Q1 was in line with Q4 in terms of net sales, which amounted to SEK4.7m, an increase of 42% y/y and 41% in constant currency. This is 6% lower than our expectations of SEK5.0m. The deviation is attributed to lower ARPDAU (average revenue per daily active user), while DAU (Daily Active Users) came in line with expectations. The growth in the quarter primarily stems from Questopia, while revenues from Armed Heist were in line with Q1 last year.

Looking at the profitability, Sozap reported an EBITDA of SEK-1.2m and EBIT of SEK-3.9m, which is lower than our estimates of SEK0.6m and SEK-0.9m, respectively. Higher UA mainly and higher D&A explain the deviation, while personnel costs aligned with our estimates. Cash flow from operation amounted to SEK-1.8m, negatively affected by changes in working capital of SEK-0.6m. The cash position at the end of the quarter was SEK1.8m.

ARPDAU (average revenue by daily active users) was USD0.083, 7% lower than our estimate of USD0.089, and DAU (daily active users) was 61,000, in line with our estimates of 60,000.

Sozap continued its new phase of delivering y/y growth, thanks to increased revenues from Questopia. However, this growth comes with higher costs, and UA investments in the quarter (SEK2m) were roughly SEK1m higher than our estimates, explaining the deviation in EBIT. The company has also started to amortize Fishing Tour and Questopia, with D&A expenses increasing from SEK1.8m in Q4 to SEK2.7m, which explains the even larger deviation in EBITDA. In terms of underlying costs, we believe the company continues to have solid cost control. The management states that it is still a tough user acquisition market, which has also impacted Voodoo’s launch of Questopia in China, where the increased UA investments have resulted in lower returns than expected. To improve returns going forward, Sozap made a comprehensive update to the game in April. Moreover, the company maintains its goal of fully launching Fishing Tour in Q3 and reaching positive cash flow (excluding UA investments for the Fishing Tour) in Q4.

Looking at ARPDAU (average revenue per daily active users) and MAU (monthly active users), we can see an uptick in both, especially in ARPDAU, which grew 48%y/y, in line with the previous quarter. While it is common for MAU to lag when a new game is introduced, ARPDAU serves as a more reliable leading indicator. Therefore, in the forthcoming quarters, we will closely monitor the ARPDAU metric as it will provide valuable insights into the performance of the new titles.

Since our initiation report, Sozap has streamlined its game portfolio from seven games to three. We believe the reduced portfolio is a positive development as it enables Sozap to focus its resources and attention on its most promising game titles. Given the importance of achieving a healthy return on investment for the new games, we believe that it is essential to concentrate resources on the company's best ideas, rather than spreading them across multiple titles.

As mentioned in our earlier research updates, we are especially excited about Fishing Tour, and the game was globally soft-launched in Q4 2023. According to the company, both retention rates and conversion to paying customers surpass Questopia and Armed Heist, which is highly encouraging. Sozap intends to continue developing the game before scaling up user acquisition, and in conjunction with the announcement of the rights issue, Sozap released a roadmap for 2024, indicating that Fishing Tour is expected to be ready for a global launch in the second half of 2024, something that was reiterated in the Q1 report.

In terms of the game’s development, the company continues to develop the game by creating content that enhances the game's retention rate. For instance, METAFISH serves as a good example, generating an unlimited variety of fish and consequently offering an endless amount of gaming sessions. Moreover, it enhances the social interaction within the game, an important factor in player retention. Retaining players is increasingly vital in the mobile gaming market as acquiring new players becomes more expensive. Anticipating upcoming changes in Google Play in 2025 (like Apple’s IDFA changes in 2021), user acquisition (UA) is expected to become even more challenging. Thus, developing deep games capable of retaining players for extended periods will be vital moving forward.

In our initiation report, we demonstrated the potential outcome of the game by looking at Fishing Clash, a similar fishing game from Ten Square Games. Fishing Clash has 50+ million downloads on Google Play Store.

Assuming Fishing Tour achieves 5% of Fishing Clash’s MAU in 2024 (130,000) and 10% of its ARPU (Average Revenue Per User) (SEK0.1), the game will generate revenues of SEK3.7m in 2024. Looking at 2027 and assuming Fishing Tour reaches 20% of Fishing Clash’s current MAU (520,000) and 50% of its ARPU (SEK0.4), there is a potential for the game to generate revenues of SEK75m in 2027. An ARPDAU of SEK0.4 does not appear unrealistic, as this is relatively low compared to similar games. Although the assumptions in the table below can look conservative, the game is not even in global launch yet, so there is considerable uncertainty about the outcome. This implies a high-risk premium. We are thus more conservative in our estimates. It is also worth highlighting that since we started to track Fishing Clash, the game has had a tough period with lower MAU and ARPU.

The launch of Questopia has been the highlight of recent quarters and continued to be the primary growth driver in the quarter. According to data from Appmagic, the game appears to have maintained its position across various gross charting lists. It also has a high score of 4.5/5.0 on Google Play and 4.6/5.0 on the App Store. Looking at reviews, it seems that players are enjoying the game, yet there is a continuous demand for further development to meet players’ expectations for more playable content. In late February, Sozap announced that Voodoo had initiated the launch of Questopia in China and decided to fully release the game on platforms such as WeChat, Douyin, Android, and iOS.

In the Q1 report, the management states that the launch in China has been impacted by the more challenging user acquisition climate, and the increased UA investments have resulted in lower returns than expected. To improve returns going forward, Sozap made a comprehensive update to the game in April. We maintain our view that Voodoo’s China launch holds the potential to serve as a positive catalyst if the game gains traction, although we do not expect any material contribution in the short term.

After the quarter, Sozap announced a rights issue. The capital injection is similar to the previous one (conducted in Q2 last year), which, upon full subscription, will bring SEK11.4m before issuing costs. Once again, we are encouraged to note that several representatives from the Company's board of directors and management have entered subscription commitments corresponding to approximately 35.5% of the rights issue where the company’s CEO, Rade Prokopovic, has committed to subscribe for shares for approximately SEK2.7m. The company mentioned already in the Q4 report that it could require another capital injection to support the development and launch of the Fishing Tour. Consequently, we had already factored in a rights issue of SEK10m. However, the subscription price of SEK0.75 per share represented a larger discount than we had initially anticipated. The rights issue is expected to be completed in Q2, and we will adjust our valuation based on the final outcome.

Following the Q1 figures, we made limited revisions to our sales estimates, taking down 2024e sales by 9% while leaving 2025e-2026e unchanged. In terms of cost, we have increased D&A as the company has started to amortize more of its game in the quarter. We leave other opex roughly unchanged.

We apply a WACC of 13% in all DCF scenarios, derived from Redeye’s Rating model, and we use a tax rate of 20.6%. The discount analysis extends to 2036E. We take a cautious approach and estimate a capital injection of SEK10m in our scenarios. Below, we summarize the key financial assumptions for the scenarios.