Hello, everyone. Thank you for connecting to our earnings call this morning. My name is Vlad Suglobov, and I will walk you through the presentations that we have for you today. Let's move on to the page one, the highlights of the quarter, the fourth quarter, includes outstanding year-on-year growth of 82% in our top line. We've also grown quite a bit our revenue in Q4 compared to the third quarter by 46% quarter-to-quarter. This was possible because we have expanded our monthly audience quite a bit, by 75% year-on-year, and the number of monthly unique payers has also increased by almost 70% year-on-year. A little bit further increase came from the fact that the average revenue per paying users, average checks, also went up by about 10%, as you can see from our reports.
The main driver of this growth was the Hidden City games, one of our licensed games. We also have seen quite a good growth in our wholly owned portfolio of games, specifically Mahjong Journey and Survivors: The Quest were top performers in that part of the portfolio. As I mentioned, the user acquisition team has done a great job of really boosting our audience in this quarter and getting our audience to the next level, I would say, and this has produced this outstanding growth in the quarter. Other highlights in the owned part of our portfolio were Twin Moons and Supermarket Mania Journey games.
Twin Moons just came out at the end of the third quarter, but already we've seen some very good performance from the game, and Supermarket Mania Journey has been around for some time, but it started getting really better during the fourth quarter. Let's move on to the next slide and look at these results in more detail. The net turnover for the quarter was almost SEK 185 million, 82% growth year-on-year. Actually, the underlying growth in free-to-play games was more like 95%, and the unlockable games segment continues to slide down. It's now a small percentage of revenue. I think it's down to about 3% from 9% in the year before. We have seen a larger share of revenue coming from Asia in the fourth quarter than a year before that or even compared to the third quarter.
That is connected mostly to the fact that we have identified points of growth, certain points of growth in Japan, South Korea, and China with some of our games. Specifically Hidden City was very successful in these geographies, and we focused on growing the game in these specific markets. That brought some increased revenue from there. If you look at the chart positions of Hidden City in these markets, they continued improving even after the end of the fourth quarter, which is quite exciting. Another area of focus during the fourth quarter was increasing the percentage of revenue coming from small screen devices. By that I mean phones as opposed to tablets, where we usually have seen most of the success with our games.
In Q4, our user acquisition team did a great job of increasing our audience within the small screen device owners, that also something that did not happen a lot before. This is something that we have achieved in the fourth quarter, and that is a very exciting thing. The operating profit in the quarter was SEK 7.3 million and EBIT margin of only 4%. The reason the margin was lower than in the third quarter was exactly why the revenue was so much higher in the fourth quarter. The reason is we have spent a lot of money on user acquisition in the fourth quarter, that was done on purpose in order to increase the pace, of course, of the company and bring the company to the new level of revenue.
That comes at the expense of sacrificing the EBIT margin in the short term for a little longer term. We shall see the improvement in the margins going forward, and this margin, this level of profit margin, is not representative of what the company is trying to deliver. That said, even with the lower profit margin in the quarter and lower earnings year-on-year, if you look at the year overall, you see that we have actually improved our earnings year-on-year for the full period, and earnings per share as well. That is in line with our commitment, which something we have been doing for two quarters already, that we aim to gradually increase earnings year-on-year, and we are delivering that. When we see the opportunity for growth and the opportunity to bring the company to the new level of revenue, obviously, we will do it, obviously.
Another highlight of the fourth quarter is that we had a very solid positive cash flow of SEK 16.5 million. I think we have a record amount of cash and cash equivalents on our accounts at the end of the year. That is a good thing. Let's move on to the next slide and looking through how user acquisition expenses worked in Q3 and Q4. I think it gives a good understanding, a good explanation of what happened there, so you can better understand what happened with the margin in the Q4. In Q3, we realized that there is an opportunity to grow revenue substantially if we can invest more money in user acquisition.
We have a number of tools that show us how well user acquisition expenses are working in terms of how much money the users that we acquire spend, how fast can we get the money back. Looking at these numbers, we saw an opportunity that we can substantially expand our revenues. We decided to go all in at the beginning of the fourth quarter, and you can see that in October, we have increased user acquisition expenses almost 100% compared to September. We kept them more or less the same in October, November, and December. As a result, what happened is that our revenue started growing much faster than before. You can see there is substantial growth in November compared to October and December compared to November. You can also see there is a certain lag.
We've increased the user acquisition spending in October, but the increase in revenue came in November and further increase came in December, although we kept spending at the same level. That's what's happening when you have user acquisition spendings and the dynamic of new acquisition and how users stay back, that we have is when we acquire a user and they stay within the game for a long time, and they gradually monetize better and better and over months. Some users stay in our games for several years, but obviously when we spend on new acquisition, we expect to get the money back faster. In any case, we don't get the money back in the same month. We don't get the money back the next month.
In fact, the recoupment of money invested in new acquisition and getting a profit on top of that amount can last for one or two or three quarters. That's the reason you are seeing this dynamic here, revenue against new acquisition expenses. The good news here is that you can see the orange line, new acquisition expense as a percentage of revenue, jumped up substantially in October, but then it gradually was going down towards December. Basically, the goal of using new acquisition expenses to boost the company's revenue and bring it to the next level is to increase new acquisition expenses and hold them there until basically the user acquisition expenses to revenue are coming back to the same number where you started.
That's from basically if you extrapolate what's happening from here, that's something that we may see in the first quarter or in the second quarter. I actually spent a part of the CEO comment in the Q4 report explaining it in more detail. If you need more kind of reading on that's available right there. Let's move on to the next slide. This is a snapshot of our revenue over the last two years, a bit more than two years. You can see we started 2016 rather slow, but then we seem to be doing really well in the market. We've seen in Q3 that it's capable of growing substantially, then we went all in in Q4. Again, 82% top line growth, free-to-play segment growing by 95%.
As I mentioned, downloadable games are down to 3%, and it was 9% of total revenue last year. Some impressive growth here. Let's move on to the next slide. This is a breakdown of our operational costs by the same quarter. You can see they were more or less stable. The big difference in Q3 is the research and development expenses. The biggest difference in Q4 is obviously the spending on sale and marketing, which is mostly driven by new acquisition expenses. Apart from that, there's really not much change in our expense level. Everything else is growing much slower than our revenue or our user acquisition expenses. Let's move on to the next slide. EBIT and EBIT margin. As you can see, we've been profitable in 2016. We're profitable in 2016.
Of course, the picture of the fourth quarter is a little distorted because of this substantial spend on new user acquisition while we push company's revenue to the next level. Still, if you look at the full year, the EBIT margin has increased from 5% in 2015 to 7% in 2016. Obviously, at the same time, we delivered higher earnings year-on-year. We are delivering on our commitment to gradually improve earnings year-on-year. Yeah. There's really not much to add on this one. Let's move on to the next slide. Net capitalization. As you probably know, we capitalize our game development expenses, so expenses related directly to the development of CD games. We take them on the balance sheets, and after the soft launch period is over, we start amortizing the value on the balance sheets.
This chart shows you the net capitalization, basically capitalization minus amortization. It has been positive over a long period of time. By the fourth quarter, it's almost zero. We almost canceled out. There is pretty much no effect of capitalization and amortization on our earnings in the fourth quarter. That is also the reason why we're seeing substantial positive cash flow in the quarter. This is the true profit as real as it can get, and it also shows in our free cash flows, which is substantially better than before. If we look at our game portfolio, you can see that we are down to almost zero on not really changing unlockable segment, which is natural. We are substantially smaller with these unlockable games.
Because we have seen a number of newly released own games in free-to-play sector, the amounts have moved fro`m not really games free-to-play to really games free-to-play, and that's now the biggest part of our balance sheet. Overall, the total value of games on our balance sheet has changed and increased a little bit. That is not a very substantial change. Going forward, we expect to be at about the same level. We don't expect to dramatically ramp up our development, neither do we expect to somehow start stemming the loss on that. It's probably going to stay at about the same level, maybe increase gradually over time. The pace of that increase is going to be much slower than our spend on marketing or our revenues. With that, let's move on to the cash flow slide, the next one.
We have cash flow from operating activities of SEK 29.7 million in Q4, which is quite an increase over year-on-year. With a bit more investing activities this quarter compared to a year ago, we have the resulting free cash flow of SEK 16.5 million. As I said, this is basically being profitable and amortization catching up with capitalization because we have released more games and we started amortization on more games. These two amounts almost cancel out now. We basically have whatever EBIT we're seeing becomes cash flow, and then you have to include the non-cash charges because even though we have amortization, that's not a cash charge. The resulting cash flow will be even larger than EBIT in the quarter. Right. I hope I explained it well enough. With that, we're moving on to the next slide. Questions and answers.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Once again, please press zero one to register for questions. There'll be a brief pause whilst questions are being registered. I remind you that if you want to ask a question, you will have to press zero one on your telephone keypad now. We have a question registered from the line of Gustaf von Schantz from Carnegie Fonder. Please go ahead, sir. Your line is now open.
Yes. Good morning or good evening. I have a question about the cost, let's say, of marketing. I think most participants of your talk are a bit surprised about the size of that now and the percentage referring to the sales. My question is, how stickable are the customers now, and what are we going to expect for the year coming as the cost of acquisition as a percentage to the sales?
All right. Thank you for the question. Basically, if we can go back to the slide with user acquisition, you can see that already during the fourth quarter, the percentage, the user acquisition expenses to revenue started dropping down, although the revenue continued to go up. Our goal is to basically move up by doing these bursts, so to speak, or stepping up user acquisition expenses to a new level and then waiting for the user acquisition to revenue ratio to go down back to previous levels. What I want to see when we are doing something like this, is I want to see the user acquisitions percentage of revenue go back to the level where it was, so about 15%-17%.
If we see that we can continue this pace of growth, not just arrive at the next platform then keep it there, like we did in Q3 and Q2 and Q1, but if we feel that we can bring it further, then we may extend this period. We may not wait the whole quarter for the UA to revenue to go down all the way. We may continue and, for example, step up the user acquisition expenses once again. This will sort of prolong the period of lower earnings margins, but that will be driven by our decision to go higher in revenues. There is also some middle ground.
There is usually a middle ground where we maybe spend not the minimum that we ever had in user acquisition expenses, but a little higher, but below the maximum, where we can keep it steady at about this percentage and the revenue will continue growing. This is a part of our operational decision pretty much every month. Some think that we should go all in and try to grow as much as possible, even sacrificing our profitability. Some prefer that we be very responsible with this and we pay attention to our profit margins and maximize our profit margins. I think what we will do in reality is try to be somewhere in between.
We have made a commitment that sort of restricts us in terms of how far we can go with increasing user acquisition expenses, because we have said that we will deliver the growth in earnings year-on-year. That we did in 2016. If you compare 2016 earnings, they've grown substantially. If you compare earnings margin, they've expanded compared to 2015. That limits how all in we can go when we see the opportunity for growth. We want to keep the company profitable. We want to deliver earnings growth year-on-year. Otherwise, we will see and direct our user acquisition spend to where we think we can achieve the highest return on user acquisition expenses and the highest possible growth. To your question about for how long the users will stay in the games. Users stay in games for a very long time.
We have cohorts of users acquired in February 2013 that are still making money for the company and paying money every month. Some paying users stay for many years. Of course, we lose a large number of users along the way, and not every user becomes a paying user. What's important is that we carefully measure the return on the marketing spend that we are doing, and we are tracking it very carefully month-to-month. We're making sure that when we go in and we really invest heavily in user acquisition, by that moment, we are confident that we're getting that money back and we're tracking that we actually do that. Did I answer your question?
Yeah. Fine. Can I have a follow-up, please?
Yeah.
I think about the "Twin Moons" and your other own developed games that you own yourself. My question is, how long is the process when it comes to sort of trimming it and really getting it the way the players want to have it? I mean, I remember last spring we talked about "Hidden City" and it took some six months to get it going, and I wonder, how is it going with the "Twin Moons" in that respect?
Yeah. Well, I'm afraid with "Hidden City", it took a bit more than a year for the game really to start working. It has been released in the spring of 2014, if I remember right. Very soon the game's going to be three years old. It took quite a bit of time, and unfortunately, it's not always easy to predict. If it was that simple, it wouldn't be such a challenging business. We've seen some games perform quite well from the beginning, and some other games taking quite a bit of time to gain the Audience and to really get to the point where we can scale them further.
Some of the challenges that we face include adding enough content to the game quickly enough, and that is a good problem to have because if everything else is working, this is something that can be solved with adding more resources, which still takes time, but it's not the biggest issue. Sometimes we run into issues with figuring out the way monetization must work for the game to be scalable and attractive to users. It's just a very complex process that unfortunately is not completely predictable. Six months, I would say, is a minimum to get to a point where the game can be really scalable, and we've seen more. We've seen a year, we've seen a little bit more than a year. That's about the range.
Okay, thanks.
As there are no further questions registered, I'll hand back the conference to the speakers.
Yes, we've had a few questions on email. This is Stefan here, that I received, so I will ask those. We've seen one question from Juan Lia. He asked about how the VR project that we communicated, how that's progressing and what the plans are.
Yes. Thank you for the question. We are looking with great interest in this area. If you follow the news, perhaps you could notice that perhaps the start, essentially with the desktop platforms, wasn't as right for game developers as many hoped. Now it is looking more towards AR and VR mobile, and it's considered the next big thing, and we are, of course, following it, and we have some ideas how to maybe use the technology in our games. That's the reason we are doing that, but we have not made any announcements yet. What we have said is that we do not expect this to have any impact on the company in the short term, and it pretty much remains the same situation for us.
We also have a question from Stefan Knutsson at Remium. He's been obviously looking at the charts, and he asked the question if we could comment on the drop in performance for Hidden City in U.S. mid-February. Seems like a data issue in App Annie. The performance has now recovered afterwards. Any reasons for this?
I've heard some things, but I can't really speak on the subject. I mean, charts are just charts, which Apple and Google, some numbers that Apple, Google, and other companies are putting out there. I don't follow them, to be honest, on an everyday basis. I follow the revenue and the audience of our games. There may be fluctuations that have to do with a number of things, starting with the glitches in the systems of Apple or Google, and we've seen a couple of those over the years. I don't know if that's the case now.
Even the revenue that the game is making can change depending on whether we have some special events going on now or whether it has just finished, there may be other things that are running in the game, the game may go up in the charts for some days and then go down a bit. That is all normal, we are tracking the situation with the sales every day, if we see any issues, we obviously go and fix them. There's really not much to say at this point. We are going to have some preliminary sales announcements in the beginning of April. That will be for the first quarter. We will see some numbers quite soon in terms of the performance in the first quarter.
That was all the questions we know.
There are no further questions registered on the phone line.
All right. Thank you everyone for being with us today. Thanks for your interest in the company.