Flexion Mobile

Initiating Coverage

Equity Research 6 May 2019

Flexion Mobile

Sector: Gaming

Platform play FAIR VALUE RANGE

BEAR BASE BULL Flexion offers investors a high-growth platform play on mobile gaming that keys into the 5 17 50 growing shift away from the Apple/Google duopoly. Its technology-driven service allows game developers to easily distribute their products through alternative Android app stores. Having signed up some of the global market’s highest grossing game publishers in recent months, the company is poised for a great leap forward. VERSUS OMXS30 OMXS 30 Flexion Mobile 18 Growth with controlled risk 16 14 The newly signed games alone have the potential to double Flexion’s total annual revenues 12 10 and strengthen its future market position. Signing more top-grossing games this year 8 would provide a clear catalyst. Untypically for the sector, the company is able to control its 6 4 risk – for example, by choosing games with proven monetization and replacing those that 2 0 do not perform. This should equip it to build a diversified portfolio with a high likely hit-rate. 13-jun 11-sep 10-dec 10-mar

REDEYE RATING ‘Spotify -like’ scenario Platform strength will determine sustainable profitability. We forecast a gross margin of 8 7 7 around 14%, assuming that publishers of top-grossing mobile games will retain the 5 bargaining power to squeeze Flexion’s margins. Nonetheless, if Flexion can achieve a

market position with long-term competitive advantage the reward could be notable – as 0

the comparable case of Spotify indicates.

Strength

Financial

Ownership

Profitability Management Explosive expansion Outlook Profit

Our base case anticipates explosive growth over the next three years with a CAGR of KEY STATS almost 80%. This reflects Flexion’s first-mover opportunity and its growth from a low base. Ticker FLEXM It should be profitable by the end of 2021, though revenue growth will be key valuation. Market First North

Share Price (SEK) 12.0 Our fair value range is SEK 5-50 with a base case of SEK 17. Market Cap (MSEK) 494

Net Cash 19E (MSEK) 67 Free Float 46 %

KEY FINANCIALS (GBPm) 2016 2017 2018E 2019E 2020E 2021E

Net sales 1 2 5 11 19 25 ANALYSTS

EBITDA 0 -1 -1 -2 -1 0 Tomas Otterbeck

EBIT 0 -1 -1 -2 -2 -1 [email protected]

EPS (adj.) 0.02016 0.02017 0.02018E -2019E0.1 0.02020E 0.02021E Kristoffer Lindstrom

EV/Sales -1.6 -3.6 7.4 3.7 2.2 1.6 [email protected] EV/EBITDA 13.5 9.0 -45.1 -17.6 -45.4 111.2 EV/EBIT 13.0 8.8 -43.9 -17.3 -24.9 -55.5 P/E 0.0 0.0 -51.8 -20.5 -31.1 -65.8

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]

REDEYE Equity Research Flexion Mobile 6 May 2019

Table of Content Investment Thesis...... 3 Company description ...... 4 History ...... 4 Technology ...... 4 The market ...... 5 China dominates ...... 5 Growth projections ...... 6 Why an alternative Android market? ...... 7 Business perspective ...... 7 User perspective ...... 7 Business model ...... 8 Revenue share model ...... 8 The Flexion platform ...... 9 Channel portfolio ...... 9 Revenue distribution ...... 10 Games portfolio ...... 11 Flexion’s market opportunity ...... 13 Competition ...... 13 Growth opportunities ...... 13 Medium-term vision ...... 14 Well positioned to win the game ...... 14 Financial projections ...... 16 12 months view ...... 18 2-3 years from now ...... 19 Valuation ...... 19 Long-term EBIT-margin ...... 19 Case scenarios ...... 20 Peer-valuation ...... 21 Appendix ...... 22 Flexion’s enabling technology ...... 22 Management ...... 23 Mobile games market ...... 24 Market growth in Q1 2019 ...... 24 Summary Redeye Rating ...... 26

REDEYE Equity Research Flexion Mobile 6 May 2019

Investment Thesis

Flexion is a potential Spotify of gaming. With contracts with leading mobile games newly in place and its service platform now fully established, the company is set for explosive growth in the coming years.

Content is king – Like all platform companies, Flexion needs blockbuster content. In the last three months it has signed contracts with some of the global market’s highest grossing games. These five games alone have the potential to double the company’s total annual revenues. Their network effects are even more important, though – strengthening Flexion’s future market position. Accordingly, we expect it to sign more top grossing games this year, which would provide a clear catalyst for the stock.

Duopoly in doubt – With content giants such as Netflix, Spotify and Epic Games neglecting Apple’s and Google’s mobile marketplaces, a major change is under way. As Flexion is particularly suited to a more fragmented market, this shift could create new opportunities. As a result, we see strategic partnerships with new and existing app stores potentially strengthening Flexion’s platform.

Diversified portfolio with leverage – Unlike other companies in mobile gaming, Flexion is able to control its risk – for example, by choosing games with proven monetization and replacing those that do not perform. Moreover, its primary strategy is organic growth, not user acquisition. As a platform company it should be able to build a diversified portfolio with a high likely hit-rate. This contrasts with the normal extreme revenue distribution in mobile gaming, where a handful of games drive most revenues at even the biggest players. EBIT margins will probably remain low while Flexion builds critical mass, especially with a concentration on top-tier games.

Game of scale – While Flexion is a first mover, dominance of its area is likely be settled over the next 2-3 years. Flexion’s business model has many similarities to Spotify’s, with Flexion building a platform for game developers and Spotify one for music artists. Both companies have low gross margins, with Spotify still scaling up after 10 years. Flexion, which has just begun to scale, is a growth case with the biggest future catalyst for the stock revenue growth, not profitability. If Flexion succeeds in gaining a market position with a sustainable competitive advantage the reward could be notable.

Valuation – Going forward, revenue growth will be most important for the stock’s valuation. Our base case anticipates explosive growth over the next three years with a CAGR of almost 80%. This reflects Flexion’s first-mover opportunity and its growth from a low base.

Challenges

Small player - Flexion has an attractive first mover advantage in a niche where no major player sees a sufficiently large opportunity. If western app distribution markets become as fragmented as those in Asia it will benefit Flexion. In the longer term, though, the company is likely to either lose its market position or be acquired.

Consolidation - For the last 10 years Apple and Google have had a duopoly in western markets, where Flexion generates most of its revenues (84%). The market is becoming more fragmented, but in the longer term it is likely that 3-4 big players will dominate. In this scenario, Flexion’s value to developers might decline.

Cost of growth - In some of Flexion’s latest agreements with top grossing mobile games the company has offered a minimum guarantee, which adds risk. Even with proven success on the dominant app stores, it could still underperform in other channels.

REDEYE Equity Research Flexion Mobile 6 May 2019

Company description

Flexion offers a technology-driven distribution service for free-to-play Android games that allows game developers to distribute their products with ease through multiple channels, such as Amazon, Samsung, and OneStore, and via leading regional distribution channels. Flexion’s cloud-based service platform is used to manage functionality – user experience, authentication, authorisation, payments, and store independence features – in distributed games. Flexion operates in the alternative distribution market for Android games. It targets growing distribution channels outside Google Play and China. Its base is the top 400 grossing games globally.

History Flexion Mobile was founded in 2007. Initially, the company supported feature phones, supplying solutions to mobile operators such as Telefonica O2 and Orange, and device manufacturers such as Sony Ericsson and Nokia. Using its proprietary wrapper software, Flexion built a position as a market leader in what was once a relatively small market.

Technology Flexion’s service offering is powered by a combination of unique enabling/conversion technology and a cloud-based service platform.

A key strength is Flexion’s ability to take existing game files straight from a developer's production line and make them compatible with other distribution channels. Flexion achieves this without the game developer needing to undertake any significant development work.

This is made possible by Flexion’s core enabling technology, which allows for the addition, removal or replacement of features in games without requiring access to a developer’s source code. The technology is automated, machine-based and operates on already compiled game files. The enabling technology is unique, patented in the US, with patent pending in Europe.

The wrapper and the core enabling technology is described in detail in the appendix.

Management and ownership (see appendix)

REDEYE Equity Research Flexion Mobile 6 May 2019

The market

Industry-leading research firm Newzoo estimates the total gaming market accounted for USD 135 billion in 2018. Although PC and console games experienced the largest growth in 2018, mobile games accounted for the bulk of the industry’s revenue. Newzoo estimate approximately 47% of total game revenue (USD 63 billion) came from mobile devices (smartphones and tablets).

According to app analytics and data platform App Annie, total consumer spending in mobile app stores reached USD 101 billion in 2018. Games accounted for 74% of consumer spending in app stores, equivalent to USD 75 billion. China was the biggest contributor, at nearly 40% of the total generated revenue.

The USD 12 billion variance between the Newzoo and App Annie estimates could stem from different measurement methods and app stores analysis. We believe that, thanks to its mobile games data dominance, App Annie probably has more accurate data.

According to our sources, Apple has a 44% market share or USD 33 billion in mobile game revenue, suggesting that approximately USD 44 billion came from mobile gaming on Android devices in 2018.

Total market Mobile games bUSD Name Marketshare Revenue

App Store 44.0% 33.0 Google Play 29.3% 22.0 MyApp (Tencent) 6.3% 4.8 Oppo Softw are Store 2.8% 2.1 Huaw ei App Market 2.5% 1.9 360 Mobile Assistant 2.2% 1.6 MIUI App Store 1.8% 1.3 Baidu Mobile Assistant 1.8% 1.3 VIVO App Store 1.5% 1.1 ONE Store 0.5% 0.4 Alternative App Stores 7.3% 5.4

Source: https://w w w .appinchina.co/market/app-stores/

Apple’s App Store and Google Play dominate, with a combined market share of 73%. Google Play is barred from the Chinese market, most likely thus missing out on billions of dollars of revenue each year. 56% of total worldwide revenue, however, comes from Android devices.

China dominates We estimate the same revenue distribution in China as globally, with 74% of total revenue coming from games. This implies a market size of about USD 30 billion in China. Apple is the biggest player even in China according to Apple Insider, with estimated revenue of USD 11 billion, or about one-third of total mobile games revenues in China (also approximately one- third of Apple’s total mobile gaming revenue from the App Store). (https://appleinsider.com/articles/19/04/04/app-store-revenue-still-stable-with-chinese- gaming-revenue-remaining-a-highlight)

The Android market in China is fragmented, but still, around 80% of total revenue in China comes from our top 7 billion-dollar club (in the table above).

REDEYE Equity Research Flexion Mobile 6 May 2019

The list shows that Tencent (the world’s largest gaming company) has the strongest position in the Chinese mobile games market. Tencent is therefore in third place after Apple and Google on the list above that shows the global market.

However, hardware developers such as Oppo and Huawei have gained a strong position as well, boosted by massive growth in smartphone sales in recent years. Chinese telecom operators also have a strong position.

Growth projections Users worldwide are predicted to spend USD 156 billion on Apple’s App Store and Google Play by 2023 according to new data published by Sensor Tower. The forecast marks a 120% growth from 2018 at a compound annual growth rate (CAGR) of 16.8% over five years.

Mobile games user spending forcast for Apple and Google

180

160

140 60 120 53 100 45 37

(USDb) 80 29 60 25 96 88 40 78 67 49 56 20

0 2018 2019E 2020E 2021E 2022E 2023E

App Store Google Play

Source: Sensor Tower

App Annie released its annual prediction almost a year ago with a more aggressive prediction were consumer spent was expected to reach USD 157 billion by 2022 (a year earlier). We believe that it is likely App Annie will lower its estimates after the somewhat slower than expected revenue growth in 2018.

Apple could reach a revenue of USD 96 billion in 2023, which represents a growth of 104% from USD 47 billion in 2018. Meanwhile, Google Play is projected to reach USD 60 billion in global spend, up 140% from USD 25 billion in 2018. This means Google will likely continue to close the gap from the market leader Apple.

According to Sensor Tower one of the key revenue drivers is growing smartphone and app usage, boosted by improved network performance. Google Play is also projected to grow more heavily than Apple’s App Store in Latin America and Africa with estimated revenue growth at over 400% in both regions between 2018 to 2023. Overall, according to Sensor Towers predictions China will still dominate followed by North America, Japan and South Korea. (http://www.businessofapps.com/news/mobile-users-to-spend-156-billion-on-apple-and- google-app-stores-by-2023/amp/)

Further market data (Q1 2019 estimates and geographical distribution (see appendix)

REDEYE Equity Research Flexion Mobile 6 May 2019

Why an alternative Android market? Google owns most of the western Android app sales market. However, hardware manufacturers such as Amazon, Samsung, Huawei, Xiaomi, Oppo, Vivo, and Lenovo, among others, have their own app stores.

Business perspective It is easy to understand the demand for other app stores from a business perspective. Of course, companies want a bite of this huge business opportunity.

Margin pressure – Margins on hardware are steadily being reduced due to more intense competition and companies need to generate margins from software instead to achieve sustainable profitability. A successful gaming strategy is key for them to attract users to their eco-system.

Regulatory pressure – The regulators in Russia, Korea, and other larger markets are working to reduce the dominance of both Google and Apple. As part of an antitrust settlement in Europe, device manufacturers now must pay a license fee of up to EUR 50 per device to enable access to Google Play for end consumers. This will erode their margins even further and is spurring them into getting their own app stores into the market.

Developer’s perspective – It is also easy to understand the demand for an alternative market from a developer’s perspective. Competition is fierce amongst mobile game developers and it is hard to gain marketing efficiency, making it challenging to create games that are profitable and rendering user acquisition expensive.

User perspective Why an increased number of app stores should be interesting for end-users is more difficult to understand, however. Below we list a number of reasons why users might venture beyond Google Play.

Discovery – Apple and Google's duopoly has made their stores too mainstream, with a “one size fits all” approach. It is hard for users to find new games and apps that suit their personal preferences. For example, some app stores have a specific focus and a smaller selection of app selection that have been filtered for quality, age group or purpose.

Smaller app stores also have a more limited app library, with curated apps and games, making it easier to find the best apps.

Free apps and promotions – Many alternative app stores feature a free app of the day, a discounted premium app, or a money-saving offer. For example, Amazon has been very successful with its so-called “Coin promotions” and has converted users from Google Play to the Amazon Appstore.

Domestic stores – Apple’s App Store and Google Play are primarily western stores. Demand for stores that prioritise cultural differences with local payment solutions is therefore obvious. India, South East Asia, South Korea, and countries in the Middle East, for example, have regional games with regional pricing.

User preference – Users like what looks familiar. A loyal Amazon user would probably prefer an Amazon store to something different.

Exclusive content – Some app stores specifically cater to different countries and may offer localised apps users wouldn’t otherwise find. The most current example of this is Fortnite’s exclusive launch on Samsung with specially designed features (skins).

REDEYE Equity Research Flexion Mobile 6 May 2019

Business model

As described above, the landscape is becoming increasingly technologically and commercially fragmented. Consequently, distribution channels often use their own technologies, such as proprietary payment systems. Distributing to a new channel involves a set of specific steps, ranging from game development to payment integration and channel management. When distributing to the wider open market, developers are exposed to additional regulations, specifically for payments. Moreover, cost and complexity rise further when distributing to multiple channels.

The developer's dilemma Investing in new distribution is not always cost-effective for developers, as new channels also often have far longer payback times than user acquisition or feature investments in existing distribution. To successfully distribute to many stores, developers need to divert resources from their core business of making games.

This leaves them with a dilemma:

1. Invest in long-term growth through diversified distribution but risk losing short-term momentum in existing stores. 2. Defend a position in existing stores by foregoing new channel investments.

Neither scenario is preferable. Developers struggle to balance the investment decision, and many end up foregoing investments in diversified distribution. As a result, many channels are missing out on content. Open market distribution channels could be growing faster with more quality content, and effective ways of eliminating this dilemma could lead to even stronger overall market growth than today.

Revenue share model Flexion operates a simple revenue share model, taking a percentage of payments made for distributed games.

Flexion handles all payment transactions in distributed games. The percentages vary considerably depending on what role each party has played. We show a typical flow below (illustrative purposes only). In this example, USD 70 represents Flexion’s revenue and USD 56 is its cost of sales, leaving a gross profit of USD 14, which is equivalent to a 20% gross margin. Note that the payment flow may differ if Flexion provides the billing services as well.

The company has two sets of partners: game developers, and distribution channels. In addition, its activities also have a direct impact on end-users.

REDEYE Equity Research Flexion Mobile 6 May 2019

Game developer offering: For developers, Flexion is a full-service distribution partner with a better understanding of the alternative distribution channels and more resources to manage these channels than individual developers.

Flexion is integrated with a broad spectrum of distribution channels, ranging from global players such as Amazon and Samsung through to regional or local stores in emerging markets. According to Flexion, it arguably has the largest footprint in the market in terms of distribution to stores beyond Google Play and China.

Distribution channel offering: For distribution channels, Flexion is a content partner. Using Flexion’s portfolio of games, distribution channels can scale their revenue and content offerings, focusing on retailing and ensuring their overall store user numbers grow, allowing Flexion to manage the relationships with developers.

End-user impact: Irrespective of which store an end-user uses to download a game from Flexion’s portfolio, Flexion is part of the end-user experience. End-users interact with Flexion- enabled features such as payment or upgrade management. Freemium games are updated frequently. The upside of this is that new features can be rolled out swiftly to an entire user base, more or less automatically, via the Flexion platform. Flexion controls the upgrade flow and can migrate a user base to a new game version within hours.

The Flexion platform

Channel portfolio Amazon Appstore was founded in 2011 to sell apps for its own hardware: Kindle readers and later Fire OS tablets. The app store is pre-installed on those devices and they do not have Google Play store. (Amazon has also launched a 3rd party Android app store and promotes this to all its customers.) The biggest audiences for Amazon Appstore are in Europe and North America, which means comparatively low downloads but higher monetisation than Google Play, for example.

In comparison to Google Play, Amazon also has strong content guidelines and a more efficient app approval process, avoiding the store being overloaded with lower-quality apps or, for example, malware (a virus that steals user data).

Monetisation index flurry.com also states that Amazon only has 10% lower monetisation than Apple’s App Store and almost 300% better than Google Play. After some input from European mobile game publishers we estimate the Amazon Appstore generates annual revenues of approximately USD 0.5 billion (1% of Apple and Google’s combined market share).

Samsung Galaxy Store seems to have lost some of its market momentum in the last two years. In China, the market leader was on the top 10 list amongst the app stores with the biggest monthly active users (MAU). In April 2017, its MAU was around 24 million. Today, however, its 4 million MAU is only 1.6% that of Tencent’s App Store. (https://www.appinchina.co/market/app-stores/)Despite the fairly even monetisation between the different app stores, this means Samsung App Store only generates annual revenues of USD 80 million in China, and approximately USD 160 million (including South Korea) worldwide.

Huawei App Gallery is China’s second-largest Android app store, with estimated revenue of USD 1.9 billion in 2018. (https://www.appinchina.co/market/app-stores/)

REDEYE Equity Research Flexion Mobile 6 May 2019

As only 14% of Flexion’s revenue comes from Asia, we believe only a few minor games from the company have been published in Huawei’s non-Chinese test store so far and not yet in its main store. Chinese local games rarely work very well in western countries and vice versa. Huawei launched its app store globally in April 2018. This market push should benefit Flexion as a global app store needs a more even spread of geographically adapted content.

ONE Store is a regional app store in South Korea in the early stages of collaboration with Flexion. Google Play dominates the market in South Korea, with an estimated 60% market share, followed by Apple App Store and One Store in joint second position, with 20% market share each. In late 2018, ONE Store started to challenge Apple and Google’s high commissions with a distribution fee of 20% (rather than 30%). This market move increased its rates of games released by 72% in Q4 2018. During the second half of 2018, the app store had revenue growth of almost 60% and reached monthly revenues of USD 35 million. ONE Store had revenues of approximately USD 400 million in 2018. (https://m.post.naver.com/viewer/postView.nhn?volumeNo=17444089&memberNo=340594 80&vType=VERTICAL)

KDDI is a telecom company based in Japan that Flexion says it is in the early stages of working with. KDDI offers a so-called “Smart Pass” subscription service to its customers. The subscription service has been a success over the past year according to KDDI.

Our estimates indicate that the smart pass premium service has 20 million customers at present and is still growing strongly. We believe the service has annual revenues of about USD 400 million, of which about USD 280 million comes from AU Smart Pass subscriptions and the rest from the company’s Appstore AU Games. (https://www.kddi.com/english/corporate/ir/ir-library/presentation/2018/)

Revenue distribution According to Flexion’s latest quarterly report, the company’s geographical revenue distribution looks like this:

Company: Sales per region

2% 14% N America 42% Europe Asia Other 42%

Source: Flexion Mobile

North America and Europe account for 84% of total revenue. In Flexion’s communication, Amazon Appstore and Samsung are stated as the company’s main channels.

REDEYE Equity Research Flexion Mobile 6 May 2019

Most of Flexion’s games portfolio is also represented in those two channels. According to our research, the Amazon Appstore generates about 350% more revenue than the Samsung App Store. However, Flexion has published more games in Samsung’s App Store and has a longer relationship with Samsung.

We therefore believe Samsung represents a larger share of its revenue than the global market size relationship between the two app stores would suggest. Currently, only 14% of total revenue comes from Asia, which probably means ONE Store, KDDI, Huawei, and Alibaba Group represent a relatively small share of total combined revenue.

Flexion Channels Name Flexion rev. Est. total rev. Amazon App Store 63% 450 mUSD Samsung App Store 23% 160 mUSD ONE Store 7% 400 mUSD KDDI 4% 400 mUSD Huaw ei AppGallery 2% 1900 mUSD Others 1% Unknow n

Source: Redeye Research

Games portfolio In the last three months Flexion has signed the largest deals in its history according to the press releases. The name of the games and which game developers was however not stated in the press releases. We have searched the Amazon Appstore to find which games cite Flexion Mobile as their developer contact.

Everything indicates that the big deal signed just before Christmas 2018 was with US rising star Scopely. The mobile game studio just announced it has hit a USD 400 million run rate with its game portfolio.

The biggest contributor to this is the newly released “Star Trek: Fleet Command” game. According to Sensor Tower Star Trek generate USD 4 million each month on Google Play.

Scopely also has four other top-tier titles, including “The Walking Dead: Road to Survival”, “WWE Champions”, “Looney Tunes: World of Mayhem” and “Yahtzee with Buddies”. All games are generating approximately USD 2 million each month according to Sensor Tower. These four games are now distributed by Flexion in the company’s main channels. Star Trek is Scopely’s highest grossing game so far and we believe Flexion must prove itself before Scopely will considering using Flexion on this title as well.

Flexion’s second-largest single game ever signed was announced in a deal on February 19, 2019. The only information we have received is that the deal was made with a major film studio. The only game we could find in the top grossing lists that fulfils both criteria and is not already released on the Amazon Appstores with another company as a developer contact is “MARVEL Strike Force”, developed by Foxnext Games, a subsidiary of 21st Century Fox. The game is the debut for Foxnext Games, which includes the former Los Angeles team from Kabam Studios. During its most profitable month so far, the game – which was released on March 28, 2018 – generated revenues of USD 8.9 million.

On March 27, 2019, Flexion announced a contract for its largest game to date. Based on the information in the press release, we believe the game is “Guns of Glory” from the developer Funplus, published by China’s Diandian Interactive.

REDEYE Equity Research Flexion Mobile 6 May 2019

Investors can read two important comments in the press release: “The distribution agreement allows Flexion to distribute the game in most of its main channels”, and “We don’t know yet how big the game will be in our channels but could potentially double our revenue over time”.

An interesting note about this co-operation is that the same publisher chose to publish its previous blockbuster, “King of Avalon”, itself. Obviously, the company has subsequently seen many benefits in Flexion’s full-service offering, which we consider a sign that Flexion fills a gap in the market.

Flexion's game portfolio Name Developer Revenue/m IAP Rev Cut Gross P Guns of Glory Funplus 10 000 500 8% 40 Game of Sultans Mechanist Games 7 000 420 8% 34 MARVEL Strike Force Foxnext Games 3 000 300 8% 24 Yahtzee w ith Buddies Scopely 2 000 200 15% 30 WWE Champions Scopely 2 000 200 15% 30 Walking Dead: Road to… Scopely 2 000 200 15% 30 Looney Tunes: World of… Scopely 2 000 200 15% 30 Legacy of Discord Youzu 1 600 160 20% 32 Rise of Kings Onemt 1 000 100 20% 20 My Story Nanobit 700 70 20% 14 Star Trek Timelines Tilting Point 500 50 20% 10 Wheel of Fortune Scopely 400 40 15% 6 Animation Throw dow n Kongregate 400 40 20% 8 Alchemist Code Gumi 200 20 20% 4 Fancy Blast Fenomen Games 50 5 20% 1 Rise of Ragnarok Youzu 28 3 20% 1 Total 32 878 2 508 313

Source: Sensor Tower, Amazon App Store, Redeye Research

A clarification of the metrics in the table above:

Revenue/m: Monthly revenue from Google Play based on estimates from data research provider Sensor Tower. These estimates are not always accurate. For example, Flexion’s press release declared that the new top 10 grossing game (“Guns of Glory” in the table) made approximately USD 15 million per month. According to Sensor Tower, however, the game made USD 10 million per month. To make the size ratios fair we use Sensor Tower data throughout the table.

IAP (in-app purchases): We estimate that the games in Flexion’s portfolio generate about 10% additional revenue on top of Google Play’s revenue. Currently, close to 99% of Flexion’s total revenue is from in-app purchases in games.

Rev Cut (revenue cut): Every contract is likely to have a different revenue share. In its IPO prospectus, Flexion provided an illustration that approximately 14% of end-user spending is the company’s revenue share. This means 20% of revenues from the app store after platform costs of 30%. In the table, we estimate that revenue share depends on Flexion’s negotiating strength in each specific deal. The bigger the game, the lower the revenue share.

REDEYE Equity Research Flexion Mobile 6 May 2019

Gross P (gross profit): Like Spotify, Flexion also has a very low gross profit margin for a software company. The explanation for this is simple: Flexion is a service platform, rather than a content owner. Currently, its gross profit margin is 17.6%.

The so-called top-tier titles are shown bold in the table above. All the games in the list have been released or will be released on the Amazon Appstore. Most of them have also been distributed on Samsung/Galaxy App Store. More famous games, such as “World of Tanks Blitz” and “Talking Tom”, have only been released on Samsung’s marketplace.

The top three games in the list above account for almost 50% of total revenue of the titles listed. That the revenue distribution of the largest games represents almost all is in line with the market dynamics as a whole in the mobile gaming market.

Flexion’s market opportunity Flexion’s main focus in its “go to market” strategy is alternative Android app stores in markets outside of China. According to the company, this market opportunity is worth approximately USD 2 billion each year. Summarising Flexion’s current channel portfolio’s market value, we believe it is worth approximately USD 1.5 billion (excluding Huawei China). In Flexion’s IPO prospectus, the company estimated that this segment will grow to USD 5 billion in 2021. Flexion has started targeting the western markets and is slowly building up momentum in Japan, South Korea and South East Asia.

We see some potential growth drivers. For example, we believe Epic Games will launch a mobile store as a follow-up to Epic Store, which was recently launched on PC. Last year, Epic Games deserted Google and launched the world’s highest grossing game on Android outside Google Play. Likely, Epic and similar competitors to Google will lower the distribution fee paid by developers to attract content to its stores. Epic has already done so on the PC market to challenge Steam, the dominant marketplace there. We also believe smartphone manufactures such as Oppo and Vivo will try to enter the western markets as they gain hardware market share. Content providers and hardware manufacturers alike are thus likely to challenge Google, and regulatory pressure on Google will intensify this trend in Europe.

Competition The most obvious competition comes from developers conducting distribution themselves, and the alternative Android channels try to make it easier for them. For example, Amazon has made it easier for developers to integrate new games into its channel. This may entice some developers to distribute directly with some stores.

Growth opportunities

We believe Flexion’s business model includes multiple opportunities to grow:

Platform/network effects:

✓ Increased number of games – by adding games to its platform, Flexion can provide a continuously expanding offering to distribution channels and their end-users.

✓ Increased number of channels – by adding new channels to its platform, Flexion increases the reach to end-users who can play and spend in Flexion’s distributed games.

REDEYE Equity Research Flexion Mobile 6 May 2019

✓ Improved performance in existing stores – by building up knowledge of optimal performance in a channel – in terms of suitable games, promotion, and marketing efforts – Flexion can materially increase its revenue potential from a channel. This is key to attracting new games to the channel.

✓ High switching costs – after Flexion has built a strong relationship with a game developer, the company is likely to receive new games released by that same developer.

✓ Higher-earning games – as the distribution platform grows, it will be increasingly easy for Flexion to improve the quality of its game portfolio. This is likely to have a direct impact on Flexion’s revenues.

Market trends that enable growth:

Growth investment programmes by integrated channels: The majority of the channels that Flexion works with have their own growth strategies to increase their user bases. This will directly improve the revenue potential for the games that Flexion has live on those channels.

General market growth: By offering a distribution platform in a market with high expected growth, Flexion is likely also to benefit from this market growth.

Medium-term vision Flexion has communicated a medium-term vision to quantify its go-to-market opportunity. The company is currently working towards a portfolio of 100 high grossing games.

Top-tier games: Its goal is that one-third of the portfolio will be so-called top-tier games, which can be defined as those on Google Play’s top 100 grossing list. These games have an earnings potential of above USD 100 000 per month for Flexion.

Mid-tier games: Consequently, two-thirds of the portfolio should be mid-tier games. These have an earnings potential of USD 30,000 for Flexion. Simplified mid-tier games can be found on Google Play’s top 400 list of the highest grossing games.

Well positioned to win the game The founders Jens (CEO) and Per Lauritzson (COO) own 28% of Flexion. The shares are evenly distributed between the two brothers. They are typical entrepreneurs who have built the company for over 10 years with small cautious steps and are now moving towards a giant leap forward. We believe the two have built a strong network since they both have contributed to the creation of this relatively young industry.

The chairman of the Board, Carl Palmstierna (former CEO at ABG), owns 9% of the shares. In our opinion, the ownership structure is favorable and we anticipate that Flexion’s leadership will act in the interest of shareholders.

Currently the games in Flexion’s portfolio generate about 10% additional revenue on top of Google Play’s revenue. If a game generates USD 1 million per month, it can thus generate an additional USD 100,000 per month from Flexion’s channels. However, this can often be achieved when a game reaches a more mature level (typically 3-6 months on the channels). As Flexion adds more games on more channels, its platform grows and so its revenue potential increases.

REDEYE Equity Research Flexion Mobile 6 May 2019

Flexion currently has 6 top-tier games and 5 mid-tier games live in its channels. It has also announced 2 more top-tier games in the near future. Flexion has taken some giant steps in recent months to realise its medium-term vision of gaining critical mass. If the company manages to sign some more top-tier games, it can probably sign many additional games without much further effort as a result of network effects.

We believe Flexion will continue to use its relatively stable cash position to invest in minimum guarantees, so as to maintain its market momentum. Thanks to its rapidly growing portfolio of content, we believe Flexion will become a more interesting option for channels.

REDEYE Equity Research Flexion Mobile 6 May 2019

Financial projections

In the last four months, Flexion has signed a portfolio of games that we believe has the potential to generate revenue growth of approximately 100% in 12 months. We estimate Flexion’s portfolio can potentially generate about 7-10% additional revenue on top of Google Play’s revenue in a long-term perspective. Currently, close to 99% of Flexion’s total revenue is from in-app purchases in games.

Based on these assumptions, we estimate the largest games in Flexion’s current portfolio have the potential to generate revenue of some USD 1.94 million quarterly (GBP 1.49 million). Given our assumptions regarding revenue share for the games listed below, Flexion’s quarterly gross profit is USD 359,000 (GBP 276,000).

Flexion's mature games Name Developer Revenue/m IAP Rev Cut Gross P

Walking Dead: Road to… Scopely 2 000 200 10% 20 Legacy of Discord Youzu 1 600 160 20% 32 Rise of Kings Onemt 1 000 100 20% 20 My Story Nanobit 700 70 20% 14 Star Trek Timelines Tilting Point 500 50 20% 10 Animation Throw dow n Kongregate 400 40 20% 8 Alchemist Code Gumi 200 20 20% 4 Fancy Blast Fenomen Games 50 5 20% 1 Rise of Ragnarok Youzu 28 3 20% 1 Monthly 6 478 648 110 Quarterly 1 943 329 Source: Sensor Tower, Amazon App Store, Redeye Research

In Flexion’s latest quarterly report, the company announced IAP revenue of GBP 1.24 million and gross profit of GBP 222,626, which suggests that our assumptions for the revenue distribution between its largest revenue drivers should be fairly correct, with a difference of 20% on total revenue.

If we look at the revenue potential of the newly signed deals, we see a potential quarterly revenue boost of USD 7 million for these seven titles alone in the long term. For several reasons, however, the revenue boost will not be explosive in the short run. For one thing, Flexion spends almost nothing on user acquisition at present. Despite the company only working with games with proven monetisation, the current user base already plays the game downloaded from other app stores, which means Flexion needs to attract new players. Organic growth is a relatively dependable strategy, but it is also safe to say that this will take time.

Flexion's grow th drivers Name Developer Revenue/m IAP Rev Cut Gross P Guns of Glory Funplus 10 000 1 000 5% 50 Game of Sultans Mechanist Games 7 000 420 8% 34 MARVEL Strike Force Foxnext Games 3 000 300 7% 21 Yahtzee w ith Buddies Scopely 2 000 200 15% 30

WWE Champions Scopely 2 000 200 10% 20 Looney Tunes: World of… Scopely 2 000 200 10% 20 Wheel of Fortune Scopely 400 40 10% 4 Monthly 26 400 2 360 179 Quarterly 7 080 536 Source: Sensor Tower, Amazon App Store, Redeye Research

REDEYE Equity Research Flexion Mobile 6 May 2019

Flexion has communicated that it will take 3-6 months for it to build up an acceptable user base. This means it will take 6-12 months for most games to generate significant revenue; players must become loyal and start spending money in the game (in-app purchases).

Timing issues are another key factor when trying to gain momentum in popularity. Channels can offer a promotion for newly released games, but the timing of this promotion typically depends on the channel’s promotion schedule.

We estimate the “Guns of Glory” game has the potential to generate 5% additional revenue on top of Google Play’s revenue, largely because the game will certainly only be published in Amazon Appstore. For conservative reasons we also expect the newly signed “Game of Sultans” have the potential in generating approximately 6% additional revenue on top of Google Play’s revenue.

Flexion is a small company that wants to optimise cost efficiency. Having signed large blockbuster games for the first time, the company needs to prove it can manage high-quality releases for the rest of the market. Investors can read an important comment on this in Flexion’s Q2 18/19 report, where co-founder and CEO Jens Lauritzson wrote: “Currently, we can deploy and support three new games per month in existing channels”. Scalability in Flexion’s business model is therefore somewhat limited.

An interesting comment in the press release regarding the Scopely agreement in late December was that it will affect profitability in the following quarters. The company stated: “As an incentive, the agreement also includes a partial revenue share reduction on an existing game and this is expected to impact margins in the short term”. We believe this means a lower revenue share on Flexion’s current highest grossing game, “The Walking Dead: Road to Survival”, for the subsequent 6-12 months.

Our expectations for Flexion’s coming Q4 18/19 report:

Flexion Mobile : Estimates GBPm 18/19 Q3 18/19 Q4E 18/19E Revenue 1.26 1.38 4.83 Cost of Revenue -1.04 -1.20 -3.93 Gross profit 0.22 0.18 0.90 Gross margin 18% 13% 19% Staff -0.52 -0.56 -2.18 Other OPEX -0.42 -0.26 -0.96 EBITDA -0.72 -0.64 -2.24 D&A -0.02 -0.02 -0.07

EBIT -0.74 -0.66 -2.31 Revenue growth 155% 92% 135% EBIT margin -59% -47% -48% Source: Redeye Research

We expect the revenue growth from newly added games will barely be visible in the Q4 18/19 results. Gross profit will, however, be lower than in the previous quarter owing to the impact of the revenue share reduction on “The Walking Dead” and because of lower revenue share on the newly added games.

Other opex is called “Other Overhead” in the quarterly reports, but our forecast for this also includes share-based payments. The last quarter’s other opex was primarily impacted by a one-off technical integration fee of GBP 191,314 stemming from the Scopely agreement signed during that quarter. In our estimate for Q4 18/19, we do not assume additional technical integration costs from the two newly signed top-grossing games.

REDEYE Equity Research Flexion Mobile 6 May 2019

12 months view

We expect annual revenue growth of 124%. Growth rates will gradually increase on a quarterly basis, in our view, with modest growth rates for the coming two quarters (18/19 Q4 and 19/20 Q1). Flexion will engage with some games and channels that ultimately underperform and others that overperform, meaning growth may come in fits and starts on a quarterly basis.

As it is almost impossible to estimate these growth surges in the short term, we take a more conventional approach and estimate a gradual growth rate increase.

For conservative reasons, our base-case scenario estimates that less than half of the potential revenue growth from the newly signed games will be obtained within 12 months from launch. Technical and commercial delays are two factors that can dampen overall revenue growth.

Flexion Mobile: Revenue projection

4 000

3 500

3 000 1 974 2 500 1 291

2 000 893 (GBPm) 400 1 500 210 1 000 1 749 1 736 1 440 1 260 1 337 500 1 170

0 18/19 Q3 18/19 Q4E 19/20 Q1E 19/20 Q2E 19/20 Q3E 19/20 Q4E

Current Growth

Source: Redeye Research

The partial revenue share reduction for Flexion’s biggest current revenue contributor is likely to put some pressure on gross profit in the next quarter. Meanwhile, implementation of the new blockbuster titles will also have a minor impact on gross profit, according to our estimates.

Flexion Mobile: Revenue & Gross profit

4000 600

3500 500 3000 400 2500

2000 300

Sales(GBP) 1500

200 (GBP) Grossprofit 1000 100 500

0 0 18/19 Q3 18/19 Q4E 19/20 Q1E 19/20 Q2E 19/20 Q3E 19/20 Q4E

Revenue Gross profit

Source: Redeye Research

REDEYE Equity Research Flexion Mobile 6 May 2019

2-3 years from now

Due to a higher concentration of top-tier games with an estimated lower revenue share, Flexion’s gross margin should likely gradually decrease in the coming 1-3 years. In the long term, Flexion’s negotiating strength will improve if it can grow its platform to a sufficient size. In our estimates, we assume that Flexion will prioritise growth ahead of profitability.

We anticipate no dramatic changes in operational costs in the coming years. Our estimates predict the first impact from explosive revenue growth in 2021. To more easily attract prospects Flexion has offered a minimum guarantee. If the company estimates that these minimum guarantees can be paid back, these investments will only be visible in Flexion’s operating cash flows. According to our calculations, these minimum guarantees will have only a minor impact on “Other opex”.

Flexion Mobile : Estimates GBPm 19/20 Q1E 19/20 Q2E 19/20 Q3E 19/20 Q4E 19/20E 20/21E 21/22E Revenue 1.84 2.23 3.04 3.71 10.82 18.82 25.32 Cost of Revenue -1.59 -1.92 -2.60 -3.18 -9.29 -16.28 -21.65 Gross profit 0.25 0.31 0.44 0.54 1.53 2.54 3.67 Gross margin 13% 14% 14% 14% 14% 14% 15% Staff -0.58 -0.58 -0.55 -0.59 -2.29 -2.54 -2.66 Other OPEX -0.32 -0.42 -0.45 -0.28 -1.46 -1.56 -1.64 EBITDA -0.65 -0.68 -0.56 -0.33 -2.22 -1.56 -0.63 D&A -0.02 -0.02 -0.02 -0.02 -0.07 -0.10 -0.13 EBIT -0.67 -0.70 -0.57 -0.35 -2.29 -1.66 -0.75 Revenue growth 77% 94% 141% 168% 124% 74% 35% EBIT margin -36% -31% -19% -9% -24% -9% -3% EBIT-margin on Gross profit -270% -225% -131% -65% -149% -65% -20% Source: Redeye Research

Valuation

Long-term EBIT-margin

While Flexion is a first mover, the dominance of its area is likely to be settled over the next 2-3 years. The biggest question in the Flexion case is how good the company will be able to scale. With the company’s cost-efficient approach, we believe the company will have to grow its revenues 5 times (GDP 25 million) in our base-case scenario before it becomes profitable.

However, the company has communicated a medium to the long-term goal of a sustainable gross margin of 20%. If that is the case the scalability in the business model will be shown when revenues are less than 3 times higher, which could be the case in approximately two years from now.

If Flexion succeeds in gaining a market position with a sustainable competitive advantage the reward could be notable. In our opinion, Flexion will have to be one of the market leaders in this small niche to obtain an EBIT-margin of around 10%.

REDEYE Equity Research Flexion Mobile 6 May 2019

Case scenarios

Base case – SEK 17

Our base case scenario forecasts three years of explosive growth with a CAGR of 78%. This reflects Flexion’s first-mover opportunity and its growth from a low base.

The industry is changing rapidly, which makes a more conservative approach to long-term prospects preferable. We expect significantly slower growth from 2023 and beyond (12-20%).

The key question is how strong Flexion’s competitive advantage will be in the future. The platform’s strength will determine sustainable profitability. The company has communicated a long-term goal of a sustainable gross margin of 20%.

In our base case we factor in a gross margin of below 20% until 2024. We assume content owners (mobile game publishers) of top-grossing games will continue to have a bargaining power for years to come. When a larger share of total revenue in Flexion’s game portfolio comes from top-grossing games, a margin squeeze is most likely.

In our base case we expect Flexion’s EBIT margin to peak around 12-15% in 2023-25. Terminal EBIT margin (2026 and beyond) is set at 12%. Terminal growth is 2%.

Bull case – SEK 50

Our bull case scenario forecasts CAGR somewhat above 90% over the next three years.

The main difference between our base and bull cases is our long-term expectations. In this scenario we expect Flexion to execute its medium-term vision faster, building a strong platform over the coming years. In this scenario we expect Flexion to achieve a CAGR of 30% in the 2022-25 period.

We forecast a gross margin around 22-25%, while the EBIT margin will peak around 16-20% in 2023-25. Terminal EBIT margin (2026 and beyond) is set at 15-17%. Terminal growth is 2%. In this scenario, Flexion is one of the top three biggest players in its niche.

Bear case – SEK 5

In our bear case scenario, we expect a CAGR of 56% the next-coming three years. The industry changes rapidly which means a more conservative approach about long-term prospects is preferable. We expect single-digit growth from 2023 and beyond (6-9%).

In our bear- case we expect a gross-margin around 15%. Game publishers will have strong bargaining power. In the longer term, only 3-4 big players in the app store market will dominate. In this scenario, Flexion’s value to developers will decline.

Minimum Guarantees will impact the income statement when the games signed does not deliver on Flexion’s estimated revenue projection. Even with proven success on the dominant app stores, the games could still underperform in other channels.

In our bear-case, we expect Flexion’s EBIT-margin will peak around 6-9% in 2023-2024. Terminal EBIT-margin (2026 and beyond) is set to 5-6%. Terminal growth is 2%.

REDEYE Equity Research Flexion Mobile 6 May 2019

Peer-valuation

Peer valuation SALES EV/Sales EV/EBIT EBIT margin CAGR Company EV (MSEK) 2018 2019E 2018E 2019E 2020E 18-21E 2018E 2019E

Mobile game publishers Zynga 44 377 3.9x 3.1x 21x 16x 14x 23% 19% 19% GLU 14 272 3.4x 2.9x 27x 18x 17x 19% 12% 16% G5 Entertainment 721 0.5x 0.5x 5x 5x 4x 3% 10% 11%

Median 14 272 3.4x 2.9x 21x 16x 14x 19% 12% 16%

B2B SaaS Fortnox 6 637 13.4x 10.9x 44x 33x 26x 25% 30% 33% Talenom Oyj 2 675 4.3x 3.9x 21x 19x 16x 16% 20% 21% Admicom Oyj 1 939 11.8x 9.0x 30x 23x 18x 30% 40% 39% Lime Tech. 1 673 5.9x 5.0x 30x 24x 18x 16% 20% 21% Aspire Global 1 631 1.1x 1.0x 7x 7x 6x 21% 16% 15%

Median 2 307 8.8x 7.0x 30x 23x 18x 21% 25% 27%

Tech software/platform - High Growth Netflix 1 605 845 6.8x 5.7x 43x 30x 24x 18% 16% 19% Spotify 225 459 3.2x 2.6x n.m. n.m. 309x 26% -3% -1% Huya 39 791 4.1x 3.1x 65x 30x 18x 39% 6% 10% Smart Eye 1 341 18.0x 9.1x n.m. n.m. 9x 97% -78% -16% Imint 124 2.7x 1.8x n.m. 8x 4x 42% -4% 23% XMReality 75 3.4x 1.8x n.m. n.m. 15x 91% -114% -39%

Median 20 566 3.7x 2.8x 54x 30x 16x 41% -4% 5%

Peer Group median 14 272 3.7x 2.9x 30x 23x 16x 21% 12% 16% Flexion 430 3.2x 1.8x -15x -21x -46x 74% -21% -9% at Base-case 646 4.8x 2.8x -23x -31x -69x

Source: Bloomberg & Redeye Research *Redeyes ow n estimates

A peer valuation is most often used in conjunction with the DCF valuation to derive with an estimated fair value of a company. For Flexion we believe that the peer valuation levels are of and gives limited insight, mainly because there is no direct peer to Flexion that are publicly traded. Despite this we use a peer table mainly consisting of mobile game publishers and high-growth tech companies. To get a better understanding of the valuation levels we choose to divide the peers into three groups:

• Mobile game publishers have a relative low valuation compared to the other peer groups with EV/Sales around 3x and EV/EBIT around 16x based on estimates for 2019. Mobile game publishers often have a low diversification in its game portfolio and long-term growth prospects could be considered as relative uncertain in this young and highly competitive landscape.

• B2B Software as a Service (SaaS) companies has a higher valuation multiple. Growth projections in our peer-table is similar to the mobile game publishers, but profitability shown in EBIT-margins is almost the double as high. Those companies often have more sustainable recurring revenues. sometime patented technologies

• The last peer group is tech software companies. Netflix and Spotify is two of the biggest platform companies in the entertainment business. Huya can be explained as “Netflix in China”. All companies in this peer group is in a growth phase were growth is prioritized before profitability. Smart Eye, Imint and XMReality is small/micro cap companies covered by Redeye with patented technologies and high growth prospects.

REDEYE Equity Research Flexion Mobile 6 May 2019

Appendix

Flexion’s enabling technology

The basic conversion process looks as follows.

1. A game file is submitted to Flexion as part of a game’s normal submission or update cycles.

2. The file is processed by Flexion’s enabling technology (often referred to as a wrapper) which creates a number of new versions – one per distribution channel. After initial set up, processing and converting a file takes just minutes to complete and encompasses the following basic steps:

✓ Flexion’s wrapping engine analyses the game file and identifies required changes based on pre-defined settings.

✓ Flexion’s wrapping engine undertakes modifications to the game, adds required code for new features and components and adds Flexion specific components to ensure new features function correctly.

✓ The process completes with the wrapping engine saving the completed file (which is now ready for distribution without further work).

The two last steps are repeated automatically in order to produce a variant for each distribution channel to which the game should be delivered.

3. Flexion’s operations team undertakes automated or manual quality assurance and thereafter delivers converted files to relevant channels.

The process is largely industrialised and Flexion performs thousands of wrapping operations monthly as part of its business operations.

Developers can also choose to build the game for the open market at start. This is achieved by integrating parts of Flexion’s core technology directly into a game (using Flexion’s so-called SDK). With this solution, developers do not need to integrate and test channel specific features or payments, as this is a part of Flexions full-service offering.

REDEYE Equity Research Flexion Mobile 6 May 2019

Management The text has been completely retrieved from the company’s website.

Jens Lauritzson, CEO (14% of capital) Founder. Experience: Sales manager, UK Aspiro Managing Director Popwire Limited Deal maker and leader with one of the strongest networks of mobile industry contacts developed over the last 20 years. As a pioneer & entrepreneur there are not many things he has not seen in terms of mobile games. Before founding Flexion Jens worked for several mobile games and content aggregators in Europe. Warrants: 74 000

Per Lauritzson, COO (14% of capital) Founder. Experience: Polopoly and Swedish Trade Council A positive thinker and true problem solver, Per has +15 years of hands-on experience in the web and mobile start up space. Per has been instrumental in building up Flexion's organisation from scratch, setting up and recruiting for offices in London, Stockholm and Budapest. Before founding Flexion, Per worked for the Trade Section of the Swedish Embassy in London where he advised technology companies on how to be successful in overseas markets. Warrants: 61 750

Andreas Mac Mahon, CPO (0.18% of capital) Experience: Popwire, AMM Consulting A multitasker and out-and-out doer. Andreas has driven Flexion's product offering since the company's inception - guiding the offering through a decade of mobile ecosystem evolution. Beyond his engagement in product strategy and delivery, Andreas has architected Flexion's successful bid for €1,9 M EU grant funding. He also leads the company's ongoing patenting activities. Andreas has been in the mobile gaming and content space since 2005. Warrants: 361 750

Niklas Koresaar, CFO (0.12% of capital) 20 years within banking, fund management and start-ups in London and Dubai. Started within the shipping & offshore space generating, structuring, documenting and closing real asset investments on both project and corporate level at banks and the world leading fund Tufton Oceanic. Niklas left the space in 2010 to work with start- ups. He joined Flexion in 2014 to build up the finance team. Warrants: 437 500

Jonathan Williamson, CTO An industry veteran with 20+ years of extensive experience in software development and operations. Following more than a decade of various roles in network administration, software development and database administration, he has spent the last 12 years focussing on building large scale platforms for mobile apps and content distribution eco-systems. Has worked for Qualcomm on their content delivery systems (primarily on their large scale data warehouse) and later at Metaflow building their automated large scale app publishing tool. Joined Flexion in 2012.

Richard Raynor (Head of developer relations) 10 years at Flexion Rich has enjoyed over 22 years working in all areas of the mobile industry from mobile carriers to retail and in both tech and non tech roles. Following senior positions with Carphone Warehouse and Hutchison Whampoa he has spent the last 10 years working with the game developer community delivering profitable partnerships in alternative appstores and emerging markets with companies like Outfit7, Wargaming and Scopely.

REDEYE Equity Research Flexion Mobile 6 May 2019

Victor Horbach (CRO- Chief Risk Officer) Result oriented and P&L driven commercial leader with over 10 years’ experience in the Games industry. Victor has been spearheading new business opportunities and building teams to accelerate growth. Before joining Flexion he successfully managed teams at Spil games and Hachette Filipacchi, creating sustainable growth while pivoting businesses to web and mobile.

Mobile games market

Market growth in Q1 2019

Sensor Tower reports that mobile games revenue hit USD 14.6 billion in Q1 2019, growing 12.3% year-over-year and accounting for 76% of total app revenue. 59% of this revenue came from the App Store (USD 8.6 billion) a growth of 10.3% year-over-year. Google Play saw a larger 15.4% increase but still trailed at $6 billion. Eight of the top 10 mobile games in Q1 hailed from Asia. (https://www.pocketgamer.biz/asia/news/70499/global-mobile-gaming-revenue-hit-146-billion-in-q1-2019/)

App Annie estimates

Both Google Play and iOS saw their most lucrative quarter to date, surpassing 2018’s holiday season and highlighting mobile’s centrality in our lives. While iOS maintained a nearly 2x lead, consumer spend on Google Play grew 25% year over year.

REDEYE Equity Research Flexion Mobile 6 May 2019

China, the US, Japan, Taiwan and the UK continue to be large contributors to growth in consumer spend on iOS, and together made up 80% of iOS spend in Q1 2019. Hong Kong and France also saw strong year-over-year growth in market share of iOS consumer spend. On Google Play, the US, Japan, South Korea, Germany and Taiwan were the largest contributors to growth in consumer spend, and collectively made up 70% of total spend in the quarter. However, Russia and Indonesia saw meaningful strides in year-over-year growth in market share. Publishers should watch these markets in the quarters to come, particularly for potential expansion opportunities.

Similar to downloads, Games were a key driver of consumer spend on iOS and Google Play. This further supports the strategy behind Google and Apple’s plans to move into this space, especially given that mobile games saw 20% more spend than all other gaming platforms combined in 2018 — PC/Mac, handheld and home consoles. Among non-gaming apps, Entertainment was the #1 contributor of year-over-year consumer spend growth on iOS in Q1 2019, which bolsters Apple’s decision to launch its own subscription streaming service in 2019. After all, services and content are king.

(https://www.appannie.com/en/insights/market-data/mobile-hit-new-milestones-in-q1-2019/)

Geographical revenue distribution

In 2018, games accounted for 74% of consumer spend in the app stores. Mobile games was the fastest growing sector of the overall gaming market, beating consoles, PC/Mac, and handheld gaming. Mobile gaming will reach 60% market share of consumer spend in 2019, up 35 percentage points from 2013. China, the US and Japan are the top markets for mobile gaming consumer spend and accounted for 75% of spend in 2018. For both mature and emerging markets, consumer spend in games grew rapidly from 2016 to 2018.

(Source: The state of Mobile 2019- App Annie report)

REDEYE Equity Research Flexion Mobile 6 May 2019

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: 7.0

Flexion has a good cost control that is managed in a risk-conscious manner that should benefit its shareholders in the long term. Large parts of management have been in the business since the start more than a decade ago. Flexion recently became a listed company which makes it hard to determine some of our parameters about execution etcetera.

Ownership: 8.0

The founders Jens (CEO) and Per Lauritzson (COO) owns 28% of total capital in Flexion Mobile. The shares are evenly distributed between the brothers. The brothers are two typical entrepreneurs who have built the company for over 10 years with small cautious steps ready to take the next giant leap. We believe the two brothers have built a strong network since they both have had a part of the creation of this relatively young industry. The chairman of the Board, Carl Palmstierna (former CEO at ABG) owns 9% of the shares. In our opinion, the ownership is favorable which means that the leadership is expected to act in the interest of the shareholders. However, other key personnel has relatively low ownership with ownership below 0.2%. The CPO (Chief Product Officer) and the CFO (Chief Finance Officer) has a larger share of warrants which is positive, but we would like to see higher ownership in the management overall (excluding the founders).

Profit Outlook: 5.0

Unlike other companies in mobile gaming, Flexion's business model enables the company to control its risk – for example, by choosing games with proven monetization and replacing those that do not perform. Moreover, its primary strategy is organic growth, not user acquisition. As a platform company, it should be able to build a diversified portfolio with a high likely hit-rate. The mobile games market is expected to show high growth in the next coming years, especially app stores based on Android. Flexion is estimated to show a CAGR of almost 80% in the next three years. However gross margins are relatively low. We believe Flexion's market position is strong in its niche as a first runner. At this point, our model tells us the company only has temporary competitive advantage.

Profitability: 0.0

The company has recently made some major changes in its business model. With contracts with leading mobile games newly in place and its service platform now fully established, the company is set for explosive growth in the coming years. The company is not expected to grow with profitability until earliest 2021-2022.

Financial Strength: 7.0

With approximately SEK 80 million in cash and cash equivalents Flexion is considered to have a stable capital structure and is debt-free. Net sales are however low and the company has only a few paying customers (app stores/channels).

REDEYE Equity Research Flexion Mobile 6 May 2019

INCOMEPlease STATEMENT comment on2016 the changes2017 2018E in Rating 2019E factors…… 2020E DCF VALUATION CASH FLOW, MGBP Net sales 1 2 5 11 19 WACC (%) 11.7 % NPV FCF (2018-2020) -6 Total operating costs -2 -3 -6 -13 -20 NPV FCF (2021-2027) 16 EBITDA 0 -1 -1 -2 -1 NPV FCF (2028-) 36 Depreciation 0 0 0 0 0 Non-operating assets 7 Amortization 0 0 0 0 -1 Interest-bearing debt 0 Impairment charges 0 0 0 0 0 Fair value estimate MSEK 646 EBIT 0 -1 -1 -2 -2 Assumptions 2017-2023 (%) Share in profits 0 0 0 0 0 Average sales growth 51.1 % Fair value e. per share, SEK 17.0 Net financial items 0 0 0 0 0 EBIT margin -2.6 % Share price, SEK 12.0 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 0 -1 -1 -2 -2 Tax 0 0 0 0 0 PROFITABILITY 2016 2017 2018E 2019E 2020E Net earnings 0 -1 -1 -2 -1 ROE 0% -19% -13% -40% -39% ROCE -15% -19% -13% -34% -22%

ROIC 0% 3691% 123% 820% -96% BALANCE SHEET 2016 2017 2018E 2019E 2020E EBITDA margin -12% -40% -16% -21% -5% Assets EBIT margin -12% -41% -17% -21% -9% Current assets Net margin -28% -41% -17% -19% -7% Cash in banks 2 7 6 6 6 Receivables 1 1 2 5 9 DATA PER SHARE 2016 2017 2018E 2019E 2020E Inventories 0 0 0 0 0 EPS -0.01 -0.02 -0.02 -0.05 -0.03 Other current assets 0 0 0 0 0 EPS adj -0.01 -0.02 -0.02 -0.05 -0.03 Current assets 3 8 9 11 15 Dividend 0.00 0.00 0.00 0.00 0.00 Fixed assets Net debt -0.05 -0.18 -0.16 -0.07 -0.02 Tangible assets 0 0 0 0 0 Total shares 41.13 41.13 41.13 41.13 41.13 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 VALUATION 2016 2017 2018E 2019E 2020E Goodwill 0 0 0 0 0 EV -2.2 -7.4 35.8 39.5 41.3 Cap. exp. for dev. 0 0 0 0 0 P/E 0.0 0.0 -51.8 -20.5 -31.1 O intangible rights 0 0 0 2 4 P/E diluted 0.0 0.0 -51.8 -20.5 -31.1 O non-current assets 0 0 0 0 0 P/Sales 0.0 0.0 8.7 3.9 2.2 Total fixed assets 0 0 0 2 4 EV/Sales -1.6 -3.6 7.4 3.7 2.2 Deferred tax assets 0 0 0 0 0 EV/EBITDA 13.5 9.0 -45.1 -17.6 -45.4 Total (assets) 3 9 9 14 19 EV/EBIT 13.0 8.8 -43.9 -17.3 -24.9 Liabilities P/BV 0.0 0.0 6.8 10.2 15.1 Current liabilities SHARE PERFORMANCE GROWTH/YEAR 16/18E Short -term debt 0 0 0 0 0 1 month -18.9 % Net sales 87.7 % Accounts payable 1 2 3 6 11 3 month 72.7 % Operating profit adj 119.1 % O current liabilities 0 0 0 0 0 12 month - EPS, just 47.0 % Current liabilities 1 2 3 6 11 Since start of the year 99,999,999,900.90.2 % Equity 68.4 % Long-term debt 0 0 0 3 5 SHAREHOLDER STRUCTURE % 0 % CAPITAL VOTES O long-term liabilities 0 0 0 0 0 Mobile Sensations Ltd 28.2 % 28.2 % Convertibles 0 0 0 0 0 Carl Palmstierna 9.1 % 9.1 % Total Liabilities 1 2 3 10 16 Sjätte AP-fonden 8.7 % 8.7 % Deferred tax liab 0 0 0 0 0 Zallaz SA 8.1 % 8.1 % Provisions 0 0 0 0 0 Claes Kalborg 0.3 % 0.3 % Shareholders' equity 2 7 6 4 3 Andreas Mac Mahon 0.2 % 0.2 % Minority interest (BS) 0 0 0 0 0 Niklas Koresaar 0.1 % 0.1 % Minority & equity 2 7 6 4 3

Total liab & SE 3 9 9 14 19

FREE CASH FLOW 2016 2017 2018E 2019E 2020E SHARE INFORMATION Net sales 1 2 5 11 19 Total operating costs -2 -3 -6 -13 -20 Reuters code FLEXM Depreciations total 0 0 0 0 -1 List First North EBIT 0 -1 -1 -2 -2 Share price 12.0 Taxes on EBIT 0 0 0 0 0 Total shares, million 41.1 NOPLAT 0 -1 -1 -2 -1 Market Cap, MGBP 42.3 Depreciation 0 0 0 0 1 Gross cash flow 0 -1 -1 -2 -1 MANAGEMENT & BOARD Change in WC 0 1 0 1 1 CEO Jens Lauritzson Gross CAPEX 0 0 0 -2 -2 CFO Niklas Koresaar Free cash flow 0 0 -1 -4 -2 IR Niklas Koresaar Chairman Carl Palmstierna CAPITAL STRUCTURE 2016 2017 2018E 2019E 2020E Equity ratio 70% 78% 68% 30% 15% FINANCIAL INFORMATION FY 2018/2019 Results June 19, 2019 Debt/equity ratio 0% 0% 0% 76% 167%

Net debt -2 -7 -6 -3 -1

Capital employed 0 -1 0 1 2

Capital turnover rate 0.4 0.2 0.5 0.8 1.0

ANALYSTS GROWTH 2016 2017 2018E 2019E 2020E Redeye AB Tomas Otterbeck Mäster Samuelsgatan 42, 10tr Sales growth 0% 50% 135% 124% 74% [email protected] 111 57 Stockholm EPS growth (adj) 0% 124% -3% 153% -34%

Kristoffer Lindstrom [email protected]

REDEYE Equity Research Flexion Mobile 6 May 2019

Redeye Rating and Background 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.

REDEYE Equity Research Flexion Mobile 6 May 2019

Redeye Equity Research team

Editorial Management Jim Andersson Björn Fahlén [email protected] [email protected] Eddie Palmgren Håkan Östling [email protected] [email protected] Mark Sjöstedt Technology Team [email protected]

Jonas Amnesten Johan Kårestedt (Trainee) [email protected] [email protected]

Henrik Alveskog [email protected] Life Science Team Anders Hedlund Dennis Berggren [email protected] [email protected] Arvid Necander Havan Hanna [email protected] [email protected] Erik Nordström Kristoffer Lindström [email protected] [email protected] Klas Palin Fredrik Nilsson [email protected] [email protected] Jakob Svensson Tomas Otterbeck [email protected] [email protected] Ludvig Svensson Eddie Palmgren [email protected] [email protected] Oscar Bergman (Trainee) Oskar Vilhelmsson [email protected] [email protected] Alexander Ribrant (Trainee) Viktor Westman [email protected] [email protected]

Linus Sigurdsson (Trainee) [email protected]

REDEYE Equity Research Flexion Mobile 6 May 2019

Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization).

Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis.

Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies: • For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, effective from 30 days before its covered company comes with financial reports, such as quarterly reports, year-end reports, or the like, to the date Redeye publishes its analysis plus two trading days after this date. • An analyst may not engage in corporate finance transactions without the express approval of management, and may not receive any remuneration directly linked to such transactions. • Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.

Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument.

Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making.

Redeye Rating (2019-05-06) Rating Management Ownership Profit outlook Profitability Financial Strength 7,5p - 10,0p 49 47 19 12 21

3,5p - 7,0p 91 86 121 41 56

0,0p - 3,0p 15 22 15 102 78

Company N 155 155 155 155 155

Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB.

CONFLICT OF INTERESTS

Tomas Otterbeck owns shares in the company: No Kristoffer Lindström owns shares in the company: No Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this.