Despite our expectations that Q3 would mark a transformative quarter with an uptick in UA spending, Sozap continued to exercise caution regarding user acquisition costs. This caution translated to sales of SEK3.1m for the quarter, representing a y/y decline of 20% and a 17% q/q, falling below our estimated SEK4m. However, the lower UA spend and continued good cost control resulted in an EBITDA of SEK-0.1m and EBIT of SEK-1.6m, which was better than our estimates of SEK-0.4m respective SEK-1.8m. All in all, we argue the Q3 figures to be of relatively minor importance in the context of the awaited game launches that will become visible in the coming quarters.

With the announced cost-reduction program, Sozap has increased its focus on its core titles (Armed Heist, Questopia, and Fishing Tour) while downsizing resources for developing new titles. Although we think the decision makes sense given Sozap’s financial position, it also increases the concentration risk, and it is now essential that the new titles are scalable. On that note, we are encouraged to see Questopia climb on gross charting lists at the end of the quarter, suggesting that the company has ramped up the UA for the game. Hence, we expect an uptick in sales in the coming quarter.

On the back of the Q3 report, we have taken down our growth assumptions for 2024e-2025e. However, we have also made downward revisions to our cost estimates, resulting in relatively small EBIT adjustments. Due to higher interest rates, we have increased the risk-free rate from 2.5% to 3% and our WACC from 12.5% to 13%. As such, our base case has been adjusted from SEK10 to SEK8, and the fair value range from SEK2-18 to SEK1.5-16. Our base case implies an EV/EBITDA (2025e) multiple of 7x.