Please see analyst certification (Reg. AC) and other important disclosures on page 5 of this report.
Think Entertainment: Gaming
Social Media: An Interview With The CEO Of Sulake
We had a chance to interview Timo Soininen the CEO of Sulake, one of the
largest social hangout destinations for young teens, with 15 million monthly
unique visitors, primarily from the Western Hemisphere. Virtual item sales
contribute 90% of the company's revenue; in addition the company sees a
thriving secondary market for these virtual goods—almost 10x bigger than the
primary market, which likely reflects on the comfort level of Western
Generation Y audience with virtual items, in our opinion. During 1H10, the
company grew its revenue by 20% Y/Y to $40 million and expects further
growth opportunity via new acquisition channels (social media), new
geographies, and more content (to drive monetization and stickiness).
• Sulake is the developer/publisher of Habbo Hotel, one of the leading social
destinations targeted for young teens, with 15 million monthly unique visitors,
mostly from North America, Europe, and Latin America; $40 million revenue
in 1H10 and 15% EBITDA margin.
• Unlike most social games, Habbo is more about real-time interaction
between users—chatting, and engaging with user-created social activities
• The company derives about 90% revenue through user pay (virtual
items/premium subscription services) and the rest through advertising. The
company sees conversion rate at about 10% and ARPPU higher than the
industry average for teenage users.
• Sulake also operates a thriving secondary market for users to trade virtual
items, which it estimates is almost 10x of the primary market, which likely
reflects on the Western teenage audience's comfort level with the virtual
environment and virtual items, in our opinion.
• Most of the advertising revenue comes from immersive campaigns (such as
custom virtual spaces within Habbo). The company recently launched
Habble, a tracking tool to measure the virality of the campaign and is now
introducing video ads.
• Mobile payments are the largest source of payment for the company,
followed by credit cards/PayPal (mostly parents) and prepaid cards.
• The company expects growth to come from new acquisition channels such
as social media, opening of APIs, expanding the payment infrastructure, and
adding new content to improve monetization and stickiness. The company is
also starting to evaluate companies for potential M&A and strategic
Reason for Report:
November 15, 2010
Atul Bagga, ThinkEquity (AB): Can you explain your business and why should investors care about Sulake?
Timo Soininen, CEO, Sulake (TS): Sulake is the proud owner and developer of Habbo Hotel, world's leading social hangout
and game for teens. As a company, we focus on "social places" for user-created social games, self-expression and
communication. We are one of the pioneering companies of virtual goods model since year 2000. We built our own payment
infrastructure when it was not available from commercial third parties at that time. Habbo Hotel has now about 15 million
monthly unique visitors from over 150 countries, and the service is available in 11 language versions. Habbo has always
been all about real-time interaction and user-created activities and games as opposed to guided storyline driven
games—our teen users use props and items from our catalogue to create their own spaces, games and activities, and to
socialize with each other in real time in Habbo Hotel.
AB: What is the target audience of Habbo Hotel?
TS: Habbo Hotel users are primarily young teens, typically 13 to 16 years old. In some markets, our demographic is skewed
slightly to younger and in some markets slightly older. The split between male and female is 55/45, and it has been very
consistent over the last 10 years. We support 11 languages currently and currently have users from over 150 countries but
our key markets are North America, Europe, and Latin America.
AB: Is Habbo Hotel more about discovering new friends or about interacting with existing friends?
TS: Generally, our users hear about Habbo Hotel from their friends but once in the service, they make new friends by
meeting other users in various public venues of Habbo or in thousands and thousands of user created rooms and activities.
The main attraction of Habbo Hotel is real time interaction of users in a cartoony virtual Hotel. Habbo is not for playing
traditional online casual games or asynchronous social games. Instead, our service is about participating in other user's
social activities and games, chatting, interacting, and getting noticed in real time; it is in-between traditional casual gaming
sites and social networking sites: we like to call it a user created social hangout.
AB: What is your business model? What is the breakup of revenue between virtual goods and advertising?
TS: We derive about 90% our revenue directly from consumers buying virtual items, extra features, and subscription
services. Advertising represents around 10% of the total revenue.
AB: What kind of virtual items your customers are buying—is it more about self-expression, or functional upgrades? And
how often your users would buy these items?
TS: The key attraction of the virtual goods model is self-expression, decorating your space, but it is also about acquiring and
trading with other users. We started with furniture, and we have added functional items, which help users create their own
activities (such as re-enacting TV shows) and simple social games. One of the main attractions of Habbo Hotel is that you
can start trading different kinds of rare items and ordinary virtual items between each other. We don't allow users to
exchange real money, but trading is a huge part of the attraction of Habbo.
AB: Do you manage your own secondary markets? How big is the secondary market compared to the primary market?
TS: In our virtual goods catalog, we have a section called "Habbo Market Place," which works as a simple and handy trading
tool for our users. All items placed in the tool receive a value based on their historical trading values, and the rarer the item,
the higher the price. We, as a service provider, take a small tax of all the trades done through the tool. Currently, we
estimate that the trading value between users is multi-folds bigger than the primary market, and is somewhere in the range
of $650 million per annum. Our users also operate market places, which facilitate player-to-player trading within the service.
AB: How do your users pay for virtual items, given that most of your users may not have access to credit cards or PayPal?
TS: Teenagers are probably the trickiest audience to tackle. For a company like Club Penguin, which is targeting young
kids, parents use their credit cards. For sites that target older audience, users have access to credit cards. We tap into three
kinds of money that teenagers have—their weekly allowance, digital money (mobile phones) or parent's credit cards, and
gifts. We currently offer 150 payment channels using different providers in 32 countries. Mobile payment is still the biggest
source of our revenue, because mobile phones are extremely handy in many parts of the world, and it is all about impulse
payment. The only downside is that the carriers still charge very high commissions for mobile payments. The other big
payment channels for us are credit cards and pre-paid cards, which are sold in places like 7-Eleven and other convenience
stores around the globe.
TS: Moving to your advertising business, can you explain what kind of advertising is this? Is it banner ads, video ads,
product placements? Is it mostly remnant or premium ads?
TS: The primary volume of ads comes from what we call immersive campaigns. We create custom virtual spaces for brands
e.g., the movie industry has been a very active promoter inside Habbo Hotel. We also have display ads and are now
November 15, 2010
introducing video ads. But the most important and the most effective ads for our clients are the immersive campaigns, as
they create very strong viral effect for brands in the community.
AB: How scalable are these immersive campaigns? Can you talk about how many campaigns you might be running at any
given point of time?
TS: You are absolutely right; the problem with these campaigns is the scalability. But so far, it hasn't been really much of an
issue because advertising sales hasn't been that huge chunk of our business. We also believe in having a relatively clutter
free environment for our users and brands—that's how advertisers get really good results. Our focus has been on the user
experience and creating the user economy; and the advertising usually follows that. For example, this year we introduced a
conversation-tracking tool called Habble, which is a real-time conversation tracker inside Habbo. For the first time, we are
able to know how many people interacted with your brand, how the does viral start to happen, and how the brand messages
AB: How do you see ad revenues growth versus virtual item growth for 2010 and beyond?
TS: We're focusing primarily on growing Habbo via new user features and improving usability constantly, but are also
introducing new advertising functionality and advertising products. We expect to grow on both fronts in 2010 and 2011.
However, we don't expect the share of ad sales to grow significantly.
AB: Can you give us some sense how big the addressable market could be for you?
TS: We are really targeting 12-17 year old teenager market globally, as our core competence is understanding and
monetizing that audience internationally. As Habbo Hotel today is also a Facebook app, we have an opportunity to get some
older users as well to boost our growth. In addition to our current geographical scope, expanding further to other interesting
international markets like India is another growth dimension going forward. Our ambition is to exceed the $100 million
revenue mark within the next two years. We believe that Habbo has huge market potential going forward in both existing
and new markets—we have only scratched the surface.
AB: Can you highlight what are the big drivers that are driving growth in this business?
TS: Understanding your users and their motivations deeply is the biggest driver. We spend a lot of effort in understanding
their needs and current usage of Habbo and do a lot of research and data-mining to support these efforts. There are also
other four big growth drivers. The first one is the opening APIs of the social Web that allows you to shift away from the
mindset of proprietary Websites and owned audience that you have to guard tightly. It is all about accessibility, convenience
and allowing people to use whatever credentials they use to come into the system. The second area is content sharing. The
whole point of open APIs is that you have to allow an easy access to shared content. The third one is huge explosion in
social gaming, which has been so well executed by companies like Zynga. There is an opportunity for us to take that
learning and use it in Habbo. The fourth area is the development in payment infrastructure over the last two years. There
are a lot of aggregators who are able to deliver good coverage and convenience to tap into different types of payment
AB: Can you share any metrics that you track on a regular basis, like conversion rate, ARPU, attrition?
TS: The health of our business depends on constant tracking of a portfolio of metrics. We've developed, and continue to
refine a set of metrics which track our users and sales through the entire lifecycle—from the conversion funnel to
month-to-month retention, initial and repeat purchasing, and so on. We believe to be clear market leaders in the ability to
sell premium content to teen users, and back that with a paying-to-nonpaying % of nearly 10%, and ARPPU well above the
typical seen among teen audiences. That is thanks to our competence in virtual economy management and converting a
user to a customer.
AB: Where do you see a bigger part of your growth coming from over the next few years—is it more about new users, new
markets or ARPU growth?
TS: We are definitely looking into possibilities to go to new markets (for us) like Poland, Turkey and India among others.
However, we expect most of the growth to come from tweaking the product, improving the economy, adding new content
tools to incentivize people to spend money that could help increase the conversion rate and improve ARPU. Third, it will be
from new acquisition channels such as social networking sites. Habbo Hotel can provide a unique addition to the social mix
of people, and we have yet to connect with most teens.
AB: Who do you see as your competition currently and who do you think has the potential to be your competition over a
TS: There are hundreds of casual MMOs and social gaming companies in various development or launch phases. But most
November 15, 2010
of these have either very different proposition or their age demographic is quite different. We keep a close eye on services
like Gaia Online, IMVU, Stardoll as well as fast-rising entrants, and try to learn from their successes and mistakes. Social
games moving from simple asynchronous games to real-time experiences are something we expect to see. Competitors can
be your best allies as well: it is possible to implement clever ways of sharing and cross promoting users.
AB: What is your secret sauce? What makes it difficult for someone to replicate Habbo Hotel?
TS: Habbo is clearly differentiated concept and has a very distinctive look & feel—this is a must for survival in the long run.
Additionally, our focus on user-created activities and games is keeping Habbo always fresh and interesting. There are tens
of Habbo-like virtual environments out there, but we are very agile and continuously do things faster and better than our
competition. Our development is metrics and analytics driven, and we encourage our teams to pilot new things as soon as
possible to quickly adapt to market needs and new technologies. Sulake has the broadest international operating
infrastructure and have accumulated a wealth of information about local consumers' habits and monetization mechanisms.
AB: Outside of Habbo Hotel, are there other things that you are working on, that we should be paying attention to?
TS: Our focus is now 100% in Habbo growth and development. We have internal development efforts and pilots; some of
them may become product features in Habbo Hotel or some of them may emerge as sub-brands of Habbo Hotel or even as
stand alone products. We will also start to evaluate the market for M&A, because there are some very interesting companies
and hopefully we can find a few good companies to team up with.
AB: How big is Sulake and how fast are you growing?
TS: The first half of this year was the best 6 months in company's history, on all metrics. We grew our revenues by 20% vs.
2009 and reached revenues of $40M and EBITDA level of 15%.
AB: Over the next couple of years, what do you see as the big challenges for Sulake?
TS: I would say that the number one challenge for us is accelerating our community growth and ensuring cost efficient
acquisition of new users. Other key challenge is (for everyone in the industry) to find ways to reduce the very high payment
commissions on mobile payments to drive profitability further.
AB: Where do you see Sulake three years from now; do you see yourself as a stand-alone private company, as part of any
bigger platform, or as a public company?
TS: I suppose any of the three is possible. In three years, Habbo Hotel has seen significant growth and has expanded its
reach with its sub-brands both within the target audience and in new markets. In addition, we have a portfolio of other "social
hangouts" catering to different audiences and different usage needs. Sulake will be clearly bigger and more profitable
company or part of a bigger platform.
AB: Thank you so much for speaking with us, Timo.
TS: My pleasure Atul, always great to catch up with you.
November 15, 2010
Important Research Disclosures
I, Atul Bagga, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject
securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed in this research report.
The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total
revenues, a portion of which is generated by investment banking activities.
Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier
Buy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including
previously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600
Montgomery Street, San Francisco, California, 94111.
Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquity
recommends initiating or increasing exposure to the stock.
Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stock
is fairly valued.
Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquity
recommends decreasing exposure to the stock.
Distribution of Ratings, Firmwide
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [B] 136 64.80 18 13.24
HOLD [H] 73 34.80 3 4.11
SELL [S] 1 0.50 0 0.00
This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The
information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The
opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past
performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or
implied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall
there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or
qualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clients
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personal financial advisors before making any investment decisions based on this report. Additional information on the securities
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Montgomery Street, San Francisco, California, 94111. Stocks mentioned in this report are not covered by ThinkEquity LLC unless
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November 15, 2010