Remedy Entertainment Oyj (REMEDY) Earnings Call Transcript & Summary

Hello, everyone. And on behalf of Remedy Entertainment, welcome to the first half year 2020 review. My name is Tero Virtala. I'm the CEO of Remedy. And with me is our CFO, Terhi Kauppi. In this presentation, we'll first discuss the key events and developments during the first 6 months of 2020, then we'll look at the financials and summarize the outlook for the rest of the year. Overall, we had a strong first half of 2020. Our revenue was EUR 17 million. And compared to first half of 2019, this represents a growth of 23%. Our operating profit was EUR 3.2 million, which is a growth of over 100% compared to first half of 2019, and this profit represents almost 19% of our revenue. During this period, we signed a publishing deal with Epic Games on 2 new multi-platform games, which are based on an IP created and owned by Remedy. In these deals, Epic covers the development costs. We will receive 50% of game sales net revenue, and we retain the IP ownership. Control team launched the first DLC, The Foundation. They have continued working on the second paid DLC, AWE. They have been preparing the Ultimate Edition and especially Steam version launch to be released now in August. The Control team has also been preparing for the future launch of next-generation consoles. Crossfire team has been preparing for the single-player campaign release on Xbox platforms in 2020. And overall, we can say that the results of the first half year are strong, and our developments have been progressing well despite of the COVID pandemic. We were able to adapt to this new situation well. Before discussing the status of our game projects, it's good to say a few words on the wider market context, where we as a company and our games are focused on. Within the wider video game market, we keep on focusing on creating and commercializing big-screen games for gamers. So far, this has most visibly meant PlayStation, Xbox and PC as platforms which have all continued to grow, of course, then creating all the time bigger potential audiences to our games as well. At the same time, our industry is both growing and transforming with other growing platforms like Nintendo Switch and new platforms, subscription and streaming services. All this will further grow our industry. But also, the battle for audience between these platforms and services will intensify. One of the big indications from our point of view is that demand for interesting gaming brands, great games and high-quality development studios will keep on increasing. At the same time, for Remedy's type of high-quality, high-production value, big-screen games and developers, entry barriers are high. Building new studios or significantly growing existing studios is challenging and takes time. So in this growing and transforming market, our industry has been consolidating, and there are fewer and fewer independent AAA gaming studios, while at the same time, there is a growing demand for them. So from our point of view, it is a good position to be in. And with our transformation and improvements during the past years, we see that we are in a very good position to benefit from the market and industry developments that are ongoing and will continue. So when we look at our games and projects, Control was launched almost a year ago. This award-winning, supernatural, third-person, action-adventure game was released in August 2019 on PlayStation 4, Xbox One and PC. The game is published by 505 Games, but it's an IP created and owned by Remedy. Our revenues are based on the development payments from our publisher and share of game sales net revenue. The game overall was developed in 3 years with a budget of less than EUR 30 million, which is a remarkable achievement for a game of this quality and uniqueness. During the 6-months period, Control was added to PlayStation Now subscription service as well as we launched the first DLC, The Foundation. The second expansion, AWE, for the original platforms and Ultimate Edition for Steam are coming in August 27, which is the 1-year anniversary for Control. Control is also, at the same time, developed for new platforms and services, which, among others, includes the next-generation consoles, PlayStation 5 and Xbox Series X. Control game sales have continued on a good level with ongoing PR and marketing activities. It's also good to note that in a growing and all-the-time evolving digital industry, good-quality games continue to be relevant for years to come and will have opportunities to expand to new platforms and services. Control, with its acknowledged high quality and great reception is a good example of this. So in 2019, we launched the Control base game. Along the launch, 2 future DLCs were also announced, but not yet launched. This enabled in 2019 to have an additional bucket season pass to be offered for our gamers. With some additional offerings, this provided a possibility for a full deluxe version for the gamers. Now during 2020, 2 expansions, The Foundation and AWE, have been added. With some further developments, we will also have an Ultimate Edition to be offered for the players. So in that sense, the game has been evolving further all the time, which is good for the gamers, but also provides new opportunities for us and our partners. Platform and service-wise, Control has, in 2020, launched already also in PlayStation Now. It's soon coming to Steam. And later this year, we'll launch in next-generation consoles, PlayStation 5 and Xbox Series X. And Control will expand further, which will be announced when the time is right. All this helps us to reach wider and different audiences and sales channels, but also boost the game's overall awareness and visibility, supporting good level of sales both in current platforms and services and also in new ones. In relation to Crossfire, we have continued to work as planned. Crossfire, as a recap, is one of the world's most popular online first-person shooters with hundreds of millions of registered players. Crossfire has been created and it's owned by Smilegate. We, as Remedy, are closely collaborating with Smilegate to create single-player experiences for the Crossfire. Our revenues are based on development payments from the publisher and potential royalties. We have been preparing for the launch of Crossfire X on Xbox platforms, Xbox One and Xbox Series X. It's going to be a big moment for us. Players will finally get their hands also on Remedy's single-player campaign. This campaign is our first-person debut. We are excited to be a key part of bringing Smilegate's highly successful game to the Western audiences and be able to put Remedy's flavor on it. The objective of Vanguard has stayed the same: to create a long-lasting, service-based multiplayer game combined with Remedy's style of making games. We have the internally playable first development version of the game, and team has taken that playable version further, continuously evaluating it, learning from it and adjusting the development based on that. Some parts of the game show very good promise. Some parts have been redesigned and are iterated continuously further. This early phase work on Vanguard continues with a small team. An important event in the first half of 2020 was also the signed publishing agreements on our previously unannounced AAA project and a smaller project with Epic Games. These games will come out on multiple gaming platforms. According to deal, Epic will fully fund the development. Net revenues will be shared 50-50, and we will retain the creative control and IP ownership of the games. We had multiple concrete partnership options. But eventually, when evaluating these alternatives, we believe that Epic Games was the best for these games and for Remedy. Epic has a vast experience as a developer. They have track record of successfully expanding into new areas of gaming and ambition to take the publishing to a new level. They are already very strong in digital. They already have a global presence. And we, as Remedy, are a key partner for Epic. Deals with Epic give a very good basis for these games in question, but they are also important logical step further in our development as a company. In 2017, we set ourselves a new strategy with an aim to become a long-lasting growth company. Our aim was to get on that growth track in 2019, in which we succeeded. We were able to make that growth with 2 games, Crossfire and Control. Now these 2 games and related projects continue to develop further, and Epic Games partnership provides a third strong leg to stand and grow on. We will continue on the growth path where we have all the time aim to go. People-wise, we have continued to grow, and we were 266 full-time employees at the end of this period. Even though competition for talent is tough in video games industry and COVID pandemic has created some additional challenges, we have succeeded also in recruitment and onboarding in this period. Remedy clearly is a respected employer. Our games motivate many world-class developers. And our production and people-related processes and ways of working function well and keep on developing. All these are appreciated by our very international crew. And now Terhi will have a closer look at financials.

Thank you, Tero. Let's continue with more detailed analysis of our financial results for the first half of 2020. Our revenues grew strongly by 23%, reaching EUR 17 million in the first half of 2020. This is EUR 3.2 million more revenue than in comparison period first half of 2019. Main factors contributing to the revenue growth were from 2 sources: revenue income from Control and development fees received from Epic Games. We received 45% of net revenue of Control sales. Before revenue share is calculated, costs are deducted from gross sales. And only after those deductions, we have net sales from where revenue share is calculated. These deducted costs relate to delivery, quality assurance, localization and marketing. These costs affected net revenue calculation, especially in the beginning of the game sales life cycle. In current life cycle of sales, the most effect comes from special marketing campaigns. As we signed 2 publishing deals with Epic, we could also recognize development fees received for those projects. EBIT for first 6 months was EUR 3.2 million. That's 18.6% of revenue and 116% more EBIT than in comparison period. EBIT growth was enabled by revenue growth and higher product development cost capitalization as well as scalability, meaning that our overall costs were rising on a lower rate than revenue. We reached EUR 1.2 million positive operating cash flow. In comparison period, operating cash flow was a bit negative. Revenue recognition and cash flow, especially for royalty payments, can vary quite significantly from each other in a certain time period. And normally, royalty payments come in later than revenue is recognized. Total cash flow for period was negative by EUR 2.8 million, which resulted in cash position of EUR 16.8 million. We continue to invest in future revenue-generating projects, and that has an impact on cash flow since activations do not affect our cash flow positively. Financial cash flow was affected by dividends. We have been paying dividends for 2 years in a row, EUR 2.5 million in total. We have been growing our revenues more or less steadily from 2010 onwards. We are accelerating the growth, and 2019 showed revenue growth of 57%. And now first half of 2020, growth of 23% already. In comparison period, first half of 2019, our EBIT level was 10.6% of revenue. Now 18.6% is clearly on a higher level. When calculating as rolling 12 months back, EBIT percentage is 23.6%. As we can see from the chart, EBIT percentage has historically followed game launches. But with more steady stream of launches, EBIT percentage should stabilize over coming years. Net sales grew due to Control continuing to sell well and projects for Epic proceeding well, resulting in good amount of revenue share and development fees. EBIT more than doubled compared to comparison period due to increased sales, more product development activations and being able to control cost increase. Our other OpEx actually did not increase at all when compared to comparison period. We see there actually a corona effect since, for example, traveling expenses were basically nonexistent in the second quarter of 2020. Capitalizations grew from less than EUR 500,000 to over EUR 2 million. More about this in following slide. Staff expenses grew along as number of personnel grew by 21%, reaching full-time equivalent level of 266 people in the end of June. This means Remedy own personnel only. We are also using some subcontractors. To minor extent, also higher bonus accrual than in comparison period affected staff expenses growth. Then as promised, a little more about capitalization logic. Here, you can see the current 5 projects we are working on. First one, cooperation with Smilegate is subcontracting work and, thus, not eligible for capitalization. Second is Control, which was started years back. And as we started capitalization from beginning of year 2019 for new projects only, Control is not under activations. For Vanguard, project funded by Remedy only with a small team, we capitalized all expenses fully. 2 projects done with Epic are capitalized partially. For them, we have estimated total future return expectations and specifically returns of the game launch. We calculate share of future returns after game launch from the total future return expectations and use that percentage as activation percentage for project development costs. It's good to note that costs to be capitalized are calculated as per Finnish accounting standards. And now back to Tero for summary and outlook.

Thank you, Terhi. So as a summary, we are developing 4 game franchises and 5 game projects under these franchises. Control's second expansion, AWE, Ultimate Edition and Steam launch are released on August 27, 2020. Control is, at the same time, being developed for new platforms and services, including next-generation consoles, PlayStation 5 and Xbox Series X. Crossfire X is coming to Xbox One and Xbox Series X. Projects with Epic Games and Vanguard continue in their early development phases. As an outlook, we expect our revenue and EBIT to grow during 2020. Majority of that revenue and EBIT growth is estimated to happen during the second half of 2020. Overall, we continue according to our long-term growth plans with the goal to have consistent game releases, aiming to launch at least one game or game expansion annually. We are expecting 2020 to be a good year. So thank you for following this presentation. Second half of 2020 is definitely going to be very exciting with our upcoming game launches, and we'll finish with one of them. Thank you. Stay safe, and enjoy.