Starbreeze AB (publ) (STAR-B.ST) Earnings Call Transcript & Summary

Good morning, and welcome to the third quarter presentation of Starbreeze Entertainment's results. The key highlights of this quarter include the strategic refocus with PAYDAY at the core, where we unfortunately had to make the decision to discontinue Project Baxter. Project was great, but it was the right decision to make to basically refocus our company on PAYDAY with PAYDAY at its core. We updated our strategy and expanded into the heisting genre. The quarter was good in terms of strong operating cash flow, which is supported by about 35% increase in revenue versus last year. We expanded the PAYDAY team to about 65 people, and we are now progressing well in terms of changing the model of the game to a live service engagement model. We also launched our partnership with Sidetrack Studios in terms of maintaining PAYDAY 2 going forward. PAYDAY is a platform of growth. PAYDAY is our core franchise and our growth engine. Expanding the PAYDAY universe into new formats and platforms remains a priority for the company. We have select premium project and strategic partnerships that will broaden the reach and diversify the revenues. The strategic focus aligns with the global IP trend, concentration of proven franchises. This focused model deepens the player engagement, strengthens the brand equity and creates a scalable foundation for sustainable value creation. We can see across the industry, major studios are refocusing their efforts on the strongest franchises and most loyal communities. We are already there with clarity of purpose and owning one of the most recognizable global IPs in gaming and a clear path to disciplined growth. By challenging our resources into PAYPAY and selected strategic initiatives, we will reduce complexity, improve predictability and enhance our returns. The expanded team is now in place and its general new manager, which are now driving the rebuild of the live engagement model of PAYDAY 3. There are continuous updates to gameplay, onboarding and technical stack on the road map. Also sequent updates and patches look to improve retention and settlement for the game. The road map is focused on consistent content cadence and community connection. The goal remains clear to deliver PAYDAY experiences that are rewarding, dynamic and connected like never before. In terms of our partnerships, as I said earlier, we secured a long-term support for PAYDAY 2 through partnership with Sidetrack Games. The team is deeply rooted in the PAYDAY community and engine expertise. It ensures continued support and updates for millions of fans of PAYDAY 2. This also allows Starbreeze to focus internal resources solely on PAYDAY 3 and future experiences. We are now a focused and aligned organization. We have aligned the organization around clarity and accountability. Simplified structure enables faster decision-making, empower teams to deliver creatively with clear P&L ownership, and we have renewed focus on cross-functional collaboration and studio synergy. We are bringing the company closer together, fostering creativity, accountability and sustainable delivery. We are executing with focus. We continue to strengthen the PAYDAY 3 live operations and player retention. We're expanding beyond the PAYDAY universe to new platforms, UEFN, Roblox and beyond. We are deepening our strategic partnerships and collabs to diversify revenues and broaden the reach. At the same time, we are maintaining our cost discipline and operational efficiency. In summary, we are now a stronger Starbreeze built on focus, creativity and resilience. Now I want to hand over to Mats Juhl to talk about our financials.

Thank you, A.K. Just to go in a little bit to the number continuum for the quarter. If you're looking at the net sales for the quarter, it amounted to SEK 58.4 million compared to SEK 42.7 million in the same quarter last year, a good growth of SEK 15.7 million. If you look on the PAYDAY franchise, it generated about SEK 32.6 million during the quarter in net revenue compared to SEK 34.4 million last year, more or less in line with the previous year. Work-for-Hire, our PUBG project generated about SEK 20 million during the quarter and will continue up until the year-end, which is a good thing. Our EBITDA for the quarter amounted to SEK 19.3 million in the reported numbers, a slight decrease compared to SEK 21.4 million last year. Keep in mind that in the same quarter last year, we had one-off effects of about SEK 5 million related to reversal of previously expensed cost for personnel expenses. So adjusting for that in the EBITDA, we saw a good growth in the EBITDA as well. And if you have followed us in the news, you know that we sent out a press release related to the closing of Project Baxter. Related to that, we also did an impairment, of course, of that project that hits us a little bit. So we reported a noncash impairment related to Project Baxter of SEK 262 million, increasing our accounted depreciation to SEK 304.7 million during the quarter. It's a one-off effect, and you will not see that kind of effect going forward related to that project and depreciation will continue to decrease in the coming quarters. As previously said in previous calls as well, depreciations are going down over time. We do continue to invest into our projects, and the total loss for the quarter amounted to SEK 285.9 million. We closed the quarter with a healthy cash position of SEK 135 million. We saw that we had a positive effect on cash received, both related to PAYDAY, of course, but also for the Work-for-Hire project. So the healthy cash position that we closed with enables us to continue to both invest into PAYDAY and other experiences going forward. If you look on the full 9 months up until September, we reported a net revenue of SEK 179.9 million, a growth compared to last year with almost 30%, which is good. Our EBITDA amounted to SEK 40.9 million, and our cash flow for the first 9 months was positive with SEK 49.2 million. And as we talked about before and as I usually say, we are not happy with the net sales for the first 9 months. We see that we have room for improvement. We see that the measures we've taken and the investments we do into our games now will have a positive effect going forward. Our core focus is to continue to grow both on the PAYDAY franchise, but also to be careful on how we spend the cash we have at hand. So if you look on a little bit more on the cash flow development for the full 9 months, we closed previous year with a cash position of SEK 192 million. During our first 9 months, we had a positive cash flow from operating activities related to our games then of SEK 49 million. And the investments made into PAYDAY and historically on Baxter so far this year amounts to SEK 130.8 million. In total, we made investments of almost SEK 142 million up until end of September. Part of our revenue related to PAYDAY 3 was also in third quarter recognized as financing. This will change going forward. And from fourth quarter and onwards, there will be no financing activities related to PAYDAY 3 reported. We will have all revenue coming into Starbreeze firsthand. And during the first 9 months, we also did a directed share issue of SEK 33 million, actually done in second quarter and had a positive effect of SEK 33 million. In total, our financing activities have had a positive effect over the year so far of SEK 36.1 million. And as I said, we closed the period with a healthy cash position of SEK 135 million. On the expense side, of course, the direct cost reported during the quarter is heavily impacted by the impairment. Again, it's a noncash impact and it amounts to SEK 262 million. Total direct cost amounted to SEK 320.8 million. We see that -- if you're looking forward, you see that our direct costs continue to decrease and due to both the efforts we take when it comes to cost efficiency and streamlining of our organization, you will see that trend continue. So focus is on keeping control of our cost as well. Selling and marketing amounted to almost SEK 6 million during the quarter. The expenses mainly relates to staffing, working with marketing and PR activities, of course, also for the games that we have in our portfolio. Administrative expenses amounted to slightly over SEK 40 million in the quarter. Last year, same period was positively impacted by the reversal done of previously expensed personnel costs, as I mentioned, of about SEK 5 million. So we are -- when it comes to admin expenses in line with expectations, and we will see decreased expenses going forward in that area as well. Reported other expenses during the quarter, this is only related to valuation of assets and liabilities in foreign currency. So it's currency translation expenses that's reported under other expenses. Number of employees by the end of September amounts to 156 people. The recent changes we've done within staffing related to the closing of Project Baxter is not reflected in the September numbers, and you will see that effect in the coming quarter. And if you look into our balance sheet, finally then, our intangible assets after the impairment amounts to SEK 151 million. It's mainly consists of capitalized expenses for game development and our IP rights that we own. Property, plant and equipment amounts to SEK 47 million. Right-of-use assets for office lease is a majority of that and it amounts to SEK 34 million. Our current assets amounts to SEK 60 million and mainly relates to prepaid expenses and trade receivables. And cash then, of course, as mentioned, SEK 135 million. Furthermore, our external noncurrent liabilities of SEK 64 million mainly relates to lease liabilities for the office and also tax and prepaid revenue related to a previous old project. Our current liabilities are SEK 56 million mainly relates to accrued expenses and trade payables. Currently, we have no interest-bearing debt in the company, which is -- enables us then to report a very healthy balance sheet and a good foundation for continue to build on service. Yes. To sum up the quarter from the financial side, we see good progress in many areas. Even though the third quarter is heavily impacted by the impairment, of course, we see improvements in the coming quarters, both when it comes to focus on our expenses, but also constant improvement in sales and efficiency. So we have a good foundation to continue to improve our numbers going forward.

Yes. So to finish off, as I said earlier, we are much more focused than before with the decisions that we've recently been making. We are -- we have the operating cash to keep on developing and building experiences based on the PAYPAY franchise going forward. We have now secured support for PAYDAY 2 and because we are servicing essentially tens of thousands of players who are playing that game every day. PAYDAY 3 team has hit the ground running, is now building the back-end systems, upgrading the engine to Unreal 5, which is the newest engine from Epic. We are renewing and reworking through all of our highest and our content. And we are now getting into an updating cadence, which is going to be on a monthly basis starting in December. So clearly, more focused company, and I want to thank all the teams and our people and our developers who are working so hard to bring this fantastic product to market. I want also to thank our players to keep on heisting. Thank you so much.

Thank you.