User base build taking longer than expected

Revenue ramp-up pushed forward

DCF valuation range of SEK 6-20 per share

Q2: Sales miss, but gross margins increased q-o-q
Flexion reported net sales of GBP 2.3m (1.6m) corresponding to y-o-y growth of 46% (20% behind ABGSCe). The deviation is due to the firm’s new mobile game taking longer to build a user base than we had anticipated. Our view of Flexion’s long-term potential, however, remains intact. Gross margin amounted to 12.1% (16.2%), up 0.5pp q-o-q and 0.4pp ahead of our forecast of 11.7%. Lower operating expenditures on capitalized personnel exceeding expectations, together with the stronger gross margin, led to a small deviation on the EBIT level. The report raises no real issues concerning revenue potential save that it has taken slightly longer than we originally anticipated. On a positive note, the stronger gross margin increases our confidence in its future development.

Negative revisions mid-term, long-term potential intact
We have adjusted our initial time scale so that full potential is reached in 10 rather than 12 months in general, and 15 in some specific cases. This pushes the sales ramp-up further out, but doesn´t affect the long-term potential. In fact, we have increased long-term penetration to 12% (10%) of Google Play revenues after the recent signings of partnerships with Xiaomi and Huawei. The biggest long-term risk we see is a slowdown in new game signings, which has been the trend recently as Flexion has focused on strengthening its distribution power.

Span of 80-120 signed games in DCF scenarios
Since Flexion is a first-mover in a niche market, we deem a DCF model to be the best valuation approach. We have constructed four different DCF scenarios that have a connection to Flexion’s financial targets. They span from 80 to 120 signed games in the coming five years with gross margins of between 12 and 14%. Our DCF scenarios indicate a valuation range of SEK 6-20 per share.

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