Earnings Call: Q3 2017

Nov 14, 2017

Hello, everyone. I'm happy to be here to report another stable quarter for THQ Nordic. During the quarter, we had a net sales increase of 9% compared to last year, Q3. Net sales was up to CHF 84,700,000 as well as improved gross margin up from 53% to 65%. The EBITDA level increased from 33% to 41% during the quarter. And most importantly, we made EBIT of CHF24 1,000,000 compared to CHF16 1,000,000 last year. That's an EBIT margin of 28%. That's a 50% increase over last year. And the reason for the improved EBIT margin is mainly driven by higher net sales of owned products as long as improved margins. I have to note that the comparable quarter last year had a publishing title with a lower margin and only on physical distribution. This quarter, we had a few releases, one of them being Cinema, which in the end of the quarter did fairly well on Nintendo Switch. Looking at the interim period, the first three quarters of the year, we almost doubled the EBIT from CHF 44,000,000 up to CHF 86,200,000. That is the EBIT margin of 34%. Looking at the breakdown of the business. We, as stated, improved the net sales of owned products Compared to the Q2 of the year, the net sales of owned products increased from SEK13,700,000 up to €32,700,000 as well as the digital share of the total revenue were up 5% compared to the same period last year. I have to note though that even though we had a good share being digital, we did not have any major, ESD promotion, meaning digital sales promotions during the quarter, especially compared to the Q2. If you remember, we had a Humble Bundle, Steam Summer Sale, Publisher Weekend and as well as the Darksiders 2 or Darksiders back catalog promotions as with the announcement of Darksiders 3. Furthermore, looking at the investments and depreciation during the quarter. We had a stable depreciation of IP being SEK 3,500,000. I would like to remind you that we depreciate all our IPs straight over 5 years. So that's 20% per year. So during next year, all our THQ assets will be fully amortized. Game development depreciation were CHF 6,500,000 and that's because of most of the new releases were released during the end of September or during September. So our depreciation levels will significantly increase during Q4 where we have a lot of new leases as well as the Q3 releases coming into full effect. During the quarter, we completed the development that were put into the balance sheet of Battle Chasers. However, that title will be started depreciated or amortized during the release month of October. So that's the reason there is SEK39,800,000 in completed development. Capitalized internal development, that's the amount of money basically we spend on all our internal game development studios. And compared to last year, it's almost doubled from €10,200,000 up to €19,200,000 And historically, our game development has been about 1 third being internal and 2 thirds being external studios. And because of the acquisitions now in August with Black Forest Games and Pieces, that ratio will most likely increase the internal ratio will most likely increase in the future. The total game development and royalty advances for future products were SEK78 point 1,000,000. That's more than doubled the last year number of 35,100,000 and that is the mainly you can see it as an investment for the future pipeline for the coming periods and years. And finally, the IPE acquisitions during the quarter were SEK3.8 million. That's mainly being the IP acquisitions from the Black Forest Games, the 3 titles we put on to balance sheet. We have also started a depreciation of the GILT early access because we started having revenues. However, the full game release will happen in the future. Looking at the releases made during the Q3. We had Cinemara that we released on PlayStation 4, Xbox 1 and PC during August. And most importantly, we released it in America in September on Nintendo Switch. And in Europe, it were released in October. We had the title Baha, Edge of Control. That's where IP we acquired from THQ North THQ Inc. Off road racing game, It has been placed at mainly mass market retailers in North America. And so far, the sell through has been okay. So we hope this will be a slow, but steady seller over the next years. We had The Hunter: Call of the Wild Publishing title from our friends here in Stockholm at Avalanche and Expensive World Studios at Soder. We are handling the physical distribution for North America, Australia and New Zealand. And so far, the title has been having satisfying numbers on sell through at mass market retailers. The 26th September, we released The Guild Tree, the medieval economic simulator on early access. The game has been under development for more than 3 years in at Golem Labs, external studio in Canada. To be honest myself, I were a bit surprised of the all the bugs and technical issues, but also that's the reason we decided to launch it in early access. The good thing with the game is the fans, they could really see there is a guilt game there, but we significantly need to improve the quality of the product until the game could be in final shape for release sometime in the future. And finally, we released Sniper Versus Thieves, our first major mobile title. The publishing were made by a third party publisher in the U. K. The game has been under soft launch since November last year and it went into global launch in August. I would say the download numbers or installs are excellent, more than 13,000,000 downloads by end of the quarter. So by far, this is our most played product on a daily basis and in the total download numbers. However, as you know, in mobile gaming, that is not proof for success. So the title needs to significantly improve the monetization, meaning the amounts of money the players are spending in the game in order to have a long term visibility or yes, track record to continue the development. So we are they are working very hard to improve the monetization in the game. Also during the quarter, we made 2 major game announcements. We had a big presence at Gamescom in Cologne in August, where we showed our mainly our Q4 lineup as well as we announced the coming title Biomutant. And however, when we signed Biomutant, we know it was a great team with a great experience, and we really believe in the product. However, the reception at the trade show was fantastic. It was one of the most talked about title at Gamescom. We had amazing feedback from all major games press and there were hours of lines in queue to play the game. So the game is fully playable at trade shows since then. So we expect Biomutant to be one of our key titles for the future. In September, we also announced MX versus ATV all out. That is the first and I'm very happy to make this announcement that this is our first new MX game ever and it's the first game for 7 years since MX versus Elite Alive released in 2011. The game is being developed in our own internal studio, Rainbow Studios in Phoenix, Arizona, And they have been working for a long period of time making this into the next generation of MX game. They are working in the Unreal Engine, and we will very soon start increasing the PR and marketing During quarter, we acquired 2 studios, one being Black Forest Games based in Offenburg in Germany, close to the French border. They have a very long track record of making a lot of different types of console and PC games. I were there visiting myself and I really met a great team and quite a few of them have been working together since the 90s. They are 55 headcounts currently. They have a major pipeline project that is not announced, but that will be announced and released in a fairly short period of time. As well as Pieces Interactive, we acquired 1 week later. They are based in Shavda in Sweden. They were 13 headcounts. They will be increasing that headcounts a bit during the coming periods. They have also worked on an unannounced pipeline project that also will be released fairly soon. The total THQ Nordic headcount were 469 as of end of the quarter compared to $432,000,000 end of second quarter. I have to note that Black Forest Games are will or are now our biggest internal studio, and they will have the capacity to make sequels on our major IPs as well as smaller asset care project at the same time. So they have a full capacity in house. That is very valuable for us going forward. Financing activities. We raised in the end of the quarter NOK598 1,000,000 in the new share price offering before transaction cost. I'm very happy to welcome quite a few new institutions as shareholders. And those cash will mainly be used or will be used for acquisitions of IPs, studios or potentially new bigger game development projects. After the quarter end, we also increased the working capital facility with Danske Bank from NOK 100,000,000 up to NOK 250,000,000. We are now in the middle of Q4, and we have released quite a few titles already in Q4. We have released Battle Chasers on PlayStation 4, Xbox 1 and PC. We have released the 2nd major mobile title, the Muscle Hustle. We have released another installation of Weixin Pop! For Xbox 1 and PlayStation 4. We have released the our biggest project so far called Elex at PlayStation 4, Xbox 1 and PC. We have digitally released This is the Police on Nintendo Switch. And a few days ago, we released a minor asset care project called Swings and the Cursed Mummy on Steam. Coming up in Q4, we have quite a few titles still to be released. So stay tuned. For the coming year and periods, we have quite a few titles that I will come back in the coming reports to talk more about. During the quarter, we have also signed on a few new major projects that will be in the future pipeline for 2019 and onwards. So in the end of the quarter, we had 29 game development projects, where all 13 were announced and 16 were unannounced. So we are as long as we are releasing products, we need to sign on new projects. And I'm really looking forward for our most exciting year so far, that will be 2018. That were my quarterly report. I'm very happy to welcome you, Lars Ola. Thank you, Lars. We will not speak so much about the report today on the actual numbers. Just only one question. And the games that we released and the products that was out in the market, what surprised you most on the upside, the games that actually was performing a bit better than expected? I think overall, we had a very stable quarter. The Cinnamora Switch release, that was our first release on Nintendo Switch, and we were not sure how well Nintendo Switch will perform as a platform. So I would say those numbers, especially compared to the PlayStation 4 and Xbox 1 and PC numbers, were kind of surprising me. And you also announced the sequel of MX, and you had a bundling offer in September. Was it affecting in a positive way as well? No. That bundling offer was kind of a disappointment because it just disappeared in the wrong side of the ESD stores. But we will for sure have more promotions coming up. And I also noticed that The City Police has continued to perform really well on all formats. Now you have released it at Switch in October. Is it performing on that format as well? There is a few dollars coming in. There is a few dollars coming in. It's not a major release, but that's it's a quite, in development terms, cheap product to develop. And it's a steady seller on steam. And I think it works quite well on switch. So yes. Looking into the Q4, which is going to be the most important this year and also 2018, you have now released battery shasers, really good reviews. It seems to be selling really well. ELX seems to work out nicely as well. Are we in line with your internal expectations for the games released or? I say collectively, we are in line with the management expectations of all releases until today. I'm not saying that it's the financial expectations. I'm saying it's overall expectations of the title. Some are performing a bit less. Some are performing a bit better. I'm happy to have my 1st major baby out, Elix. It's the 1st new IP as well. It's a damn hard game. It doesn't appeal to everyone. You need to spend quite a few hours in the game actually until you can start playing the game in the normal sense. So but the diehard fans, they love it. And I read some reviews that it's a bit buggy, but how fast can it be fixed? And you have a live team operating on that? I don't know. There is a question, is the game buggy or is it just too hard? I think quite a few journalists review the game without actually either playing the game or just play 30 minutes. You need to spend 50 hours in the game. It's hard to have a yardman. We have players that spent a few 100 hours in Illich, yes? So yes. Also, the guild, it was released end of September. Yes. Early access. Yes, early access. How much work do you think it's left to do? And when can we do that? There is a lot of work left. So H1 next year, full scale release? I would say I'm a bit conservative, pessimistic. I could see a lot of work. However, I would say the guilt free has a huge fan base. It's a title. If you do it well, it could sell for a number of years. We can bring out a lot of more content. So that's why I'm very keen on investing into this title and to put out the code that are really working well that you can build on. And I was not really super happy with the current build. Commercially, it's okay. Okay. And then going on to the next title that is going to be released, not Black Mirror, but Spellforce 3. Age of Empires will be delayed until early 2018. It was slated for release mid October. But can it be positive for SPELFORCE 3 or SPELFORCE 3 is a major investment in our internal studio. So I have quite high expectations internally of the title, both in terms commercially, but also in terms of quality. I hope they are able to pull it yes. I'm trusting my guys, but there's a few weeks to go, yes. But do you think that the game can attract some of the player that was waiting for Age of Empires and that they will play that. Obviously, it's the same audience, yes? So for sure. Yes. But it can be a potential upside to Yes. It's hard to say if age will the delays of age will be good or I don't know. We haven't thought about it. We are really focused on delivering a really good product. Yes. And you kind of hinted here that we will see some announcement for Q4 as well. What's the reason to delaying the announcement and not making promotions for it? Because now it's I didn't freeze the quarter that I will announce it in the quarter, but that's your phrasing. But the reason being you can have different strategies of doing PR marketing. One strategy could be that you do like a same day approach and grabbing the attention you're getting in the media and releasing a product the same day. Or you can do the same thing, but perhaps a week earlier. Doing the whole Dark Side is 3 thing, traveling the world with trade shows and all the PR marketing for a year, it's a substantial effort. And sometimes it's you make it too early. So the fans get tired waiting for a product. People are they want to play at once, yes. Okay. And also when we were at Gamescom and you announced the Black Forest acquisition, you said that they will release the new game, what it is, soon. So I just wonder what's your definition of soon is? An analyst and a CEO. So Sony is Sony, yes? Yes, it's Sony. Yes, it's Sony. Going on to 2018, we have MX slated for release then. And I just realized a couple of weeks ago that Madskills Motocross is also targeting a sequel in 2018. How Yes. You mean the MXGP game by a milestone, yes. Yes. Can you compare these titles or Yes. Well, it's a similar audience. They have been very good doing the European motocross. What I understand, they're now doing American Supercross. I think there is room I think our games is very different. However, they're made in the same engine. I'm confident we have the fan base. I think we are focusing on delivering it to that audience, so rather than speaking about the competition, yes. Okay. And about SEK 600,000,000, we have talked about earlier that you get a lot of propositions for publishing deals. Out of 100 of projects you see, how many is worth evaluating? It's hard to say. We daily have, I would say, a few handful opportunities. So over a year, that becomes a lot. So we are evaluating quite a lot. However, obviously, we are focusing on our own IPs and our own studios even more and more. So the publishing titles we will pick up for the future will most likely be bigger and bigger that they need to be worth doing. So could you even consider now invest SEK 150,000,000 to SEK 200,000,000 in a single project? No, I think that's over our reach at the moment. But on the top that you guided at the IPO process, SEK 125,000,000, something like that. And concerning IP acquisition or larger IP acquisition, what's the main obstacle there? Is it price expectations of the seller? No. It's the slowness of the seller. It's big organizations, and they are people are afraid of making decisions, yes? That's the big obstacle. But you have some ongoing discussions, I guess? I have a lot of ongoing discussions, yes. That's my work, yes? I have a great team executing on that. So I'm sure we will see some very nice deals in the future. However, I'm will we be waiting on the right terms? As always. Questions from the audience? Lars, you mentioned the new projects for 2019. Are those mainly your own IPs? Or are you already looking for publishing deals? Or if you can comment something. Those we signed during the quarter, I would say, are our own IPs. Okay. Those are new or follow ups or There is always a mixture. It happened to be our own IPs during this quarter. But obviously, I can't comment more on that. Yes. Okay. Yes. Stay tuned. Thank you for taking my question. So my question pertains to Darksiders. And unfortunately, I'm not sure if I'm going get an answer to this, but I'll try. So will you have multiplayer apart from what you had in previous games? And what are you thinking about like Overwatch and Destiny? Yes. Well, I think to start with the Darksiders multiplayer and co op, I think obviously, there is one day, it will be a day after Darksiders 3 release. What are we doing with Darksiders then? And obviously, we are evaluating various things. And one thing that being in demand are obviously multiplayer and co op. So and Darkstar is being one of our main IPs. So God knows what we have in our pipeline, yes? Thank you. Having so many studios and so many games, and you need to have a certain in dependency on the studios, but at the same time have a perhaps a rather tight leach on them. How do you go about to organize this within your company? I think, 1st of all, we are acquiring Studisys has an established setup culture. They have the systems and financial in place already. So I think the management or the management of our internal studios are fairly easy and they don't have any external customers. They don't have any external interest. So they really become internal development capacity. So I think we treat them in the same way as we treat the external studios in terms of management the product, yes, because that's the most important thing, what are they delivering? Are they delivering what they're telling us? If not, we're making the changes as we're doing with the external suit as well. Financially, obviously, we have a reporting package and all that in place. We have some controlling functions. I don't believe in having too much control and too much management overlay because this industry has clearly proven that if you add too much corporate bullshit into studios, they fail, yes, people leave. And quite often the big studios or the big publishers, internal studios sometimes collapse. So, they just close it. So, I think we have a kind of different approach to that, believing in people, believing in what they are good of doing, and we are supporting that. So far, it has worked very well. All right. Is there any questions from the telephone conference? We have one question for you so far. The first is from Stefan O'Brienian. Taking my question. It's regarding Elex. Can you give any guidance on where you expect the sales split on the title? No. Well, I think traditionally, Piranha Bytes Games, the major format has been PC. However, this time, we do have quite a lot of expectations on PlayStation 4 and Xbox 1. I can't really give you a percentage split on that, but obviously, there will be a good revenue from all platforms. Okay. That's fair enough. And another question is based on your digital sales, how much roughly is from Steam? Historically, Steam has been about 1 third, up to 40% of our digital sales on a regular basis. The rest has been promotions on the various PlayStation stores and Xbox stores as well as all other minor PC, ESD channels such as gog.com and the other 35 or so we're having as well as a bit on the mobile income. Okay. Let's rephrase my question. How much of the PC digital sales are from Steam roughly? No, that's depending. I understand where you're trying to comment. But historically, I would say our steam percentage is about 80%, 80 5% on our products. Okay. That's fair enough. Thank you for taking my questions. Thank you. Thank you. All right. Lars Olav, do you have any final questions? I can go back to the 2019 pipeline. And should we interpret that it's own IPs that is in the project, unannounced project that is for 2019? It's no publishing deal. No, no. I was saying the title we signed during this quarter for 2019 onwards happened to be our own IPs. We are signing title every quarter. And it's not only 2019. There is also the coming years. Can you say something about Sniper versus Steve, how much it contributed in terms of revenue? Is it What I said before is my expectation financially on Sniper is that we make the money back and we learn something kind of. And currently, it's on that level. Obviously, it's kind of depending how it continues now, but it's not a commercial success. It's a success in number of installs and people really enjoy playing it. The problem is people are playing for a day or a week and they leave it, yes? But we have a few players, if they stay more than 2 weeks, they start spending a lot. That's quite interesting. Unfortunately, it's not enough players doing that. And the Muscle Hustle that is released now is how I see it? I think you can look in Google Play yourself and Android or Apple App Store. I think the reviews has been so far really good, yes. People are really enjoying the game. That's why I want to say this. I will update you more in next quarter. Okay. Thank you. Any more questions? No? All right. Thank you very much, everyone. See you next quarter.