Beyond Frames: Report comment Q2 2023

Beyond Frames' positive momentum persisted in Q2 as they nearly decupled their revenue compared to the same quarter the previous year. The quarter showcased the highest revenue ever at 43,3 million SEK, largely due to the highly positive response their game "Ghosts of Tabor" received from players worldwide. Additionally, the increase can be attributed to funding obtained for games in production at their game studios, of which they either wholly or partially own. Thanks to the revenue growth and the company's economies of scale, they achieved a positive cash flow of 6,3 million SEK and an EBITDA of 4,4 million SEK for the quarter. This contrasts with a negative EBITDA of 6,4 million SEK and a negative cash flow of 8,6 million SEK in the corresponding period the previous year. Consistent with what was mentioned in the initial analysis on June 30th, 2023, the company's growth is driven by hardware launches in the XR domain. Several launches from some of the world's largest companies are set to hit the market shortly. During the quarter, both Apple and Meta unveiled new XR hardware, with these devices expected to be on the market in early 2024 (Apple) and the fall of 2023 (Meta). These hardware launches are anticipated to contribute to further growth for Beyond Frames as they expand the firm’s potential customer base. However, the company notes in its quarterly report that they believe the announcement of Meta's new hardware decreased sales of the Meta Quest 2 VR (their old hardware). This is because they estimate that consumers prefer to buy the new hardware instead of the one currently available on the market.

In addition to the previously mentioned positive developments, the game "Outta Hand" from Capricia Productions is set to launch on the Meta Quest Store in the fall of 2023. This game targets a similar genre and audience as the successful games "Gorilla Tag" and "No More Rainbow." The game is expected to generate positive cash flow for Beyond Frames, as they have a publishing deal with this global gaming studio. Furthermore, the company announced a gradual expansion of its operations to include game development and publishing for PC and console games. This move is considered highly positive as it enables the company to sell games to a broader customer base while reducing their risk by diversifying  to different markets. It is also noteworthy that several key individuals within Beyond Frames possess extensive experience in non-XR games, which will aid the company in managing the challenges that arise from entering these market.

Q2 exceeded our expectations in terms of both revenue and results, especially compared to the analysis as recent as the end of June. However, the gross margin was lower than anticipated, standing at only 20%. This compares to 39% in Q1 and our forecast of 42% for the full year. The lower gross margin than expected can be attributed to Beyond Frames' accounting principles, as the revenue is reported before platform fees and revenue sharing with publishing partners, and that we previously have underestimated this cost structure. With this in mind, we predict a lower gross margin for both the current year and the next. We forecast that the positive trend will continue with more game launches and hardware releases, as well as the continued strong performance of their current gaming portfolio. As a result of this and the positive development in Q2, we are raising our revenue projection for the year by 107% to 92,5 million SEK and our EBITDA projection by 120% to 1,1 million SEK. We are also significantly increasing our revenue forecast for the upcoming years, now projecting that the revenue for the fiscal year 2025 will be approximately 210 million SEK, as opposed to 125 million SEK in the initiation analysis. Our DCF valuation, based on our current projections, yields an estimated value per share of around 28 SEK, implying a valuation upside of about 33%.

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