Earnings Call: Q1 2017

May 16, 2017

Hi, and welcome to this 1st quarterly report by Peer 2 Nordic. The CEO, Mr. Lars Vinge Forsch, will take us through the report and the numbers. My name is Lars Ola Hellstrom. I'm working at Pareto Securities. Currently, I'm 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 for really strong report. And Lars, you may go ahead. Thank you, Lars Ola. Hello and welcome everyone. Nice to see you all again. As stated or Lars Ola stated, we gave our report this morning and 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 43,000,000 to SEK 82,000,000 by 90%. The EBITDA increased from SEK 23,000,000 to SEK 42,000,000, but the scalability came most at the EBIT level at 125% increase against last year's quarter from $14,200,000 to 31,900,000 The cash flow from operations increased 17 percent from SEK 25,300,000 to SEK 29,700,000. Dollars 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 Q1, we released 5 asset care titles and one publishing title. And while 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. But our MX versus A2V series contributed very strong during the quarter as long as the dark side of Sirius. A nice not surprised, but a nice old IP we revived during Q4 last year was destroyer of all humans that we acquired from TSQ and that had a good income during the Q1 on PlayStation Network on digital channels. Also, this is the Police had a notable contribution during the quarter by we are having the release of PlayStation 4 and Xbox 1 versions. The balance sheet, still it looks clean. Our cash position are SEK 131,000,000 end of the quarter, down from $167,000,000 end of last year. The big increase are in intangible assets, where the biggest part is ongoing development. And that positions are increasing from CHF229 1,000,000 to CHF286 1,000,000 and that mainly comes from the investments made for the future. We invested CHF 66,400,000 in ongoing development and royalty advances for future titles compared to $34,700,000 in Q4 last year. Total assets is for exactly the same number, dollars 465,000,000 and equity is 368, dollars capital internal development increasing from about $12,000,000 to $13,000,000 in the quarter. That's our own development and that's recognized in the profit and loss statement as RBH Under ish, but it's then capitalized. And start depreciation of the owner development when we're done making the release of the titles. So that doesn't have 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 200,000,000 end of quarter. And we have a smaller depreciation of Finnish gensd from SEK7.1 million to SEK6.3 million. And we can still see we have a relatively small investments or the investments are relatively small for all the asset care releases we're making. Here is some more KPIs. Looking at the top, we have a stable, exactly the same ratio of owned titles and publishing titles, 68% owned titles and 32% publishing titles on the net sales split in the quarter. And that is the same as Q4 last year. And exactly the same KPIs for new releases within the quarter. So new releases released during Q1 were 36%. But as you can see, we still have a strong back catalog business with 64%. And KPIs of game development projects are has been increasing from 27 end of last year to 32 end of the quarter, where of the announced game development projects has increased from 7 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 number 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. And the total number of headcounts are increasing about 400. 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. Yes. Then 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 the 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 the May. We have Lux Quest, an own IP we acquired from THQ, which were originally released on Nintendo DS 2,008. It's a niche hardcore. Products released on PC, PlayStation 4 and Xbox 1 is coming end of May. Then we have 2 publishing titles, one called Victor Vran. Victor Vran is established product on PC. They have now ported this into console and we are helping them on physical channels. And then we have Town of Light, which is in the game developed in Italy that we also will be releasing offline. And then 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 on the presentation. And finally, we have a very small iOS release, Neighbors from Hell, an IP we acquired from JUWO 2011. But still, Q2 will be a release quarter without any major releases. So it will be an ongoing business. Then we will continue to have the 2 titles from Foxglove Studios, Sniper Versus 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 2 titles. Going from Q2 to Q or the second half of the year. We have the 5 the big five titles, the sequels, and there is still no delays confirmed. However, I will point out that the quality are absolutely key to release these titles. We will obviously announce release dates for these titles when we are ready and certain about the release dates. Again, 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 foremost, it will tease about 2018. And 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 5 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. But the aim for this title was higher also to find the 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 has been 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 Madd and his team, Airship Syndicate, and that is the creator behind Darksiders series. And that studio is also based in Austin, Texas as the gunfire game studios making Darksiders 3 for us are. Battle Chasers will be a multi format release, including Switch. Equinox Deep Descent, our hardcore underwater shooter RPG style title. It's now under beta 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, very nerdy title. Spellforce 3, it's a mixture of RTS and RPG, 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're a shareholder or a fan, you can Google it and you can see some previews from various magazines. And it has been a very, I would say, positive feedback on this title. It's developed in our own studio Grimlore Games in Munich. And again, we are having a high ambition to make something outstanding. It's only going to be released on PC. And the last title is the GILT 3 that are developed in an external studio in Canada. Guild 3 is also an early 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 Yield 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 2 in. That tech is now becoming old. So we would not have doing the same decision, but now we can't really change that. So 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 if we when we chose to put this on the market, it will be a positive reaction from the fan base of Guild. And we have this title that we announced a week ago, and I would like to show you a trailer you haven't seen. With pleasure. It has been generally overwhelming feedback. Obviously, when you release something with a woman in game, there is always big discussions about feminist men and sexism and so on. Overall, in general and Fury was already announced when making Dark Star Wars 1. So this is not kind of a new character. But fans love to they love to hate and love to love them. The trailer has been viewed over 2,000,000 times, which I would say is impressive number if you compare it to any other title. And there is thousands of comments on the various social medias. And 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 relationship with business partners such as Sony and Microsoft's team, retailers, fans and everything. So yes, our team are excited. Darksiders 3, as I communicated in the press release before, were already announced in the prospectus for the IPO as unannounced title. So that was my quarterly presentation, Lars Olar. Thank you. So I have some questions, but you have been really good at answering most of them already. But 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 than you got for This is the Police last autumn. But can you say something about digital versus physical sales in the quarter and how much that has affected in a positive way? Well, margin is a complex material and we are not disclosing the exact margins for various channels. And 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 the distribution? As you stated, we are happy with the margin on Halo Wars Tow. 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, this is 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. I don't doesn't really the physical distribution are implemented into our business model, it's important. And 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, Laurence. It's crystal clear, as always. And maybe you can say that the back catalog was 64% of the revenue in the quarter. I guess that the remaster of Dark Souls 1 is included in the back catalog in the Q1. So can you say what kind of activities you did on the Darksiders brand during the Q4? I guess it was digital promotions on a lot of channels. Well, I don't really have the promotion. I don't think we did a lot of active promotions on Darksiders series in the Q1. I think without saying specifically on Darksiders, generally, we are preparing old assets if we are making a sequel. So if we're having a sequel coming up, we make sure we have the old assets in owning because normally, you will have the sales pickup on the back catalog titles. So if you announce a new title, you will sell more of the old versions because people will try to get in mood kind of. And something we made during the quarter that was not really a big buzz about was we upgraded the assets for Spellforce 2 on steam. So we gave that away for free to all the SpellForce 2 owners. Are you bundling SPELFORCE 2 on other channels and Well, we have not announced yet our lineup for all day 1 additions. I'm sure they do something nice in Vienna. And also concerning MX, which in the prospect of had a run rate until September 2016 about €9,000,000 Can you say something? Are we still on that level? Or where is the curve happening? I'm really surprised that Amex has a very, very stable income. It's 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 by stable. We just need more helmets. Yes, exactly. Okay. Questions from the audience? Okay, I'll go on. Concerning the project pipeline, now 32 titles in production. It was 5 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 Olav. Yes, of course. Well, we're not as you know, we are trying to build the company around having a catalog. We are talking we have a broad portfolio of products. And we are when we are ready, we are announcing the game titles. So 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 Q2 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. So I think all of them are 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 AmEx? No, I wouldn't say that. And we don't have the same development vision for that, of course. But it will be it has a niche. It could be a very nice long tail. But we need to get the right listings at retailers and some promotions from the platform holders to get it going. And you mentioned Halo Wars. Is revenue from that title as expected? Or is it more to come? Has it given some spillover? I think Halo Wars 2 is really that's a downside of that kind of deal. It's very much about day 1 product. It's hot for the 1st weeks, then it's quite dramatically declining, and we don't have a digital income. So I would not expect a big income for Halo Wars 2 going forward. Perhaps when it's activated in promotions, but without saying that for Halo Wars, I think it's a general thing for all AAA titles, it has a big push to 1st period, whether it's days, weeks or perhaps even a quarter. So that is not only for Halo Wars, it's for all AAA titles. And on back of the publishing deals you've made for Marcus Scharf 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 corporation where we started last summer and hopefully, we will have a very long term relationship to Microsoft. Microsoft is a very, very big company. So their needs are not always the same as a small indie developer. So it's a complex business relationship. And going on, I saw on the slide on the developer side, you have increased both internal and external. First, concerning internals, have you set up a new internal team? Or have you just recruited on the existing teams? And the internal, is it new teams or the same? Internally, we added a few people, as you can see, headcounts. So that's the reason in, I think, all teams, at least in Grimlore and Foxglow. Obviously, there is a big difference in ongoing development from €35,000,000 to €66,000,000 dollars in the quarters. So we've 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. So we have a good pipeline. Quarters could that number could vary between the quarters. So it could, in theory, be less next quarter. So quarters could if 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 this. It could be a reason that quarters are varying. Okay. And yes, and of course, we have the question about Darksiders. What's the plan for this year? Or we have a maybe we can take that first. What's the plan? Well, I can probably I'll talk about Dorksiders just a bit. As stated, we made a big thing with IGN now in the announcements, and they've made the IGN exclusives, one of the most successful IGNs from her kind of promotions ever, Igens First. And we are now business closing, I would say, quite early in the process, the pre alpha gameplay interviews with the developers, yes, a lot of material. Obviously, this site is coming out 2018, and we have not announced when. So now we need to leave not leave Drogsales behind us, but kind of leave it and then focusing on our 5 big second half twenty seventeen titles. And that's the absolute key for the people in Vienna, especially on the trade shows at E3 and Gamescom. Obviously, we'd 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 Lars Ullar. A quick question regarding your 5 asset care releases during the quarter. Were they over your expectations, would you say, for performance wise? Yes. I think they were according to my I think in the end, for example, we had I think the MX versus A to B season pass made a good contribution. It had a bit slow start, but then it made a good contribution to the business. More questions? Okay. Final for me then. One of your growth strategies is to continue to acquire IPs. How is the list looking the candidate 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. So 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. I would like to ask what's your view on channels like Twitch and YouTube in form of marketing campaigns, especially on like internal products? Yes. 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 and other repeating the titles you're going back to, it has a disadvantage. So most of our many of our RFPs are something you play Dark Side is you play that for 50 hours and then you leave it. But when you announce it, it's a very big interest. Those Twitch are super important and they also announced their own sales platform. So you can actually buy click and buy products on Twitch as well as Tencent announced their own platform for China. So obviously, this is something we are looking into and working on. I understand that one problem is to get the best game developer. Is that correct or is that uncorrect? Well, it's a tricky question. We can leave the question so far. But I still mean, if you don't if you must have good game development. Yes, yes. Obviously, we need to have a very good team. What is a good game development? It's a very complex question itself. 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. So in a few cities such as Phoenix, in Arizona, we're making MX, we are kind of the only hardcore studio. If you compare that, because Phoenix is a similar sized 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 kind of 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. So if you have the right culture, mindset, pay and something people would like to work on, you can get the best what you call the best developers on board. But this is a very, very daily topic. Obviously, we would like to have very good people, long term people on board our business, both externally and externally. And I think this is something we can see making Darksiders 3 with Gunfire Games. They are very senior, professional, good developers. That's a strategy we're having. Okay. Thank you. I think I have a final question, at least another one. Foxglow, once again, last report when or when we had our seminar in February, I think Sanathe told me that the KPIs from Muscle Hustle wasn't that good, but it was for sniper versus thieves. Can you say something like that? Is sniper versus thieves continue to look really good? And what about So I think the muscle hustle, what I understand, the KPI, if you get the people into play it, it's easier than you 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. But it's only soft launch in Southeast Asia kind of previously. So is that the right market for a wrestling game? Wrestling is American. So Sniper doesn't have the issue of having issues getting the people to play it. We had like 2,500,000 downloads, But we have an issue of getting them to spend money in the game. So yes. Okay. That's it. That's all from me. Thank you very much. You welcome the next quarter report.