EG7 reported revenue of SEK382m and adjusted EBITDA of SEK62m, which was lower than our forecast of SEK408m and SEK89m, respectively. Looking at the performance per segment, Daybreak saw somewhat higher revenue than expected, while profitability was in line with our forecast. Performance from Big Blue Bubble was slightly softer than expected. However, the company commented that My Singing Monsters is back to a pre-peak pattern, suggesting stable performance from here. Piranha, which was impacted negatively by the cancelled WFH contract, saw a bigger revenue drop than expected, which also resulted in lower EBITDA. Toadman saw slower progress towards break-even than we expected while Petrol unexpectedly saw a negative EBITDA. Fireshine reported softer topline than expected, with revenue mainly generated from back-catalogue titles, which also impacted profitability negatively. The table below summarizes the Q1-results outcome compared to our forecast.

Following continued weakness in the gaming industry, EG7’s service-focused businesses faced a challenging market environment in Q1 2024 as illustrated by the performance of Petrol and Toadman. EG7 continues to adapt the operations where Petrol and Toadman launched cost cuttings in April that will yield total savings of SEK35m on an annual basis. As such, we expect improved profitability for the two businesses going forward, albeit with a more limited topline growth potential in the short term. Coming to Piranha, which saw a large work-for-hire contract being cancelled in Q4 2023, the studio has cut new hiring while remaining employees will fully focus on Mech Warrior 5: Clans which is set to be released in Q4 2024. As such, Piranha should see stronger performance in H2 2024, despite the loss of the WFH contract.

While the outlook for the service-focused businesses is soft, the outlook for EG7’s games business remains strong. Looking into H2 2024, we expect stable performance from Big Blue Bubble as My Singing Monsters stabilizes at a new normal, while Daybreak’s live service games also shows stable performance after meeting tough comps in 2023. With continued content updates scheduled for 2024, the live service games should continue to see good performance for the rest of 2024. Finally, Fireshine also sees the typical seasonal pattern with a stronger H2 than H1, where support will among other come from the version 1.0 releases of Core Keeper and Shadows of Doubt. Looking into 2025, Daybreak is also on track to release the Cold Iron game project, while H1Z1 is targeting to enter production in H2 2024 with a release targeted in 2026. As illustrated in the chart below, we expect that 2024 will be a transition year followed by stronger growth and profitability in 2025-26E.

While the growth outlook remains positive for 2025-26E, we have lowered our 2024E EBITDA estimates by 16% on the back of the weaker-than-expected Q1-results and softer outlook for Petrol and Toadman. Our 2025-26E estimates are also trimmed by 5-6%. However, we still forecast strong topline growth of around 17% in 2025E and 24% in 2026E, as well as stronger profitability. Our 2026E estimates (revenue of SEK2.4bn and EBITDA of SEK650m) are below the company’s target of SEK3bn in revenue and EBITDA of SEK1bn. The 2026 target is built on growth from the release of H1Z1 and an additional game that has not yet been announced. We see potential for the gap to close as H1Z1 moves into production and as the release of a second game is confirmed. The table below summarizes key financials for the group and segments for 2022-26E.

On the back of the lowered estimates, we also adjusted our valuation range where the new base case stands at SEK41 (SEK44) while the bull case is SEK72 (SEK77) and the bear case SEK12 (SEK15). Our base case implies an EV/EBITDA valuation of 7x 2025E while the share currently trades at less than 2x 2025E EBITDA, suggesting that the market is sceptical about the company achieving its targets. In our view, successful game launches in 2024 (Mech Warrior 5: Clans), continued progress on the Cold Iron project, and H1Z1 moving into the production phase could be triggers for improved market confidence and a higher valuation. The table below summarizes key assumptions for the valuation scenarios.