Welcome to this presentation of the Acquisition of Six Waves. Good morning, everyone. With me here today is Andreas, our CFO, and Marina, head of M&A. We will start with a short presentation, and then we will go into a Q&A session. Slide number four, please, Andreas. First, an overview of Six Waves. Six Waves is a company that we have followed closely for many years, and the last two years we have been in discussions with them. They have quite a unique position. They have a long and strong track record of focusing on strategy games for the Japanese market. They have been established in 2008, and they are approximately 135 full-time equivalents as of today.
They have revenues of 755 million SEK up until Q3, the last 12 months up until Q3 2021, with an EBITDA of 252 million SEK. They in September had 171,000 monthly unique players. They focus on four so-called 4X strategy games, which is an area where our legacy basically in Stillfront where we have been active for many, many years from the very beginning. We know that area well. We are very well-positioned to create synergies together with a strong team, I will come back to that later in the presentation. They have definitely a very proven track record of adopting high-quality strategy games into the Japanese market. The revenues are 100% in-app purchases and no ad revenues at this point. That's an opportunity as well.
The offices are headquartered in Hong Kong, and they have offices in both Tokyo and Beijing. You can see on this slide also, they have currently four main titles, which are evergreen titles with a high stability and predictability in its revenues. You also see the split of these revenues on the lower right side of this slide. Please, next slide. Looking a bit more into their products, the typical games are medieval Asia setting, the historical Asian settings, which are very popular, and as I said, very strong, loyal user base and hence stable revenues. They are these kind of true evergreen strategy titles that we know very well and have a number of them in our portfolio.
The current titles have been developed externally, and they have long agreements with being the sole publisher for the Japanese market for these games. They are also in their pipeline, their very strong pipeline of products expected to start coming out mid this year with so-called second-party publishing, meaning that someone has developed, but everything is owned by Six Waves. They're also through their own development studio in Beijing; later on, there will be a so-called first-party publishing deal where basically they publish the games that they have developed themselves. This is not only addressing the Japanese market.
These games can be adopted, and we can use the knowledge and the presence and the market reach that Stillfront have built for many years to actually reach a global audience that's a very exciting opportunity coming up for growth. We also had a few games that was divested pre this transaction that was not fitting the portfolio that Stillfront are focusing on. Next slide, please. There are many in our view, not only we think this is a financially appealing transaction, we think this has a very, very strong rationale and fitting extremely well into the Stillfront strategy that we have conducted for many years. This will be a very important and yet another brick in building Stillfront to be the leading free-to-play mobile games powerhouse.
Obviously a very strong foothold in Japan, and Japan is the third largest mobile gaming market in the world and with the highest spending, so it's a very attractive market. What is exciting is that this makes Japan being our second largest market, for Stillfront after the U.S. Now we get a balance between the different parts in the world, in a very good way, I think. We are increasing diversification, not only within strategy, but also between our different product areas and also in geography.
As you have heard us saying many times, we think that one attribute a winner in the gaming market needs to have is extremely good market reach and have the opportunity and the capability to optimize capital allocation and resource allocation over a wider and wider array of both product genres as well as geography. This is fitting that extremely well. Also, expertise that Rex Ng and their team have developed over such a long time, 14 years, really how to adapt and bring high-quality games into the Japanese market, both when it comes to the product. When it comes to live ops and when it comes to marketing, which differs in many ways compared to how it is in U.S. how it is in Europe, how it is in the Middle East region.
We also see there is a strong cross-publishing opportunity to take other strategy titles that is already existing in the Stillfront portfolio and through the Six Waves team's extensive expertise on this area, adopt them and launch them and develop these games in Japan in particular. That is an obvious and very interesting cross-publishing or cross synergy basically that we think we can create. Also the other way, these high-quality games with a adaptation for other markets is also a great opportunity. As a matter of fact, our success that we have enjoyed in the MENA region is based on publishing games that are primarily developed in Asia. We have seen that that fits very well already, but now we can take Six Waves games and publish them in the MENA region.
Also, through this transaction, we get access to a very highly skilled development studio in Beijing, high quality at a good cost-benefit or cost-quality ratio. We think that is a very good opportunity not only for publishing games as of today for the primary purposes for Six Waves to publish in Japan. As I said, that is yet another muscle for the whole group to benefit from over time. Last but not least, we have tried for many years to get a strong foothold in Japan and in Far East, but that is very tricky to do from basically doing remotely. We work with agents in different ways to try to establish this. With this transaction, we get exactly that.
The team is very well established and well known and have obviously a very strong network. They can have a role of strengthen our position both organically obviously, but also through new partnership and potential new acquisitions in the Far East because we have the presence, we add to our network significantly. There is a very, very strong strategic rationale for us, and we are very pleased to present this transaction today. It's something that we have looked to do for several years with this specific company. Next slide, please. The transaction structure is that we pay upfront $201 million on a cash and debt-free basis, wherein approximately $185 million is a cash consideration and the remaining 16 is a share consideration.
Important here is that the operational shareholders representing some of our active shareholders, employees, they take 75% in cash and 25% in equity. They will have from already the upfront consideration a significant portion, and hence, an alignment of interest for developing and creating shareholder value as well, by owning a significant portion of Stillfront stock. We make this transaction on what we think is very attractive multiples, 6.8x EBITDA, and important is that we are not looking at some future EBITDA. This is the historical EBITDA up until including Q3 last year. If you think that this will grow in profits, then obviously the multiple will be lower looking forward. That is important to also emphasize.
We think that's a very attractive multiple for a quality asset and a quality company like Six Waves. We have an earn-out from 2022 to 2025, and this is also very important. The earn-out is only for the operational shareholders. The financial and industrial shareholders that are also sellers, they will not participate in the earn-out. The earn-out is model built upon a number of parameters in combination of top-line growth as well as profit growth and profit development. It's per year up to a maximum of 1x EBITDA, but then they have to grow both top line and the EBITDA. A total cap of $100 million exists for these full four years.
As mentioned, this is a 75% cash and 25% Stillfront stock, and the stock will be issued after each of the earn-out years respectively. Next slide, please. Here you see a preliminary pro forma income statement for this deal up until Q3. As mentioned, they had SEK 755 million in revenues, which at that point LTM Q3 represented an increase or an additional 15% revenues. They also have an EBITDA, as mentioned, of SEK 246 million , which represents a 14% increase relative to our reported numbers for Stillfront Q3. As you can clearly see here, they have a slightly different structure in the P&L for the very simple reason that the majority of the revenues up until Q3 were third-party publishing.
You have a direct cost for royalties. On the other hand, you have an offset because you have a lower cost base. As you can see, they have a very strong 33% margin for the last 12 months up until Q3. The profitability is strong, but the structure in the P&L is different from what we have in Stillfront. We can go to next slide, please. Just to repeat and summarize a bit, we think this is a highly attractive and for a long time sought-for opportunity for us. We build a very strong presence in Japan, which becomes our second largest market, one of the most attractive markets globally. This adds to our scale, and we know that we are good at creating synergies.
Our synergies that we have created through the Stillops operational platform so far in Stillfront increases not only linearly with the number of studios we are, it increases progressively. I'm sure, and we have already identified a long list of things that we should start with immediately after closing this transaction to deploy. I see great cross-publishing opportunities, but also a number of other synergy opportunities as well alongside. Of course, as mentioned, this provides us with a platform for further expansion and growth, both organically but also through add-on acquisitions in East Asia, which is very hard to do remotely. All in all, very attractive. It contains not only a very sound and strong and growing business in itself, it adds components building a much stronger Stillfront for many years to come. Next slide, please.
We also provided you with an updated guidance for the fourth quarter. We have a guidance already out from Q3, but now as we are closing the quarters very soon, we narrowed the outcome to SEK 1,430-SEK 1,450 in net revenue, so we will be slightly higher than the mid-range. Also looking at the adjusted EBIT, we will also be on or slightly ahead of our previous guidance. Now we say that SEK 4,050-SEK 4,065 million in adjusted EBIT. That implies a 32% margin in Q4. We are of course very pleased with that and that we have returned to organic growth in Q4. More about that as we report the fourth quarter. This is just an additional important information.
We focus primarily on presenting the acquisition at this presentation. That was basically what I intended to present initially. Now we open up for Q&A, and it's not only can you ask me, but we have Andreas and Marina here to talk about both financials and the financing, as well as the transaction and the company where Marina has obviously been leading the great efforts in a very good way, the last months. Please go ahead.
Our first question comes from Martin Arnell with DNB Markets. Please go ahead.
Good morning, Jörgen, Marina, and Andreas. I have a question firstly on the Japanese market. What do you think is the market growth forecast in Japan for mobile free to play for the coming years, and sort of how mature is that market today?
Well, I think that what is key here is whether we see growth opportunities, and we do. I don't honestly have the number by heart, but maybe Marina or has that number by heart. I don't know the latest market report for Japan. It is obviously a mature market just as it is for strategy games in general, but we are quite used to that circumstance. Strategy games in itself are a much more mature part of the subgenre or part of the mobile games industry, which is, by the way, the very reason why we have broadened our genre footprint into casual, mashup, and simulation or RPG. We are very keen to keep the balance between strategy games because strategy games are not necessarily growing by 20% per year so easily.
It's very stable, it's very predictable, and you can have a very good and predictable business coming from that, and also growing that but with lower numbers on average. Both having high growth segments in our portfolio as well as the stability and predictability from strategy games. Also having said that, we have been growing, for instance, the Goodgame games that were very early on in pioneering and creating some of the largest strategy games under the EMPIRE brand for many years. They actually grew the first three years after we acquired them when we received the same similar question. It's definitely possible through good live ops, through precise marketing to grow strategy games, which I'm sure we have the opportunity to do.
To existing games, to grow them at double-digit percentage is tougher than other types of games. Very importantly is that we have a strong pipeline of new games coming into the market, and besides directly from Six Waves, but also we have the opportunity to take existing Stillfront games, adopt them, and make them grow in Japan. We see several growth opportunities not driven from the market necessarily growing that much, but what we have in the pipeline, and what kind of cross-selling or cross-publishing opportunities we have.
What-
Then, uh-
Jörgen, what would be your sense?
Quick comment. The growth year-on-year is approximately 18% based on consumer spending. What's also very relevant is the level of spending of the players, because Japanese players are high spenders, which is also very relevant and attractive for us, of course.
Okay, thanks a lot for that. What's your sense about Six Waves market share in Japan? Do you have a number for that?
I often get the question what is your global market share? As you all know, this is still a fragmented business, even though we see transactions happening. We make a transaction today, but also very large ones where companies among the 25 largest are acquiring each other. This is what I refer often to the second wave of consolidation. But we are still a very small company in terms of market share globally, and also Six Waves in Japan, which I think is good because that proves that we have great growth opportunities both organically as well as non-organically. There are many companies out there.
I think that Stillfront as a whole has 1% or something of the mobile gaming market or something in that direction. It's not like we are competing about, with a few others about, being the market leader in terms of market share.
Okay, thanks. On geographic expansion, how important is that for Six Waves to grow the games outside Japan and in the region?
As I said, they have a very, I mean, they are really, really good at what they're doing. I mean, many of the largest gaming companies in the world use Six Waves for launching titles in Japan. I think that says a lot. They have an operational ongoing business going concern, which is functioning obviously very well. You can see the profitability and the very stable business that they've had for many years, and they have been growing also and have a lot of products on its way out. I think that stands on its own. As mentioned, we can grow by several other dimensions. Both that Six Waves get the expertise and the corresponding knowledge that they have for Japan, we Goodgame have for Europe, and Babel have for the MENA region.
Obviously that is a good add-on growth opportunity for Six Waves. By the fact that they work with engines and understand how to build engines and use engines to build new games with an optimized capital requirement, that is one of the core strategies that we have had in Stillfront for many, many years. That means that they can take engines from other parts of the Stillfront Group to develop games for Japan and vice versa. We have, as mentioned, multidimensional growth opportunities. Already Six Waves as is standalone is a very healthy and growing business.
Okay, thanks. Finally, a final question from me is on the Q4 update. Would you care to comment anything about what kind of level of organic growth you posted in December, and also if it has continued in the first weeks of January? Thank you.
We will come back when we report the Q4. I think otherwise we focus on wrong things. We thought it was important to mention what we have been talking about since the beginning of the year, that we expect that we should return to organic growth, whereas the comps are getting away. We managed to reach that in December, and we have provided ourselves with the best possible opportunities to grow organically in 2022. More details about that we will present when we present our Q4 quarter more in detail.
Okay, thank you. That's all.
Our next question comes from Oscar Erixon with Carnegie. Please go ahead.
couple of questions from me starting with the pipeline. You mentioned the press release here, a mix of first-party, second-party, and third-party titles due to come out in the coming years. Can you say something about how many titles you expect in 2022, and also what category of titles in terms of own development or externally developed? Thank you.
Well, maybe Marina, you could elaborate a bit on the pipeline.
Yes. For 2022, it's a mixed selection of third-party, second-party, and in-house developed titles. We have, for Six Waves, two third-party titles as Jörgen mentioned during the presentation. Six Waves is a publisher in the top ten, so they've been working with third-party publishing for a long time and very experienced. We have two expected launches. Also second-party, two of those for 2022. What is very relevant and interesting with second-party is that larger revenue share goes to Six Waves, which means good news for profitability of course. Also one is in-house developed title, so very strong pipeline.
Excellent. Thanks, Marina. A question on growth, partially related of course, but it seems like Six Waves has had several years of sort of double-digit growth as far as I can tell, revenue-wise, but more limited growth in 2021. What can we expect in 2022, both in terms of revenue growth and also margins? I mean, I think any indication, you know, flat revenue or you know, 5%-10% growth, what is reasonable to expect in 2022 and 2023, just roughly? Thank you.
Yeah. As you know from many talks, Oscar, that we don't give forecasts for, especially not on individual studios. Again, as always, I mean, you need to understand, and I know that you're good on understanding our business. It's been years, Oscar. There is a very solid foundation of strategy games, and there is no more solid thing in the gaming industry than strategy games. The existing games they will provide, we think there is a good chance that they will grow, but that will be single-digit percentage points. That is the best guess. I mean, you can get further traction before we manage to potentially get them to other markets as well, but in Japan.
That will not be a high growth, but on the other hand, they're very stable, so the risk for them declining is correspondingly low. The growth opportunities come from the pipeline obviously that Marina spoke about. I think that especially on the second half of the year there is a very good chance that at least typically 20% becomes very good, 20% fails, and 60% becomes somewhere in between. I think that they are good on they are definitely not on a lower percentage ratio between successes and mid and fails, but this is the average that we've had over 11 years since Stillfront. I think Six Waves have a better percentage distribution. Some games very likely will gain traction.
How much game number three in the pipeline will generate during 2022 is very, I mean, it's impossible to say, but it will be growth coming from these games in 2022 and more, even more so in 2023. It will not, I think it's a fair assumption to say this is this is probably not as much a growth case as, for instance, Jawaker that we acquired in September. But there is, it's definitely a very stable business with growth opportunities, and as you rightly pointed out, they have shown in the history that they have been good on growing strategy games more than most other strategy games publisher I must say.
We have high hopes, and we have built it into our earn-out model that they should grow, and they also agreed to do that, which also shows, I would say, that they are comfortable and believe in growing this with a double-digit number, but not necessarily 20%. I think there is a good chance of growing this business over longer time with double-digit percentage points. Again, it's very hard to say in short term, but the downside is, on the other hand, very low.
Excellent. A question related to my first question. What developers and publishers outside of Japan is Six Waves cooperating with as a publisher? Is it the likes of Tencent, NetEase, or is it also smaller developers?
Marina, maybe you can take that one.
Sorry, could you please repeat the question?
Absolutely. What developers and publishers outside of Japan is Six Waves cooperating with as a publisher? Is it the likes of Tencent and NetEase, or is it also smaller developers?
There is a number of. It's not Japanese developers in the first hand, but the portfolio, if you just look at the website of Six Waves, you can see that they have really broad experience of cooperating with the leading developers. A number of developers are Chinese who they're working with, but there are a number of international developers. They are an experienced publisher.
We can say that, Tencent is one of them. Yes.
Yeah.
Great. Then final question from me, for you, Marina, as well. Can you say something about what the M&A pipeline looks like and how this acquisition can support further M&A in the Far East in Asia?
Also, for us, we've been looking for quite a while to find a great team in this region. For us, of course, it's really a big step because we are building a strategic presence in East Asia, so we are convinced that Six Waves team will help us to grow through add-ons in the region because it's very, very challenging for a Western player to enter into this region and to establish presence. We've known this team for over two years, just the management of Six Waves. We've been already preparing and working together, and we have really big hopes that this acquisition will help us to grow in the region.
Perfect. Thank you very much. That's it from me.
Our next question comes from Nick Dempsey with Barclays, please.
Yeah. Good morning, guys. Just looking into history, Six Waves had some allegations of cloning other people's mobile games, and there were some settlements around that. I mean, we're talking 2012, 2014, that sort of timeframe. Can you just talk about what you know about that and how much confidence we can have that issues like that are no longer a risk around this business? Second question, we know there are regulatory changes in China around video games. There could be more at some point. That's an uncertainty out there in the video games landscape. Six Waves, all of its revenue is in Japan, but is it protected from those regulatory issues despite the fact that it has, you know, offices in Hong Kong and Beijing?
the third question, I'm just wondering if you can give us some more color on why you've chosen the mechanism of a rights issue for this deal. Can you talk about what other options you considered and might have used to achieve the same thing?
Well, Marina, maybe you can take the two first, then Andreas can take the rights issue topic.
Of course, regarding the allegations about cloning the games, I think any developer or publisher may have this kind of cases. There were, like, you know, obviously we've done our legal due diligence, in-depth due diligence, and this is one kind of questions that you really make sure that there is nothing like that that is pending, or, like, you know, so that there is no exposure. Whatever, all of this kind of issues are settled for a long time ago, and no risk going forward. It's like, you know, it's not unusual that this kind of things come up for any developer or publisher.
The second one, regarding the Chinese regulations, what we have with Six Waves, we have talented team of developers located in China. It's like, this is a great benefit, but we do not have revenue generated in China. We are like, almost the entire revenue is generated from Japan. What we see there, it's like it's a benefit for us because talented Chinese developers can work on games that generate revenue in China and hopefully going forward, more revenue also in the Western market. For us, it's not a threat, but rather a benefit.
In terms of financing, I mean, firstly, it's important to make clear that the deal is not conditional on the rights issue. We are using available capacity on our credit facilities to actually finance the deal, and there's no new credit facilities, and that's why we have that capacity. Of course, in terms of the types of rights issue you can do in terms of a preferential and direct share issue, we chose after deliberating on that based on the historical market volatility and also to go down that route.
I think it's also important that we have a strong support from our shareholder base supporting us in this transaction or indicated support or as Laureus have indicated very strong support for the way we are proceeding with this. That was the driver for that type of rights issue. It's important to remember we will be able to close the deal without that. It's just to get a better balance sheet and a strong additional firepower to actually do further acquisitions.
Okay. Thank you, guys.
As a reminder, if you do wish to ask a question, please press zero one on the phone keypad. Our next question comes from Simon Jönsson with ABG Sundal Collier. Please go ahead.
Hi, thanks for taking my questions. I have some questions about the organic growth in Q4. Is the organic growth presented in constant currency or non-constant? Also, are the games Iron Throne and Crush Them All included in the organic growth numbers? If they are, is there still the organic growth without them in December?
I can start with that, and maybe Andreas can fill in. Again, we are not presenting Q4. We will come back to the details of Q4. We just thought that this was important because it's, it has been a discussion about that, and we have been repeating that we expect to be back on organic growth. The Firstborn is not. I mean, that is primarily generating revenues. There's a few days of revenues maybe in, but that is neglectable in Q4, that is going forward. Also when it comes to revenue recognition from, that's a longer discussion. When you acquire assets, it's very similar to publishing actually, which is in this case.
When it's publishing, you acquire the right to publish something, another game, which is very similar to acquiring a asset because you need to put in your own team working with it. It's not a business that is operational. You have to take your own cost and not sell them. You have a transition period of several months to get that asset into your business, which obviously are associated with some cost. We are happy to elaborate further on that as we present the Q4. This is primarily about the acquisition. Maybe if you have an additional comment at this point, Andreas.
I think we should tackle that in Q4.
Okay, thanks. In general, the organic growth, is it constant currency or non-constant?
Sorry?
Is the organic growth in constant currency?
Yeah, yeah. Exactly. That's correct. Currency is not.
Okay
is neutral, so to speak.
All right. Thank you.
Our next comes from Emmanuel Caudron with Quaestor . Please go ahead.
Thanks for taking my question. The selling party, Nexon, announced in their press release on the acquisition that they did not succeed in getting enough synergies out of Six Waves. Why and how confident are you that you can do this?
Yes. I think that we have proven that we are very good on creating synergies in the group. We have been investing in our Stillops platform for exactly this purpose, and that we have done for 10 years. I think the whole structure of business since I founded this company more than 11 years ago, we said that we should be leading on creating a value add in its structure in itself so that we are creating synergies. I think we are quite good in this, and we can look at the actual synergies that we have created so far are in relation to the individual studios by themselves is really significant indeed.
We have had some more than 100 synergies projects running, where I think 60, 70 are running as we speak now, both on product level, always on marketing and leveraging the market reach we have been very successful in, but also sharing expertise in different areas. I think that has been also a very decisive factor for the. I mean, the largest shareholders in Six Waves are still a few, not Nexon, it's the management and the people being or been active. I think they see also that we are more likely to create synergies. That I cannot speak for and should not speak for Nexon.
It's not a complete surprise they express it in one way and we see things differently when you're on the buying and selling side of a transaction. We know what we can achieve. We already have the list of things that we are ready to start working with on the first day after closing. We feel confident that we know what to do.
Okay, great. Thank you.
There are no further questions. I hand back to our speakers.
Yes. Just closing words from me. Thank you everyone for dialing in. Again, we are extremely pleased with reaching this, I would say even a milestone in development of Stillfront, getting the establishment in Far East that we have been seeking so long. It's a high quality establishment as well. Also we regain a good balance between the three product areas, and we get Japan, which is a very exciting market, being the second-largest for Stillfront. We have prepared for creating a lot of synergies going forward. We are extremely pleased about the industrial fundamental value creation that this acquisition brings to us, and our shareholders for a long time. Thank you for listening and asking questions. Thank you all. Bye-bye.