Hello everyone, and thank you for joining this Remedy Entertainment webcast. My name is Liisa Eloranta, and I run the investor relations at Remedy. Today, we will go through Remedy's half-year financial report for January-June 2024. With me here are Tero Virtala, Remedy CEO, and Paula Feodoroff, finance manager. We will have a Q&A session after the presentation. Tero, the floor is yours.
Thank you, Liisa. Welcome everyone also on my behalf. So Paula will later go in more detail through the financials. Just a few words on our second quarter and the highlights. In the second quarter, our revenue was EUR 10.3 million, which is 16% higher than it was last year. We still did make an operating loss, minus EUR 3.2 million, but it's clearly less than in the comparison period, so overall, the direction is right. Cash flow from our operations was positive, like it was in the previous quarter. An important milestone for this quarter specifically was the Night Springs expansion for Alan Wake 2, which was released and got a very good reception. I'll later talk a bit more on our game and project portfolio and multi-project model.
Overall, our projects have been progressing better in 2024 than they have done ever before. There is always, of course, room to improve, but our multi-project model works now fairly well. This also means that we don't anymore need to grow the organization in the same way that we have done in the past, which means less newcomers into the company, less onboarding in our game teams, more stable development teams, and all the way- all the time improving ways of working. We are clearly now getting more and better output without needing to grow the organization. In fact, with the aim to increase our focus, that we also discussed, in the quarter one, we have been also reviewing our operations and costs to see what are the most important things that our talented people should focus on and what not.
That has given an additional focus for us and supports our game projects, and has also started to create some cost savings. The main reason for all this is to ensure that we can create excellent games in schedule and budgets, and get also into profitable growth that has been our big gain. But now, when the industry overall has had tough financial times, and we have seen that in our partners as well, additional cost controls has been good for us as well. Then few words on Alan Wake 2. As I mentioned, the Night Springs expansion was launched, and the reviews have been excellent. Metacritic average is currently 85. The well-received expansion is highly appreciated, of course, by players and the fans of Alan Wake.
It gets players back into the game and boosts the visibility of the overall game, and with the expansions, we are also driving the sales of the Deluxe Upgrade for the whole game, which gives access to both 2 expansions of the game and also to some additional content and content items. So we are not selling expansions separately, but the players who want to get the DLC expansion need to upgrade to the full deluxe version. We also announced in Quarter Two that the Physical Deluxe Edition of Alan Wake 2 is coming out in October, and Collector's Edition is shipping in December. Pre-orders for both of these editions have started right away.
With our partner, Epic Games, we have been actively promoting the game and have also been preparing for the fall time and end of the year, which always are the year's biggest sales phases. We have been able to keep a fairly high price point for Alan Wake 2 so far, which then also means for the later life cycle, that there is still a lot of audience that we can reach with the game. The game and its sales has now recouped most of its development and marketing expenses. We previously, in the first quarter, said that the game had recouped significant part, which indicated recoupment of 50%-80%. So now the game has recouped more than that. Let's go through the status of our game and project portfolio.
As said, in Alan Wake 2, we launched Night Springs expansion and are now developing the second expansion, the Lake House. Codename Condor is in full production. This is the last big leg of the development. In Quarter Two specifically, the development team has worked on multiple maps and different mission types, with also growing amount of play testing. Control 2 progressed to the production readiness stage during the second quarter. Moving to a next stage always means that the development team reaches a bigger milestone, in which the progress of the game, the development so far, the status of the game, the updated plans, are all reviewed to make sure we are set to succeed also in the next development phase. The game build that this team had included several important features and parts of the game now in playable form.
This actually also coincide very well with the ongoing business negotiations with potential future partners. The game is starting to show its potential more and more concretely... Max Payne 1 and 2 Remake also progressed to next development phase from production readiness to the full production stage. The development team has been working towards developing the game to an early functional state from beginning to end. What you can all see is missing from this slide in comparison to our previous presentations is Codename Kestrel. In May, we canceled that project. This gave more focus and synergies to our game portfolio and overall operations. We also got experienced additional developers from Kestrel to help with our other game projects. So it's fair to say that during 2024, our game projects have, across the board, been progressing clearly better than before.
Growing the organization and building the multi-project model isn't an easy endeavor, and there is all the time room to improve, but we now have, production-wise, reached quite well a well-functioning multi-project model. This is also important, as now we have two games in full production and one in the production readiness stage. Now, another viewpoint to this project and game portfolio is that we have for years been building a multi-project model. In addition to creating great games, an important aim has been to be able to launch these games more regularly. Step by step, we are getting there. One year ago, we actually had no games live and in the early sales phase.
Alan Wake 2, a year ago, was in production phase, but all our other games were in the earlier pre-production phases, meaning we were still quite far away from other launches than Alan Wake 2. When we look at the situation now, Alan Wake 2 is out, and it's still in fairly early sales phase. Alan Wake Remastered and Control continue selling. We can see from Control, which launched already five years ago, that the good quality games can have a long sales life cycle. For the first time in development phases, we now have two games in full production and one game on late pre-production phase. This then also means that those games are in their last phases before they then one day launch.
Our aim as a company has been that we would have well-advancing portfolio of promising game projects in development that can be launched at regular intervals, and with that, we would have a growing portfolio of games in the market that keep on selling for a long time. Business-wise, now when we are advancing in this model, it means that we are moving from business-to-business, lower margin revenue business, more towards business-to-consumer business, where the potential for growth and higher profitability is much better. Even though with live games, some development and marketing investments are needed, they are much less than what they are in actual game development phases.
The developments that we have taken as a company with our multi-project model, how our games have been advancing lately, what we have now done with Alan Wake 2 and its expansions, are good steps which are all taking us into this direction. And now, when we move then towards a more balanced business model of business-to-business and business-to-consumer revenues, games in development, more regular game launches, growing portfolio of live games that keep on selling, the very important consideration naturally is: how do we commercialize and publish our future games? This directly affects on the share of revenues we can get from these games and also on the investments we need to make. Also to consider is the right partnerships made and also open up possibilities, as an example, to reach new audiences. With Alan Wake 2, we can freely choose the future model for us.
Early this year, we also bought back all the commercial rights from 505 Games to Control, and are now free to decide the best way forward. We have been weighing self-publishing and related business model, as well as discussing different partner publishing opportunities for Condor and Control 2. These models have their own characteristics with different reward potential and requirements for our own investments, and therefore risks, as well as what are the publishing capabilities that would be needed in these different models. When we work with the partner-owned IP, like Max Payne, partner pays the full development, and we have a royalty upside, but it's naturally more limited than it would be with our own IPs.
The first step in our transformation to multi-project and stronger position in the value chain years ago was that we wanted to get back into creating our own IPs and also to partially investing into them. The games that we then decided to start doing were still brought to market by publishing partners. So all the games that we have launched in the recent years, Control, Alan Wake Remastered, and Alan Wake 2, are with these models. Partners have handled the marketing and sales, they have collected the revenues, and then after deducting their cost, the net revenues have typically been shared 50/50. Now, already during the last years with Vanguard and with Control games, with 505 Games, we have been aiming to take the next step in the value chain, going to co-publishing. Now, during the past years, we have gained a lot of learnings.
We have built our competencies in publishing further, and we have now had the opportunity to take a step, step back and once more evaluate and negotiate with potential partners what would be the right long-term model for us. We have taken the time, we have had good considerations, and we have had a lot of valuable and good discussions and negotiations with potential partners. Now, these negotiations, they are still at this very moment ongoing, but what we can say is that with Condor and Control 2, we are not anymore going to the more traditional we-develop-the-game, partner-publishes-it model. We are preparing to take a more significant role in growing our games franchises and how we commercialize and publish our games. As said, these negotiations are still ongoing, and we will share more info on this strategy towards the end of the year.
Then another topic to highlight that now we are definitely moving to a new phase as a company. In relation to that, we have also strengthened our core management team. It already started in 2023 and has now continued in 2024. With more own and launched games, important games currently in development, we earlier introduced a Chief Product Officer role and also had a new Chief Technology Officer who leads the team behind our proprietary Northlight Engine. There have also been additional changes and developments in their respective teams. We also, earlier this year, appointed Mikael Kasurinen as Remedy's Creative Director, who shares the Creative Director responsibilities with Sami Järvi. Our previous CFO stepped down this summer, and we just this week announced a new CFO, Santtu Kallionpää, who will start in October.
He has, of course, financial expertise, but additionally has really valuable experience in consumer business, leading related strategic projects, business development, and performance management of different product development, production, and marketing operations. These are all relevant competencies and skills for Remedy's next phase and needs. Personality-wise, I believe he will be an excellent match for us and our teams. I'm personally really happy with the core management team we have in place for leading the company into the next years. Then to conclude, this part on my behalf, as said earlier, we look forward to being able to give an update on our strategy towards the end of the year. In the last quarter one presentation, we said that there are selected guiding principles we are following, and that has been the case.
One of these principles is that we have all the time wanted to ensure sufficient focus and use of synergies so we can step by step develop and commercialize games that can become larger successes. We have been following that principle and continue to do so. In relation to financial targets, which is one part of any Remedy game's planning process, the minimum target is to earn back at least double the money we invest into a game. We now then also have two franchises fully owned by us, Control and Alan Wake. Key part of our strategy will be on growing them into much bigger and successful franchises.
As we have done for the past six years, we continue to look for the opportunities to strengthen our value chain position, which we just discussed, so that our franchises would reach bigger success, and when that happens, Remedy would succeed in a bigger way. But as said, we will get later this year to a more comprehensive strategy update, and at this point, I'll hand over to Paula to talk on financials in more detail.
Thank you, Tero, and good afternoon on my behalf as well. Let's have a look at the second quarter and first half year financials. In the second quarter of 2024, our revenue was EUR 10.3 million. The development fees were EUR 9.4 million and higher than in the comparison period. This was due to development fees related to Max Payne 1 and 2 Remake. Main sources for royalty income were game sales from Control and Alan Wake Remastered. When looking back at our historical revenue breakdown, the revenue level during the both first quarters of 2024 has been higher than in their comparison periods in 2023. We canceled Project Kestrel in May and purchased publishing rights for Control franchise earlier in the year, which both, of course, affect the revenue accruals as well.
Revenue levels overall vary quarter to quarter based on milestone timings. Comparing to the second quarters, the difference year-over-year was 16.2%. Alan Wake 2 hasn't yet filled its recoup, and thus it doesn't yet generate royalties to us. The operating profit of the second quarter was negative EUR 3.2 million, yet, as Tero said, improving from the year before, when it was negative EUR 4.8 million. The improvement was due to higher level of revenue, as described on the previous slides. Operating profit margin was -31%. In the first half of 2024, our revenue grew year-over-year by 34% to EUR 21.1 million. Development fees were EUR 18.4 million and higher again than in the comparison period.
As in the second quarter, this was also due to the development fees related to Max Payne 1 and 2 Remake. Royalties formed EUR 2.7 million of the revenue. Amount of royalties from Control was higher than in the comparison period, and the growth of the amount is also due to royalties from Alan Wake Remastered, which started to generate them in the third quarter of 2023. In the first half, our operating profit was -EUR 5.3 million, improving EUR 5.1 million from the comparison period. The improvement was mainly due to higher revenues, but also slightly lower amount of expenses. Comparing to the comparison period, the operating profit is also affected by depreciations related to capitalized development expenses of Alan Wake Remastered that were also started on autumn 2023.
Here we can see the analysis of unnetted amounts of expenses and capitalization for transparency. External work expenses were EUR 5 million, approximately 5% higher than in the comparison period, when they were EUR 4.7 million. Our personal expenses increased year-on-year by 7.7%, while the increase in our own employees was about 4%, from 347 to 361. From the headcount growth of 14 people, 10, which is over 70%, was in Sweden, where the personal expense level is higher than in Finland, which explains the higher increase in the expenses related to the personal growth. Capitalized development expenses were 77% higher than in the comparison period.
The growth is visible already from the first quarter of this year, and it is due to higher capitalization percentage and thus, higher amount of capitalized expenses related to Codename Condor and Control 2 game projects. The capitalization percentage was raised as we purchased the publishing rights for Control franchise. For a third quarter in a row, our operating cash flow remained positive. In the reporting period, the operating cash flow was EUR 0.9 million positive, as in the comparison period, it was negative by EUR 7 million. The main reason for positive operating cash flow is the development fee payments related to Max Payne 1 and 2 Remake, but also lower level of outgoing payments. Part of the lower level of outgoing payments was due to the quarter ending on weekend and pushing some of the month-end payments to the third quarter of this year.
In the second quarter, our total cash level was EUR 26.1 million, decreasing by EUR 1.3 million from the previous year. This amount includes EUR 3.7 million of cash management investments. During the period, we liquidated EUR 6.8 million of these investments for the use of our operations. When looking at the historical revenue and profitability profile, we can see that the current profitability level is still impacted by the level of our own investments to game development. The beginning of the year, we have been funding the development of Control franchise game projects ourselves, while weighing the business models for them, as Tero mentioned earlier. That's all from the financials. Tero will continue about the outlook next.
Yes. So the outlook, it remains unchanged. We expect our revenue to increase from the previous year and operating profit to improve. These are naturally dependent on now the choice between self-publishing and publishing partner or the model for Codename Condor and Control, and we will specify the outlook when the decision on this business model and potential agreements have been made.
That was all from our part, and now it's time for the Q&A. Speakers will now take questions from the investors, analysts, and media representatives. Please type in your questions. I think there are a few here already, so let's start with them. So how do you view the hiring opportunities, given Remedy's financial position and outlook?
Overall, as I mentioned, we have less hiring needs than we have had in the past. Of course, there are always individual needs, and we are keeping open positions if we find the right type of people. So that's one background, that the needs aren't anymore that vast as they used to be in the past years. But overall, the opportunities for hiring for Remedy are really good, and there are a few factors that are defining that. The first one is that gaming industry has had really hard past couple of years. There have been a lot of layoffs, there has been a lot of uncertainty in many companies. So overall, a company that still keeps on hiring, a company that has been quite the stable employer, is even in higher demand than it used to be.
Alan Wake 2's launch and the quality of the games, the creativity that there is, it's always been one factor that attracts the top talent of the industry. I think overall when our project planning has progressed much further, and we are able to also introduce in very clear way to the potential new hires what are the projects, what are the roles we are looking for, what are the expectations? The overall processes work better than they have worked before. I think all this is supporting us to find those rare talents that we still are looking for.
How will Remedy work to commercialize future games in the best possible way, so that the sales match the high critic reviews that Remedy is able to achieve?
Well, as I, as I mentioned in the presentation just a moment ago, we have been reviewing different potential commercialization, marketing, publishing options, and models for Remedy. We haven't yet set it in stone. These negotiations and evaluations are still ongoing. We have been able to narrow it down. We know that we will take ourselves a bigger role in that, because we do know our games the best. We have kind of like a big stake in making sure that these games will then also sell in the best possible way. And we do know that in some roles, partners are needed, and we have been now, in a way, considering and discussing that who would be the right partners for the future Control games. But I can't yet disclose anything more on that topic.
Looking long-term then, how do you plan to grow beyond Control 2 and Max Payne remakes? How can we, as investors, be assured that Remedy will reach profitable growth in the long term, given the latest years' volatile financials?
As has been said, our intent all the time has been to build a company that can get into a sustainable, profitable growth path. We have been building a multi-project model. The past few years have been, in a way, the phase of building, scaling up that multi-project organization. Especially the past couple of years were times of heavy investments, when almost all of our games were in development, and we also had to invest heavily ourselves into that. Now, we are entering the phase where we should have, in a way, steadily developing, promising good quality games in development, but more and more regular game launches, which are then also growing the portfolio of live games that keep on selling in the market. That's in a way the model that we have been building.
Alan Wake 2 was the first launch in that, and now in the next coming years, we intend to have all the time more and more regular game launches. So the best way to follow us is to keep on following how do our games that are out there sell, and how are the games in development, that are coming to launch, how are they progressing? And once they start reaching closer to launch, what are the publishing models that we are using, and what seems to be the reception for the audience, for the games, and for our marketing?
How will Remedy finance its business in the coming year? Is there a need for capital injection?
Well, what we mentioned already in the first quarter, when we bought back the rights for Control, that this is a unique opportunity now for us to really, with an open table, in a way, clean table, evaluate what's the right way for us to commercialize our games. Is it with the traditional publishing partner? Is it with the co-publisher? Is it with the self-publishing and even heavier own investment? And the more that we invest, the more it will then involve different type of, in a way, financing options that we will need. So alongside these business partners, if we have of course, been also evaluating different type of financing opportunities, options, and I would say we have good lineup of options in our hands, and we keep on doing that.
So of course, for any company, capital injection is one option, but it's just one option. And at the moment, we have been very much focusing on, in a way, finding the right business model for Remedy, and then what are the financing needs for that, and what are the different options for financing, if that would be needed.
The next one is related to the core management changes, and especially the role of Christopher Schmitz. So how will you work moving forward to optimize multi-project development?
Well, as was just this explained, I think the multi-project organization definitely does require all the time development, but the basic structure starts to be in order, and the underlying teams that are driving the development, not just of the game projects and technology, but also the support functions needed, they are starting to be in a fairly good shape. They have their leaders, their leadership teams, and now we are having, in a way, all the learnings that we had from the past. So we also then changed the model that we don't anymore have the Chief Operations Officer role, but we have a Chief Product Officer, Chief Technology Officer.
There are two creative directors in the company, and then, of course, in the extended management team, we have the support functions that are carrying many of the operational responsibilities that in the past used to be core management's role.
... Related to Alan Wake 2 sales numbers, why did you not disclose an update? Are you satisfied with the current sales development?
Disclosing the sales numbers is always a discussion between us and our publishing partner that what's the, in a way, right time, and when do we publish the exact numbers. We decided now to go on with this model. What we have been doing with, as I mentioned, with our publishing partner, Epic Games, we have continued to boost the sales and promote the games, and the game has continued to sell. We have also been all the time preparing for the end of the year, which always in AAA games, is by far the biggest sales phase of the year. We have been now... We just started to introduce, in a way, the new bigger updates for the game. With the first expansion, we announced the coming of the deluxe physical edition, the Collector's Edition.
I think we are quite well lined up for the rest of the year, rest of the year sales opportunities.
In relation to that, what kind of expectations do you have for the physical edition of Alan Wake 2? Is it a meaningful sales driver?
Well, overall, the industry, as we said last year when we made the decision to go into fully digital launch, the industry has been changing more and more towards digital. But of course, when we now decided to have the physical edition, the Physical Deluxe Edition, it is done for the sake that we see that there is a demand for it, there is an audience for it, there are meaningful sales opportunities also. So, so, so definitely we do expect that it's a good addition to the overall, overall sales.
Related to Max Payne 1 and 2 Remake, was there some kind of a milestone payment in Q2 related to moving to full production?
Well, well, in this type of, big, in a way, stages like we had with Max Payne, there always is a big milestone, and, and the team reached a good milestone. So yes, there was a milestone payment also related to that.
Negotiations regarding Condor and Control 2 have taken quite a long time. Is it because of Remedy's multiple options, or is it a slowness among possible publishing or financing partners?
In fact, it hasn't actually taken that much time when we consider the normal negotiations time, the negotiation times for big deals. I would say that one big difference is that we openly, in a way, disclosed that we bought back the rights for Control, and only after that, we were able to start the potential new negotiations, and we already, at that very moment, in a way, told to the markets that we are now starting to evaluate potential partners. Typically, what companies do is that they only disclose this type of opening of the negotiations much later in the negotiations. So overall, I would say that these negotiations have been progressing well.
At the same time, we have been taking our time 'cause we do know that the potential partnerships that we make, again, will have a long-term impact on the company, both with the model that we take and with the partnerships which we form, and we want to make sure that we make the right choices that are best, in a way, for us. They are good for our partners, and they maximize the opportunities that our games have.
You have a new team to manage games currently on the market. How large team are we talking about, and what are their responsibilities?
Could you, could you repeat that for us, please?
So we disclosed that we have a new team that manages the games that are currently on the market. How large team are we talking about, and what are their responsibilities?
It's still a smallest team. We don't yet need a big team. The games we have now out in the market, Alan Wake Remastered, Control, Alan Wake is still in its fairly early phases, and Epic is managing many parts. But, it's a small team, very experienced team, and the idea is that they are able to evaluate that how could we best, support the games we have? What are the opportunities to find, in a way, new audiences, for these games? What makes sense investment-wise? What is the potential, in a way, payback that we could get? How much work and investment would it, would it require?
We are all the time also then taking learnings that we are then better prepared when in the coming years, we will have more games out there and more games whose sales we want to support for a longer time.
Next one is related to Gamescom, that is around the corner. Is Remedy going to participate the event?
We always participate these bigger events. It's. But often it's a possibility to meet our partners all during the one week, to meet potential new partners. These are events, when we talk about GDC, when we talk about Gamescom, events like these, opportunities during few days' time to meet most of the relevant parties that we want to discuss with.
Then a couple of finance questions. The amount of trade and other payables at the end of the quarter seems unusually high. Could you elaborate on this? Well, the amount contains also the rest of the payments related to the Control franchise, publishing rights purchase, which we paid one third in the first quarter. So two thirds are now marked in the other payables group. And the rest of the difference is basically explained by the quarter ending on the weekend, which pushes the payments forward, and thus it creates the debt. How comfortable are you with your current financial position, considering you are running quite low on cash by the end of the year if Alan Wake 2 does not generate meaningful royalties?
Well, I'd say that as I mentioned in our presentation, we have been developing really well as a company. The game projects are progressing better and better all the time. That then means that the partner payments that we will get from these projects, they should be quite well aligned with our needs. We now have three games in the market. Alan Wake 2 hasn't yet recouped, but there are definitely good opportunities when we go towards the end of the year. The game has continued to sell all the time. We have been fulfilling the recoupment better and better.
And then as said, we are of course, as any, in a way, company is doing, we are all the time evaluating and updating our plans, developing our business, and as part of that, then also evaluating our cash needs and, proactively building different options for the company. And now, especially when we have been discussing the financing needs for the Control games, we have been doing that all the time. Without disclosing anything more, we have good options in our hands, and, we are taking the time needed to make sure that the choices we make are best for the company.
Next one is related to the games pipeline. You now have three games under development with the potential launch next year. Assuming the plan is to run a multi-project model, when does planning for new games start?
I won't go into speculating that, but what I can just say is that, of course, when we said that we now have multi-project model running, the aim is that we would have a steady lineup of promising, good quality games in development all the time, and we would have a growing portfolio of games out in the market that we keep on supporting.
Then a few more questions related to Alan Wake's sales. So generally speaking, what kind of percentage range does most imply regarding the recoup?
Over 80%. So what we said before was that, the game had recouped... I think it was in quarter one when we said the game had recouped significant part, and that referred to recoupment between 50%-80%. So now the new term refers that we have crossed, the 80% mark and, are beyond that.
Have Alan Wake 2 sales progressed faster or slower than you have anticipated in Q2?
The sales have been in line with the expectations that we and Epic Games had. So there are always variations month by month, and that is also then affected on different sales promotions. When do we have those? So definitely in a way, week by week, month by month, there is always variation, but overall, we have been in line with the expectations that we have had.
Okay, I think that's it for the questions. Thank you for the call. We will be back with the next earnings webcast, which is our business review, January, September 2024, on November 1st. That's all for now. Have a great rest of the week, everyone.