Earnings Call: Q2 2017

Aug 15, 2017

Thank you very much, Lars Ola. I do this in English because we have some international viewers in the webcast. Yes, it has been so far a pleasant ride being a stock listed company, and I'm very happy and proud presenting, as stated, the 3rd quarter report, the Q2 of 2017. It has been, as you stated, Laszola, a quarter without any major releases. However, the business has been growing compared to last year, the same quarter. Net sales increased from NOK 52,700,000 to NOK 85,600,000, an increase of 62%. The EBITDA increased from SEK 23,200,000 to almost SEK 40,000,000. And the EBIT level increased in percentage even more from SEK 14.2 to SEK 30.3. The reason for the higher percentage in EBIT level is because the amortization in the quarter are lower because we have not really completed any new development. So the net sales in Q2 has been driven by a good amount of promotions, especially around the Darksiders series because of the Darksiders III announcement in May. The Darksiders series was promoted with new bundles on PlayStation Network, Xbox Live and on promotions on Steam. Other promotions we were running in Q2 were a steam publisher weekend and the classic steam summer sale that the majority of the income came in Q2. We also had very proudly a humble bundle together with Hand in Hand International. And that was the 2nd ever PlayStation Humble Bundle ever. The first one was done by Capcom last year, and we did the second one grossing over $1,000,000 And our gross net was about $500,000 But even more important or as important, the consumer contributed to charity for about $240,000 generating over 3,000 jobs in developing countries. During the release during the quarter, we also had some minor releases. We had 5 asset, what we call asset care releases. It was the blob. The blob is IP we acquired from THQ, and it has now so far been launched at PC platforms on Steam, number 1 and 2. We also released the Darksiders on the Wii U, probably one of the last releases ever made on that platform. We released another THQ IP we acquired, Lox Quest. And finally, we released asset care product called Neighbors from Hell, which is original IP created by JUWOOD in the early 2000s. That was released on mobile platforms. We also had 2 publishing titles together with our long term business partner, Wired Productions in the U. K. It was Victor Brand and Tower of Light. Those releases was only done on physical distribution on our side. The cash flow from operations, as you can see, increased considerably from NOK 2,000,000 to NOK 21,600,000. And again, the percentage margin increased on both EBITDA level and EBIT level. If you have read the report this morning, you could see on Page number 12 that we have implemented a new quarterly information. And that has been not a demand, but a request from major shareholders and analysts to follow the company over longer time periods. And here, you see some quarterly information that are relating to the sales. And if you read these numbers, you can understand our business a bit more on a long term basis. And obviously, I would like to compare it to the Q2, as you can see here at the right hand side. The gross margin are at peaking or at a record level of 72%, and in 1,000,000, dollars 61,300,000. And that is because of the very high percentage of digital sales. And the margin, as you know, are higher on digital sales. And if that sales has been driven on our own IPs and back catalog IPs, that is are then becoming even higher margin. Looking at the net sales split between owned titles and publishing titles, 77% of our business in the quarter was generated by our own titles and 23% on the publishing titles. And looking on the specific quarter, the new releases I talked about, the 7 of them, they collectively generated, I would say, in this case, only 13,700,000 And the back catalog, then including, obviously, the Darksiders and everything else, we got were SEK 71,900,000. So 84% of the business or net sales in the quarter was generated from the back catalog. And if you look at the information about the relation of physical and digital sales, 69% a record high 69% came from digital sales. And again, that is because of the high percentage of back catalog promotions. You can find quarters here, and you are very welcome to ask questions after my presentations about because if we are having a new release, a larger new release and especially on console, you would see a higher percentage of physical sales. So this KPI or information will vary over the quarters, obviously. If you look at the balance sheet, it still looks healthy. We have a cash position at almost DKK 125,000,000 together with unused credit facilities of SEK 38,000,000, our total cash available cash position at end of June were SEK 162,500,000. Another very interesting note you can make in the balance sheet is the intangible assets that are driven by our continued investments into the future leases. And that position were, at the end of June, the DKK 338 1,000,000. And that is the comparable number. Last year was DKK 144 1,000,000 and end of the year 2016 was SEK 228,000,000. So we are still investing a lot of the or more than the cash flow generated into new releases. And this SEK 339 million, you can compare this to another KPI or information, given that the total completed development in the first half this year was only DKK2.7 million. Equity stands at SEK394,000,000, giving a solvency of 75%. Looking at the depreciations levels, the IP depreciations are stable at about SEK3.4 million. Dollars And the game development depreciations are actually becoming lower because Sovi hasn't, as stated, released any completed any major completed game development projects. IP Investments has been almost 0. We made one acquisition in Q1 for a nominal amount, and that's why it doesn't show anything here. Game development and royalty advances were a bit lower than Q1. It was SEK58,600,000 compared to SEK67,200,000. And the reason for the differentiation was different number goes not only with the month but also milestones according to projects. And capitalized internal developments are increasing because we are increasing the headcounts in our internal studios. So that number in the quarter was SEK 14,400,000. The total headcounts, and that includes all contractors and internals and external people working on full time for TSG Nordic are, at the end of the quarter, 423. Percent. That could be compared to 3.72 percent end of last year. Here, we have a slide showing perhaps the most important stuff, what will happen in the future. We have changed the model of how to do this in the reporting. Rather than stating only the next quarter, we are stating now all the announced products. And if you want to find out the exact release dates on every product, that is, from my side, ongoing business in Vienna, and you can find that information on tqnordic.com. Looking at this list, this is the 13 projects announced. Some publishing titles will be in addition to that number, for example, the Hunter. But the Hunter, we would not have any development in the balance sheet, and that's why it's not counted in the KPI. One major news today is that Aquanox deep descent has been moved to 2018 in order to polish and maximize the potential of that product. And we have replaced that with another title called Black Mirror. Black Mirror is an IP we acquired a few years ago. It has been a successful IP. It has been already Black Mirror 1, 2 and 3. And it's as many of our other IPs, it has been quite successful in that genre in certain territories such as Germany, Eastern Europe and partly also Canada and the States. That we'll release at the end of the year. My or according to management expectations, both titles have a similar potential. Also, I would like to point out today that a lot of title has now moved to Q4. So I would say our absolute majority of the incomes for the remaining part of the year would be in Q4 rather than Q3. Q3 will be a very operational hectic period with, for example, games come next week, but also a lot of marketing, PR and sales and obviously finishing all these products in order to get them out. And talking about operational things, I would like to point out that development are not only the bottleneck of the company. We have a lot of projects. And perhaps someone could be surprised that we could pull up Black Mirror, but we have, as a principal, trying to complete quite a lot of or projects and products and shows the right time to release them when we have a capacity in the organization to do deserves and requires deserves and requires a substantial amount of time to do the PR and marketing and sales. Also, we have still these 2 mobile titles in soft launch. The Muscle Hustle and Sniper versus Thieves. We are expecting that sniper versus thieves would be the first one out, and that would be fairly soon. So it will be very interesting to follow that. That will be through a 3rd party publishing partner. And as stated, next week, we have the major trade show called Gamescom, where we would have a major event, both on the consumer side and business side. And I know a lot of people from Sweden and investors and a lot of people are traveling down there. So we are really excited to really show off our lineup. And a lot of our Q4 releases, if not all, would be playable in almost final stages. That was the presentation for the Q2 2017. Thank you. And I think we start off with some questions. I have some minor questions on my own. But let's take some questions from the audience. Okay, nothing? It's Christophe. Christophe from Redeye. Congratulations to report ours. Thank you. The promotional bundles for the older Darksider titles, and is that something that has continued in Q3 also? I mean, if you look at the catalog sales or was it a burst in conjunction with the analysts? Well, I think that specific to ArcSider's promotions, they were running in May. So that is not running into Q3. But we're always trying to promote our back catalog as much as possible. But I would say that Q2 was a very it was a lot of promotions on the digital side. Okay. Thank you. Yes. Okay. I can take a question also on Darksiders. When you made this promotion in May, do you feel that you have expanded the fan base of the Darksiders franchise? Yes. Well, as you or when we made the announcement, the trailer we made had 2,300,000 views only on IGN and YouTube. Obviously, there has been a great interest and we are not tracking everything. But I would say, I'm sure a good amount of the buyers were old fans that want to replay the products. But obviously, I'm sure and I'm convinced that it was also a good amount of new players that would like to play the games in order to be kind of played up for the release 2018 of Darkseid III. And how is the franchise performing on Switch? It's not released on Switch. Okay. Wii U. Wii U. Wii U. Well, Wii U is very old format. It's end of stage of the life cycle of Wii U. I would say it has been according to our expectations. It was a promise we made last year to release it on Wiju. And I would say the fans were really happy that we actually fulfilled that promise. And we made our money back. But obviously, it's not the key products or key formats anymore. Okay. Is it some other titles except for Darksiders that you want to highlight? I noticed, for example, This is the Police had almost 370,000 copies owned on Steamspy. I think it was below 180,000 last time we were Yes. I think looking at on our Steam promotions, obviously, Darksiders is one of the best sell. But also This is the Police is one of our best seller products, and I'm very happy that we acquired that title from the owners end of last year. That will be a long term seller. Is that a title performing on console as well? I wouldn't this is a piece of title. I would say we made our money back with a good return of investment because it was quite low on PlayStation 4 and Xbox, but this is a PC product. But it fits our catalog well. And while making promotions on PlayStation, Xbox, we can do some heavy discounting and get some good revenues. Another title performing well, I would say, is Titan Quest anniversary edition on Steam. That is constantly one of our top sellers. And I'm really excited about that IP. In the future? Yes. It's a quite old IP and but has a huge fan base, and it continues having new fans joining. Okay. And concerning the beta test of Spellforce, I don't know what to expect. I'm pretty new to this industry, but I noticed that it was 65,000 owners on Steam. Is it really good? Actually, I didn't know that you can track the Beata on Steam. Steamspice is unofficial products. You can't really trust those numbers 100%. I would say we are very pleased with the beta testing. It has been a multiplayer testing and with a lot of feedback, good and bad, in order to improve the multiplayer experience. Obviously, we can't please all fans, but we are certain that Spellforce 3 will be, I would say, a pleasant experience. Really good to hear. And also last time we were in this first quarter report, we spoke about broadening the fan base of ELX and the Piranha Bytes fans to the U. S. Market. Can you say something about how that has turned out? I think reading the feedback and hearing the feedback when we were at E3 and from written sources, there is people really going for that IP also from America. We can now track the preordering of steam, for example, and see from which countries they are. Obviously, there is we can see the fan base in Germany, Russia, Poland, but also in America. So your expectation, Alex, is it the same as it were 6 months ago? Or is it No, I would say it's the same. I'm confident it will be a decent return of investment. It's a new IP. It's a prAna bike game. It's super nerdy, heavy, open world, 100 hours. It's not a game you play for 5 minutes for fun. And better shares is communicated. And the guild, you haven't communicated the release date yet? No, we haven't. And but we are finally showing something good at Gamescom. And it has been a challenge developing that. It has been a quite small team. It has been for a long period. It was done in the old engine, the old Darksegg engine, which now is just becoming the only game made in that engine. It has been various discussions how to please the fan base, user interface and so on. We are now confident that it will be for the fan base a good product. And still released in Q4? It's achievable. Yes. Well, because of it was one of the 5 titles, I would say if I had any information, it was 2018, I would have said that today. But obviously, until the game is actually released, but today, I don't have any other information that the game will be to the consumers this year. Okay. Any questions? Or should I just go on. From the teleconference. Okay. Then I guess can go on the IP acquisition side. Basically nothing. It's just a small nominal amount. Is it a few objects out there? Or is there a price tag simply too high? I just think it's a mixture of reasons that we haven't made any major acquisition. Obviously, the price tag has been, in a few cases, just outrageous, and I won't pay that price. Sometimes, it just takes time to complete deals because you sometimes have to dealing with parties that doesn't have like a very keen interest to make a transaction, it could be either like a big corporation or someone that are not used to that kind of transaction. And I'm not stressed. I'm sure we will make some good acquisitions over time. Unfortunately, we haven't made any really this year so far, but I'm sure it will happen sometime in the future. But the number of leads is increasing or the same or I wouldn't say there is no other competitor showing up. So I think the situation is the same. There is a lot of IPs out there that we could do a much better job of actually owning than the current owner. So in theory, there is a lot of deals we've made. On the other hand, we have a lot of assets already. As you can see, we're popping up new titles and products just from the war chest. So we can continue just using that pool of assets and IPs for a considerable amount of time. And I guess it will be exciting times next week when you will speak about the new IP. I guess you won't say anything today. So I will not even ask questions from the audience. I think otherwise, I'm pretty done. Thank you, Lars Ola. Thank you very much. Thank you for coming here today.