Welcome to Remedy's Q1 2023 earnings webinar. My name is Veli-Pekka Puolakanaho and I manage the investor relations in Remedy. In today's webcast, we will go through Remedy's Q1 2023 highlights and financial results. With me are Tero Virtala, Remedy CEO and Terhi Kauppi, Remedy CFO. We will have a Q&A session after the presentation. Tero, the floor is yours.
Thank you, Veli-Pekka. Everyone, welcome also on my behalf. The Q1 of 2023. Q1 overall was in line with our expectation. Our revenue decreased by 45% to EUR 6.9 million. EBITDA decreased to EUR 4.9 million negative, mainly due to the significantly lower level of revenue than in the comparison period year before we had. Our operating profit was minus EUR 5.6 million and cash flow from operations minus EUR 3.9 million. We are now, as the numbers show, in an investment phase. Four of our five games in development, they are co-financed by Remedy and one game, Max Payne, is fully funded by our publishing partner, Rockstar. This investment phase will continue throughout 2023.
This, of course, has an impact on our profitability in the short term but will increase the longer term growth and royalty potential and overall builds a basis for bigger profitable growth. In relation to Q1, it's also worth mentioning that the low numbers are also related to a fact that we recognized an unusually low amount of development fees due to project milestone timing. In operations overall, the focus has been and will be the whole year on advancing our game projects, most importantly, of course, launching Alan Wake 2 later in this year. Before we go in more detail then into our projects, a short overview on the project life cycle model that we use. At Remedy, we have our internal project phases via which our projects step by step advance towards the launch and then live phase of the game.
This model guides our development teams to define what the key focus is at which stage of the project and what are the main goals that project should reach before advancing to next phases. When the game project creates agreeable goals of that specific phase and get to proceed to next project phase, it will typically also mean bigger development team and higher development costs. We start from a mandate phase where we align with the team or a small core team on the clear objectives and success criteria for the game that we are envisioning. We have the mandate approved. The project proceeds with the slightly bigger team to a concept phase that focuses on having a clear vision, clear intent, what we are aiming to create and already some early phase development starts.
When the concept and vision where we are aiming at is clear enough for the whole team, the management approves it, we go in the proof of concept phase. Typically at that stage, we already have something playable. We have been able to see also on the build some parts of the game. Now in the proof of concept phase, we are really proving the core fun of the eventual final gameplay experience. What are the key elements that should bring value for the players? What are the biggest risks that we really need to tackle to make a successful product? We are also building a credible full plan that we would see in a way the project taking from this point to launch.
From that point onwards, we proceed to production readiness, where at the end of the production readiness, we want that the pipelines that are needed for the much bigger team to execute the whole game to go into production they should be in order. We should have one area of the game in high quality form, sometimes even in a shippable quality form, so that we will see also in a way the experience as it would be in the final versions of the game. From that point onwards, we are proceeding to full production, creating all the features, the content that the complete version of the game requires, going into polishing, achieving the quality levels that we need for the game. The game launches and depending on the gameplay type, in a way different live service phases start.
The further the project advances in this life cycle model, the more it typically has personnel and the higher the costs are. When the project team grows bigger and the game is more advanced development-wise, dependencies within the game, its different parts and team are growing more complex. At that point, it would also be slower to make any more design changes to the game and delays would be bigger. That's also one of the reasons why during the past couple of years we have started to put even more focus on the early phases of our projects.
They are the key phases to make sure we are making the right game, we know what are the most critical parts of it and we have proven how that game should be done. In the early phases, we really set the path to successful and efficient production. These early phases are also lower cost phases and we are nowadays keeping the projects in these early phases clearly longer than we used to do in the past. With this as a background reminder, looking at our current project portfolio, we have the five games in development. Four of these five games are owned by us and we are also co-financing these four games and one game, Max Payne, is fully funded by our publishing partner, Rockstar. Out of these games, key focus in 2023 is naturally Alan Wake 2.
To ensure that the size and quality of the game will be on the high level we expect, we are also ourselves investing into Alan Wake 2's development. Alan Wake 2 is now in full production. It's on its way to become a great game and will launch later this year. In big games like Alan Wake 2, there are always a lot of dependencies between different aspects of the game that only come together in the late development phases in production. It's really good that this is now the phase we are in and we are prepared for that. There is more work left in some content areas as there always is in big AAA games.
What is really great is now that the game is playable from start to finish, the development team can now really get into the polishing, balancing and fine-tuning a game, which is a crucial thing overall in game development and in AAA game development especially to get the quality we aim at. I'm confident myself that this will lead into a game that we will be proud of and gamers will love. Alan Wake 2 now during this year advances towards launch, it also means that more developers will free up from the project and move to our other projects during the year. These other projects, they have been longer in the earlier phases, which overall has been good time to make sure we are ready to start taking more people into these projects.
We will then get people from Alan Wake 2, the other projects are ready to take them. Out of these other projects, Control 2 has continued to advance well and the project moved from concept stage to proof of concept. Condor, the spin-off of Control, is a service-based cooperative multiplayer game. The game has had a steady progress and is still kept in the proof of concept stage to prove selected key game designs and also the way how the locations from the original world of Control are utilized. We want all these aspects to be proven before we move to next phases of development. Vanguard is our another cooperative multiplayer game. Being a free-to-play game, there are even more systems and elements that the game needs than, for example, Condor.
Free-to-play game as a service game, it's a new type of game for us and we are taking the time it requires to have this in order. At the same time, in Vanguard, we have selectively strengthened the team and we have seen promising developments as a result of that. Max Payne 1 & 2 Remake has progressed well and during the Q1, it moved from concept phase into proof of concept. I'm expecting the project to continue developing well and Max Payne is definitely one of those projects that will gradually expand during this year as we get people freeing up from Alan Wake 2. Overall, looking at our project portfolio, I can say that there has been clear progress with our projects. As we have then many times emphasized in the past, at the heart of Remedy are world-class talents, our people.
We now have almost 380 world-class talent supported by better external development capabilities and good partners in that front as well. We are selectively still recruiting more people. There are areas in the company where team strengthenings are justified. These needs are not anymore that big as they used to be. Even more focused on the people front, on the human resources front than before goes to professional development, career progression, leadership, improving the ways of working, how our teams can work and collaborate all the time better and better. How this all in a way comes together? We now have all the key elements in place to develop our roadmap of 5 games and succeed with them in the future. Reaching this point definitely has been a long process. It started already in 2017.
We started the transformation to be able to develop longer engaging games on top of Remedy's unique strengths. To make multiple games in parallel and with this model also step by step gain a stronger position in the value chain and get more of the value created when our games then one day would launch and succeed, that was the goal. It's been a long transformation. It's not been an easy one. We have faced our share of challenges and learnings, but we have been able to take these learnings and all the time improve. We took our time and end of 2022, we've reached our goal to have a strong organization and ability to develop five big games in parallel.
We now have a well-balanced high potential portfolio of 5 games consisting of longer engaging single player games closer to Remedy's historical strengths, but we also have 2 service-based multiplayer games. We are doing these games patiently, going to co-op multiplayer, where we can utilize also more of the narrative storytelling, world-building expertise and bring something new to these genres. We have trusted partners in place for all of these 5 games, partners that are the right ones to help us succeed exactly with the games we have in development. We have now gained a stronger position in value chain. Out of the 5 game projects, 4 are based on Remedy-owned brand. Remedy is a co-publisher in 3 of these. Max Payne is the one that is owned by Rockstar, but it's a great match to our portfolio.
We have a strong back as position, high potential games in development and ability to make them happen to develop them. According to our strategy, together with our partners, we have started to invest also more of our own money to gain bigger benefits when we get these games into markets in the future. This investment phase will continue in 2023. Our strategy overall and these investments are done to enable major growth opportunities in the future and an even stronger position to benefit from this growth. The aim, naturally, where we are going is that starting from the launch of Alan Wake 2 continuing the following years, we are building ourselves and having an ability to develop new games and live operate the existing ones on a constant basis.
We will have an ability to make game updates, keep these games relevant for their gamers and have new game launches at the same time every year. Our games, when they are long-lasting, they will be longer engaging for the players and also provide possibilities for longer term and recurring revenue. With the model we have built where we are also self investing ourselves into the games, we are owning many of the games, it provides us also a higher royalty upside. Now, with the co-publishing model, we have a direct involvement in game marketing and sales and we have stronger ability to build, connect and serve our communities, both for the sake of every individual game, but also for the benefit to cross-market across our games. That's my part at this phase. Let's go to the financials. Terhi, please.
Thank you, Tero and good afternoon to everyone. Just as an addition also what we have done as a company, we renewed our brand and you can see also in the presentations now our new logo. Yes, let's continue with the financials. They were not great now, but as the current status of the company, they are logical. Let's see. Yes, here we go. Our quarter one revenue decreased by 45%. This decrease was mainly due to timing of the project milestones and then the related revenue recognition. We had also low level of game sales royalties, only half a million EUR this quarter. The split between the development fees and royalties were 93%, 7%. actually a similar split as in the comparison period.
As a reminder again, there has been and will be quarterly variation in revenues and thus also in profitability. The level of royalties has been low for quite a while now, as you can see from the graphs. Alan Wake Remastered has not yet recouped and thus not generated royalties for us. Like Tero said, we are now in an investment phase and that is reflected in the profitability. For the Q1, the EBIT was negative by EUR 5.6 million and that's -81% of the revenue. Whereas in comparison period, we had a slightly negative EBIT. Sorry, we had a positive EBIT of EUR 2.8 million. There's been a year-on-year a big variation.
The decrease in the profitability was due to lower level of revenue, also due to higher staff expenses and lower level of capitalizations. We are now financing a larger share ourselves during project development phase to ensure future revenue shares. That is a planned action. For the transparent reasons, we also present here the unnetted amounts of expenses, unnetted out of the capitalizations. The external work performed were at about on the same level as in the comparison period in EUR 3.7 million. In personal expenses, we had about 19% increase due the increase in staffing of 14%, also due to higher level of Sweden site costs. Also we have a higher level of holiday pay accrual booked. Our capitalizations were 90...
49% lower level than in comparison period and that's mainly due to Condor's lower level of external work performed. Yes, as we are in investing phase and we are co-financing a large share of our projects, so it also visible here and the operating cash flow was minus EUR 3.9 million. Also in the comparison period, we had high one-off incoming payments by the time from Epic for budget increase amendment and also from Tencent for a new Vanguard team. Our total cash level, slightly under EUR 50 million currently and that's a decrease of about EUR 6.2 million now during the beginning of the year.
Also we increased our cash management investment by EUR 3 million, so a little bit from under EUR 7 million to a little bit under EUR 10 million now. That's to mitigate the banking risk overall. Yes, the investment phase is affecting profitability and the composition of our revenue. We are having more risk, all risk in the development and lower level of royalties. Overall, in the long term, we see possibilities for our top line growth still and the improved profitability in the long run. We are not like saying this is the level we want to be in the future. This target in mind, we want to make operatively wise decisions still, although in short term this impacts our numbers.
With the strong cash position, we are able to build the long-term success for the company. We have, yes, a balanced portfolio of projects. We have a subcontracting type agreement with Rockstar Games for Max Payne. We are working with 505 Games and Epic in a model where Remedy owns the IP, publishing part funds the development fully or partly and we share game sales profits. We also have co-publishing deals with projects Condor, Vanguard and Control 2 by IPs owned by Remedy. Here is the same portfolio described by the type they generate revenue as. Especially taking the timeline in account as we are in an investing phase. The higher we move up in the picture, the more there are models where the profitability of a game project is depending on game sales rather than development fees received from a publishing party.
That was all from the financials this time and Tero, you can continue.
Thank you, Terhi. With all of that, as has been now said a couple of times, we are in an investment phase, focusing on developing the five games, investing more also ourselves into them. Later this year, we will launch first of these five games Alan Wake 2 . Taking this into account, we are expecting our revenue to decline from previous year and a negative operating result. Just as a reminder, our long-term objectives remain the same. By the end of 2025, we have created several successful game and at least one major hit game, a game that reaches the global top-selling charts and can keep on succeeding also after the launch. We have built ourselves unique creative skills and can create worlds, characters, stories that build powerful brands. We own at least three expanding game brands, all with long-term hit potential.
We will have commercial capabilities so that we can select the right commercial model for any of our future games, be it for some self-financing, self-publishing, be it working with publishing partners with a model that fits that specific game. Great people will continue to be a key focus for us. We aim to be the most attractive gaming industry employer in Europe. As has been said many times before, we aim to reach these objectives while having a profitable and growing long-term business in which we all the time manage smartly and well our risks. That's it on the presentation side. I guess it's time for the Q&A.
Yeah. The most special part, of course. If you want to ask questions, type in your questions, to the q&a and, we are now ready for questions. There's actually quite many questions already in the q&a and a couple of pre-questions as well, let's kick off. Can you elaborate on the development of Vanguard and Condor and how that relates to the numbers we are seeing at the moment, bearing in mind that the full publishing, expansion a little bit?
Well, relatively slow progress. That's in part true and in part not. First of all, always when we start a project, we set ambitious innovate targets to ourselves and in a way, the faster we can progress, the better it is. Especially with Condor and Vanguard, we have known from the start that they are new type of games for us. They are multiplayer games which are not that familiar to us and especially when we talk about Vanguard, it's many steps further in complexity compared to Condor, as it is a free-to-play game, even newer one for us, but also due to the free-to-play nature, the systems required for the game are much wider and there are more of those than with any other game.
Overall, now when we talked about our life cycle model, the stage gate model, it's even more important for this type of games that are not that familiar to us, that have many new elements that we haven't done before, that we keep these games in the earlier phases longer, so that the core elements that need to be proven, they are in place before we move on. In a way, the bigger the games are, the more complex they are, when we start moving into towards the production phase and on the execution phase, the harder it would be any more to make any, in a way, bigger and needed changes that the games would have. In that sense, in a way, we have kept the games in these earlier phases the longer, as long as we have seen they need.
I would say that when we compare then Condor and Vanguard, Condor definitely is closer to what we already know. It's based on the world of Control. Many of the innovate game vision, world building, some of the game mechanics, they are already familiar to us. We are developing the game on top of our existing Northlight technology. Part of the Condor development team comes with the background of having been already in the Control project, so they know the game, the background and part of the development team is then with the multiplayer experience. It's not a free-to-play game, so in many ways, in a way, there has been a steady progress on that front and I think the team has been focusing on the right topics before we then at some point start scaling the project up.
Vanguard, in a way, we have taken, as was communicated already in summer 2022, in a way, some delays for the project, some additional time. In a way, it's been a big learning process for us and I think we are still in some areas making the learnings. We have been able to, in a way, take these learnings, both on the game design, on the vision, but also on the team building side. What's exactly the right team we need? There have been some team strengthenings and changes that we have still done. Now, we have definitely seen a better momentum in that game, but in a way, there are many systems that need to be in place before we start scaling up the team.
Part of the challenge and beauty in free-to-play games is that when we develop a AAA type of a game, in a way, typically there is say only a few kind of like core elements in the game that need to be proven and those often can be proven with, in a way, one or two, in a way, enemies or kind of like one scene of the game. Free-to-play game consists of different type of game systems, where you need to have, in a way, the combat system in order and typically the progression system in order and the core game loop and some of the meta game elements in order before you can actually prove if the core functions or not.
Many of the systems actually in the proof of concept phase need to be taken much further than some of the product type of games. That's also one aspect that needs to be taken into account, that the early phases of the service-based games and multiplayer, especially on the free-to-play side, they take longer than on the, in a way, more product-focused games.
Thank you, Tero. Are we open to terminating projects such as Vanguard or Condor if they do not meet our requirements in the proof of concept stage?
Yes, definitely. Definitely. Now, when we have multiple projects, we are not as a company dependent on any one individual project. In a way, at the moment, in a way, we see potential in all of these projects and that's why we are continuing with these ones. In a way, if we would see that one of these projects would not be able to meet the goals set for them, we would take actions. At the moment, together with our partners in all of our projects, we still think that, in a way, they are on track to meet the goals.
Good. Are we still aiming to release at least one game per year between 2023 and 2025?
Yes.
Let's go to Alan Wake 2. Can you share any plans regarding marketing for Alan Wake 2, especially now that the E3 has been canceled?
No, no. We won't speculate on that. We have said that the game is launching this year, in a way and of course, we are now already in April. Marketing is handled. We are, of course, involved in that, but it's done by our publishing partner, Epic, who has a, in a way, strong team behind the marketing plans. When the time is right, I think, we will everyone will see more on what we will do.
A question related to Alan Wake Remastered. Is royalty for Alan Wake Remastered, our goal when the real marketing for Alan Wake 2 commences?
We see that Alan Wake Remastered definitely has a royalty potential and that's definitely something that I'm personally expecting. Alan Wake Remastered is part of the wider kind of, like, plan that we have also for Alan Wake 2. When the marketing campaigns then at some point kick off with Alan Wake 2, in a way, I think it's fair to assume that they should have an effect also on Alan Wake Remastered.
A question on, Alan Wake 2. Can you elaborate on the competitive landscape with regards to launch window this fall/winter?
there is no blue ocean. In a way, all the categories that show potential, like, in a way, survival horror, they have really good quality, in a way, competing games as well. At the same time, of course, we are closely following that, what is the likely competition in the window, when we will approximately come out. At the moment, how it seems, there aren't that many yet announced games, kind of like, for the second half of the year. In a way, will that change now when we are, in a way, coming closer and closer to summer and fall? We will all see.
Overall, what I personally think is promising that when we look at some of the recent launches in this category where Alan Wake 2 also will go, survival horror, be they kind of like the versions from the Resident Evil or some of the other games, they have actually been doing fairly well. It seems like these years ago, in a way, niche segments and categories have actually grown in size and there is obviously a lot of demand for high-quality games. I think in a way that overall, that gives a good promise also for us and potentially these games have also attracted new audiences to this type of games. Overall, we are seeing kind of like some good signs on that front.
Of course, what's most important then is that the quality of the game, quality of Alan Wake 2 has to be high and that's where we are aiming at, all the time. I have strong belief that that is also what will happen.
Thank you.
Actually, I could also say that now, when this is going to be a Remedy game, it will have a new flavor to the category where we go. Actually, that will also, I think, play in our favor, that if you are interested in that type of games and even though there would be competitive games, when you try Remedy games, there is always this secret Remedy sauce that will give you something different that other games don't.
Good. Will the development fees increase as the projects move into the later stages of production beyond proof of concept?
As a general rule, yes, because we also then have a larger team working for the project. That is, like, the main rule. Of course, project by project, there are some variations.
Terhi, could you talk about Remedy gross margin? Is it lower in this investment phase or investment period due to certain costs? On the other hand, what should be a reasonable level in the future with higher royalties share?
Surely the investment phase affects the gross margin in a negative way because not so much due to the cost level that we are having, which is pretty much stable. There is some variation in the level of external work we are utilizing, but not so much variation on that, but there is a variation from the revenues. Yes, we do get the development fees to some extent, but just recently shown that the level of royalties is really low and that has some huge impact on the profitability. Going forward, yes, surely, the more we have game sales royalties, the higher the gross margin should be. To which level, that we cannot comment.
A question related to game budgets. What costs are included in the budget? For example, Control 2, if the budget was EUR 50 million, what is included there?
There are several components, but when we talk about the game budget, we talk about the work that is needed to make the game complete. It means our internal personal costs. It means the external development costs. We also of course, have some general allocations from the shared services for the projects we are having. We typically don't include there the marketing budget.
When you have a 50/50 split of budget and net revenues, do you instantly receive 50% of all net game revenues when it launches?
It depends on the contract type. If there is no recoupment for the development fees, yes. If there is not, then the first is the recouping and only after that is full, then we share the net revenues.
Good. How much higher development fees do you expect in Q2 this year, given the unusually low amount of development fees in Q1?
Well, we don't give the guidance on a quarterly basis, so, unfortunately I cannot comment on the level on that way. What we have said is the guidance for the full year and there we see that the revenue level will be lower than in 2022.
Thank you. With all games outside of Alan Wake 2 in proof of concept stage, how will Remedy be able to release one game each year moving forward?
Well, we need to succeed with our productions. I think as a company overall, we are much stronger than we used to be in the past. I think it's been exactly the right approach that we are spending enough time in the earlier phases, so the success of the production phase very much depends on how well we do this earlier concept, proof of concept and pre, production readiness phases. We have been putting a lot of effort into those and now looking at our projects that have been spending more time in these phases, I think they will be better prepared to take on more people, especially when the people start freeing up in bigger quantities from Alan Wake 2. That's one part. Then definitely as a company, we have developed.
There have been some growing pains in the past and, we have taken our learnings also as, say, management, how we are guiding our projects, how we do the talent allocation, how we manage our portfolio and how we also have developed the external development capabilities and added in a way, found in a way and proven certain development partnerships that are really able to help us scale up the productions in the quality we have. Definitely it's not an easy equation, but that's what we have been preparing ourselves and, I see us ready for that.
Good. How many copies sold do you see as success for any one of your AAA games and which is the base scenario?
We don't have any, in a way, one set of numbers for a game. It always depends on the type of game, on its business model, on the kind of like budget we are using for the game and also whether the game is a sequel, so having an existing fan base and market, or if it's a new one. In a way, Control has now sold 3.5 million units and we already a while back said that we consider Control having been a first installment, that it's been a success for us. Now, with some other games, kind of like, the numbers may be different, but when the game reaches a certain profitability level and can continue selling, then we consider it as a success for us.
Yeah. I could add to that it's not only currently the game copies that matter. There's also, at least in some games and projects we are having the importance of B2B deals is quite high.
That's actually a really good point and I could elaborate from that how the gaming market has changed. It was in 2017 when we signed the deal for upcoming Control with 505 games and our own business model and 505's business model, revenue model, was built on two pillars: how many units the game would sell as a physical copy on retail and how many copies it would sell on digital. Now, in a way, we go further from 2017 to 2020, 2021, in a way, the retail part, the physical sales, they were not kind of, like, non-existing, but they were not important in this bigger picture. The game had three different pillars.
The full game sales on the digital channel, the post-launch sales that we could generate via DLCs and different type of, in a way, sales campaigns that we were driving and also the business-to-business deals that we could get from the subscription services, new platforms. That's quite the radical change that has happened and that's, in a way, the opportunity, as Terhi said, that we are also today saying that, yes, the unit sales is one aspect, but only one aspect.
When a game is released, how fast do you amortize the development costs on the balance sheet?
We basically try to look that according to the estimated sales curve. Typically, I would say, like, between 2 to 5 years, depending on the type of a game.
Final question, at least for now. Could you open up the strategy of building a Remedy's studio brand? I see this as one of the crucial factors which increases the probability of achieving a major hit game.
Well, We have basically, in a way, of course, the game projects have been the main focus. As a company, we have been loyal to some of the roots that we have had and they give a lot of strength to us. From the storytelling, world-building, characters, action, gameplay, in a way, some of the cultural aspects, how we have always been treating our people with high respect and integrity, how we are dealing with our partners, really building long-term collaboration. These type of matters have always been important, now when we renewed our brand, it came with the notion that, as a company, we have changed a lot during the past 20 years, past 10 years, past 5 years' time, it's not just the logo that relates to brand.
In a way, we defined also in more detail the core brand pillars that define Remedy and are important, in a way, that are really representations of who we are, but which are also important to bear in mind, especially not just in the business where that we do, but also the communications and in a way, when we are facing our stakeholders, our, in a way, recruitment market, in a way, the players. The old kind of, like, Remedy branding was very much based already in the times of Max Payne, when the whole company was developing 1 game, kind of like bullet time was a big thing for us. It was a linear story that we were making. Nowadays, the company, in a way, still knows that part, but we are 5 game projects. We have grown to close to 400 people.
We have two studios. Remedy, while building on the core strengths of the company, it's much more multifaceted than it used to be and, in a way, this is on a high level, what has been, in a way, the thinking behind it. As said, the devil is in the details and we have done a lot of work also on the detailed level, some of which, we are sharing also externally, some which is more for the internal use.
Good. Thank you. I think that was the last question for today. Thank you all for the call and the questions. We will be back with the next earnings webinar, our half-year financial report for January-June, on August the 11th. That's all for now. Have a great rest of the week.