: Fredrik 4 275 shares in Stillfront Group with an approximated value of SEK 0,3m (at share price of 66 SEK).

Company analysis 52 Stillfront

Annette Brodin Rampe - Board member since 2016 Annette holds a Master of Science in Industrial Chemistry from Chalmers University of Technology. Annette is the Managing Partner for Europe of Brunswick since November 2014. Before joining Brunswick in 2007, Annette was Senior Vice President of Sales and Marketing at E.ON Sverige AB. She also served as Chief Executive of Senea, a listed Swedish data systems company. Annette has over 20 years of board level experience in Nordic large-cap companies, among others Norske Skog, Vattenfall and Peab.

Mark Miller - Board member since 2016 Mark studied economics and business at the University of Witten/Herdecke and the University of Texas at Austin under a scholarship from the Association of German-American Clubs and a Fulbright scholarship. Holding a BA in business administration, he worked at Deutsche Bank in the corporate client and asset management businesses before joining Bertelsmann AG as a strategic investment analyst. Mark is the founder and m of CatCap GmbH, an international M&A firm. He has been involved in more than 100 successful transactions.

Comment on the board Stillfront has a board consisting of seasoned veterans with experiences from large-cap companies, financing, M&A, gaming and technology companies. We would like to see larger share holdings by the board members but Fredrik Åhlberg, Annette Brodin Rampe and Mark Miller is relatively new in their positions. Insider buying by the board members would be a definite sign of commitment and strong belief in Stillfront’s future.

Company analysis 53 Stillfront

KPIs DAU – This number measures the average unique daily active users during a given timeframe. For Stillfront it will be the daily average during the quarterly period.

MAU – This number measures the average unique monthly active users during a given timeframe. For Stillfront it will be the monthly average during the quarterly period.

DAU/MAU – Measures the engagement and usage. A high number indicates that your players use your game often. The measure is calculated by dividing the DAU with the MAU. During a period of a significant rise in downloads, the DAU/MAU ratio might be positively skewed as new players’ most often try the game at least once after install.

ARPDAU – Average Revenue Per Daily Active User is an important metric to help you understand how well your game is monetizing. ARPDAU uses the average daily revenue during a specific timeframe and divide it by the average daily active users during the same period. The metric answers the question on how much your players spend, on average, per day in the game. Calculation as follows:

(푅푒푣푒푛푢푒 푑푢푟푖푛푔 푞푢푎푟푡푒푟⁄푁푟 표푓 푑푎푦푠 푖푛 푞푢푎푟푡푒푟)

퐴푣푒푟푎푔푒 퐷푎푖푙푦 푎푐푡푖푣푒 푢푠푒푟푠 푑푟푢푖푛푔 푞푢푎푟푡푒푟

Company analysis 54 Stillfront

Terminology

Additional Content: Downloadable add-ons available for purchase after the original installation of a full game, including map packs, expansions, premium content, vanity items, in-game currency, etc.

Browser Games: Games that are not downloaded onto a computer but instead are played directly inside a web browser.

Casual gamers: Gamers who play occasionally, choosing games that have a low learning curve and can be played easily whenever they have a free moment.

Compound Annual Growth Rate (CAGR): Defined as the nth root of the total percentage growth rate, where n is the number of years in the period being considered. It represents the year-over-year growth rate of a figure over a specified period of time, assuming it is growing at a steady rate.

Free-to-Play/Freemium (F2P): Offering a game, product or service free of charge (such as software, web services or other) while charging a premium for advanced features, functionality, or related products like virtual goods and services.

Full game: A base game that is purchased and/or installed, not including any additional content or in-game items that are purchasable and/or downloadable after the initial installation.

Hardcore gamers: Avid gamers who generally spend most of their free time playing video games, have the latest gaming technology, and play a few chosen games on a regular basis or to completion.

In-Game Purchase: The purchase of virtual goods within a game after its initial installation.

Intellectual Property (IP): Original and proprietary creative material used in a game, such as storyline, animation, characters, gaming mechanics, etc

Microtransactions: Small in-game purchases of economy-based downloadable content, such as in-game currency, vanity items, weapons, songs, vehicles and class unlocks.

Platform: A specific combination of hardware and software in order to play a certain game category. E.g., console, PC, smartphone, handheld gaming device, etc.

Company analysis 55 Stillfront

Summary Redeye Rating

The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points.

Rating changes in the report

Management 7.0p

The current leadership has delivered in term of both growth and profitability. Their history in the company is, however, short. The allocation of capital has through acquisitions improved competitive advantage for Stillfront Group. The company is picky in their evaluation process minimizing risk for their shareholders.

Ownership 6.0p The CEO Jörgen Larsson have significant holdings in the company. Management controls 24 percent of the capital which implies a shareholder friendly environment. The institutional ownership is good for a small cap company listed on First North with Swedbank Robur Ny Teknik controlling 8 percent of the company. We would like to see increased holding from the board of directors.

Profit outlook 4.5p Stillfront’s products have high gross margins and a relatively stable customer base with good leverage in the business model. The underlying growth in the gaming industry is a key driver for continued future growth for the company, where a successful shift towards the mobile segment is essential. We think Stillfront have good potential for both organic growth and growth fuelled by acquisitions the next coming years. Stillfront is, however, a small player in a competitive landscape dominated by a few with no decisive competitive advantages

Profitability 6.0p

Stillfront’s relative small investments have gained high returns of investments. The company has positive cash flows and high net margins on their products. The company’s rating is punished due to the brief history.

Financial strength 7.0p

Stillfront has a strong cash position a major equity issue which was made at the same time as the IPO in December 2015. Stillfront’s products are somewhat differentiated and are not affected by a higher extent of the business climate in the world.

Company analysis 56 Stillfront

Income statement 2014 2015 2016E 2017E 2018E DCF valuation Net sales 29 57 92 122 190 WACC (%) 12.2 % NPV FCF (2016-2018) 37 Total operating costs -37 -53 -86 -106 -129 NPV FCF (2019-2025) 288 EBITDA -8 4 6 17 61 NPV FCF (2026-) 1414 Non-operating assets -9 Depreciation 0 0 0 0 0 Interest-bearing debt 0 Amortization -15 -8 -8 0 -4 Fair value estimate MSEK 584 Impairment charges 0 0 0 0 0 Assumptions 2016-2022 (%) EBIT -23 -4 -2 17 57 Average sales growth 24.5 % Fair value e. per share, SEK 105 EBIT margin 21.7 % Share price, SEK 66.8 Share in profits 0 0 0 0 0 Net financial items -1 0 -2 0 0 Exchange rate dif. 0 0 0 0 0 Profitability 2014 2015 2016E 2017E 2018E Pre-tax profit -24 -4 -4 17 57 ROE 0% -16% -12% 15% 42% ROCE -190% -8% -3% 19% 50% Tax 0 -2 -2 -6 -15 ROIC 0% -16% -24% 147% 371% Net earnings -23 -8 -8 11 42 EBITDA margin -28% 7% 6% 14% 32% EBIT margin -79% -7% -2% 14% 30% Balance 2014 2015 2016E 2017E 2018E Net margin -80% -13% -9% 9% 22% Assets Current assets Data per share 2014 2015 2016E 2017E 2018E Cash in banks 4 73 76 82 124 EPS -7.78 -1.50 -1.50 1.93 7.59 Receivables 3 9 16 22 34 EPS adj -7.78 -1.50 -1.50 1.93 7.59 Inventories 0 0 0 0 0 Dividend 0.00 0.00 0.00 0.00 0.00 Other current assets 0 0 0 0 0 Net debt -1.43 -14.37 -13.52 -14.71 -22.13 Current assets 7 82 91 104 158 Total shares 3.00 5.09 5.59 5.59 5.59 Fixed assets

Tangible assets 0 0 0 1 1 Valuation 2014 2015 2016E 2017E 2018E Associated comp. 0 0 0 0 0 EV -4.3 -73.2 379.7 361.8 295.5 Investments 5 0 0 0 0 P/E 0.0 0.0 -44.5 34.7 8.8 Goodwill 16 10 10 10 10 P/E diluted 0.0 0.0 -44.5 34.7 8.8 Cap. exp. for dev. 0 0 0 0 0 P/Sales 0.0 0.0 4.1 3.1 2.0 O intangible rights 2 0 0 4 6 EV/Sales -0.1 -1.3 4.1 3.0 1.6 O non-current assets 0 0 0 0 0 EV/EBITDA 0.5 -18.2 64.4 21.9 4.8 Total fixed assets 24 10 10 14 16 EV/EBIT 0.2 17.3 -182.4 21.9 5.2 Deferred tax assets 0 0 0 0 0 P/BV 0.0 0.0 5.5 4.7 3.1

Total (assets) 31 93 102 118 174 Share performance Growth/year 14/16e 1 month Net sales 77.9 % Liabilities 3 month 19.2 % Operating profit adj -70.0 % Current liabilities 12 month -4.0 % EPS, just -56.1 % Short -term debt 0 0 0 0 0 Since start of the year 1.9 % Equity 84.7 % Accounts payable 5 13 18 24 38 O current liabilities 0 0 0 0 0 Current liabilities 5 13 18 24 38 Shareholder structure % Capital Votes Long-term debt 0 0 0 0 0 FKL Holding Gmbh (Bytro management) 17.2 % 17.2 % O long-term liabilities 1 0 0 0 0 Acacia Asset Management 10.8 % 10.8 % Convertibles 0 0 0 0 0 Swedbank Robur Ny Teknik 8.1 % 8.1 % Total Liabilities 6 13 18 24 38 Fyrmax Limited 4.4 % 4.4 % Deferred tax liab 0 0 0 0 0 Nordea Liv & Pension 3.4 % 3.4 % Provisions 0 0 0 0 0 Christoffer Lundström 3.1 % 3.1 % Shareholders' equity 22 76 68 79 121 Nordnet Pensionsförsäkring 3.0 % 3.0 % Minority interest (BS) 2 3 15 15 15 Niclas Eriksson 2.4 % 2.4 % Minority & equity 24 80 83 94 136 Avanza Pension 2.1 % 2.1 % Strömberg Förvaltning AB 1.8 % 1.8 % Total liab & SE 31 93 102 118 174 Share information Free cash flow 2014 2015 2016E 2017E 2018E Reuters code SFRG.ST Net sales 29 57 92 122 190 List Total operating costs -37 -53 -86 -106 -129 Share price 66.8 Depreciations total -15 -8 -8 0 -4 Total shares, million 5.6 EBIT -23 -4 -2 17 57 Market Cap, MSEK 372.9 Taxes on EBIT 0 1 1 -6 -15 NOPLAT -23 -3 -2 11 42 Management & board Depreciation 15 8 8 0 4 CEO Jörgen Larsson Gross cash flow -8 5 6 11 46 CFO Sten Wranne Change in WC 3 1 -1 0 1 IR Gross CAPEX -39 5 -8 -4 -6 Chairman Per Skyttvall

Free cash flow -44 12 -3 7 41 Financial information

Capital structure 2014 2015 2016E 2017E 2018E Equity ratio 79% 86% 82% 79% 78% Debt/equity ratio 0% 0% 0% 0% 0% Net debt -4 -73 -76 -82 -124 Analysts Redeye AB Capital employed 20 6 7 11 12 Kristoffer Lindström Mäster Samuelsgatan 42, 10tr Capital turnover rate 0.9 0.6 0.9 1.0 1.1 [email protected] 111 57 Stockholm

Growth 2014 2015 2016E 2017E 2018E Tomas Otterbeck Sales growth 41% 96% 61% 33% 55% [email protected] EPS growth (adj) 0% -81% 0% -228% 294%

Company analysis 57 Stillfront

Revenue & Growth (%) EBIT (adjusted) & Margin (%)

200 120.0% 70 40.0% 180 60 100.0% 20.0% 160 50 140 80.0% 40 0.0% 120 30 100 60.0% -20.0% 20 80 10 -40.0% 60 40.0% 0 40 -60.0% 20.0% -10 2013 2014 2015 2016E 2017E 2018E 20 -80.0% 0 0.0% -20 2013 2014 2015 2016E 2017E 2018E -30 -100.0%

Net sales Net sales growth EBIT adj EBIT margin

Earnings per share Equity & debt-equity ratio (%)

10 10 1 0.5% 8 8 0.9 0.4% 6 6 0.8 0.4% 4 4 0.7 0.3% 0.6 0.3% 2 2 0.5 0.2% 0 0 0.4 0.2% -2 2013 2014 2015 2016E 2017E 2018E -2 0.3 0.1% -4 -4 0.2 0.1% -6 -6 0.1 0.0% -8 -8 0 -0.1% -10 -10 2013 2014 2015 2016E 2017E 2018E

EPS, unadjusted EPS, adjusted Equity ratio Debt-equity ratio

Sales division Geographical areas

Conflict of interests Company description Kristoffer. Lindström. owns shares in the company Stillfront: Yes Stillfront is an independent creator, publisher and distributor of digital Tomas. Otterbeck. owns shares in the company Stillfront: Yes games – with a vision to become one of the leading indie game creators and publishers. Stillfront operates through five near- Redeye performs/have performed services for the Company and autonomous subsidiaries: Bytro Labs in Germany, Coldwood receives/have received compensation from the Company in connection Interactive in Sweden, Power Challenge in the UK and Sweden, Dorado with this. Online Games in Malta, and Simutrionics in the United States. The Group’s games are distributed globally, however main markets include Sweden, Germany, the United States and South America

Company analysis 58 Stillfront

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Redeye Rating (2016-12-09)

Rating Management Ownership Profit Profitability Financial outlook Strength 7,5p - 10,0p 40 42 20 8 19 3,5p - 7,0p 74 63 95 37 46 0,0p - 3,0p 8 17 7 77 57 Company N 122 122 122 122 122

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Company analysis 59