Hi, welcome to this first quarterly report by THQ Nordic. The CEO, Lars Wingefors, will take us through the report and the numbers. My name is Lars-Ola Hellström. I'm working at Pareto Securities. Currently the only analyst on THQ, but I believe it will change in a short period of time considering the rapidly increasing market cap. First of all, congratulate a really strong report, Lars, you may go ahead.
Thank you, Lars-Ola. Hello and welcome, everyone. Nice to see you all again. As Lars-Ola stated, we gave our report this morning. It has been a great or a stable quarter. I think we have been seeing a good scalability within the business. The net sales increased from SEK 43 million to SEK 82 million by 90%. The EBITDA increased from SEK 23 million to SEK 42 million. The scalability came most at the EBIT level at 125% increase against last year's quarter from SEK 14.2 million to SEK 31.9 million. The cash flow from operations increased 17% from SEK 25.3 million to SEK 29.7 million. The margins are still at a healthy level. The EBITDA level are around 50%, and the EBIT margin increasing from 33% to 39%. I think this quarter shows our execution on our business model. It shows we have a great momentum in our Asset Care program.
During the first quarter, we released five Asset Care titles, one publishing title. When I'm looking at all the revenues for the quarter, we could see a strong long tail income from very many products. We have more than 900 product lines generating revenues during the quarter. As stated, the big publishing title was "Halo Wars 2" that we made in cooperation with Microsoft for physical channels in Europe. Our "MX vs. ATV" series contributed very strong during the quarter as long as the "Darksiders" series. A nice, not surprise, but a nice old IP we revived during Q4 last year was "Destroy All Humans!" that we acquired from THQ. That had a good income during the first quarter on PlayStation Network on digital channels. Also, "This Is the Police" had a notable contribution during the quarter.
We're having the release of PlayStation 4 and Xbox One versions. The balance sheet still looks clean. Our cash position are SEK 131 million end of the quarter, down from SEK 167 end of last year. The big increase are in intangible assets, where the biggest part is ongoing development. That positions are increasing from SEK 229 million to SEK 286 million. That mainly comes from the investments made for the future. We invested SEK 66.4 million in ongoing development and royalty advances for future titles compared to SEK 34.7 in Q4 last year. Total assets is for exactly the same number, SEK 465 million. Equity is SEK 368, giving a solidity of 79%. We have a slightly increased capital internal development increasing from about SEK 12 million to SEK 13 million in the quarter.
That's our own development, and that's recognized in the profit and loss statement as "Arbete under." But it's then capitalized, and we start the depreciation of the own development when we're done making the release of the titles. Some investors have been asking if that are contributing to the profit, but it's not because the same costs are showed in the profit and loss statement. The total available cash is SEK 200 million end of quarter. We have a smaller depreciation of finished games from SEK 7.1 million to SEK 6.3 million. We could still see we have a relatively small investments, or the investments are relatively small for all the Asset Care releases we're making. Here are some more KPIs.
Looking at the top, we have a stable, exactly the same ratio of own titles and publishing titles, 68% own titles and 32% publishing titles on the net sales split in the quarter. That is the same as Q4 last year. Exactly the same KPIs for new releases within the quarter. New releases released during Q1 were 36%. But as you can see, we still have a strong back catalog business with 64%. The KPIs of game development projects has been increasing from 27 end of last year to 32 end of the quarter, where the announced game development projects has increased from seven to 14. So end of the quarter, we have 18 titles to announce in the pipeline.
The KPIs of headcounts, it's not exactly the same as the numbers you see of human resources in the quarterly report, because in the quarterly report, we just count the number of employees on the employment list. These KPIs are including contractors. In certain territories, we're using a lot of contractors also for the in-house people. The total number of headcounts are increasing about 400. So we have 404 headcounts end of the quarter. As you can see, we have a slight increase in the overhead of publishing from 40 to 44 people. Looking into the future. We have the current quarter we are in Q2. We have the following planned and announced releases so far. We have de Blob, an IP we acquired from THQ, already released on PC on digital channels.
We have Darksiders, probably one of the last Nintendo Wii U releases ever, coming out end of May. We have Lock's Quest, an own IP we acquired from THQ, which were originally released on Nintendo DS 2008. It's a niche hardcore product released on PC, PlayStation 4, and Xbox One, is coming end of May. We have two publishing titles, one called Victor Vran. Victor Vran is an established product on PC, and they have now ported this into console, and we are helping them on physical channels. We have The Town of Light, which is an indie game developed in Italy that we also will be releasing offline. We are finishing the quarter with Baja: Edge of Control. Baja is an IP we acquired also from THQ, and it's a racing game, as you could see in the presentation.
Finally, we have a very small iOS release, Neighbours from Hell, an IP we acquired from JoWooD in 2011. But still, Q2 will be a quarter without any major releases. It will be an ongoing business. Then we will continue to have the two titles from Foxglove Studios, Snipers vs. Thieves and The Muscle Hustle still under soft launch. Both are published through external parties. They will go to global launch when the KPIs for the title shows the right data. When that will happen, well, God knows. I have a good feeling for the team and development, and fans for the titles are still showing a great interest in the two titles. Sorry. Going from Q2 to the second half of the year. We have the big five titles, the sequels, and there is still no delays confirmed.
I will point out that the quality are absolutely key to release these titles. We will obviously announce the release dates for these titles when we are ready and certain about the release dates. I'm repeating, we are expecting to make further product announcements on both owned and publishing titles in the coming quarters. Some will release already 2017, but for most, it will tease about 2018. This line gave us the title I will show you on the next slide. So we will pick the right dates and periods to announce new titles. To give you some more color on the five titles, ELEX, which is an open-world RPG, 100 hours of gameplay, developed by Piranha Bytes in Germany. If you are a fan of Piranha Bytes, it looks fantastic.
The aim for this title was higher, also to find an audience outside the fan base, especially in America. So we have been running focus tests with a large group of players, also in America, and we are implementing this feedback into the game. And if we are happy with that implementation, we are certain this will be a healthy return of investment. Battle Chasers, it looks fantastic. Fans are reacting very positively. We have, I would say, a notable or even a considerable interest from various markets in Asia regarding this title. It's a very Japanese title or Asian title, but developed in America, which is very unusual. It has a great art style, attracting a lot of fans. As you know, the titles are made by Joe Mad and his team, Airship Syndicate, and that is the creator behind Darksiders series. That studio is also based in Austin, Texas, as the Gunfire Games making Darksiders III for us are. Battle Chasers will be a multi-format release, including Switch.
Aquanox Deep Descent are a hardcore underwater shooter RPG-style title. It's now under closed beta testing on Steam, and we are now implementing the feedback from the fans. And if we are implementing that feedback and it all looks right, we are confident this will be a strong title for second half. But again, it's a very nerdy title. SpellForce 3, it's a mixture of RTS and RPG. It has a very large fan base across the world, again, mainly in Europe or Northern Europe. Perhaps not so much in the Nordics, but especially in Germany, but also Russia and Poland and so on.
I would say if you are a shareholder or a fan, you can Google it and you can see some previews from various magazines. It has been a very, I would say, positive feedback on this title. It's developed in our own studio, Grimlore Games, in Munich. Again, we are having a high ambition to make something outstanding. It's only going to be released on PC. The last title is The Guild 3, that are developed in an external studio in Canada. The Guild 3 is also a nerdy title, medieval strategy simulator-ish title. To be honest, it has been in development for a long time. One of the issues we've been having with The Guild 3, which we now seem to overcome, is it's developed in our own tech that we acquired from THQ, the Vigil engine, where they made Darksiders II.
That tech is now becoming old, we would not have doing the same decision, now we can't really change that. We're trying to make the best of it. It's a very good tech, but it requires a bit more time. Again, we're implementing feedback from fans. We have been running focus tests. I'm confident when we choose to put this on the market, it will be a positive reaction from the fan base of Guild. We have this title that we announced a week ago, I would like to show you a trailer if you haven't seen it.
Do you accept this undertaking? Though they are seven, you but one. With pleasure.
Franchises. It has been a generally overwhelming feedback. Obviously, when you release something with a woman in the game, there is always a big discussions about feminism and sexism and so on. In general, Fury was already announced when making Darksiders I, so this is not a new character. Fans love to hate and love to love them. The trailer has been viewed over 2 million times, which I would say is impressive number if you compare it to any other title. There is thousands of comments on the various social medias. We have also showed a 12-minute gameplay video, where you can Google it up. I would say to be in pre-alpha and still fairly early in development, it looks. Well, have a look yourself. I would say this announcement will drive the company into the next level of excellence.
It will be something that will drive our relationships with business partners such as Sony and Microsoft, Steam, retailers, fans, and everything. Our team are excited. Darksiders III, as I communicated in the press release before, were already announced in the prospectus for the IPO as unannounced title. That was my quarterly presentation, Lars-Ola.
Thank you. I have some questions, but you have been really good at answering most of them already. Maybe we could start with some questions from the audience. Otherwise, I go ahead. In the quarter, you have a really good gross margins of 68%, and I guess you got a little bit better terms on the publishing deal concerning Halo Wars 2 than you got for This Is the Police last autumn. Can you say something about the digital versus physical sales in the quarter and how much that has affected in a positive way?
Margin is a complex material, and we are not disclosing the exact margins for various channels. I would say margins also just for publishing is a very complex material. It all depends on, obviously, the royalty rate. It depends on how much risk you're taking into the project. Are you investing into development or just investing into distribution? As you stated, we are happy with the margin on Halo Wars 2. I can't really disclose the exact margins. Obviously, the margins for digital sales on our own IPs are very good. That's 100%, more or less, before depreciations. Margins on physical goods are also good if you do the right titles. I would say physical distribute something, especially a PC product, could be a very good margin as well.
To replicate a PC product doesn't really cost a lot, and if you have a high value, as Halo Wars 2, you can have a nice margin in between. The physical distribution are implemented into our business model, and it's important. I don't think it's that important where the consumer buys the products. Is it physically or digitally? For our own IPs, it doesn't really matter so much. That's my answer, Lars-Ola.
It's crystal clear as always. Maybe you can say the back catalog was 64% of the revenue in the quarter. I guess that the remaster of Darksiders I is included in the back catalog in the first quarter.
Yep.
Can you say what kind of activities you did on the Darksiders brand during the fourth quarter? I guess it was digital promotions on a lot of channels.
Well, I don't think we did a lot of active promotions on Darksiders series in the first quarter. I think, without saying specifically on Darksiders, generally, we are preparing old assets if we are making a sequel. If we're having a sequel coming up, we make sure we have the old assets in order because normally, you will have a sales pickup on the back catalog titles. If you announce a new title, you will sell more of the old versions because people will try to get in mood. Something we made during the quarter that was not really a big buzz about was we upgraded the assets for SpellForce 2 on Steam. We gave that away for free to all the Steam SpellForce 2 owners.
Are you bundling SpellForce 2 on other channels and this company?
We have not announced yet our lineup for day one editions. I'm sure they do something nice in Vienna.
Also concerning MX, which in the prospective had a run rate until September 2016, about EUR 9 million. Can you say something? Are we still on that level, or where is the curve heading?
I'm really surprised that MX has a very stable income. It's a surprisingly strong IP on both digitally, but also we have a great business on physical channels in America, on Walmart and so on.
Are you seeing that the franchise is growing in terms of users, or is it?
I wouldn't use the word growing, but stable.
They just need more helmets.
Yeah, exactly.
Okay. Questions from the audience? Okay, I go on. Concerning the project pipeline, now 32 titles in production. It was five more than it was in the last quarter. Can you say something about the split type of projects if we take the whole Asset Care value chain? Are we having some remasters or even a sequel that has moved into a production now?
That would be a dream for you to see that list, Lars-Ola.
Yeah, of course.
Well, as you know, we are trying to build the company around having a catalog, and we have a broad portfolio of products. When we are ready, we are announcing the game titles. We are not making the split of what kind of projects there is. Sorry.
It shouldn't be easy to be an analyst. Also, going forward in the second quarter and the product releases, which title are you most optimistic about?
I don't think any of them will stand out as perhaps "Halo Wars 2" did. There is no major titles. A title I like is "Baja". If we can succeed having a long tail business on that, on physical and also digital channels, it will be a very nice business because it's something we acquired and upgraded.
Is "Baja" holding the same DLC potential as "MX"?
No, I wouldn't say that. We don't have the same development vision for that, of course. It has a niche. It could be a very nice long tail. We need to get the right listings at retailers and some promotions from the platform holders to get it going.
You mentioned "Halo Wars". Is revenue from that title as expected, or is it more to come? Has it given some spillover effect?
I think "Halo Wars 2" is really a downside of that kind of deal. It's very much about day one product. It's hot for the first weeks, then it's quite dramatically declining, and we don't have a digital income. I would not expect a big income for "Halo Wars 2" going forward. Perhaps when it's activated in promotions, without saying that for "Halo Wars," I think it's a general thing for all triple A titles. It has a big push the first period. Whether it's days, weeks, or perhaps even a quarter. That is not only for "Halo Wars," it's for all triple A titles.
On back of the publishing deals you made for Microsoft now, are you getting more suggestions concerning publishing deals?
We have a good relationship with Microsoft, I would say. I don't have that myself, so it's my team in Vienna, management team, and I think it's a fruitful cooperation where we started last summer, and hopefully we will have a very long-term relationship with Microsoft. Microsoft is a very big company, so their needs are not always the same as a small indie developer. It's a complex business relationship.
Going on, I saw on the slide on the developer side, you have increased both internal and external. For us concerning internals, have you set up a new internal team or have you just recruited on the existing teams? External, is it new teams or the same?
Internally, we added a few people, as you can see, headcounts. That's the reason. I think all teams, at least in Grimlore and Foxglove. Obviously, there is a big difference in ongoing development from SEK 35 million to SEK 66 million in the quarters. We made a lot of investments, that's my statement. I mean, we increased the number of game projects from 27 to 32, and then you need to minus the titles released in a way. We have a good pipeline. That number could vary between the quarters. It could, in theory, be less next quarter. For example, if you pay in advance to a party for a royalty advance for a publishing title, that could be a reason. I'm not saying it is. It could be a reason that quarters are varying.
Okay. Yeah. Of course, we have the question about Darksiders.
Yeah.
What's the plan for this year? Maybe we can take that first.
I can talk about Darksiders just a bit. As stated, we made a big thing with IGN now in the announcements, and they made the IGN exclusives one of the most successful IGN's from a kind of promotions ever, IGN First. We are now be disclosing, I would say quite early in the process, the pre-alpha gameplay, interviews with the developers. A lot of material. Obviously, this title is coming out 2018, and we have not announced when. Now, we need to leave, not leave Darksiders behind us, but kind of leave it and then focusing on our five big second half 2017 titles, and that's the absolute key for the people in Vienna, especially on the trade shows at E3 and Gamescom.
Obviously, we would like to talk and sell our current year's products rather than talking about Darksiders. That will be a balance because I'm sure people will ask more about Darksiders as well.
I think we had a question.
Yes. Thank you, Lars and Lasse Juhl. A quick question regarding your five Asset Care releases during the quarter. Were they over your expectations, would you say, performance-wise?
I think they were according to my expectations. Normally, a few titles do a bit less and perhaps a title do a bit more. I think in the end, for example, we had, I think the MX vs. ATV season pass made a good contribution. It had a bit slow start, but then it made a good contribution to the business.
Thank you.
More questions? Okay, final from me then. One of your growth strategies to continue to acquire IPs.
How is the list looking, the candidates looking?
Well, I have the long list. As stated again, when you knock on the doors and ask to buy, it's always become more expensive. I'm still having the same principle of not paying too much, which means I will most likely walk away from deals and have been walking away from deals. I'm not stressed of making any acquisitions. This company will deliver just fine doing the Asset Care and the core business model on the current IPs. I'm confident we will make acquisitions in the future when people need our support or cash or help, but it needs to be on the right terms.
Okay.
Hi. I would like to ask what's your view on channels like Twitch and YouTube in form of marketing campaigns, especially on internal products?
Yeah, well, I wish I had my marketing team here answering. Everything we're doing with Twitch and obviously we are working with lots of YouTubers and Twitchers announcing or displaying our products. I think our products partly has sometimes perhaps a lack or if you compare it to Counter-Strike. Repeating the titles you're going back to, it has a disadvantage. Many of our IPs are something you play. Darksiders, you play that for 50 hours and then you leave it. When you announce it's a very big interest. Those Twitch are super important, and they also announced their own sales platform. You can actually click and buy products on Twitch, as well as Tencent announced their own platform for China. Obviously this is something we are looking into and working on. Yeah.
I understand that one problem is to get the best game developer.
Is that correct or is that incorrect?
Well, it's a tricky question.
We can leave the question so far, I still mean you must have good game development.
Yeah. Obviously, we need to have a very good team. What is a good game developer? It's a very complex question itself.
Yeah.
I think we have a very global business in our We have 14 different nationalities, and our studios are based internally and externally across the world. In a few cities, such as Phoenix in Arizona, we are making MX, we are kind of the only hardcore studio. If you compare that, because Phoenix is a similar size city as Stockholm, we are with 26 people, more or less the only one to go to if you want to develop game. We have a better position than if we were to be in Stockholm, because here you have a fairly sharp competition. Of course, the upside in Stockholm is you have the pool of talent. If you have the right culture, mindset, pay, and something people would like to work on, you can get what you call the best developers on board. This is a very daily topic.
We would like to have very good people, long-term people on board our business, both internally and externally. I think this is something we can see making "Darksiders III" with Gunfire Games. They are very senior professional good developers. That's a strategy we are having.
Okay. Thank you.
I think I have a final question, at least another one. Foxglove, once again, last report or when we had our seminar in February, I think Sonata told that the KPIs for "The Muscle Hustle" wasn't that good, but it was for "Snipers vs. Thieves." Can you say something on that? Is "Snipers vs. Thieves" continue to look really good?
It's hard. I think "The Muscle Hustle", what I understand the KPI, if you get the people in to play it's easier to get the right KPIs of getting them to pay. I think that title perhaps have more of the problem of getting the players into the game. It's only soft launch in Southeast Asia previously. Is that the right market for a wrestling game? Wrestling is American. "Sniper" doesn't have the issue of having issues getting the people to play it. We had two and a half million downloads, we're having the issue of getting them to spend money in the game.
Okay. That's it. That's all from me.
Thank you very much. You're welcome the next quarterly report.