Earnings Call: Q4 2016

Feb 15, 2017

I'm very proud being here today with the 1st quarter report and year end for 2016. Before running into the numbers, I would like to recap on our strategy for profitable growth. Our core business model, as we talked a lot about during the leasing process, is about our acquisitions of IPs and the asset care we are providing those IPs and development for sequels. And I will come back to that in the numbers. And I'm very happy to present the Q4 numbers. We had a really strong Q4. The growth was 30% year on year, and the EBIT margin was 39%. The main driver for Q4 was the broad portfolio of games in the catalog, mainly promoted on various digital channels such as Steam, PlayStation and Xbox Live. As you look at numbers here, you can see that the EBIT levels are increasing a percentage more than EBITDA levels, and then that's due to lower amortizations of own development in the quarter. And this is because we the releases we made of own development in the quarter was less in terms of 1,000,000 than the comparable quarter 2015. Looking at the full year numbers. We have been growing our net sales with 42%. Our EBIT operating profit with 43%, And again, the EBITDA level at 26%. So and the depreciation of owned developments are on the full year numbers, as you can see, about the same. It's a little bit less from 2015, from SEK 26,000,000 to SEK 24,000,000. During the Q4 period, we made 4 acquisitions of IPs. The main ones being Delta Force from NovoLogic, Joint Operations, Comanche from NovoLogic. We bought the previous THQ Inc. Title, Swings and the Cursed Mummy. And we finished Q4 buying the previous publishing title, This is the Police. And This is Police was a title we published or we released during August last year. We also released 2 own titles and 2 published titles during the quarter. The 2 own titles was Darksiders War Master Edition and We Sing. Combined, this release's performance are according to the management expectations. I'm also happy, proud to show some numbers from our balance sheet Because of the IPO process and the raising of new capital, our cash position end of December was SEK 100 and 67,000,000, comparable to SEK 25,000,000 the year before. And we also had unutilized credit facilities at end of Q4 at SEK 71,000,000. So the group's total cash available was SEK248,000,000. Equity are SEK 345 1,000,000 and the assets ratio is 74%. So we have a very strong balance sheet. The cash flow from operations are slightly down. Obviously, the cash flow from the EBITDA level has been increasing, but it's slightly down due to the tax and increased working capital reductions. Also some interesting numbers looking at the balance sheet for the total intangible assets. You can convert this partly to the investments made during the past years the past year. So we have increased the total intangible assets from $104,000,000 end of 2015 to $228,000,000 end of Q4. And the absolute majority of this is the ongoing development for products. We are running at full speed for development. I will come back to that very shortly. But that position has increased from $51,000,000 to 170 $4,000,000 during the year. We have also acquired increased acquisitions of IPs during the year. So from SEK 4,600,000 2015, we invested SEK 22,600,000 during the full 2016. In order for you to get a better understanding of the business and for analysts and others to follow the business, I'm providing a bit of more KPIs today. And the new especially the new KPI I would like to point out is the share of new releases sales. So what is this number? Yes. New releases sales in Q4. So during Q4 2016, the new releases we made were 36% of the net sales, meaning SEK 46 1,000,000. That means that is only the new releases in that quarter. So titles released in Q3 or before are then counted as backlog. The comparable number for this KPI was 52% 2015 and in million that was €51,000,000 And as you remember, we had 2 strong titles, 2015 in Q4. We have Darksiders 2, HD version, and we had especially MX versus A2E Supercross. The next KPI I'm providing is new releases sales for the full year. So this KPI is for all titles released during 2016. And that amount is 41% of the business, meaning SEK 123,000,000 during 2016, and the comparable number was 42% to 20.15 $88,000,000 Meaning this KPI will mean that the titles released in Q1 2016 will then be counted in Q1, Q2, Q3 and Q4. And titles released in Q2, obviously Q2, Q3, Q4. But the titles then in Q4 will only be counted in Q4. And next time, providing this KPI, all titles 2016 will be counted as backlog. Looking at the old KPIs we provided is the owned titles percentage of sales. That number decreased a bit from 76% twenty 15% to 71%, 2016. That is because we had a lot of publishing titles, especially in Q3. As you remember, we published Quantum Break, for example, from Microsoft. We published Warhammer from Fat Shark here in Stockholm, and we published many other publishing titles during the year. But in terms of millions, our own titles increased from 162,000,000 in 2015 to EUR 214,000,000 in 2016. Just to clarify, own titles, meaning it's the IPs and franchises we own. Everything else then is publishing titles. Then I'm providing some other KPIs. They are not always super relevant, but just to give you a bit of more understanding for the business. And then the amount of owned titles, 204 publishing titles. The cost carrier numbers in our systems, well, you can call it SKUs, it's 14.70 I would like to give you just the picture. We have a very complex business, so it's hard to provide all details. Obviously, I can't do that. But there is a lot of products, lot of channels, retailers. So it's a complex material. And that's what I'm saying here, we had in Q4, we have the strong backlog sales. As you can see in the numbers here, the share of new leases only were 36%, the rest was then backlog. I hope this new KPIs will give you some more color until we have the next quarter report. Perhaps I will try to get better every quarter providing KPIs. Now looking into the future. As you know, we are not providing any financial forecasts. However, I would like to talk to you about our upcoming products. And in Q1 2017, we will have the following new products or new releases. I would say there is no major title for us in Q1, but we do have new products. And the product I would like to point out here is especially Halo Wars 2 coming out this week in cooperation with Microsoft and 343 Industries. And in end of the quarter, we have This is the Police, where now being our own IP, we are very excited to bring this out on console, PlayStation 4 and Xbox 1, both on physical and digital formats. In the corresponding quarter 2016, we had non new release. I will also tell you a bit more now on our mobile products. As you remember during the listing process, we just acquired a studio called Foxglove Studios, actually based out from Stockholm. They had been working on 2 titles for 2 years owned by a Japanese big gaming company. Somehow, they decided not to continue their Western operations, not only Foxglow, but a lot of other studios. And we agreed with the teams to take them on as fully owned studios. However, we let the employees of the studios still owning the rights for IP, but we made a deal that we will recoup the cash, the burn rate we're spending with them to get these 2 products out. And we will also have a bulk or a good chunk of the net profit of the products. The 2 products, they are called Snipers versus Thieves and the Muscle Hustle, a wrestling game. It's a multiplayer mobile products. I would say they are very good mobile products. They are very, very senior teams. They've been working 2 years, and they have been like about 10 people on each game. As you know, the lady heading up this operation on Foxglow is Sanna Jakobsen, which has been in this industry for many years. She was previously Chief Operating Officer at DAIS here in Stockholm. Okay. So this product has been soft launched or being soft launched during Q1 together with 2 different publishers, 1 called PlayStack and 1 called PlayLab. So as you know, TSU Nordic, we don't have our own publishing operations for mobile. So they will provide the PR and marketing and all the publishing duties. And I have to say, I'm a bit excited for this. Sniper versus Thieves is very good mobile product. It has been on Google beta play since December. And it so far, it had about 2,000,000 downloads. And Google also seemed to be very excited. Apple are also interested, but or excited, but we had a trial in Nordics here. So the 4 Nordic countries during not last week, but I think the week before. And we were the most downloaded game for a few days in most of the countries. So we had about 200,000 downloads here in Nordics, which is a good number for Nordics. The challenge with the title, this is a free to play product. So this is a for me, it's a new market. So perhaps I'm sounding too excited, but I would like to give you some color, so my view on this. Sniper versus Thieves has good traction. People like to play it. They would like to come back to it. They are on YouTube, so you can find a lot of videos and so on. But it's a challenge to get people to spend enough in the game. And obviously, what I understand, if you don't have the right KPIs, the products are financially not worth anything because you can't charge for products. You need to get people either to spend something or you look at some advertising. So this is about spending. Masks, this is about robbing banks and sniper versus thieves. So all right. The other part is the muscle hustle. Wrestling game, a fantastic game, multiplayer, also had very good KPIs, better spending KPIs. The problem is the traction. People are not doing it on YouTube. They're not really talking about it so much, but I like to play it. We have some serious interest. It has been under soft launch in Indonesia Malaysia, Indonesia, Philippines during the past month. But I wouldn't this is my view today. This is a new new market for me. We previously had pay to play products. This that is a totally different market. For example, we had the books of Amerencing Tales 2 for launching on pay to play during the past weeks. But the numbers of that is, okay, it's not that exciting. So the big market is free to play. I'm looking forward to coming back on these two titles in the coming quarters. Okay. So here comes the big thing. What are we doing to do in the future? So we raised new capital. We are building our strategy for growth and it's very much about the investments we're making to own development. We have a very strong pipeline for 2017 and onwards. We have some major sequels coming out on own IPs and publishing titles, and they will come as of the information I have today in Q3 and Q4. The titles announced are Elix, own title or 70% owned. It's Battle Chasers, a publishing title Equinox Deep Decent, own title Spellforce 3, own title and Guild 3, own title. As of today, there is no delays. However, we are in the games industry. So it's normal that product gets delayed for various reasons. Key for me as owner and on the business side of it is that we bring out products that has the right quality. So the product will have a long term value, meaning the product should be without bugs by releasing, should have the polish that the consumers expect. These products have millions of fans waiting for this collectively. Coming back to the intangible assets, we had SEK 174,000,000 in ongoing development end of December. By end of December as well, we had 27 products under in the pipeline, whereof 7 were announced and 20 were not announced as of 31 December. As you know, our strategy is to announce products where we think it's beneficial for the company and especially for the product for the consumer perspective. So we will make announcements during the year at trade shows and other occasions. And that will be announcements on both owned and publishing titles also coming out 2017. But foremost, some of these will be for 2018 and onwards. There is different strategies. To give some color on that, there is different strategies. How long time do you need to announce a title before you're releasing it? Various publishers have everything from 1 month minimum up to years. I would say, when you announce it, you have kind of a moment. And that moment you need to catch. You need to catch excitement and continue having the audience or consumer fan bases excited until the release. And you need to convert that excitement into hopefully pre books of the new releases. So there is different strategies how long you should announce titles. This type you see here, Elix, was announced long time ago. And that is always a challenge to keep that excitement going. However, I'm excited for the future, what we have to show you in the future. I would also say that compared to many other publishers in this industry, we have a lot of products, many titles, many releases, many IPs. I will also state that, okay, we have some substantial investments in Helix and a few others, but we are not dependent on any of them. I'm still, as I stated during the process, comfortable with that it's a good investment and we will have a good return of investment. But I would like to point out that we have a broad portfolio of backlog, but also of new releases. Okay. Ladies and gentlemen, that was my presentation for the quarter. I would welcome to you to have questions. And this session will have a head drop of you, Lars. Yes. Thank you, Lars. And once again, congratulations to a really strong report. And also thank you for giving me some new KPIs, so it's easier for me to track this company. First of all, I was thinking to start if we can if you can say something about specific titles that over delivered during the quarter, which you are really satisfied that you're surprised on the upside. Well, combined, as I stated, the new releases was according to expectations. There is always titles that there's always titles doing a bit better. I would say there was none of the titles doing extremely well. That if something does extremely well, I will point out that. Darksiders War Master Edition had a great feedback from fans and on Metacritic, we had good reviews again. It's a 5, 6 years old product. We gave away 2,000,000 copies on Steam for free to the previous owners, and they were, of course, very glad to get this new version. And I think that is an investment for the future in the IP. And what concerns publishing titles? Was it some that over delivered or Well, we had the dwarves. It's okay. We made our money. It wasn't too big investment. Okay. You invested SEK67 1,000,000 during the quarter. It's quite a lot. Are we now if you would split that, how much is for title studies to be released during 2017? And how much is for titles later on? First of all, I think that number is including the IP acquisitions made. So I think you can dig that number down. How much development there is? I'm sorry, but I don't have that exact number. So I'm not providing that KPI. How much of the development investments are being released? Okay. I must say it was really exciting to hear about their mobile venture with Foxglow. For how long have they been developing these games? You said 2 years? Yes, a bit I think over 2 years. Have you something to say about the investment budget, how much they've been putting in? Well, the team is in total, there are 18 very senior people. So this is not low cost productions. Well, we made a deal that we paid a burn rate and we recouped the burn rate and we share kind of the margins on it. My thinking of Foxglow is not these two titles. I think it's nice to have them. I'm excited, and I'm right to support it. But the thinking behind Foxglow was to like understand the market, start looking at our own IPs, what they could make for the future. But please, this is like kind of a little bit excitement in the corner. This is not a big, you know If this venture goes well, can you consider using existing IPs for free to play games? Well, I'm not the man to answer that question. I will come back to that in the coming quarters. Do we have any questions from the web or for and from the telephone conference. Okay. No questions, so I go on. Maybe you can tell a little bit more about acquisitions you have made since the IPO, the Novologica and the Swings acquisition? And what kind of development activities can we expect? How many of the title is a potential sequel? Or is it mostly porting and remasters? What's the spectrum of these investments? Well, there is some first of all, there is some asset care to be made on swings and the Delta Force titles. There is new platforms to be added for the catalog of NovoLogic. I would say the NovoLogic has a challenge because those titles are on the edge of being very old. So it's games from the 1990s, early 2000. That early 2000 works okay. 1990s, it's becoming a lot of retro. I think the IP such as Delta Force, for example, has I will not say a strong following, but there is millions and millions of players that remember a game, played a game and lived with this game when they were young, and they're now in my age. So I think if you have the right team, dev team, you can make something really good on that. That's just one example. Swings has also following, it's a bit more niche. There is a potential on Nintendo Switch. There is a legacy from THQ Inc. On this as well. And really strong ratings for that IP? Yes, good ratings. And this is Police. It's like that's a new thing. We published the title and then we acquired it. I like it. It's a good investment, I would say. I'm excited for that IPs in the future. The good thing is a current game. There is a current team. There is like an up to date product. Concerning new IP acquisitions, how is the deal flow? Have you noticed even more potential deals since you changed the name to Kure Nordic? Or is it basically the same? We always had a good deal flow, and that's because I'm proactive rather than waiting for the deals to come. There's always a challenge if you approach people and would like to buy something rather than the people come to you and need your help. So there is a difference in this. I'm not concerned. We will make acquisitions going on continually making acquisitions this year and the years to come. There is some deals that are too expensive in the market. I want to keep the strategy of paying the right amount for the products rather than getting overspending on acquisitions. Sounds likewise. Also another question on the publishing side. Now you got this new deal with Microsoft for Halo Wars 2, which is a high flying title. Should we expect more and larger titles on the publishing side going forward? Yes. As classified as publishing, I'm really excited for the future. But publishing title is like a wide spectra here. So for example, Battle Chasers and a few others we have, we are investing in the development. We're owning all rights for all future on digital and physical formats and working with the team on that for Sequel and so on. But then we have publishing titles as Microsoft. Microsoft, that's a big company. So doing Halo Wars, that is a very specific thing. We're doing the thing on Halo Wars 2 is we're doing the physical version on the PC edition now in the European markets. It's okay. We like to work with Microsoft. It's a business, and we're providing something they need and the market need. How long is this market? I think there is a market having physical products for years to come because people like to have something in the bookshelves, especially collector's editions as well. But the issue with just doing physical publishing deals is I don't see the same long term income. So you have income in the quarter releasing it. And then there is a challenge to have that income going forward in a sizable amount compared to if you have a product on publishing, you also have digital product. You can have income for 20 years. So this is something we are working on to balance. I'm happy to work with Microsoft, but it has to be a business for both parties. Okay. Should we check if there is any question? No questions? I can continue the questions with the pipeline, and you will announce further down the road when the projects will be announced. So but concerning titles for 2018 2019, will a larger part of the project pipeline be revealed this year? Or is it only some high flying projects? I can't really provide if it's a larger part or a percentage on the pipeline. But I would say there is a good chunk of titles coming out this year. Of course, but this gaming industry, you need to invest. It takes 2, 3 years to make a good product. So I think you should be worried if I didn't have any plans for 2018, which we do, of course. So 2018, we're now planning for 2020, 2021 in discussions? At the IPO, we had, I think it was 29 projects. And now we have released some and excluded them on the pipeline and now we're at 27. So I think one project is added since IPO. How much is in the planning phase? If we stand here in 6 months' time? How many new products do you think that you have added? We have a good deal flow. We have a good process of signing up new products. And also, I love this asset care, portings. I love this where you can reuse some of the assets. It's a bread and butter business for us. Making major investments on AAA products, you need to be careful. And concerning development studios, is it still 2019? Or have you added another external Sorry, what studio? Development studios, external. Yes. I'm not providing a KPI on that today. I'm sorry. Okay. I think that was it for me. Thank you all, and thank you, Lars. Thank you. And let's see you in first quarter report. Yes. Thank you.