I NNOVATIVE STAKES - Cision

 
I NNOVATIVE STAKES - Cision
I N NOVATIVE STAKE S

     Cherry’s strategy is to create shareholder value by owning and
        developing fast-growing and profitable gaming, media and
  entertainment companies. The Group intends to grow organically
and implement strategic acquisitions of entrepreneurial companies.
                  In 2017, Group revenue increased by 104 percent,
                          of which organic growth was 27 percent.

                        ANNUAL REPORT 2017
I NNOVATIVE STAKES - Cision
• I M P O RTA N T E V E N T S

                                                                                                                     GAME DEVELOPMENT
SIGNIFICANT EVENTS                                                                                                   Yggdrasil Gaming launched new and
                                                                                                                     innovative games, with Jungle Books
                                                                                                                     at the forefront. The second company
                                                                                                                     in the business area, Highlight Games,
                                                                                                                     initiated the launch of its major game
                                                                                                                     SOCCERBET.

                                                                                                                     Read more on pages 16-17.

                                                                                                                     GAMING TECHNOLOGY
                                                                                                                     XCaliber develops effective solutions
                                                                                                                     for gaming and payment solutions.
                                                                                                                     The company won several important
                                                                                                                     contracts during the year.

                                                                                                                     Read more on pages 20-21.

ONLINE GAMING                                             ONLINE MARKETING                                           RESTAURANT CASINO
In 2017, ComeOn launched several                          Continued strong growth for Game Lounge                    The stable growth in Cherry Spelglädje
new products and brands, including                        in 2017. The company was established in                    continued. The company grew organically
Snabbare.com.                                             Japan and started a new business segment.                  and through acquisitions.

Read more on pages 14-15.                                 Read more on pages 18-19.                                  Read more on pages 22-23.

CONTENTS
1   2017 in brief                                         33 Group Management
2   Business model                                        34 Board
4   A word from the CEO                                   36 Administration report
6   Business concept and strategy                         40 Sustainability report
7   Financial goals                                       42 Financial statements
8   Dialogue with stakeholders                            50 Notes
10 Market Overview                                        73 Proposed appropriation of profit
14 Online Gaming business area                            74 Signatures of the Board of Directors
16	Game Development business area                        75 Auditor’s Report
18 Online Marketing business area                         78 The share and shareholders
20 Gaming Technology business area                        81 Multi-year review
22	Restaurant Casino business area                       82 Financial definitions
24 Case – Acquisition                                     84 Definitions
26 Employees                                              85 Financial calender/Annual General Meeting
27 Corporate Governance Report                            85	Addresses
                                                                                                                     Revised Board of Directors’ Report and financial
                                                                                                                     statements include pages 36-74.

Cherry AB (publ) is a Swedish public company based in Stockholm, Sweden. Corporate identity number: 556210-9909. LEI code: 549300PFWW1URKGIPU90. The annual
report is published in Swedish and English. The Swedish language version is the original document and, in the event of any discrepancy between the original and the
translation, the Swedish version takes precedence. The printed version of the Annual Report is distributed only to the shareholders who have ordered it. The Annual Report
in its entirety is available on the company’s website: www.cherry.se. The 2017 Annual Report was published in April 2018. All amounts are expressed in Swedish kronor.
Kronor is shortened to SEK, thousands to SEK thousand, and millions to SEK million or SEKm. Figures in brackets refer to the previous year unless otherwise stated.
    This report contains forward-looking information based on Cherry’s current expectations. No guarantee can be provided that these expectations will prove to be correct.
Consequently, future outcomes may vary considerably compared with forward-looking information based on, among other things, changing economic, market and competi-
tion conditions, changes in legal requirements and other policy measures, fluctuations in exchange rates and other factors. ©2018 Cherry AB (publ)

CH E R RY AB (PU B L) AN N U AL R E P O RT 2 0 1 7
I NNOVATIVE STAKES - Cision
• 2017 IN BRIEF

2017 IN BRIEF
Cherry’s strong development continued in 2017. The Group has gained market share
and strengthened its position in the value chain.

Another successful year for Cherry.
Revenues for the Group increased by 104 percent to SEK 2,525              The Group strengthened its position in all business areas
million, compared with the previous year. Organic growth in               through technology development, product refinement and
2017 was 27 percent (32).                                                 marketing efforts, providing good conditions for the Group’s
    Profitability for the full-year was good. Profit (EBITDA)             companies to continue to grow profitability.
amounted to SEK 429 million, an increase of 146 percent,
compared with the full-year 2016.

The Group, SEKm                  2017          2016
Revenue                          2,252         1,102

                                                       Q1
EBITDA                             429          174
EBIT                               295          115
                                                                                                              REVENUE PER QUARTER
Diluted earnings per
                                                                                                              AND BUSINESS AREA, 2017
share)                            0.53          1.27
                                                                                                       SEKm
Equity/assets ratio (%)           34%           14%                                                     625
                                                       • Anders Holmgren is appointed
                                                          CEO of Cherry AB.                             500
Business areas, SEKm             2017          2016
                                                       • Yggdrasil initiated new business              375
Online Gaming                                             concept, Yggdrasil Dragons.
Revenue                                         833                                                     250
                                 1,823

                                                       Q2
EBITDA                             277          120                                                     125

EBIT                               167           81                                                       0
                                                                                                                Q1      Q2      Q3      Q4
Amount deposited                 5,502         2,288
                                                                                                                Online Gaming
Active customers                                                                                                Game Development
at year-end                   929,900        557,885                                                            Online Marketing
                                                       • Christine Rankin is appointed                         Gaming Technology
                                                         CFO of Cherry AB.                                      Restaurant Casino
Game Development
                                                       • Issue of additional secured options
Revenue                            169           87      in the amount of EUR 134.5 million.
EBITDA                              71           40      Available funds designated to
                                                         finance acquisition of remaining
EBIT                                59           27      51 percent in ComeOn Malta Ltd.
Integrated operators                67           30    • Cherry called on the option to
                                                         acquire 7.5 percent in Almor and
                                                         subsequently owns 82.5 percent.

                                                                                                     Q4
Online Marketing
                                                       • XCaliber signed contract with its
Revenue                            146           57      first external customer.
EBITDA                              96           19    • Cherry completed acquisition of 25
                                                         percent of the shares in game deve-
EBIT                                89           14
                                                         lopment company Highlight Games.

Gaming Technology*                                                                                   • Trading of Cherry AB’s Class B share

                                                       Q3
                                                                                                        launched on Nasdaq Stockholm
Revenue                             39             -                                                    Mid Cap.
EBITDA                                4            -                                                 • New acting CEO of ComeOn
                                                                                                        is appointed.
EBIT                                  4            -
                                                                                                     • Cherry revised the full-year
                                                                                                        forecast for 2017.
Restaurant Casino                                      • Cherry carried out a 1:5 share split       • Cherry acquired another 12.5 percent
Revenue                            157          157      irrespective of class.                         of the shares in Highlight Games and
                                                       • Cherry adjusted full-year forecast.           the remaining 44 percent in Game
EBITDA                              17           17
                                                       • Final acquisition analysis of                 Lounge (with effect from 2018).
EBIT                                13           13      ComeOn is completed.
*The business area is separately reported
 as of 1 January 2017.

                                                                                             C H E R RY A B (PU B L ) A N N U A L R E PO RT 2 0 1 7   1
I NNOVATIVE STAKES - Cision
• BUSINESS MODEL, STRENGTHS AND OPPORTUNITIES

CHERRY CREATES VALUE WITH
A COMPLETE BUSINESS MODEL
Cherry invests in, owns and develops fast-growing gaming, media and entertainment companies.
The Group consists of online gaming operations, performance-based marketing services, develop-
ment of gaming technology and gaming development to own and external gaming operators.

Acquisition of company/project                                                                  Optimize long-term value
– Clear development potential                                                                   – Strengthen Cherry's position as the
                                                                business                          the most comprehensive company within
– Strategically important                                        acumen                           gaming, entertainment and media
– Committed people                        financing
                                                                                                – Create stable companies with
                                                                                                  clear earnings capacity
Own innovation
                                                                         corporate
                                                          network       governance              – Disposal, as the company can
– Identify business opportunities                          (skills)                               develop better on its own
– Support and supplementing                                                                       or in another structure
  of skills

                 Ongoing value creation: Operational efficiency, growth, management and capital structure

DEVELOPMENT FROM IDEA TO                           ment and analysis, sales and marketing        with the Group and its subsidiaries.
PROFITABLE GROWTH                                  knowledge as well as financial reporting.          Foresight, innovation, innovative
Cherry’s business model involves owning                 • Financing includes Cherry, in          thinking, organic growth and value
and developing fast-growing and profit-            various ways, ensuring the acceleration       creation are key concepts that govern
able companies as well as identifying and          of development through efficiently sup-       the structure and development of the
supporting innovations at an early-stage           plying capital, with the optimal com-         diversified business areas. Cherry has a
in various categories within gaming,               bination of equity and external capital.      long-term investment model and sup-
entertainment and media.                           Investment decisions can be made at the       ports the business areas in their growth
    The foundation of our success                  right time and on the right terms.            phases. We strive to be a market leader
is committed, driven people and our                     • Network include both internal and      in each business area where we operate,
ambition to develop strong and strategic           external partners that have an interest in    while continuously seeking and exploring
partnerships through offering the found-           contributing to strengthening Cherry’s        new business opportunities.
ers and management of the companies                subsidiaries through the right contacts
a clear role in which to continue running          and skills.                                   OPTIMIZE LONG-TERM VALUES
the operations.                                         Cherry’s objective is to create value    The core of Cherry’s strategy is to
    Our starting point is to develop our           through commitment and active owner-          develop stable companies with good and
companies over time, as long as we see             ship and we exercise our influence pri-       increasing earning capacity. This creates
continued potential for value creation.            marily through the boards of the respec-      cash flow and room for additional acqui-
                                                   tive subsidiary, where the management         sitions and the possibility of dividends
CHERRY THE GAMING ENGINE                           has a clear and complete operational man-     to shareholders in Cherry AB. In certain
With our common knowledge from                     date and responsibility. In parallel with     situations, the assessment may be that
different parts of the gaming market,              the formal corporate governance, we want      a company would develop better with
Cherry’s Board and management teams                to create a partnership and a joint plan      another principal owner, or that Cherry
assist in tactical as well as strategic issues     for the company’s development. Clear          would prefer to adjust the distribution
according to the conditions that each              and transparent corporate governance          within its operations, in which case we
company faces. Important areas are:                permeates our work and is the foundation      actively pursue a process to find a new
    • Business acumen, entails that we             for creating trust among all the various      suitable owner while maximizing the
together ensure good business develop-             stakeholders who choose to do business        value for our shareholders.

2   CH E R RY AB (PU B L ) AN N U AL R E P O RT 2 0 1 7
I NNOVATIVE STAKES - Cision
• BUSINESS MODEL, STRENGTHS AND OPPORTUNITIES

                                               THE SUSTAINABILITY OF                          As an employer, we focus on providing
                                               OUR BUSINESS MODEL                             a safe and inspiring work environment,
                                               We actively support all of our companies       where respect for each individual and
                                               in decisions that lead to value creation,      ethical behaviour are key factors. This
                                               which means that they may, during              enables us to recruit and retain the best
                                               certain periods, report slightly lower         talent.
                                               earnings in favour of long-term value-             As several companies are in an
                                               creating investments. We are convinced         early stage of development, much of the
                                               that innovation, committed people in           development of the Group’s sustain-
                                               close dialogue with key stakeholders, a        ability work is done within Cherry AB.
                                               strong market position and compliance          The company supports the UN Global
                                               with regulations are the most important        Compact and the OECD Guidelines
                                               factors for long-term value creation.          for Multinational Enterprises. It is of
                                                                                              the utmost importance that we always
                                               SUSTAINABILITY EFFORTS                         comply with laws and regulations. Every
                                               Cherry AB has limited operations of its        employee and consultant working for
                                               own, and works primarily through the           Cherry, and other representatives of the
                                               boards of the individual subsidiary to         Group, is expected to follow the Group’s
                                               continually raise the Group’s ambitions        instructions and policies. In order to
                                                 within the areas of social, environ-         continuously update the organization on
                                                   mental and economic issues. We             internal rules, courses are held regularly
                                                      strive to provide a good example        within each subsidiary.
                                                           for our companies, employ-             In 2018, Cherry intends to develop
                                                                   ees and investors.         a more structured programme for the
                                                                                              Group’s sustainability efforts.

Online Gaming                Game Development            Online Marketing           Gaming Technology             Restaurant Casino
– ComeOn                     – Yggdrasil Gaming          – Game Lounge              – XCaliber                    – Cherry Spelglädje
Cherry is an operator of     & Highlight Games           Game Lounge conducts       XCaliber develops and         Cherry Spelglädje
around a dozen gaming        Yggdrasil Gaming devel-     performance-based          manages a technology          delivers a complete
sites that offer custom-     ops, designs and moni-      marketing aimed at         platform for gaming           solution including staff,
ers casino, lottery, poker   tors games for mobiles,     online gaming op-          and payroll solutions.        game equipment and
and betting gaming via       tablets and desktops,       erators as well as other      The business model         payment systems.
mobiles, tablets and         and these games are         verticals, such as loan    entails XCaliber receiv-         The business model
desktops.                    licensed to online          references.                ing both an integration       entails Cherry sharing
   The business model        gaming operators.              The business model      fee and royalties based       the gaming surplus less
entails the games               The business model       entails the company        on the percentage of          Cherry’s costs with the
generating a net gam-        entails Yggdrasil receiv-   receiving payment in       transactions that take        facility owner. Games
ing surplus (stakes less     ing a one-time fee when     the form of a lump sum     place through the             offered are Blackjack
winnings and customer        a game is integrated with   per registered customer    platform.                     and Roulette, located
bonuses before tax).         an operator and subse-      or part of the gaming                                    in hotels, nightclubs,
From the net gaming          quently receiving royalty   surplus generated by                                     bars and restaurants.
surplus, a percentage-       payments based on the       the customer as long as                                  Cherry also provides
based royalty fee is paid    percentage of the game’s    the customer is active.                                  these at different
to the game provider.        generated gaming sur-       In addition, the compa-                                  events.
                             plus. In 2018, Highlight    ny can receive fees for
                             Games will launch its       advertising and other
                             innovative products for     marketing efforts.
                             the virtual sports gaming
                             market, both online
                             and physically.

                                                                                      C H E R RY A B (PU B L ) A N N U A L R E PO RT 2 0 1 7   3
I NNOVATIVE STAKES - Cision
• A WORD FROM THE CEO

INNOVATION AND CORPORATE GOVERNANCE
FORM THE CORE OF CHERRY’S
BUSINESS MODEL
Cherry’s strong development continued in 2017. We captured                                                                               REVENUE GROWTH 2017
                                                                                                                                  SEKm
market share and our companies strengthened their positions.                                                                      160

                                                                                                                                  120
After a year as President and CEO of                         organization, market and finances. In or-
Cherry, I am able to confirm that Cherry                     der to ensure sustainable development,
                                                                                                                                   80
can report yet another good year, from                       we have developed management systems
both a financial and operational per-                        and governance documents as support,                                  40
spective. A year ago, I wrote that there                     and we ensure risk assessment and risk
remained an incredible amount to be                          management are given high priority. See                                0
done in the gaming industry, and that                        more details about our business model                                          Q1      Q2      Q3       Q4
what is great about Cherry is that its                       on pages 2-3.                                                                  Online Gaming
five diversified business areas span the                                                                                                    Online Marketing
                                                                                                                                            Game Development
entire gaming industry and that Cherry                       GOOD PROGRESS OVER THE YEAR                                                    Gaming Technology
AB owns and manages highly interesting                       WITH POTENTIAL FOR IMPROVEMENT                                                 Restaurant Casino
companies. We have already benefited                         In 2017, Cherry delivered well, achieving
from this strength and progressed some                       revenue growth of 104 percent, of which
distance in our plans.                                       27 percent was organic. Our largest
     I still have the same feeling; Much lays                business area, Online Gaming, accounted                        operators and additional innovative games
ahead of us, and Cherry is the natural ac-                   for 80 percent of the Group’s revenue in                       were launched. The company has made
tor to be able to take advantage of all these                2017 and 65 percent of EBITDA.                                 significant investments in marketing and
opportunities. We will continue to focus                          During the year, we integrated the                        strengthened its relationships with both
on companies run by strong and ambi-                         operations of B2C company ComeOn,                              operators and players. The result was the
tious people with a mix of entre­preneurs                    Cherry’s largest acquisition to date. For                      highest number of game rounds to date
and specialists. Creativity and hard work                    the most part, this process has pro-                           and substantial payouts of jackpots. In
drive the products forward, also allowing                    gressed as planned, although, in mid-                          regulated markets, such as Italy, develop-
Cherry’s business areas to grow faster                       2017, we saw that the company’s costs,                         ment has exceeded expectations.
than their respective markets. The key to                    market focus and management were not                               During 2018, Yggdrasil will also
our success is that we consistently succeed                  living up to our expectations. Following                       rejuvenate the gaming experience in classic
in renewing our customer offering thanks                     an intense period in the second half of                        table games such as Blackjack, Roulette
to fantastic efforts from all employees, in                  the year, the company is back on the                           and Baccarat. Players will be offered an
combination with good corporate gover-                       growth curve that we envisaged.                                enhanced experience in a virtual 3D envi-
nance and business acumen.                                                                                                  ronment and will be able to interact with
     Cherry’s business model can be                          HIGH LEVEL OF ACTIVITY AND ACQUISI-                            a digital dealer. First out is Blackjack, a
summed up in the words ”entrepreneurs                        TIONS IN GAME DEVELOPMENT                                      game in which the company has applied its
for entrepreneurs”, that is, we see Cherry                   Yggdrasil completed yet another success-                       REDUX™ technology, developed in-house.
as an organization with enthusiastic and                     ful year with a number of new deals and                            We took a strategically important
innovative individuals helping each other                    launches of several new games. In 2018,                        step in second quarter of the year with
through rapid growth and strengthen-                         bingo games will be launched with a host                       the acquisition of Highlight Games,
ing their market position. We do this                        of new features that work smoothly on                          which broadened Cherry’s gaming
through our range of products and ser-                       mobile phones. The company continued to                        development operations. Highlight
vices as well as multi-faceted experience                    sign important customer licence agree-                         Games develops innovative products for
among senior executives who know the                         ments during 2017 with major, established                      the virtual sports gaming market both

CH E R RY ’S H I STO RY 1 9 6 3 – 2 0 1 7
                                                                                                 1999
                                                   1984                   1996            Launch of maritime                                  2010
                                               Acquisitions of       Introduces new        operations in the                              Acquisition of
        1963                 1972             Swedish gaming        generation prize-       Mediterranean.                               AutomatGruppen           2012
     Restaurang       Cherry is launched     companies lay the       based games for       Investments in IT           2003               makes Cherry      Cherry divests the
    Rouletter AB is   and the cherry sees     foundation for a     Swedish restaurant     companies, mainly          Buys into              the online      Maritime Gaming
       formed         the light of the day       new group          and bingo market        within Internet         Betsson.com           market leader       business area

                    1968                 1978                  1992                   1998                    2000                 2006                 2011
               The operations       The ban on slot    Cherry streamlines        Cherry acquires       Cherry launches       Cherry’s shares          Launches
             become nationwide       machines hits         operations.            35 percent in       new logo and the        are distributed       Eurolotto.com
                 in Sweden            Cherry hard      Activities in Eastern   Net Entertaiment AB    parent company’s       to shareholders
                                                       Europe are shelved                               Class B shares         and listed on
                                                                                                       are listed on the        Aktietorget
                                                                                                        OM Stockholm
                                                                                                      Exchange’s O-list

4     CH E R RY AB (PU B L) AN N U AL R E P O RT 2 0 1 7
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• A WORD FROM THE CEO

                                                                                                                                      Listing on Nasdaq Stockholm.
                                                                                                                         On Wednesday, 18 October 2017, Cherry AB’s
                                                                                                                        Chairman, Morten Klein, and Cherry AB’s CEO,
                                                                                                                                   Anders Holmgren, rang the stock
                                                                                                                                exchange bell at Nasdaq Stockholm.

                                                                                                                       INVESTMENTS IN INNOVATION
                                                                                                                       Cherry has a robust and broad business
                                                                                                                       model that enables effective build-up
                                                                                                                       phases in associates and subsidiar-
                                                                                                                       ies while delivering good returns. All
                                                                                                                       companies in the Group continue to be
                                                                                                                       engaged in ongoing efforts to ascertain
                                                                                                                       what the market demands – monitoring
                                                                                                                       consumer behaviour and technological
                                                         strong offerings for the gaming industry                      development is crucial to success. An
                                                         and other areas where the company’s                           important part of retaining our leading
online and land-based, including content                 unique skills make a difference.                              market position is to maintain contacts
from league football. The company is                                                                                   with entrepreneurs who have good ideas
in an early and exciting stage and has                   RE-REGULATION OF THE SWEDISH                                  and seek to grow profitably.
launched test versions in various markets.               GAME MARKET                                                       In 2018, we will increase our range
                                                         The timetable for the new Swedish                             of contacts and ensure we become
ONLINE MARKETING BROADENS                                gaming policy stands firm. The proposal                       more active in seeking out candidates
ITS MARKET                                               includes a licensing system that will be                      for acquisition or collaboration. There
Game Lounge’s performance-based                          in place as of 1 January 2019. Cherry has                     is great potential in both the Nordic
marketing operations continue to grow                    participated in parts of the hearing and                      countries and other European countries.
at a rapid pace and with good profitabil-                has expressed its view that the proposed                      We, therefore, look forward to further
ity. We are seeing that enhanced search                  tax rate of 18 percent is excessive, as legal-                developing our portfolio of investments
engine optimization, combined with                       ization of the gaming market with a high                      in new innovative and successful busi-
building strong brands, has had a positive               degree of channelling should be the main                      nesses that strengthen our position as
effect. In the Japanese market, we saw                   purpose of the regulation. The UK has                         an important part of the ecosystem for
a continued increase in the number of                    successfully achieved a 95 percent chan-                      gaming, entertainment and media.
visitors, although these contributed only                nelization, with a tax rate of 15 percent.                        Cherry is a fast-growing company in
marginally to fourth quarter revenue. The                                                                              an exciting market, and we challenge old
plan is to continue expanding the opera-                 RESPONSIBLE GAMING                                            structures. We see opportunities where
tions into several new geographic markets.               For Cherry, responsible gaming has                            others see challenges, and the Group
     In the fourth quarter, the market                   been a central issue for many years,                          comprises many different people with
broadened in which the company’s                         which we systematically manage on a                           unique skills and who are dedicated to
expertise is combined with existing                      daily basis. Within the Group’s compa-                        developing the company as well as their
infrastructure to put borrowers in contact               nies, we have clear policies, regulations                     own role. We are committed to finding
with lenders offering terms suiting the                  and experienced managers who can                              the right employees and ideas, and I
borrower’s circumstances.                                handle gaming addiction situations. We                        look forward to welcoming many more
     After the end of the period, Game                   work with several external specialists and                    in 2018. In addition, I will spend a great
Lounge invested in another complemen-                    partners, such as the Swedish National                        deal of my time meeting with entrepre-
tary segment – services optimizing                       Association for Gambling Addicts and                          neurs and creative talent. 2018 will be an
gaming for accustomed players who                        Gambling Therapy. Together, we provide                        intensive year!
seek greater control over their gaming.                  the customer with tools to counteract
With the acquisition of slottracker.com,                 unhealthy gaming behaviour and the                            Anders Holmgren
Game Lounge will continue to develop                     opportunity to play responsibly.                              CEO Cherry AB (publ)

                                                                                                                                         2017
      2013                                                                                                         2016             Anders Holmgren             2017
Divests Automat-                                                      2016                                  Cherry launches a     appointed President      Cherry acquires
  Gruppen for              2015                                  Cherry issues                             new B2B business        and CEO, Christine       25 percent of
 SEK 286 million     Yggdrasil Gaming          2016             a covered bond              2016             area focused on      Rankin as CFO, and      game development
  and acquires       receives operator   Cherry acquires 49    listed on Nasdaq       Cherry Spelglädje    gaming technology      Morten Klein elected    company Highlight
CherryCasino.com     license in the UK   percent of ComeOn         Stockholm          acquires Betman           – XCaliber       Chairman of Cherry AB         Games

                   2014                                      2016                   2016                2016                     2017                   2017
            Cherry is awarded                       Cherry is awarded the    Yggdrasil Gaming       Game Lounge         Cherry issues covered       Cherry takes
             the IGA Online                          IGA Online Gaming        receives gaming      awarded Affiliate     bonds of EUR 134.5       home big wins at
            Gaming Operator                          Operator of the Year   licence in Gibraltar     of the Year        million for acquisition   the International
            of the Year award                        award for the third        and Romania                            of remaining 51 percent     Gaming Awards
                                                      consecutive year                                                  of shares in ComeOn

                                                                                                             C H E R RY A B (PU B L ) A N N U A L R E PO RT 2 0 1 7           5
I NNOVATIVE STAKES - Cision
• BUSINESS CONCEPT AND VISION

BUSINESS CONCEPT                                                 VISION
Cherry’s strategy is to create shareholder value                 Cherry’s vision is to be a model of entrepreneurship,
by owning and developing fast-growing and                        responsibility and dedication. This means that Cherry
profitable gaming, media and entertainment                       will provide the best environment for developing
companies.                                                       profitable and fast-growing projects and companies
                                                                 within gaming, entertainment and media.

CORE VALUES
Cherry’s core values ​​should permeate everything the company does:

Entrepreneurship

Responsibility

Commitment

6   CH E R RY AB (PU B L ) AN N U AL R E P O RT 2 0 1 7
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• F I N A N C I A L TA R G E T S

FINANCIAL GOALS
The following financial targets are to guide the Group’s activities
over an economic cycle:

GROWTH                                                                          CAPITAL STRUCTURE
Cherry’s target is to grow more quickly than the European                       Cherry’s capital structure should allow for a high degree of
gaming market over an economic cycle, driven primarily by its                   financial flexibility as well as the possibility for acquisitions.
business areas that focus on online gaming: Online Gaming,                      The company’s target is for the equity/assets ratio to be at least
Game Development and Online Marketing.                                          30 percent.
    Since 2012, Cherry’s revenue has increased by an average                        As at 31 December 2017, the equity/assets ratio was 34 percent
of 71 percent per year, while the online casino market in Europe                (14).
grew on average by 12 percent per year. In 2017, the Group’s
revenue increased by 104 percent, while market growth in                        DIVIDEND POLICY
Europe during the year was estimated at 11 percent. The revenue                 According to the dividend policy adopted by the Board, Cherry’s
increase is explained by both growth of existing customers,                     target is to distribute more than 50 percent of net profit as
launches of new games and the inflow of new customers as                        dividend. However, the company’s financial position, cash flow,
well as acquisitions of companies. The objective is to continue                 opportunities for acquisitions and future prospects should be
to grow organically and structurally.                                           taken into account.
                                                                                    As for the 2016 financial year, Cherry AB’s Board of
MARGIN                                                                          Directors proposes to the Annual General Meeting that no
Cherry’s target is to increase the EBITDA margin over time                      dividend be paid for the 2017 financial year.
and in the medium term (3-5 years) achieve an EBITDA margin
of between 15 and 18 percent.
2017
                                                         104
             11 European market                   Cherry
    For the full-year 2017, Cherry reported an EBITDA    margin
of 19.1 percent (15.8).
2016                                                       109
             11

2015                                56
              13
                                                              104
2017
             11 European market                      Cherry

GROWTH,
2016    %11                                                        109

                                                              104                   The financial targets are based on the
2017                                56
2015         11 European market                      Cherry
             13                                                                     following assumptions:
2016                                                               109
             11
                                                                                    • Continued migration to online gaming via mobiles,
2015                                56                                                tablets and desktops.
              13

2017
       TARGET: to grow more quickly than the European gaming market
                                                                 19.0               • Cherry and its subsidiaries continue to be given an
       over an economic cycle                                                         opportunity to focus on the European market for
2016                                                   15.8
                                                                                      online gaming and games development.
2015                          6.8
EBITDA-MARGIN, %                                                                    • The company continues to be able to handle its
2017                                                                     19.0
                                                                                      cost structure and cope with the effects of entering
                                                                                      markets and paying applicable taxes.
2016                                                   15.8

2015                          6.8                                                   • The Group’s customer offerings are perceived as
2017                                                                     19.0         attractive.
2016
       TARGET: 15-18%                                  15.8
                                                                                    • The company retains the licences necessary for its
2015                          6.8
                                                                                      operations.
EQUITY/ASSETS RATIO, %
                                                                                    •N
                                                                                      o significant adverse effects occur as a result of
2017                                      34                                         material changes in the political, fiscal, market and
2016                    14                                                           administrative treatment of the Group.

2015                                                          52

       TARGET: At least 30%
2017                                      34

2016                    14

2015                                                          52
2017                                      34                                                   C H E R RY A B (PU B L ) A N N U A L R E PO RT 2 0 1 7   7
2016                    14

2015                                                          52
I NNOVATIVE STAKES - Cision
• D I A LO G U E W I T H S TA K E H O L D E R S

CONTINUOUS DIALOGUE WITH
STAKEHOLDERS BUILDS TRUST
The Cherry Group’s offering is based on games and media
that are entertaining and engaging.

Through the Cherry Group’s expansive               and we will strengthen this position          carry out the necessary measures – often
presence in the gaming industry, the               every day, primarily by listening to the      together with the customer. In addition,
Group has continuous contact with a                various perspectives of our stakeholders,     all employees who have customer contact
number of stakeholders. This group                 and the customer naturally has a key          undergo special training programmes on
includes players, customers, employees,            role in these perspectives. We at Cherry      an ongoing basis. These programmes are
suppliers, capital market players and              understand the importance of having           evaluated and adapted to the respective
government agencies.                               games that are entertaining.                  jurisdiction in which Cherry or its sub-
    The companies within the business                  For Cherry and our subsidiaries,          sidiaries operate. The company has its
areas Online Gaming and Restaurant                 responsible gaming is a broad concept         own staff and external experts working
Casino are gaming operators and have               that includes customer safety, combating      to strengthen the methods that enable
direct contact with thousands of end               money laundering and customer verifica-       companies to effectively develop their
customers in the gaming industry on a              tion and authentication. A fundamental        work within responsible gaming.
daily basis. The nature of the contact be-         requirement for all companies within the
tween the companies and the customer               Cherry Group is to actively comply with       Physical meetings in connection
varies between the different business              laws and regulations in order to maintain     with games
areas. Within Restaurant Casino, custom-           their gaming licences as well as to study     The Cherry Group is unique among the
ers meet the company’s employees at                developments in markets where regula-         companies active in the Swedish gaming
a physical gaming table, while contact             tion, licences and other conditions of the    market by offering games both via Res-
within the Online Gaming business area             industry are discussed and facing change.     taurant Casino and online. The majority
takes place over the Internet.                         We know that, in some cases, our          of employees within Restaurant Casino
                                                   products and services can contribute to       are dealers in Blackjack and Roulette. As
Responsible gaming                                 the risk that some players will develop       these employees are the company’s face
The basis for all communication is that            gambling problems. We therefore have          to the public, who meet customers, high
there is trust and mutual respect in the           a number of systems that monitor each         demands are placed on their training
relationship. Cherry’s ambition is that            transaction to determine the level of risk.   in responsible gaming. All employees
our stakeholders should be able to trust           High-risk activities are then controlled by   undergoing training in responsible
that we act properly, make the right deci-         a dedicated team that manages the risk        gaming and how to treat customers.
sions and act responsibly. Since 1963,             in the situation through appropriate cus-     Furthermore, there are games with low
Cherry has built a strong brand on trust,          tomer review and is subsequently able to      stakes and winnings where each game is

8   CH E R RY AB (PU B L ) AN N U AL R E P O RT 2 0 1 7
• D I A LO G U E W I T H S TA K E H O L D E R S

carried out over a long period in a con-      other market players, to prevent gaming-          tions and must verify and authenticate
trolled environment. Restaurant Casino        related problems.                                 their customers. We have developed a
is a very safe gaming form, and very few          Cherry has clear guidelines against           proprietary and established third-party
people develop gambling problems as a         moneylaundry and corruption, as well              software to ensure we have control over
result of Restaurant Casino games.            as a handbook on money laundering                 the data required to meet regulatory
                                              and financing of terrorist activities. The        requirements. Cherry’s online gaming
Know Your Customer – “KYC”                    majority of Cherry’s employees undergo            business is one of the few gaming compa-
The term “Know Your Customer – KYC”           training in anti-corruption and anti-­            nies to currently allow mobile BankID as
refers to verifying the identity of custom-   money laundering, and the Group in-               a verification method. The use of Mobile
ers. All financial companies and banks        tends to further strengthen and broaden           BankID is the safest way for customer
are required to identify their customers      its work in this area in the coming years.        verification, that is, to determine if the
to ensure they know who they are. This                                                          customer really is the person they claim
comprises requiring customers at gaming       Customer verification and authentication          to be. This method of customer verifica-
companies to identify themselves digitally    Cherry’s different companies fall under           tion is also used by, among others, most
or, in some cases, by sending documents       different regulations in different jurisdic-      Swedish banks and authorities.
to prove their identity, in accordance with
applicable laws and conditions attached
to the gaming licences in their respective
jurisdictions. In addition to being able to
verify the identity of customers, the EU’s        SLOTTRACKER.COM GIVES
Anti-Money Laundering Directive also              PLAYERS TOOLS FOR CONTROL
places requirements on internal guide-            In early 2018, Cherry’s subsidiary
lines and policies for risk management,           Game Lounge acquired US site
compliance with regulatory requirements,          Slottracker.com. The product is a
training of staff, and procedures for cus-        unique solution that offers customers a
tomer documentation and records.                  better overview and control of their gambling.
                                                  With the help of the site’s various tools, the customer
Combating money laundering                        can register every bet that he or she makes in different
The gaming companies that are in direct           games online. By choosing Slot Tracker, players are able
contact with end customers in the gam-            to have their information saved about what games and
ing industry face similar challenges as           bets are made, as well as winnings and bonuses paid.
financial institutions such as banks; they        The customer can thereby follow his or her development
process a large number of transactions            and analyze which casino works best, based on their
daily and must follow comprehensive               specific requirements and gaming tactics, including the
rules for combating money launder-                ability to set limits for amounts and stakes as well as
ing. The Group’s companies in the B2B             daily playing time.
sector also work actively, and in close
cooperation with its customers and

                                                                      TOOLS
                                                                       FOR
                                                                      SELF-
                                                                     CONTROL

                                                                                        C H E R RY A B (PU B L ) A N N U A L R E PO RT 2 0 1 7   9
• MARKET OVERVIEW

MARKET WITH STRONG
UNDERLYING GROWTH
The gaming market has shown stable growth, regardless of the economic cycle.
The market is driven primarily by the development of entertaining games, increased availability
thanks to digitized platforms combined with regulation and re-regulation of markets.

Overall, the global gaming industry is           ONLINE GAMING                                        LAND-BASED GAMING
expected to have increased revenue               The main segments of online gaming                   The restaurant casino segment is esti-
(Gross Gaming Revenue) by about                  in Europe are betting (41 percent),                  mated to represent less than one percent
3 percent to EUR 382 billion in 2017,            casino (31 percent), lotteries (13 percent),         of the total gaming market in Sweden and
of which the online gaming share of the          poker (7 percent) bingo (5 percent) and              has been characterized by a slow decline
total market is expected to have increased       others (3 percent). In the last five years,          in sales and profitability over the past
from 10.0 to 10.6 percent. Operators,            lotteries have had the highest growth                10 years.
game developers, platform providers and          rate (15.4 percent), followed by betting
performance-based companies are all              (14.7 percent) and casino (12.8 percent).
exposed to the online gaming segment.            These are the segments Cherry is
    The European online gaming market            primarily exposed to.
is currently growing by just over 10 per­
cent per year and is expected to show
an aggregate annual growth rate of
approximately 7.7 percent over the next
five years, with total sales of close to
EUR 31 billion in 2022.

     The gaming market has enjoyed good growth regardless of the economic situation.
     The market is driven principally by re-regulation of monopoly markets, a shift from offline to online,
     increased mobile use and the development of innovative and entertaining games and products.

                                       The gaming industry is expected to have in 2017 reached sales of

                                                    EUR 382
          GLOBAL MARKET FOR ONLINE GAMING, EUR BILLION
                                                      billion                                         ACCORDING TO H2 GAMBLING CAPITAL

     %
     20                                                                                                                                          450
     18                                                                                                                              418   427   400
                                                                                                                     400       410
     16                                                                                                 382   391
                                                                             360    368   362   371                                              350
     14                                                         328    341
                                                          308                                                                                    300
     12                             287    292   295
                              273                                                                                                                250
     10                256
                 240
           223                                                                                                                                   200
      8
                                                                                                                                                 150
      6
      4                                                                                                                        51    53    57    100
                                                                                          34    37      41    44      47
                                           17     19      21    23     25     27    31
      2     7     9     12    14     15                                                                                                          50
      0                                                                                                                                          0
            03   04     05    06     07    08     09      10    11     12     13    14    15    16      17P   18E    19E       20E   21E   22E

                                            Online gaming             Land-based gaming          Proportion of online gaming

10   CH E R RY AB (PU B L) AN N U AL R E P O RT 2 0 1 7
• MARKET OVERVIEW

                  FROM OFFLINE TO ONLINE

     EUROPEAN MARKET FOR ONLINE GAMING, EUR BILLION

35
                                                                         7.7%
                                                                                                               The European
30
                                                                                              31.1
                                                                                                               online gaming market
                                                                                    29.2
25
                          12.1%
                                                                             27.6                              is growing by about
                                                                25.6

                                                                                                               7.7
                                                       23.7
20                                           21.5
                                    19.3
15                         17.4
                  15.4

                                                                                                               percent
10    13.3

5

 0
      2013        2014     2015     2016    2017E      2018E    2019E    2020E      2021E    2022E             per year.

     EUROPEAN ONLINE GAMING MARKET'S SEGMENTS (PROPORTION OF TOTAL INCOME)

             3%                                  3%                                 3%
     13%                              13%                                14%

 5%                                 5%                                  5%
                                                                                                               The main segments of online gaming
                         40%                              41%                                41%               in Europe are betting (41 percent),
7%                                  7%                                  6%
                                                                                                               casino (31 percent), lotteries (13 percent),
              31%                                31%                                31%                        poker (7 percent) bingo (5 percent) and
                                                                                                               others (3 percent). In the last five years,
                                                                                                               lotteries have had the highest growth
               2016                               2017E                              2018E
                                                                                                               rate (15.4 percent), followed by betting
                                                                                                               (14.7 percent) and casino (12.8 percent).
           Betting         Casino        Poker         Bingo       Lotteries         Other games

                                                                                                     C H E R RY A B (PU B L ) A N N U A L R E PO RT 2 0 1 7   11
• MARKET OVERVIEW

ONLINE GAMING

The different product segments have              to remain positive over the next five years,   largest product segment, even though
generally had strong growth during the           with betting expected to grow from the         casino and lotteries are expected to grow
last five-year period. The strongest growth      current EUR 8.7 billion to 12.2 billion in     at a faster rate.
was within lottery and betting, at 15.4          2022, casino is expected to grow from              Overall, the European online gaming
percent and 14.7 percent average annual          EUR 6.6 to 9.9 billion and lotteries are       market is estimated to grow by an average
growth rate, closely followed by casino          expected to increase from EUR 2.9 to 5.0       of 7.7 percent per year over the next five
(12.8 percent) and bingo (9.6 percent),          billion.                                       years, to reach sales of EUR 31 billion in
according to H2 Gambling Capital.                     H2 Gambling Capital therefore esti-       2022.
The trend for these segments is expected         mates that betting will continue to be the

12   CH E R RY AB (PU B L) AN N U AL R E P O RT 2 0 1 7
• MARKET OVERVIEW

DRIVING FORCES WITHIN ONLINE GAMES
Games via the Internet are still a relatively undeveloped industry, which is expected to increase in the future
driven by a number of key factors:

Mobile share of the          Higher entertain-         Re-regulation of          Greater confidence              Internet and smart-
combined gaming              ment value when the       monopoly markets          in e-commerce and               phone penetration
market is still relatively   technical development     is increasing the         use of, for example,            is increasing and
small, but more plat-        of gaming products,       number of online          banking and booking             stabilizing at very
forms making it easier       platforms and sites       players and is            services.                       high levels throughout
to play on mobiles and       progresses and more       opening the door                                          all of Europe.
tablets are contributing     interesting solutions     to new operators,
to significant growth        are added.                such as media
opportunities.                                         houses.

LAND-BASED GAMING
The restaurant casino market in Sweden is regu-
lated and is estimated to constitute less than one
percent of the total gaming market in Sweden.
The restaurant casino market is in a structural
decline driven by increased overhead combined
with a long period of ceilings on the allowed stake
per game. However, the forthcoming new gaming
legislation is expected to have a positive impact on
the restaurant casino segment due to the proposal
to increase the highest stake from the current
SEK 75 to about SEK 220.
     The re-regulation in Sweden can also open the
door to new forms of gaming and opportunities
within online games. The new gaming legislation
is likely to be introduced in early 2019.

                                                                                  C H E R RY A B (PU B L ) A N N U A L R E PO RT 2 0 1 7   13
• BUSINESS AREA ONLINE GAMING

                                                   ONLINE GAMING
The launch of snabbare.com at the end of 2017 shows that ComeOn is back as a fast-paced
company close to its customers and with a focus on profitable growth.

Business development                               The acquisition of ComeOn helped to                        and mobilebet.com were added to the
The operations have been character-                significantly increase the share of reve-                  global brands while locally-profiled brands
ized by the extensive integration work             nue from the important betting segment,                    were expanded with casinostugan.com,
undertaken following the acquisition               which generated 17 percent of total rev-                   folkeautomaten.com, suomikasino.com,
of ComeOn. During the latter part of               enues for Online Gaming. The number of                     getlucky.com and mobilautomaten.com.
2017, after the branding portfolio and             registered customers increased by 36.6                         With the acquisition of ComeOn, a
platforms were optimized, the business             percent during the year to 4.3 million at                  leading position in the Nordic region will
area could once again focus on profitable          the same time as the number of active                      be strengthened, which will continue to
growth and begin to realize the cost syn-          customers in the fourth quarter increased                  be an important market in the future. In
ergies that exist between the operations.          by 37,238 to 347,994, compared with the                    Europe, growth opportunities continued
Revenues from casino games accounted               corresponding quarter the previous year.                   to be strong with many interesting coun-
for 83 percent of total revenue.                       During the year, comeon.com                            tries facing regulation in coming years.

     Online Gaming develops and runs, as an         range of casino, lottery and betting. This is        such as NetEnt, Microgaming, Yggdrasil
     operator, dozens of gaming sites that offer    in order to provide customers the best pos-          Gaming, Amaya and Betsoft.
     customers casino games, lotteries and          sible gaming entertainment. Being able to                 The business model is based on the
     betting via mobiles, tablets and desktops.     offer a wide range of games is an important          game delivering a gaming surplus through
     The business model entails the games gen-      competitive tool. Therefore, Cherry licenses         the repayment rate being 95-98 percent.
     erating a net gaming surplus (stakes less      from several leading gaming developers
     winnings and customer bonuses). From the
     net gaming surplus, a percentage-based
                                                            Systems suppliers
     royalty fee is paid to the game provider.                                                                        Stake amounts,
                                                                                                   Gaming
     Cherry strives to offer customers a high               Services suppliers   Profit sharing                        winnings and    End users
                                                                                                  operators
                                                                                                                         bonuses
     repayment rate in combination with a wide              Games suppliers

14    CH E R RY AB (PU B L) AN N U AL R E P O RT 2 0 1 7
• BUSINESS AREA ONLINE GAMING

ComeOn considers the regulation occur-             Online Gaming
ring at the national level to be positive as       Target                  Strategic initiatives                             Activities 2017
development in the markets regulated
                                                   Organic growth          Many different customer groups                    Well-niched brands for
in recent years has been very positive,                                    Development of existing customers                 demographic breadth
especially for major players.                                              Broad and attractive offering                     Quick, friendly and relevant
                                                                                                                             service
Acquisitions                                                                                                                 Ongoing analysis of what the
In April, Cherry increased its ownership                                                                                     end user wants to play
in the subsidiary Almor by 7.5 percent to          Growth from new         Markets with strong gaming                Comprehensive coordination
82.5 percent.                                      markets                 culture in focus                          of ComeOn
     In May, Cherry completed the acqui-                                   Ongoing review of additional acquisitions
sition of ComeOn Malta Ltd., now owned
                                                   Driving forces for      Innovative approach by our staff                  Launched new quick
at 100 percent. ComeOn is Cherry’s larg-           the business            with deep technical know-how                      and good products
est acquisition to date.
                                                   Profitability           Integrated systems for good transparency New reporting and business
Revenue, earnings and returns                                              Management of operational risks          system deployed
                                                                           Cost synergies through acquisitions      New supplier agreement
Revenue for business area Online Gaming
increased by 120 percent to SEK 1,823
                                                   Companies in the business area (Cherry’s portion of the shares as at 31 December 2017).
million (833), with acquisitions being             ComeOn Malta Ltd (100%), Cherry Gaming Ltd (100%), Almor Holding Ltd (82.5%).
a strong contributing factor. Organic
growth was 18 percent. Operating profit
(EBITDA) increased by 131 percent to               Market trends                                             Driving forces
the new record level of SEK 277 million            •C ontinued migration from offline to                    •A vailability: Games from mobile plat-
(120), which corresponds to an improved              online                                                    forms increase the availability of the
EBITDA margin of 15.2 percent (14.5).              • Increasing
                                                                 share of games via mobiles                  products no matter where the player is
                                                     due to:                                                   located
Market                                                - More capable mobile phones                           • Social acceptance: Games are becoming
The European online gaming market                     - Consumer behaviour has changed so                     an increasingly socially accepted form
is currently growing by over 10 percent                  that the mobile phone is increasingly                 of entertainment on the Internet
annually and is expected to show an ag-                  being used for a variety of purposes in             • Re-regulation of monopoly markets
gregate annual growth rate of around 7.5                 everyday life                                         creates opportunities for new players
percent over the next five years, reaching            - Enhanced infrastructure speeds provide                to operate on the same terms
close to EUR 30 billion in revenue by                    better gaming experiences via mobiles
2022.                                              • Increasing range of new game products                  Competition
    The main segments of online                      for mobiles, such as live games during                  The main competitors in the gaming
gaming in Europe are betting (41 percent),           a match                                                 operator business are Bet365, Betsson,
casino (31 percent), lotteries (13 percent),       • Betting and state-run lotteries are                    GVC, Kindred, LeoVegas and Mr Green.
poker (7 percent), bingo (5 percent) and             the fastest growing segments on the
other forms of gaming (3 percent). In                European market, closely followed by
the last five years, lotteries have had              casino games
the highest growth rate (15.4 percent),            • An increasing number of markets are
followed by betting (14.7 percent) and               preparing and introducing national
casino (12.8 percent).                               gaming regulations

4.3 million
Approximate number of registered customers as at year-end 2017
                                                                                                    120%
                                                                                        Revenue increased to SEK 1,823 million

                                   Online Gaming                   2017         2016          YOY            BUSINESS AREA'S                  BUSINESS
                                                                                                                                          BUSINESS      AREA'S
                                                                                                                                                    AREA'S         BU
                                                                                                             PROPORTION OF                    PROPORTION
                                                                                                                                          PROPORTION  OF OF        PRO
                                   Revenue (SEK million)           1,823          833       120%             CONSOLIDATED                     CONSOLIDATED
                                                                                                                                          CONSOLIDATED             CO
                                   EBITDA (SEK million)             277           120       131%             NET INCOME, 2017                 NET2017
                                                                                                                                          EBITDA, INCOME, 2017     EBI
                                   EBIT (SEK million)               167            81       105%
                                   Active Customers*           347,944       310,706         12%
                                   Amount deposited
                                   (SEK million)                   5,503        2,288       141%
                                                                                                                    80%                           65%7%

                                   *For the fourth quarter

                                                                                                             Online Gaming                OnlineGame
                                                                                                                                                 Gaming
                                                                                                                                                     Development   Gam
Tomas Johansson
Acting CEO of ComeOn

                                                                                                   C H E R RY A B (PU B L ) A N N U A L R E PO RT 2 0 1 7   15
• BUSINESS AREA GAME DEVELOPMENT

                                                     GAME DEVELOPMENT
Cherry is active in Game Development through the subsidiary Yggdrasil Gaming and via the
associated company Highlight Games. Yggdrasil mainly develops slot machines licensed to
online game operators. Yggdrasil Gaming also offers customized slot machines.
  Cherry’s associated company Highlight Games develops gaming products for the virtual
sports game market both online and land-based, including content from league football.

Business development                                 (Italian market), Danish Games, Pinnacle,       end of the year, an increase of 103 percent
The business has been characterized by               LeoVegas and Jackpotjoy (Danish mar-            compared with the previous year.
continued strong interest in Yggdrasil’s             ket). At the same time, 11 new games                New markets 2017: Italy, Denmark,
products. A total of 40 new licence agree-           and an operator-exclusive game were             Georgia.
ments were signed with various operators             launched during the past year. The vol-             Awarded “Innovator of the Year”
in 2017, including William Hill, Mara-               ume of player transactions has continued        at the International Gaming Awards.
thonbet, Betfred and Rank Group (UK                  to increase steadily during the year and            “Slot Provider of the Year” at the
market), GVC, Eurobet and Snaitech                   reached a record-high 3.7 billion at the        EGR B2B Awards.

     Within Game Development, games are               desktops. Games licensed to different        fixed compensation on integration of new
     developed and operated that are licensed         gaming operators in Europe and Asia.         games and subsequent royalties based
     to gaming site operators offering custom-        The business model entails the game          on percentage of the game’s generated
     ers casino games via mobiles, tablets and        developer receiving a combination of         gaming surplus.

                                                                                              Game supplier
                                                 Yggdrasil Gaming      Royalty payments
                                                                                                                  Gaming      End-consumer
                                                                       based on gaming
                                                                                              Game supplier                    in the form
                                                                       surplus, integration                       surplus
         Sub-suppliers of      Fees to                                                                                          of players
                               suppliers         Highlight Games       fees
         data/information      of e.g. data                                                   Game supplier

16    CH E R RY AB (PU B L) AN N U AL R E P O RT 2 0 1 7
• BUSINESS AREA GAME DEVELOPMENT

Revenue, earnings and returns                  Game Development
Revenue for the Game Development               Target                    Strategic initiatives                  Activities 2017
business area, for all material purposes
                                               Organic growth            Customer types                         Signed a contract with many
represented by Yggdrasil Gaming, in-                                     Development of existing                new tier 1 customers
creased by 95 percent to SEK 169 million                                 customers                              Launched Dragons concept
(87). The proportion of Group income de-                                                                        Launched new requested tools
creased during the year from 22 percent
to 13 percent. Operating profit (EBITDA)       Growth from               Prioritized markets                    Increased activity in regulated
                                               new markets                                                      markets such as Italy and Denmark
increased by 78 percent to SEK 71 mil-
lion (40), while the EBITDA margin             Driving forces            Product launch                         Launched 11 new online games
decreased to 42 percent from 46 percent,       for the business                                                 and one operator-exclusive game
compared with the corresponding period
                                               Profitability             Good transparency                      Built the internal economy and
in 2016, due to implemented strategic                                    in the projects                        controller function
investments and expansion.
                                               Companies in the business area (Cherry’s portion of the shares as at 31 December 2017
Market                                         and any options outstanding 2018). Yggdrasil Gaming Sweden AB (84%), Highlight Games Ltd
Both Yggdrasil Gaming and Highlight            (37.5%, option to acquire 12.5% before the end of May, and 5.5% before the end of November).
Games are exposed to the online gaming
market, where Yggdrasil Gaming is pri-
marily influenced by online casino games
and Highlight Games by the online betting      Associated company Highlight Games                       Competition
segment. Casino games comprise one of          has been consolidated as an associated                   The main competitors in the game
the fastest growing niches and continue        company as of 1 June 2017. The compa-                    development business are NetEnt,
to show rapid market development. In           ny, which is in a build-up phase, contrib-               Playtech and Microgaming.
2017, Gross Gaming Revenue (”GGR”) for         uted a negative SEK 1 million, which is
casino – the basis for revenue sharing – is    recognized as profit/loss from participa-
estimated to have increased to EUR 10.6        tions in associates. The company has
billion, of which Europe accounts for more     worked intensively with development
than 62 percent. The UK online casino          and preparation for the launch of prod-
market is the largest and most significant     ucts in several markets during 2018.
market, representing about 45 percent of
the European online gaming market, grow-       Market Trends
ing at a rate of 9 percent annually. Other     • Increased demand for mobile interfaces
important online casino markets are Italy,     • Increased focus on gaming experience
Germany, Spain and the Nordic countries.       • New regulations
These are expected to grow by 8-10 percent
annually over the next five years. Among       Driving forces
the fastest growing markets is Poland,         • Availability: mobile platforms increase
which belongs to the 10 largest European          accessibility, and games are developed
markets measured in GGR, where the                and adapted to these
online casino segment is expected to grow      • The gaming business and practice win
by nearly 16 percent next year.                  market in line with increasing legitimacy
                                               • Re-regulation of monopoly markets

                                                      78%
Acquisition of associated company
In May, Cherry acquired 25 percent of
ownership in UK game development
company Highlight Games, which is
developing a unique and patented product
within fantasy sports. In November, Cher-                      Increased operating profit
ry increased its holding to 37.5 percent.             (EBITDA) for Yggdrasil Gaming 2017

                                 Game Development              2017 BUSINESS
                                                                        2016 AREA'SYOY                 BUSINESS
                                                                                                   BUSINESS     AREA'S
                                                                                                            AREA'S                     BUSINESS
                                                                                                                                   BUSINESS     AREA'S
                                                                                                                                            AREA'S          BU
                                                                    PROPORTION OF                      PROPORTION
                                                                                                   PROPORTION  OF OF                   PROPORTION
                                                                                                                                   PROPORTION  OF OF        PRO
                                 Revenue (SEK million)                     87
                                                                169 CONSOLIDATED  95%                  CONSOLIDATED
                                                                                                   CONSOLIDATED                        CONSOLIDATED
                                                                                                                                   CONSOLIDATED             CO
                                 EBITDA (SEK million)            71 NET INCOME,
                                                                           40 201778%                  NET2017
                                                                                                   EBITDA, INCOME, 2017                NET2017
                                                                                                                                   EBITDA, INCOME, 2017     EBI
                                 EBIT (SEK million)               59          27       114%
                                 Number of transac-
                                 tions (million)               3,705       1,825       203%
                                 Number of operators
                                                                              80%                         65% 7%                           17% 6%
                                 in which games are               67          30       123%
                                 live

                                                                       Online Gaming               OnlineGame
                                                                                                          Gaming
                                                                                                              Development          Game Development
                                                                                                                                         Online Marketing    O
Fredrik Elmqvist
CEO of Yggdrasil Gaming

                                                                                              C H E R RY A B (PU B L ) A N N U A L R E PO RT 2 0 1 7   17
• BUSINESS AREA ONLINE MARKETING

                                                  ONLINE MARKETING
Several new markets are developing well. Game Lounge has recently been established
in Denmark, but the most recent, Spain and Italy, are also adding value.

Business development                              Acquisitions                                   (EBITDA) continued to strengthen and
Operations have continued to develop at           In 2017, Game Lounge focused primar-           amounted to SEK 95.7 million (19.0).
a rapid pace in 2017. Work on building            ily on organic growth with high profita-       Thereby, Game Lounge managed to
strong brands and expanding to new                bility but carried out an acquisition          strengthen the EBITDA margin from
markets has shown good results during             in November when the company                   33.3 to 65.6 percent. New deposit players
the year. Among other things, Game                acquired the Finnish loan comparison           (NDPs) increased by 92 percent in full-
Lounge became the first European                  site Lainat.fi. This became the starting       year 2017 to 44,103 (22,908).
affiliate company to establish itself in          point for establishing Game Lounge in
the Japanese market. This is an impor-            another sector, characterized by a wide        Market
tant step for future positioning because          range of contacts with a large number          Market development for Online Marketing
the Asian market is at an early stage             of customers and consumers.                    was characterized by new regulations and
of development, at the same time as                                                              legislation enabling expansion opportu-
interest in gaming is relatively larger           Revenue, earnings and returns                  nities. There are clear indications that
than most European markets and has                Revenue for business area Online               market players have begun to plan and
been so for a long time. Online games             Marketing developed strongly throughout        prepare for the forthcoming Swedish
remain a grey zone, but new government            2017 and amounted to SEK 146 million           re-regulation of the gaming legislation.
policy decisions have opened the door to          (57), corresponding to an increase of          Game Lounge sees new market channels
legalization offline and attitudes towards        156 percent. The increase in revenue           for further growth as a result of the new
online gaming are becoming increasingly           in 2017 was entirely organic revenue.          gaming regulations.
positive.                                         The share of intra-Group revenue has
     Awarded Affiliate of the Year at             also increased from SEK 10.2 million
the Malta iGaming Awards.                         to SEK 21.5 million. Operating profit

     Online Marketing is conducted through          together gaming sites that meet the         compensation per customer who opens an
     the Game Lounge subsidiary, which creates      individual player’s requirements profile.   account and deposits money. In addition,
     qualitative customer contacts online to        Revenue is generated in the form of         the company can receive fees for advertis-
     online gaming customers by bringing            revenue sharing with the operator and/or    ing and other marketing efforts.

18    CH E R RY AB (PU B L) AN N U AL R E P O RT 2 0 1 7
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