Beyond Frames - Report comment Q3 2023

Beyond Frames' growth journey continues with an almost quadrupled turnover in Q3 compared to the same quarter the previous year. The company had a turnover of approximately 36 MSEK, marking the third consecutive quarter with significant sales growth. The growth can be attributed to the continued strong sales of Combat Waffle’s Ghosts of Tabor, as well as securing project financing for games under development. In addition to this, their newly launched game, Outta Hand, has received very positive feedback from players worldwide. The game was released at the end of September and has held a top 7 position on the Meta Quest Stores bestseller list. On the cost side, personnel costs decreased by approximately 1,2 MSEK due to effective cost control, while other external costs remained at about the same level as the comparison quarter. However, the cost of goods sold and depreciation increased significantly, which is natural as the company grows. Furthermore, Beyond Frames capitalized costs of just over 6 (5.2) MSEK during the quarter. However, looking at the first 9 months of the year, the capitalizations were slightly lower than the same period the previous year. Thanks to the growth in turnover and the company's scalability, the company achieved a positive EBITDA of 2,2 (-2,9) MSEK. The cash flow has also been positively impacted by economies of scale and the company's positive development. The operational cash flow for the first nine months of the year amounted to approximately 15 MSEK, which can be compared to -8,4 MSEK for the corresponding period the previous year. At the end of the quarter, Beyond Frames had a cash balance of approximately 35 MSEK.

As indicated by our initiation analysis from 29/6-2023, the company's growth is driven by hardware launches in XR (Extended Reality). In the near future, the world’s largest company (Apple) will launch such a hardware, which is expected to contribute to additional growth potential for Beyond Frames, as it increases the number of potential customers. In addition to this, Meta has launched Meta Quest 3 in mid-October this year and has announced that they will collaborate with Tencent to create low-cost hardware for the Chinese market. Furthermore, one of Beyond Frames' most successful games, Ghosts of Tabor, will transition from early access to being released in the main stores in the first quarter of 2024. Besides this, the company's wholly-owned game studio, Cortopia Studios, has three games in development, two of which are based on an IP with a large following. One of these two titles, in turn, is based on an IP that has generated billions of USD in revenue through TV series, movies, and other partnerships. Although there is always a risk that these game launches may not unfold as planned, it demonstrates in our opinion the potential of Beyond Frames. The company has previously communicated that they will gradually expand its operations to also include game development and publishing of PC and console games. This work has continued during the third quarter, where Beyond Frames has been in contact with potential partners. We continue to assess this development as positive because this strategy contributes to reaching a larger number of customers, simultaneously reducing the risk by expanding operations to more markets.

Beyond Frames once again exceeded our expectations in both turnover and results. The latter, despite the gross margin being only 17% during the quarter, slightly below our expectations. The low gross margin can be explained by a significant portion of sales having a low gross margin. It should also be emphasized that the company reports its revenues before platform fees and revenue sharing with publishing partners. We do not consider the Q3 development to be a trend reversal and therefore maintain our full-year gross margin forecast of 22%, which coincides with the average level during the first three quarters of the year. We anticipate that the positive trend will continue for the rest of the year and into 2024, supported by completed and anticipated launches of games and hardware, as well as the launch of Ghosts of Tabor in the main storefronts early next year. Based on this and the Q3 outcome, we are raising our revenue forecast for the year to 114 MSEK and for EBITDA to 3,9 MSEK. We have also adjusted the forecasts for the coming years upwards, estimating that the revenue and EBITDA in 2025 will amount to 224 MSEK and 31,1 MSEK, respectively. This represents an increase of 8% in revenue and approximately 40% in EBITDA compared to the forecasts in the latest report comment. Based on the new forecasts, our DCF analysis provides a valuation of 32 SEK per share, which should be compared to the current share price of approximately 22 SEK.

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