Earnings Call: Q2 2018

Aug 15, 2018

Hello and welcome to this presentation of THQ Nordic's Q2 report. We have CEO, Lars Vinge Forsch here to present today. What was a solid quarter, I would say, in a quarter of quite few releases, managed to get 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. So we'll be interested to hear more about that and the performance going forward in H2 as well. So we will run through the presentation here with Lars and 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. So please go ahead, Lars. Thank you. Good morning, everyone, and welcome to this report. So we had a stable quarter again with year on year growth of 878 percent to net sales of $837,000,000 The EBITDA was up year on year, 4 20 percent to NOK207 1,000,000 and the EBIT was only up year on year 73 percent to NOK53 1,000,000. We had 10 releases during the quarter. I would like to mention Wreckfest in the end of the quarter. And financing activities together with Carnegie here, we raised SEK 1,400,000,000 in June and after the quarter end, we signed new credit facilities with the leading Nordic Bank. I will come back to everything here during the presentation. So going back to your numbers, again, well, I would like to start to remind you that Kochmirya was consolidated from February 14 this year. So the new group has a significantly higher sales in absolute terms. However, there is a lower margin profile in the KochMediacorp, 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 87,000,000 last year to SEK 837 dollars this quarter. The business area games had a stable quarter. The TSU Nordic business was up 70% to 145,000,000 dollars And the deep silver business was up to SEK 338 1,000,000, driven, I would say, with the continued performance of the back catalog, continued performance of the Kingdom Come Deliverance, for example. Also, I would like also to say that the digital back half load 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 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, but especially compared to last year, this was not a very strong quarter. In terms of EBIT, both Tiscernordic and Koch Media contributed to a positive EBIT. The EBIT is well, the EBITDA is higher than some expected. However, the depreciations in the quarter drives EBIT down to the mentioned number here, dollars 53,000,000 I'm leaving the profit and loss and going to cash flow. The cash flow from operating activities after the change in working capital in Q2 was SEK 165,000,000. Dollars If you remember, in last quarter, we had foresighting of about 450,000,000 and this year, this number was approximately SEK 200,000,000. Cash flow from operating activities after change in working capital in Q1 was compared to was SEK700 1,000,000 in Q1. However, impacted positively by a foresighting of approximately SEK 450,000,000 as stated. Cash flow from investing activities in the quarter was minus SEK 347,000,000, mainly relating to investments in game development projects and acquisition of the Koch Media facilities or property in Hafen. Finally, cash flow from financing activities in the quarter was a positive close to SEK1.6 billion, of which SEK1.4 billion came from the new share issue completed in June. Looking a bit of the business area, games. I know, Oskar, that you will come back with a lot of questions on this. But before you do that, I would like to say the net sales, as stated before, was in Q2, dollars 484,000,000 The owned titles, owned IPs were 39%, SEK 189,000,000 in the quarter. Of the business area, we had even share of digital and physical sales. So the digital sales was 50%, 242,000,000 dollars Looking at releases, now meaning the releases actually released in the quarter, that number only were 20%, so 98 $1,000,000 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'd like to start to run through the intangible assets that were a little bit above SEK 2,000,000,000. That number of that number finished already completed games were a little bit over SEK 200,000,000. The ongoing game development projects that are capitalized were a little bit over SEK1.4 billion. And the remaining amount was all IPs, films, the Partner Publishing, goodwill and other intangible assets, a little bit over SEK 400,000,000. Looking at I'd like to mention here also the cash balance, SEK1.5 billion. The available liquidity by end of the quarter was close to SEK2.7 billion, including all credit facilities. And that was before the refinancing of the Mother Group that were done after the quarter end. Going to a bit of the KPIs and looking at the depreciations, IPs, this came from the previous THQ Nordic, SEK 3,000,000 in the quarter. Games Development, that's very considerable number in the quarter and the total depreciation were SEK113 1,000,000. And the depreciation of mainly films and a bit of Partner Publishing were SEK31 1,000,000. Dollars Investments in the quarter, the external game investments were 114,000,000 and the internally capitalized development were $94,000,000 Furthermore, we invested $42,000,000 in new film rights. And in the quarter, we finalized and completed game investments of SEK 47,400,000, which you can note here is a lower amount than the investments in Q1, which if you remember, we had the MX and Kingdom Come Deliverance. So 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 from developed by Obsidian. That product is coming later on console. We had the last version or the last announced version of Battle of Chasers Night War coming out in the middle of May on Switch. That, I would say, had a great feedback from fans. We had from Fancom, we had Conan Exiles in physical publishing at Deep Silver. We had I think this is a 9th version of Legends of K, now releasing on Switch, its own IP. We also had the Blob 1 coming out on Switch. We had the 1st DLC for Deliverance releasing on both PC and console formats. We had from Fish Labs in Hamburg, Galaxy on Fire and Manticore on Switch, just distributed digitally. And that already mentioned breakfast from our friends at Bug Beer in Helsinki. They were releasing in the middle of June after 4 years, almost 4 years of development and early access on steam, I would say the complete version of the product on PC. And we have seen great feedback from fans. It has been okay sales. And it continues to perform well. And it's a game that we could note that a lot of streamers, YouTubers and Twitchers enjoy to play online and show other people. So it's a great product in terms of PR marketing. We also had a minor deceleration called illusion on digital distribution. And finally, FOX Glow, our own mobile studio, released our own IP or a new developed IP in external developer called Pocket Cowboys on Open Beta in the end of the quarter. I would say that title is very, very early, but I would like to note it. And we had a continued performance and development on Sniper versus Thieves and the Maslachussle. And after the quarter, up until today, we have released 5 more products. Finally, we were able to bring out something of Red Faction. Red Faction is an IP owned and were developed by Volition, a studio that we now own that are under deep silver. And we released Red Faction Guerrilla, re marred, on PC, PS4 and Xbox 1. Handy Games that we acquired, coming back to that, released a title called Aces of Luftwaffe on PC, PS4 and Xbox 1. 2 weeks ago, we released This is the Police 2 on PC. We had another DLC from the Ashes for Kingdom Come Deliverance early in June July, sorry. And finally, we had the Switch version of Titan Quest. We had in Q1, we had the PS4 and Xbox 1 release and now in end of July, we had the Switch release. I would like to point out just a few selected releases we had in the Partnered Publishing business area. From Codemasters, our friends at Codemasters, we had Unrush. From our friends at Focus Home Interactive, they had end of the quarter Van Per. From our friends at Siga, we had JAKUSA 6. From our friends in Italy, it's Milestone. We had the MotoGP 18. We had one of, I would say, many old gamers' favorites of SEGA Mega Drive Classics from Sega. And 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 Siga, we have Shenmue 1 and 2 coming out. And we are for Dipsel, we are publishing Shenmue 3 and that is now scheduled for next year. And by Square Enix, they have a strong release lineup for the rest of the year with Tomb Raider in Q3 and Jaskos 4 in Q4. This is just a selected mentioning of releases. There is a large amount of releases coming out. So in June, we raised SEK1.448 million with Konega before transactions cost at SEK1.88 per share. And 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 racing and also very happy to see, I would say, all the long term investors taking part of these transactions along with a few new well known institutional investors. Also after the quarter end, we finalized the new credit facilities in another company with a leading Nordic bank, in total, EUR 85,000,000 replacing the previous SEK 250,000,000 in the overdraft facility. It took a bit longer time and is partly depending on the new construction and they have their own facilities down in Austria and we have our own now in the mother company. So now it's all finalized and agreed. And we also made a final payment of 16,000,000 euros to the sellers of Kochi Media. So in July, we acquired HandyGames. HandyGames is, I would say, to be mainly a mobile company, old company founded year 2000. They have about 50 employees. It was not a major transactions, but it was a transaction driven by strategic thinking from my team in Vienna to move smaller and midsized releases and IPs partly to Handy Games because tissue Nordic in Vienna, they have a very, very broad portfolio of IPs and there is partly a bottleneck for smaller leases. So now Handy Games could take better care of this. They have a strong track record of being very early on new formats, And they have a few of their own IPs that are worth mentioning, the ACES of Luftwaffe, they have IP called Townsmen that actually have done or had a great feedback from VR, the community. And then they have a range of casual products. Also announced this morning, we acquired the game series Time Splitters. For me that have been in the industry for, well, too many years, 25 years, Time Splitters were one of the major IPs early 2000 and the following years. It was created by a team that founded the studio Free Radical Design and Free Radical Design later became Crytek U. K. And Crytek U. K. Was acquired by Deep Silver and now that studio is called Deep Silver Dambusters Studios based in Nottingham. We are more than 100 people. Obviously, they are currently working on another product, but it's great to have Time Splitters back home again with the team and with the group. And there is still I would say, there is still a lot of fans out there remember this product and it still has a uniqueness that stands out. And if you look at the Metacritic of all the 3 products released, it has a great metacritic. So I'm looking forward to put it into our model of handling IPs without confirming any new products. I'm looking forward to 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, we showed at or Microsoft shows us a press briefing at E3 on stage. And we also had a game playable at E3, and we had a very good feedback from fans and from press and from business partners. Now it's slated for release in Q1. I won't go into detail of everything, but Darksiders 3 slated for release in end of the year. We announced the release date and preordering offering in July, and we can see a good interest from fans. I don't know if you've been online and if you're a fan of Darksiders, but we have this huge apocalypse edition of $3.99 And I'm just amazed how many fasteners out there actually ordering that. Okay, it won't drive. Oskar don't take that as a revenue increase, but I'm really happy to see a strong fan base for an IP. And 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 Apicaluukt edition, there is collector's editions just $4.49 Breakfast expected on console soon. Biomutant, We signed the Generation CRO from our friends here in Stockholm at Avalon Studios. We will support them with the physical publishing globally. We also announced Pathfinder Kingmaker. It's coming up 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 was unannounced. Next week, we have the biggest event of the year for the group and I would say for consumers in Europe with games come in Cologne, 350,000 visitors last year. And well, stay tuned. That was the Q2 presentation. All right. So with that, I think we'll go some questions, and I'll allow myself to start. So if we just look at the top line first, and Deep Silver is the one that really sticks out, if you will, with quite strong sales. Obviously, you had Kingdom Come in Q1, but quite few releases now in Q2. So 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. And it's a publishing title. It's 100 Deep Silver. It has a much lower margin than other own IPs, but it really drives the revenue bit here in Q2. So, yes, that's partly one of the titles I would like to point out. And then obviously, we in Q1, we had in the end of Q1, we had MX at Tissue Nordic. That has a continued performance in Q2. Battle Chasers had a notable income in the quarter. Yes. And you mentioned the 2 DLCs released for Kingdom Come. I guess that's quite an important part of the business model for that game. Are you happy with the reception for those DLCs? Well, it's mixed, but yes, I'm happy. And 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. And it makes the possibility to make new collector's editions or Game of the Year's editions in the future. So and I think it's really important to bring out new content to the large fan base of Kingdom Come. Yes. And I mean, 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? Yes. As usual, we can see pickup of mainly digitally customers coming in and to either buy the old titles for the first time or replay the old titles. So that's part of the strategy with having sequels that to bring the new fans also to the old games. So yes, and 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. But how do you see the journey from going to downloads to monetization? Are you any further on that path? To develop this kind of products. We have, I would say, a strong to develop this kind of products. We have, I would say, strong publishing team now put in place at Foxglow. 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. So it's still it's a burn rate. So 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. So you're not giving up there. Good. And I think I would like to hear some more details perhaps on time splitters because I was 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. Well, Sky, 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 2 previous by Eidos, now Skorinix. So I would say it's a fairly old IP. So it's a bit harder to work on portings and 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 games is a bit old. It requires more of effort. Yes. And something perhaps about the size of the acquisition in between HandyGames and Cosmere, where is it? Somewhere in the middle perhaps? Of this the IP? Yes. The term is not disclosed, but it's, I would say, much, much closer to HandyGames than Cornelia. Okay. Fair enough. And another question that I think I have to ask is Biomutant. I mean, games come now coming up in, I think, roughly a week. Is there anything to say there about the possible release date? I would say, I'm still as excited as before looking at the products and I think that is the most important thing. It's a small, but very good team based here in Stockholm and we need to have their path And next week, you'll see more and hear more. Okay. I have a few more questions, but 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. And what's your which subscription services? And maybe just a little elaboration what you think about this type of business models going forward? Well, I'm a strong believer it's a great offering for consumers. There is a number of business platforms or platforms around both on console and on PC offering this now. And there will be more services coming out during the coming years. As an IP owner, creator, we can leverage our catalog of IPs and leverage our position to onboard new content to these platforms. And obviously, all these platforms are competing for the consumers. And as IP owner and content holder, we will leverage this. And 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. But 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 sense 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 in these business models. However, today, there is not that many of IPs around products made because those developers have moved to mobile. So hopefully, we can see families and children and more casual gamers coming back to the console and peace again through these business models. Okay. I think we have one question on the telephone as well. We do indeed. Our question comes from the line of Lars Olofsdom of freighter 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'm also very surprised of the performance of Deep Silver. Would you say that Kingdom Com delivered in line with the Q1 performance in Q2? Or 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 where we're stating here. It was a continued performance of Kingdom Come. That is not the only title. 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 of they have a much higher percentage of publishing revenues in the business area. Okay. And for 2Q Nordic, would you say that it's the Q4 2017 releases, the back catalog, MX and Titan Quest in addition to the Zulu switch version of battle status that is the key growth drivers? Yes. Well, we had a few, again mentioning, battery chasers both physically performed fairly well and digitally. And we had a continued performance of the previous new releases we had in Q4 and Q1. So, mong and bakkers more for Skanska. And the full release of breakfast for PC? Yes, the amazing game of breakfast. 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. So I wouldn't say it was a very large revenue from that title because it was only a few weeks in the quarter, but it had a notable income. I'm happy of the performance, especially very happy about the critics and the meta critics showing 80 plus on the title. It's I would say, as also previously stated, I think it's a product that will work as well on console. Okay. Staying in the second quarter, I also wonder a bit about the high games amortization. As far as I remember, at the end of Q1, there was roughly above €200,000,000 in completed games. I think we discussed that most of it related to THQ Nordic. And so I'm quite surprised that it is above €100,000,000 in amortization of the games. Can you explain? And does it relate to THQ or THQ and the Deep Silver? Well, again, I think THQ Nordic, again, they had in Q1, they had MX releasing and that amortization came in strong in Q2. As you remember, we have our model of amortizing 1 third the 1st 3 months, 1 third the remaining 9 months. Along with a considerable amortization in the deep silver business area. I can't give you a breakdown in this call, Lars Ola. I know you love to have it, but I'm sure I will try to give you better color on this in upcoming periods. Deep Silver was consolidated from February 14 into the group and there is a lot of financial integration going on between the entities. Yes. I understand. Finally, about Gamescom, we know you have sent out the press release for THQ Brands. And I guess Deep Silver will show a Metro Exodus and what was it, Pat Fine and the Kingmaker? Will they show something else? Or will that maybe be a surprise? That will be a surprise, 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. Can't expect too much, but I'm sure it will be a good show. Okay. Okay. Thanks. Thank you. Okay. So I think we'll perhaps wrap this up with a few last questions from me then. So 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 sort of what is the most important titles for you, not in terms of their top line potential perhaps, but for you? So F1, for example, is one of the most important? Yes. Well, F1 has been a great performer in the part of publishing the past years and from our friends at CodeMaster. So we would expect that to perform well. But 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. So 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. So I think there will be another Melanjolks cartel. 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. But Q3, there is no considerable release within the business area of games. Okay. And as for yes, let's start with Deep Silver then. You saw that released it for Bard's Tale has come out. I think it's late September. What do you expect from that title? To be amazing game from a very good team from our friends in exile. I think it has a strong fans following. They just announced or released the trilogy of the previous games going back to Amiga. So but again, it's a quite niche product. It's on PC for most. So it's not a Metro Exodus. Yes. And to follow-up on the question on the telephone there earlier, just for the record about D and A, You mentioned Deep Silver, quite a bit of D and A. Nitty gritty question, but Kingdom Come, I mean, how much is 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. And then finally, two questions here regarding, 1st of all, synergies. You mentioned hard and soft synergies. Can you sort of specify? You mentioned also the physical distribution that's Well, physical distribution was something we moved almost completely now early in Q3, but 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 Kochi Media. So that will be or that is a hard scenario we're doing. As stated before, there is this Kochmira was not a cost cutting exercise. So there is a lot of soft synergies working together with tech and assets and working together now at the trade shows. And obviously, there is sharing of information and sharing of various costs and so on and what we could improve between the entities. Yes. And finally then, the new name, which has been mentioned before, is that getting closer? Yes, it's getting closer in a way. I think during the summer, we haven't spent too much time on this. For most, the most important thing is our business. This is something for the mother company, a public listed entity. It's nothing that will change the revenues or profit levels. So 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. So there's 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. So if we have no other questions from the audience here. All right. That's it. Thank you very much. Thank you.