Hello, welcome to this presentation of THQ Nordic's Q2 report. We have CEO Lars Wingefors here to present today what was a solid quarter, I would say. In a quarter of quite few releases, managed to get a quite decent margin and also strong growth in Deep Silver, especially. Also note that you've done another acquisition of an IP, which looks interesting. Will be interesting to hear more about that and the performance going forward in H2 as well. We will run through the presentation with Lars, then we will go to questions. Possibly a few questions from me as usual, and also questions from the audience and also from the telephone. Please go ahead, Lars.
Thank you. Good morning, everyone, welcome to this report. We had a stable quarter again with a year-on-year growth of 878% to net sales of SEK 837 million. The EBITDA was up year-on-year 420% to SEK 207 million, the EBIT was only up year-on-year 73% to SEK 53 million. We had 10 releases during the quarter. I would like to mention Wreckfest in the end of the quarter. Financing activities together with Carnegie here, we raised SEK 1.4 billion in June, after the quarter end, we signed new credit facilities with the leading Nordic bank. I will come back to everything here during the presentation. Going back to the numbers. I would like to remind you that Koch Media was consolidated from February 14th this year. The new group has a significantly higher sales in absolute terms.
However, there is a lower margin profile in the Koch Media Group, largely due to the partner publishing and film business. However, the overall in absolute numbers are higher in terms of EBITDA and EBIT. Net sales were up, as I stated, from SEK 87 million last year to SEK 837 million this quarter. The business area Games had a stable quarter. The THQ Nordic business was up 70% to SEK 145 million, the Deep Silver business was up to SEK 338 million. Driven, I would say, with the continued performance of the back catalog. Continued performance of the "Kingdom Come: Deliverance," for example. I would like also to say that the digital back catalog sales contributed well into the quarter. We had a notable income from subscription-based business models. Also, film performed, I would say, well, according to the management expectations during the quarter.
I stated during the last presentation in Q1 that the partner publishing overall had a quarter without any major releases. I will come back to the releases, especially compared to last year, this was not a very strong quarter. In terms of EBIT, both THQ Nordic and Koch Media contributed to a positive EBIT. The EBITDA is higher than some expected. However, the depreciations in the quarter drives the EBIT down to the mentioned number here, SEK 53 million. I'm leaving the profit loss and going to cash flow. The cash flow from operating activities after the change in working capital in Q2 was SEK 165 million. If you remember, in last quarter, we had forfeiting of about SEK 450 million. This year, this number was approximately SEK 200 million. Cash flow from operating activities after change in working capital in Q1 was SEK 700 million in Q1.
However, impacted positively by forfeiting of approximately SEK 450 million, as stated. Cash flow from investing activities in the quarter was minus SEK 347 million, mainly relating to investments in game development projects and the acquisition of the Koch Media facilities or property in Höfen. Finally, cash flow from financing activities in the quarter was a positive close to SEK 1.6 billion, of which SEK 1.4 billion came from the new share issue completed in June. Looking a bit at the business area games. I know, Oscar, that you will come back with a lot of questions on this, before you do that, I would like to say the net sales, as stated before, was in Q2 SEK 484 million. The own titles, owned IPs, were 39%, SEK 189 million in the quarter. Of the business area, we had an even share of digital and physical sales.
The digital sales was 50%, SEK 242 million. Looking at releases now, meaning the releases actually released in the quarter, that number only was 20%. SEK 98 million came from the releases in the quarter. The remaining sales were from releases previously released in Q1 or earlier, the whole back catalog. Looking at the balance sheet, I would like to start to run through the intangible assets that were a little bit above SEK 2 billion. Of that number, finished, already completed games were a little bit over SEK 200 million. The ongoing game development projects that are capitalized were a little bit over SEK 1.4 billion, and the remaining amount was all IPs, films, the partner publishing, goodwill, and other intangible assets, a little bit over SEK 400 million. I would like to mention here also the cash balance, SEK 1.5 billion.
The available liquidity by end of the quarter was close to SEK 2.7 billion, including all credit facilities. That was before the refinancing of the mother group that was done after the quarter end. Going to a bit of the KPIs. Looking at the depreciations, IPs, this came from the previous THQ Nordic, SEK 3 million in the quarter. Games development, that was a considerable number in the quarter, the total depreciation was SEK 113 million. The depreciation of mainly films and a bit of partner publishing was SEK 31 million. Investments in the quarter, the external game investments were SEK 114 million, and the internal capitalized development were SEK 94 million. Furthermore, we invested SEK 32 million in new film rights.
In the quarter, we finalized and completed game investments of SEK 47.4 million, which you can note here is a lower amount than the investments in Q1, which if you remember, we had "MX" and "Kingdom Come: Deliverance." Looking at more the commercial bits. We had 10 releases in the quarter in the business area games. We had "Pillars of Eternity" on PC developed by Obsidian Entertainment. That product is coming later on on console. We had the last version, or the last announced version of "Battle Chasers: Nightwar" coming out in the middle of May on Switch. That, I would say, had a great feedback from fans. From Funcom, we had "Conan Exiles" in physical publishing at Deep Silver. We had, I think this is the ninth version of "Legend of Kay," now releasing on Switch its own IP.
We also had de Blob coming out on Switch. We had the first DLC for Kingdom Come: Deliverance releasing on both PC and console formats. We had from Fishlabs in Hamburg, Manticore: Galaxy on Fire on Switch, just distributed digitally. The already mentioned Wreckfest from our friends at Bugbear in Helsinki, and they were releasing in the middle of June after four years, almost four years of development and early access on Steam. I would say the complete version of the product on PC. We have seen great feedback from fans. It has been okay sales, and it continues to perform well. It's a game that we should note that a lot of streamers, YouTubers, and Twitchers enjoy to play online and show other people. It's a great product in terms of PR marketing.
We also had a minor Deep Silver release called Illusion on digital distribution. Finally, Foxglove , our own mobile studio, released our own IP or a newly developed IP in an external developer called Pocket Cowboys on open beta at the end of the quarter. I would say on that title, it's very early, but I would like to note it. We had a continued performance and development on Snipers vs Thieves and The Muscle Hustle. After a quarter up until today, we have released five more products. Finally, we were able to bring out something, Red Faction. Red Faction is an IP we own and was developed by Volition, a studio that we now own that is under Deep Silver. We released Red Faction: Guerrilla re-mastered on PC, PS4, and Xbox One.
HandyGames that we acquired, coming back to that, released a title called Aces of the Luftwaffe on PC, PS4, and Xbox One. Two weeks ago, we released This Is the Police 2 on PC. We had another DLC, From the Ashes for Kingdom Come: Deliverance early in July. Finally, we had the Switch version of Titan Quest. In Q1, we had the PS4 and Xbox One release, and now at the end of July, we had the Switch release. I'd like to point out just a few selected releases we had in the partner publishing business area. From our friends at Codemasters, we had Onrush. From our friends at Focus Home Interactive, they had Vampyr. From our friends at Sega, we had Yakuza 6. From our friends in Italy at Milestone, we had the MotoGP 18.
We had one of, I would say, many older gamers' favorites of Sega Mega Drive Classics from Sega. Finally, we have another installation of Harvest Moon on Nintendo 3DS from Rising Star. Again, Q2 was not a very strong quarter for partner publishing. Looking into the second half of the year, Q3 and Q4, there is a stronger release schedule. Now in Q3, we're having F1 2018 by Codemasters, for example. From Sega, we have Shenmue I & II coming out. Deep Silver is publishing Shenmue III, and that is now scheduled for next year. By Square Enix, they have a strong release lineup for the rest of the year with Tomb Raider in Q3 and Just Cause 4 in Q4. This is just a selected mentioning of releases. There is a large amount of releases coming out.
In June, we raised SEK 1,448,000,000 with Carnegie before transactions cost at SEK 188 per share. This is for financing of acquisitions of IPs, further investments in game development studios, and general acquisitions. I was happy to see a strong interest in the raising and also very happy to see, I would say, all the long-term investors taking part in these transactions, along with a few new well-known institutional investors. After the quarter end, we finalized the new credit facilities in the mother company with a leading Nordic bank, in total €85 million, replacing the previous SEK 250 million in the overdraft facility. It took a bit longer time, and it's partly depending on the new Koch construction, and they have their own facilities down in Austria, and we have our own now in the mother company. Now it's all finalized and agreed.
We also made a final payment of €16 million to the sellers of Koch Media. In July, we acquired HandyGames. HandyGames is, I would say, to be mainly a mobile company, quite an old company, founded in the year 2000. They have about 50 employees. It was not a major transaction, but it was a transaction driven by strategic thinking from my team in Vienna to move smaller and mid-sized releases and IPs partly to HandyGames because THQ Nordic and Vienna, they have a very broad portfolio of IPs, and there is partly a bottleneck for smaller releases. Now HandyGames could take better care of this. They have a strong track record of being very early on new formats. They have a few of their own IPs that are worth mentioning. The Aces of the Luftwaffe.
They have IP called Townsmen that actually have had great feedback from the VR community. They have a range of casual products. Announced this morning, we acquired the game series TimeSplitters. For me, that have been in the industry for, well, too many years, 25 years, TimeSplitters was one of the major IPs early 2000s and the following years. It was created by a team that founded a studio, Free Radical Design. Free Radical Design later became Crytek UK. Crytek UK was acquired by Deep Silver, and now that studio is called Deep Silver Dambuster Studios based in Nottingham. There are more than 100 people. Obviously, they are currently working on another product, but it's great to have TimeSplitters back home again with the team and with the group.
I would say there's still a lot of fans out there who remember this product, and it still has a uniqueness that stands out. If you look at the Metacritic of all the three products released, it has a great Metacritic. I'm looking forward to putting it into our model of handling IPs without confirming any new products. I'm looking forward in the coming years to tell you more about this. I would say this is a major IP. Pipeline. We have, again, a very strong upcoming pipeline for the coming periods and the coming years. Metro Exodus, Microsoft showed it as a press briefing at E3 on stage. We also had the game playable at E3. We had very good feedback from fans and from press, and from business partners. It's slated for release in Q1.
I won't go into detail of everything, Darksiders III slated for release in the end of the year. We announced the release date and pre-ordering offering in July. We could see a good interest from fans. I don't know if you've been online and if you are fans of Darksiders, we have this huge Apocalypse Edition of $399. I'm just amazed how many fans there is out there actually ordering that. Okay, it won't drive. Oscar, don't take that as a revenue increase, but I'm really happy to see a strong fan base for an IP. Also that we are able to use our physical power and distribution setup to capitalize on this to actually bring out collector's editions. Except this Apocalypse Edition, there is a collector's edition just for $149. Wreckfest expected on console soon. Biomutant.
We signed Generation Zero from our friends here in Stockholm at Avalanche Studios. We will support them with the physical publishing globally. We also announced Pathfinder: Kingmaker. It's coming out now first on PC and then on console. In total, we have 59 projects in the business area of games. Whereof 17 were announced end of quarter and 34 were unannounced. Next week, we have the biggest event of the year for the group, and I would say for consumers in Europe, with Gamescom in Cologne. 350,000 visitors last year. Well, stay tuned. That was the Q2 presentation.
All right. With that, I think we'll go to some questions, and I'll allow myself to start
If we just look at the top line first, Deep Silver is the one that really sticks out, if you will, with quite strong sales. Obviously, you had Kingdom Come in Q1, quite few releases now in Q2. What is driving that growth? Is it Kingdom Come and Manticore, or is it the back catalog with old Metro titles, perhaps?
Well, as usual, it's a wide range of products driving the total revenues. Kingdom Come had a continued good performance in the quarter. It's a publishing title, it's under Deep Silver. It has a much lower margin than other own IPs, it really drives the revenue a bit here in Q2. That's partly one of the titles I would like to point out. Then obviously in Q1, we had in the end of Q1, we had MX at THQ Nordic. That has a continued performance in Q2. Battle Chasers had a notable income in the quarter.
Yep. You mentioned the two DLCs released for Kingdom Come. I guess that's quite an important part of the business model for that game.
Yeah.
Are you happy with the reception for those DLCs?
Well, it's mixed, but yeah, I'm happy. I'm happy we can bring out new content and as you know, this is the way to monetize this kind of games or the way they have chosen. It makes the possibility to make new collector's editions or Game of the Year editions in the future. I think it's really important to bring out new content to the large fan base of Kingdom Come.
Yep. Metro now with a release date, quite big hype during E3 I would say, being there myself. How is the interest in the title now, do you feel? Do you feel like there's a lot of interest in the old titles people want to replay and so on?
As usual, we can see a pickup of mainly digital customers coming in and to either buy the old titles for the first time or replay the old titles. That's part of the strategy with having sequels to bring the new fans also to the old games.
Mobile I want to touch upon as well. You mentioned here in the report specifically that you continue to have quite a lot of downloads for your games.
How do you see the journey from going to downloads to monetization? Are you any further on that path?
We are on a strong path. I think we have one of the best teams in the world to develop this kind of products. We have a, I would say, strong publishing team now put in place at Foxglove. They are small, but good. However, again, I'm unfortunate to say that it's one of the few business areas that is not really making money. It's a burn rate. I still have confidence that we can work on these products and put them into the right direction. If not, I promise to tell you.
You're not giving up there?
No.
Good. I think I would like to hear some more details perhaps on TimeSplitters because this is an IP that I remember as well, actually.
You do?
Can you say something about the plan for it? I guess it's not within the next couple of years.
Oscar, it would be totally wrong by me to announce our plans. I would say one of the reasons acquired is, we have the original developer in-house. It's a very strong IP. There has been no asset care of this product. The last product was published by Electronic Arts, the two previous by Eidos, now Square Enix. I would say it's a fairly old IP, so it's a bit harder to work on portings and the assets because the game was made during PlayStation 2, original Xbox, and GameCube. It's a bit easier if you have an IP that were done on PlayStation 3, because then it's easier to port it into current formats. Now the game is a bit old, it requires more of effort.
Yep. Something perhaps about the size of the acquisition in between HandyGames and Koch Media. Where is it? Somewhere in the middle, perhaps?
Of this, the IP?
Yeah.
The term's not disclosed. It's, I would say much closer to HandyGames than Koch Media.
Okay. Fair enough. Another question that I think I have to ask is Biomutant. The game's coming up in, I think, roughly one week. Is there anything to say there about the possible release date? Anything you can say?
I would say I'm still as excited as before looking at the product. I think that is the most important thing. It's a small but very good team based here in Stockholm. We need to have their path. Next week you'll see more and hear more.
Okay. I have a few more questions, perhaps we can turn to the floor if there are any questions here.
Hi, Lars. I would like to ask you about the subscription-based comment. You stated that it had some contribution to the gross margin. Which subscription services, and maybe just a little elaboration what you think about these type of business models going forward?
Well, I'm a strong believer it's a great offering for consumers. There is numbers of business platforms or platforms around, both on console and on PC offering this now. There will be more services coming out during the coming years. As an IP owner, creator, we could leverage our catalog of IPs and leverage our position to onboard new content to these platforms. Obviously all these platforms are competing for the consumers. As IP owner and content holder, we will leverage this. During the quarter we had a notable income. I would not say it's amazing, but it's notable. I'm looking forward to follow this business model over the coming years. Again, the majority of the revenues digitally is still full game downloads and DLC business and so on.
Is there some type of specific genres that you see sells more on the subscription-based?
Well, we previously have been noting that compared to other business model, casual games and family games has performed well on these business models. However, today there is not that many IPs around or products made because those developers have moved to mobile. Hopefully we can see families and children and more casual gamers coming back to the console and PC again through these business models.
Okay. Yep. Thank you.
Okay, I think we have one question on the telephone as well.
We do indeed. Our question comes from the line of Lars-Ola Hellström of Pareto Securities. Please go ahead. Your line is open.
Hi, Lars. I just wanted to follow up on Oscar's question about the performance during the quarter. I am also very surprised of the performance of Deep Silver. Would you say that Kingdom Come delivered in line with the Q1 performance in Q2? Is it that you have started to digitally promote some of the Deep Silver assets, as you now can control it in a better way?
Well, I think there has been both. We are stating here it was a continued performance of Kingdom Come. That is not the only title. While it was a continued performance, there were price promotions for that title as well, as long as a range of price promotions of the Deep Silver catalog in the quarter. In total, that has driven the revenue. However, with a lower margin, because they have a much higher percentage of publishing revenues in the business area.
Okay. For THQ Nordic, would you say that it is the Q4 2017 releases, the back catalog, "MX" and "Titan Quest," in addition to the Switch version of "Battle Chasers" that is the key growth drivers?
Well, we had a few, again, mentioning "Battle Chasers" both physically performed fairly well and digitally. We had a continued performance of the previous new releases we had in Q4 and Q1. "Många bäckar små" for our Swedish.
The full release of "Wreckfest" for PC.
The amazing game of "Wreckfest." Well, it was a full release. However, as you know, the game was previously already released as early access with close to 400,000 customers. I wouldn't say it was a very large revenue from that title because it was only a few weeks in the quarter. It had a notable income. I'm happy of the performance, especially very happy about the critics and the Metacritic showing 80 plus on the title. I would say, as also previously stated, I think it's a product that will work as well on console.
Staying in the second quarter, I also wonder a bit about the high games amortization. As far as I remember it, end of Q1, there was roughly above SEK 200 million in completed games. I think we discussed that most of it related to THQ Nordic. I'm quite surprised that it is above SEK 100 million in amortization of the games. Can you explain, does it relate to THQ or THQ and Deep Silver?
Yeah. Well, again, I think THQ Nordic, in Q1, they had MX releasing and that amortization came in strong in Q2. As you remember, we have our model of amortizing one third the first three months, one third the remaining nine months. Along with a considerable amortization in the Deep Silver business area. I can't give you a breakdown on this call, Lars- Ola, I know you love to have it. I'm sure I will try to give you better color on this in the upcoming periods. Deep Silver was consolidated from February 14 into the group, and there is lot of financial integration going on between the entities.
Yeah. I understand. Finally, about Gamescom. We know you have sent out the press release for the THQ brand, and I guess Deep Silver will show "Metro Exodus" and what was it? "Pathfinder: Kingmaker." Will they show something else, or will that maybe be a surprise?
That will be a surprise, Lars- Ola. As you know, I'm not commenting on the operative, what they're planning, but I'm sure the marketing and PR teams have a lot of plans for the show. Don't expect too much. I'm sure it will be a good show.
Okay. Thanks.
Thank you.
I think we'll perhaps wrap this up with a few last questions from me then. First of all, looking at the pipeline for Q3 and Q4, you've already mentioned partner publishing looks quite strong. Is it possible to shed some light on what is the most important titles for you? Not in terms of their top-line potential, perhaps, but for you. "F1," for example, is one of the most important?
Well, "F1" has been a great performer in partner publishing the past years and from our friends at Codemasters, we would expect that to perform well. I don't really want to comment each title. There is "F1," there is "Tomb Raider," there is "Just Cause," there is many other titles coming out. I would say Q3 has a considerable release list, perhaps less titles than in Q4. Q3, there is a long range of titles coming out. Looking at the business area games, I would say Q3, don't expect too much out of Q3. I think there will be another mellanjuls kvartal. I think in the end of the year, and especially the Q1 next year, having the already announced and "Metro Exodus" will be key drivers in the business area of games. Q3, there is no considerable release within the business area games.
As for Deep Silver then. Let's start with Deep Silver then. I saw that release date for "The Bard's Tale" has come out. I think it's late September.
Yeah.
What do you expect from that title?
To be amazing game from a very good team, from our friends inXile Entertainment . I think it has a strong fans following. They just announced or released the trilogy of the previous games, going back to Amiga. Again, it's a quite niche product. It's on PC, for most, it's not a "Metro Exodus.
Yep. To follow up on the question on the telephone there earlier, just for the record about D&A. You mentioned Deep Silver, quite a bit of D&A. Nitty-gritty question, "Kingdom Come," I know there was a Kickstarter campaign for that game. How much have you invested in that, and is that a significant part of the amortization?
It's a notable part of it. It's not a significant part of it. It's a notable. I think that is the best wording.
Okay, fair enough. Finally, two questions here regarding, first of all, synergies. You mentioned hard and soft synergies.
Yeah.
Can you sort of specify, you mentioned also the physical distribution that's-
Physical distribution was something we moved almost completely now early in Q3. We had a considerable integration process going on in Q2, moving now the upcoming pipeline across mainland Europe and U.K. and Nordics now to Koch Media. That is a hard synergy we're doing. As stated before, Koch Media was not a cost-cutting exercise. There is a lot of soft synergies working together with tech and assets and working together now at trade shows and yeah. Obviously, there is sharing of information and sharing of various costs, and so on, and what we could improve between the entities.
Yep. The new name which has been mentioned before. Is that getting closer?
Yeah, it's getting closer in a way. I think during the summer, we haven't spent too much time on this. The most important thing is our business. This is something for the mother company, a publicly listed entity. It's nothing that will change the revenues or profit levels. We will have various actions taking place over the coming periods to nail this out. It's coming a bit along with the strategy and so on. There is other discussions going on together with the name, and that's why it's taking a bit of time.
Okay. Fair enough. I think that's it from me. If we have no other questions from the audience here. All right, that's it.
Okay.
Thank you very much.
Thank you.