Hello, everyone, and thank you for joining Remedy Entertainment webinar. My name is Veli-Pekka Puolakanaho, and I manage the investor relations at Remedy. Today, we will go through Remedy's half-year report for the first half of 2021. 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. Good morning to everyone also on my behalf. I'm Tero Virtala, the CEO of Remedy. Let's now talk shortly on Remedy's key developments during the second quarter of 2021. Our revenue in the second quarter was EUR 9.4 million, a slight increase to the comparison period in 2020. Our operating margin was on a good level, EUR 2.3 million, being almost 25% of our revenue. In relation to the key development key event, we signed a co-publishing and development agreement with our trusted partner, 505 Games, to expand the world of Control to a spin-off game, Condor. We also agreed on collaboration terms for a future bigger budget Control game. In relation to our overall developments that we have taken in the second quarter, as we are taking overall during this year, an important context are our long-term growth plans.
The actions that we have taken also in this second quarter are taking us towards these objectives. As a recap, by the end of 2025, we aim to create several successful games and at least one major hit game, a game that can reach the global top-selling charts. We will own at least three expanding game franchises, all which will have long-term hit potential for the games that they are producing. We are continuously, in order to capture more value in the long term, building our capabilities so that we can select the right commercial model for each of our future games. For some of these games, it will mean working with the right publishing partners for that specific games. For some of our future games, the model will be more self-financing and self-publishing.
At the heart of our operations and the key ingredient of the success in the video gaming industry are the talents, the development talents, the creative talents that we need. We have systematically been developing the organization, our leadership models, our personal development paths in order to be the most attractive employer in the video gaming industry in Europe. To reach these objectives, we are all the time paying attention that we are a profitable and growing business in which we also manage our risks well. When we look at our current project portfolio, again, an important context when we look at these slides is to bear in mind that strengthening the multi-project capabilities, building new world-class development teams, expanding our game portfolio, these all have been key operational focuses for us for years.
The reason is that in AAA games business, building these capabilities to develop multiple games, high-quality games simultaneously, to have a multiple really high-class leadership teams for these projects, it's not easy. It takes a lot of time for any company in the world, be they the biggest companies in the industry or the more flexible indie developers. This takes a lot of time, and due to this, when we have the multi-project model in operations, when we have more high-class core leadership teams, development teams with which we can utilize our creativity and develop those high-quality games, the stronger we are. These are really hard-to-copy competencies, and we see that they are some of the key ingredients that will give us valuable competitive advantages as we move further in our plans.
The good thing is that we have advanced well in continuously strengthening these multi-project competencies and development teams. A good perspective to this is that five years ago at Remedy, we had one larger team, and at that moment, we started to plan the second game that we could start developing simultaneously. Now, at the moment, five years later, we have teams with which we are working on multiple very promising games in partnership with our trusted partners. We are still working on Control. We just announced a deal how we are expanding the world of Control to Condor, a spin-off from Control. We also announced that in the very early conception phase, there is a bigger new Control game. We are working on Crossfire story modes in collaboration with Smilegate.
We are progressing with the two unannounced projects with Epic Games, and our free-to-play co-op game, Vanguard, is progressing as well. When we look at this slide, it's also good to note that while we are taking this project further and have been taking the projects further now for years, we are at the moment approaching a phase where we are able to launch into markets also new games more often and more regularly than we have been doing in the past. This is one of the key steps also in reaching the long-term objectives that we are aiming at. Few words on Control, the first of these franchises that we are working on. We already said at the end of 2020 that Control had reached over 2 million sold copies, which of course, is a really good achievement in itself.
The good thing is also that Control has continued to sell well. We have systematically been expanding Control both to new platforms that have been emerging from the next generation or new generation console platforms to different streaming services, and also to other type of services that are now coming, subscription services, new storefronts for selling these games. These developments, they are all the time bringing us learnings that we can utilize when the industry is going further every year. These type of deals quite typically bring us also additional business-to-business revenue, so in a way, fees from this partnership. We are also reaching new audiences and building a stronger brand awareness for the future Control games to come. A good example how we have succeeded, that at the moment, there are already over 10 million players that have tried and played Control.
The idea of building the audience is an important step in increasing the virality with the game, which is supporting the continuous sales of Control, but it's also building the audience for the future games to come. As said, Condor, we just announced at the end of June a co-publishing and development agreement with 505 Games on Condor. Condor is a multiplayer spin-off game in the world of Control. It's going to be a four-player cooperative player versus environment game, and it's meant for console and PC platforms. Business-wise, the initial development budget agreed is going to be EUR 25 million. The initial referring that this is going to be a longer service-based game. We are first, of course, aiming at the launch phase, and after that, the idea is that service-based games will continue to develop.
The development and marketing investments are going to be shared 50/50, and the net revenues are going to be shared in the equal amount, 50/50. Remedy will retain all the IP ownership. In addition to Condor, we also announced that the collaboration terms for future bigger budget Control game have been agreed. An important thing is that to us, this has been clear all the time, but I think that for the external audiences, this is also an additional proof of Remedy's capabilities to create franchises that are not just individual games, but they are bigger worlds that can expand to multiple meaningful high-quality games.
At the same time, the deal with our partner 505 gives us the possibility to take a bigger role in the publishing and commercial operations than we have had in the past, and in this manner also takes us further as a company. For Crossfire, this is an exciting year. We have collaborated for a long time with Smilegate to develop story modes for Smilegate's big Crossfire multiplayer universe. This year, two story modes that Remedy has developed are expected to launch. First of all, there is the Crossfire, the original game that has been developed by Smilegate with Tencent. For PC, the main focus of the game has been in China, and Crossfire HD continues the Crossfire experience. The multiplayer part has already been available from the early summer time 2021 in the Chinese market.
Now the expectation is that the story mode will expand the game developed by Remedy and will launch in 2021. Smilegate has also been collaborating with Microsoft for CrossfireX, a Crossfire game for Xbox platforms, and the expectation is that this game will be released in 2021 and will include the story mode created by Remedy. An exciting year overall. We have now collaborated with Smilegate for five years, and at the moment, our full focus is ensuring successful launches of these games and our story modes. In relation to the two unannounced games with Epic Games Publishing, the projects are proceeding. Basically, the business terms are as they have been. Of course, nothing has changed with those.
The bigger game in the second quarter of 2021 has now advanced into full production mode, and the smaller game continues in the full production mode as it was previously. In relation to Vanguard being the long-lasting service-based cooperative multiplayer game that we have been developing with a small team very iteratively now for a couple of years, that has been progressing well. We are, in a way, being cautious how we advance. It has been a new type of game for us. It has brought us a lot of learnings. We are now utilizing some of these learnings also in Condor, but Vanguard is showing promise, but it's still in an early development phase, being a free-to-play multiplayer game, service-based game, lot of new elements. The development is progressing. We are now in a phase where we have been able to do selected internal and external playtesting. We are continuing with those developments.
Outside of our projects, what we have been doing all the time are to take further our development competencies, multi-project competencies. We have a lot of focus on the creative talents we have. We now have almost 300 internal Remedy talents. In addition to recruiting these people to Finland, we, in early 2021, started piloting and evaluating new ways to attract and recruit talent that will be based permanently outside of Finland. This has been a piloting phase to ensure that we are able to attract exactly the right type of talent. We are able to onboard them into our development teams in a way that the team effectiveness is not hurt.
The early results have been good, and therefore, we are now continuing with these developments. Being now already a 300-person studio internally, this is already quite the remarkable size for an independent AAA developer. We see this development of also putting more effort into recruiting people that will be based outside of Finland as an important additional step in making sure that Remedy continues to attract the best talent also for our future needs. In addition to that, we have also continued to develop our skills and partnerships with the external developers. As we said already at the end of 2020, in 2020, we had over 300 external talents working for our game projects, and we have been taking this further all the time.
In addition to this, we are continuously developing all the time our production capabilities, the Northlight technology, our people, teams, how we work in these teams. The developments we have done at this moment, they have been good. We are happy with these developments. Again, they are steps that further strengthens in what makes Remedy so special and what makes Remedy to stand out in the video gaming industry. We are a category-defining creative super developer. We have the unique abilities to create world-class gaming brands and franchises with the world, stories, characters, the type of gameplay that we make. Out of this franchise, we have shown that we can develop distinctive benchmark-setting games. Operationally, business-wise, people-wise, we are a professional multi-project developer.
Now commercially, with our capabilities, we are developing and have been developing to a direction that we are able to select for each game what is the best model to commercialize that game. Is it via self-publishing or with some games partnering with the publishers? We are a highly attractive home to world-class talent. We have seen that during the past years, and now we are taking the next steps to make sure that when we continue to grow, this also remains a fact. At the same time, when we do all this, we are a profitable growth company that also manages its risks well. These have been the main events during the second quarter of the year. At this moment, let's talk a bit more on the financials, and I'll give this over to our CFO, Terhi Kauppi.
Thank you, Tero. Yes. Good morning, everyone. Let's look a little more into our financials. We had a slight increase in revenues, both in quarter two and in the first half of 2021, and that was the result of us receiving more royalties than in these comparison periods. Our EBIT was EUR 2.3 million, and that's 24.5% of revenue in quarter two versus EUR 2.1 million and 22.9% in the comparison period. We could actually increase our EBIT by 10% in quarter two and operate on a good margin level. For the full first six months of this year, the EBIT was EUR 3.2 million, and the margin was 18% of the revenue. Operating cash flow was negative by EUR 1 million in quarter two and positive by EUR 3 million for the first six months.
In the beginning of full year, we could generate EUR 1.8 million more of operating cash flow than in the comparison period. We need to remind ourselves that the timing of the payments from our publishing partners do affect the operating cash flow significantly from period to period. We have progressed in a sustainable way and gotten to profitable growth track. We have been able to grow our revenues in about 10 years to 10 x more, and with a sustained profitability level. 2020 was a record year for us, and now going forward this year, we actually are in about the same level of revenue where we were last year this time. Our aim is to change or at least to even out this historical pattern of profitability linked to game launches. We can do that by operating efficiently in this multi-project model.
Yes, our net sales were increasing a bit during the first half. As said, the kind of main reason is that Control continues to sell well, and we continue to receive a good amount of royalties from that. We do also receive development fees from our partners. We are receiving them from Epic for Q2 games projects going on forward well, and also now we received development fees from 505 since we agreed the new project Condor in the end of June. Subcontracting work has been more on a kind of lower burner side since, like mentioned, we are waiting for the launches during this year in that scheme. We have been able to increase our staff. During the quarter two, we could actually increase our headcount from 281 persons to 293 persons. By 4% in only three months.
That of course affects the personal expenses cost base. The largest difference in the cost base within staff expenses comes from our bonus accrual method change. In our current mode, we are calculating the full year bonus amount, and we are accruing now, based on the time elapsed, half of that to the first half of this year. It had an about a EUR 1 million effect on our EBIT. We are not releasing any adjusted numbers, if we would have continued with the old model, our EBIT would have actually increased by 30% in this first half. External development fees, what we pay to our subcontractors, were in about same level as in the comparison period.
In proportion, we saw some increase in other operating expenses, and that's because the COVID situation affected the comparison period even more than it does now, the operations level. We invest in the future, and that shows in the fact that we have 74% more CapEx than in the comparison period. The majority of the CapEx is from the product development capitalizations. The fact that we have been now working more with our own owned IP projects means that we have more capitalization eligible project work. It shows also here. Talking about the new deals and then the partner terms. We need to be very clever to have smart partnering structures on a portfolio level. In one side, when balancing risk and reward, is then the self-publishing model, where we could get the full reward, but also the risk is higher.
Kind of on the other end is the subcontracting work, where both the reward is more limited, but so is the risk, and it's still a good business. In between these two, we have currently projects with 505 Games and Epic Games, where we own the IP, then we share both the development, the investment with the publisher, then we share also the revenue and returns. Overall, the partnering terms affect our growth and profitability in a significant manner for years to come. Yes. Overall, we are in a strong position for the future. As I'm speaking, I'm also clicking through the different game, and revenue, and partnering models we could have. It's clear that we have potential for growth and EBIT. This picture is one illustration of future scenario for Remedy, a realistic one.
If one of these games becomes a big hit, as we of course aim at, then this picture would look even prettier. There is a lot of potential, and I'm especially happy that we are now having an excellent cash position to invest in these factors that really enable us to grow and also then boost the profitability further. Thank you for my part, and now back to you, Tero.
Yeah. Just on the outlook for the rest of the year or the full year 2021, the outlook remains unchanged. As we have said, we are continuing according to our long-term growth plans, with an aim that we can launch at least one game or game expansion every year. We are now expecting the launches of Crossfire HD Story Mode and CrossfireX to happen later this year. Overall, 2021 is looking to be a good year, as we have said previously. We are expecting our revenue and EBIT to grow during this year. Majority of the full-year growth is expected to happen now in the second half of the year. That's it on the key developments, key financials, and Veli-Pekka, I think it's time for the Q&A.
Thank you, Tero and Terhi. If you want to ask questions, you can type your question in the chat or to the Q&A section or request a speaking turn by clicking raise hand in Zoom. If you are participating by phone, you can dial star nine to request for a speaking turn. We are now ready for questions, and I can see that we've already gotten some. There are few questions in the chat. Maybe we could start off by those. There's a question about our expectations for Control for the second half of the year. Do we expect Control to grow revenue year-on-year? Maybe Tero or Terhi-
Yes
Can you comment on that?
Well, first of all, neither us or our partner 505 Games have announced anything on any potential future expansions. We currently have the main game Control and the two sellable DLCs expansions for the game. Nothing more has been announced. We still need to remember that in many terms, Control is not a service-based game. It's more like the traditional product. We are happy as a first step that we could take with Control. It's now much more versatile game. It has the side missions. There are much more reasons for people to replay the game, in a way discover again the areas of the game, get back to the game. In that sense, it was an important development for us as a company when we are taking our next games further. At the same time, it's more like a product.
When we originally made Control, we didn't expect Control to sell for a long time. What we have learned during the past couple of years, that when the industry's growing, when there are new platforms, the highest quality games, also as products, keep on selling for a long time, and Control is a good example of that. Control sold well in 2020, in a way, a long time after its original launch. Control has continued to sell well during this year, and we are expecting this to be a good year for Control. When it's not a service-based game, we don't have this type of expectations like we could have for some service-based game that year on year, they would continue to grow for a long time.
Overall, we are, I would say, having good expectations for the Control sales this year, but not over-hyped that some of the service-based games could have.
Thank you, Tero. There's a question for Terhi of how much revenue do you have from Asia today? If I remember correctly, we haven't disclosed our geographical distribution.
Yes, that's correct. We are not giving out that kind of detail. Overall, for us, what we receive the revenues from is through publishers. That is the main level of visibility, what we have overall. Surely at some point, We might be able to give you more details around that, but that's not the time yet, unfortunately.
Thank you.
I could then continue also with that, without going into details, what we have said already years ago, that traditionally our main focus has been in the Western markets, Europe and North America. As we are now progressing as a company, of course, we understand the giant size of the Asian gaming market, and when we go further, especially with the service-based games, we think that Asia most likely in the long-term future will also provide more opportunities for us.
Thank you. There's a question on talents. Do you have enough talents to work with all the titles in the pipeline, or do we need to hire more people?
The good thing is that we are now starting to see the economies of scale. When we look at our longer-term development percentage-wise, we had to hire more people in the earlier years of our past five-year development, in a way, 2017, 2018, 2019. In proportion to the previous years, in a way, the growth was even more. The good thing is that we are now starting to see certain economies of scale, that when we have centralized teams, the technology teams, we are step by step able to serve more ongoing projects with these centralized teams and don't need to hire every single position in the new projects that we are having. Having said that, in a way, this is a talent-driven industry in many ways.
Yes, in order to fulfill the long-term aims that we have, objectives for our future growth, we do need to continue hiring all the time. If I remember correctly, even at the moment, we have approximately 25 open positions for the new talents for our future projects. Fortunately, we have been able to succeed well with these initiatives during the past years, and I'm not worried that we would not be able to continue to do that. We are putting a lot of effort into that. Still, in proportion to our size, it's not a major increase that we need to have.
In order to complement the needs of our projects, as I said earlier, we are also having a lot of focus in the external development capabilities so that we could be especially focused on the creative parts of the games that we are making, on the most critical areas that really make those games stand out. We can utilize high-quality development partners to give us even more muscle to do the heavy lifting with some of our projects on the important areas, but maybe still more doable also by external partners than our talents. Another good point to remember is that even though we have multiple projects in the move, the idea is that we aim to have those projects in bit different development phases.
Some of our projects like Condor, the new game in the world of Control, it's in the very early phases, and we can progress with these projects with fairly small development teams. Vanguard has progressed for a bit longer time. It has now approximately 30 developers. Then we have some other projects, like the bigger project that we are now doing with Epic Games that is now in the full production modes. Then we start talking about big amount of also internal developers that we are having.
We would not be able to have four or five projects in full production mode at the moment, but when we smartly design and phase these projects, we are able to take them further, and at the same time, hire, build new development teams, build new core leadership teams, hire new developers, and use more of the external development partners in order to increase our future capabilities.
Thank you. We've had actually a couple of questions regarding the number of people required to projects. There's one question specifically on Condor, that how many people do we expect to be working on that game? Can we tell a little bit about how the staffing in general goes for these projects?
Well, we can't talk on exact numbers on our current projects, how many people we have. We can't talk exactly on the amount of developers we have planned for an individual game that we have in development. What we can in general say that Control still gives quite a good ballpark figure or comparison point to our projects. Control was a new type of game for us and took us further as a company. It ended up being a very high-quality game, a new franchise, an award-winning game that became game of the year in 2019 globally. It took us altogether three years to develop, approximately EUR 30 million. Control was still very much a single-player game, and in its highest peak times, the internal development team size was approximately 100 people.
That, in a way, for this type of single-player, bit more story-focused game, which still have a really meaningful and strong action gameplay part, it gives a good comparison point. When we go further as a company with some of our future games, most likely the budgets may slightly increase when we know what we are exactly doing and our capabilities then to manage these projects are growing. We have a different group of projects, which are the more service-focused multiplayer games, where we can evaluate that what's going to be the so-called initial development budget, the development budget that we need to make the minimum viable product that's still very high-quality game, but the game that we can launch.
After that continuous to live phase, which is going to be continuous development, hopefully for a long, long time, because the longer we develop, the longer it means that these games have succeeded and justified the development. Condor, as an example, we have said that the initial development budget with 505 Games is EUR 25 million.
Good. Some Condor-related questions. Can we give some indication of the monetization model of Control? Is it based purely on in-app purchases or game subscription, or is there an initial game purchase also involved?
Condor is an early-phase project, and we haven't yet disclosed any information with our partner, 505 Games, on that.
Fair enough. On the larger Control project with 505, we announced in June about this preliminary deal as well. What is the typical timeline before these collaboration terms being set and a more detailed project agreement? Is it few months, or year, or how long?
Well, I don't think there is any typical time in the industry. It always depends case by case. In a way, we, of course, when we announced that the collaboration terms have been set for a bigger budget future Control game, in a way, it's with a trusted partner, 505 Games, with whom we have collaborated with for a long time. In that sense, in a way, both us and 505 Games were confident to disclose that these collaboration terms have now been set. When do we have, in a way, the more detailed agreement and more info to be shared, we cannot yet, in a way, talk in detail on that or start to speculate on the timeline.
Good. Earlier we said that it's our ambition to launch one new game or an expansion per year. There's a question, does the launch of Crossfire satisfy this even though it's not our IP?
Definitely Crossfire, we have been making big story modes, in a way, and really high-quality story modes for the Crossfire universe. We have been working on those for the past five years now. When they are coming out, definitely they are, in a way, meaningful and remarkable launches also for us.
Good. There's, in the Q&A section, thank you, Tero, and the team for a very good quarter again. About Vanguard development, what platforms does that cover? Free-to-play is a new thing for Remedy as far as understood and requires substantial knowledge in business intelligence and analytics. Does Remedy already have those skills, or are those within Vanguard's realm, so something that the team should take into?
That's a really relevant question, and yes, definitely. When we are going to free-to-play, the mentality is partially different than it has traditionally been with the product-based businesses. Yes, when we have been building the Vanguard team, it has been, I would say, quite the managed initiative where we have taken selected existing Remedy talents and experts in areas that we believe can give competitive advantage to Vanguard in relation to the world-building, in a way, certain narrative elements, how we build this world, certain action gameplay mechanics that we see that can give the additional edge to the game.
There has also been a big push to find exactly the right people outside of Remedy that will bring us this multiplayer expertise, service-based expertise, the live operations understanding, the even more iterative game development approach than we have had traditionally, and game analytics has, of course, been one of these areas. What we have been doing is to really openly seek external talents that can bring and have brought additional skills to Remedy. We have been systematically building those further, both internally and also selecting external partners with whom we are partnering in these areas.
Good. At least one more question. Could you expand on what the European hiring pilot program entails? Are these new hires working somewhere in Europe or are at our headquarters in Espoo? Do we need another European mainland studio?
The background is that we are now 300 people, and when we look at the AAA gaming developers in the world, of course, with some of these big publishers, you see studios of thousands of people, but they are still not that many. When we start talking about the sizes of 300, 400, 500 people, AAA development studios, it's already a remarkable size, and the possibilities with this type of studios are quite big. Some of these studios in the world, they focus on one single huge game. Some few ones, like Remedy, have been able to build the multi-project model so that they would have multiple well-working high-quality teams and the possibility to work on multiple parallel games. We are taking that model further.
Now with 300 people, in order to manage these multiple game projects, one of the ideas has been that as a company management, we are able to give these projects certain high-level objectives. We are able to set certain good benchmarks, guidelines. In order for these projects to progress well, we need to make these core leadership teams for these individual projects even more autonomous and independent, give them more power, and set them then certain midterm goals that we are following, and being able to support these goals, that they have all the means to reach these sub-goals. Now when we have been able to progress with these plans, many of these teams are really working as more autonomous and independent teams. It's no longer, therefore, even that important that all these teams in the long term would be exactly based in our one location in Espoo.
For some of these teams, it's going to be. Now, in a way, we were preparing for that already before the COVID time, that at some point, how could we utilize potential skilled talent, even if they would not be based in Espoo. Even though our recruitment has worked well, it's understandable that the world-class creative talent that we are looking from all over the world, in a way, some of them have the possibility to move into Espoo, and we have been succeeding with that. Of course, we are every now and then facing a situation that the potential new recruit would really love to come here, but for some personal reasons or for family reasons, eventually, the move into Espoo will not happen.
Now when we look at our next step as a development, as a studio, when we currently are 300 people, we continue hiring people that we will bring to Finland and Espoo to our headquarters. At the same time, when we have been now able to develop these more independently functioning, more autonomous teams, in a way, during the COVID times, we have been able to develop, of course, as any successful company, the remote working capabilities to a new level. It, in a way, was an opportunity for us now to start piloting and testing the opportunity of actually more openly presenting the possibility of working fully remotely for some of the new recruits that we have had.
We have been now testing that, taking the approach that we always take, that in a way, the most important thing are our people and the progress of high-quality game development projects, and we cannot jeopardize the progress of these projects. Therefore, we took, I would say, very small steps in the early phases, hiring five people, hiring 10 people, in a way, taking some months to onboard these people, asking from the project leadership teams that what's their evaluation, how well are the projects now progressing when they have a bit more people working outside of Finland. The experiences and developments we have done, they have been good. That's also the reason that we are now willing to say it aloud that we have been piloting that. It has been working well, and now we continue in the next step with that.
The main focus at the moment has been to find world-class talent that is based in Europe and wants to stay in Europe, and that's again to ensure the effectiveness at this point of effective development of the game projects due to the time differences in which our project teams are working. We haven't yet disclosed in more detail in what countries, in what cities our main focus so far has been. When the time is right. We are very likely to announce a bit more. We are preserving that info also partly for the sake that we know that as Remedy, when we first time come out with the information that we are actually hiring more people in this city, it will be good news in the gaming industry.
That's a possibility then at that moment for us to reach even more potential candidates in these cities and these countries. We want to maximize the visibility at that moment and then be able to fulfill even more open positions that we have.
Thank you, Tero. One more question from the chat. With the news from China regarding games, can you say anything how it's affecting Remedy?
No. We have really strong and experienced partners, Smilegate working with Tencent. They are more than experienced and deep in that market to make sure that Crossfire has this potential. It's not up to us to start commenting on those, and we are confident that our partners know exactly what they are doing and how they are doing it.
Good. Thank you, Tero. Thank you, Terhi. I think we have now gone through all the questions. Thank you also all for the call and the questions. We will be back with the next earnings webinar on November 12th. That's all for now. Thank you.