Remedy Entertainment Oyj

OMXH:REMEDY

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Liisa Eloranta, executive]

Hello, everyone, and thank you for joining this Remedy Entertainment webcast. My name is Liisa Eloranta, and I'm part of the Investor Relations at Remedy. Today, we will go through Remedy's business reviews for January, March 2024.With me are Tero Virtala, Remedy CEO; and Terhi Kauppi, Remedy CFO. We will have a Q&A session after the presentation.Tero, the floor is yours.

[Tero Virtala, executive]

Thank you. Welcome, everyone, also on my behalf. So, let's get straight to it. The quarter one of '24 highlights in the first quarter of the year our revenue was EUR 10.8 million, which is clearly higher than a year ago. We still made operating loss of EUR 2.1 million, but the direction is right. The loss is much less than it was in the comparison period a year ago.Cash flow from our operations was EUR 3.3 million positive. And of course, a big event in the first quarter was that we acquired back the Control rights from 505 Games. We are now in a position that we can freely decide on the future of both Control and Alan Wake. Other than that, there aren't any major new news to share. It is just a bit over 1 month since we published our full year '23 results last month.Let's have a look at the status of our game and project portfolio. In Alan Wake 2, we are developing currently the DLCs and updates for the game. With Epic Games, we are of course at the same time supporting the sales of both Alan Wake Remastered and Alan Wake 2. Alan Wake 2 hasn't yet started to generate royalties for us, but it continues to sell on a fairly high price point.Codename Condor, part of the Control franchise, moved to full production at the end of the first quarter. This is the final big development stage before the game 1 day will be launched. We just also in Condor recently carried out the wide internal play test of over 100 people, and based on the results of that play test got additional confirmation that the core game loop is engaging and the game does bring a unique Remedy angle to the genre.And of course from a wide play test we get a lot of good feedback that is been taken into account when the development continues in production. Control 2 team has focused on finalizing the proof of concept stage, in which we are proving that the direction with the game world, game mechanics and visual targets, they are the right ones for this game and that they are also doable. We expect production readiness stage to start during the second quarter of '24.We have been showing during the early part of the year Condor and Control 2 to potential financing and publishing partners and overall the reception has been positive. This is also a very good state to be presenting the games. Both of these games are already quite far in development. They play well, they look good. It is easy for everyone to see what are these games, we are making. Max Payne 1 and remake continued in the production readiness stage. It is a big game, development budget being similar to Alan Wake 2. Max Payne remake is expected to move into full production also during the second quarter of '24.Codename Kestrel continued in the concept stage in which the team of 15 people works to refine the game concept. And in relation to these projects, as said, the acquisition of Control's full rights back from 505 Games was a key event in the first quarter.During the recent years, Control has been successfully established. It's gotten very good reception over the years. The game has sold over 4 million units, and via subscription services, we have had much more people that have gotten a chance to play the game. With Control's world gameplay, it does offer significant future expansion and growth opportunities.So our intent is to systematically continue growing Control into a major gaming franchise. This aim, the actions required back in the early part of this year and last year we started to see we're not fully aligned with our partner's interest and abilities. So after negotiations in good terms with our partner 505 Games, February 24, we acquired all publishing, distribution, marketing, and other rights back from them.The maximum purchase price that was agreed is approximately EUR 17 million, which equals the amount that they have paid for the development of codename Condor and Control 2 to that date when the deal was closed. And the deal allows us to then decide now what is the best way forward from this point onwards, both for Remedy and Control, and we see that it opens major growth opportunities in the mid and long-term.Overall, we are very happy with this deal. It's a very good deal for us, and it also supports 505 Games in their situation and new strategy. We are now in a position that we truly can freely decide on the future of both Control and also Alan Wake.What we are then doing in relation to getting back the rights back from Control is that we are currently weighing self-publishing and related business models, financing models, as well as evaluating potential publishing partners for Condor and Control 2.So we are seeing 3 on a high level, 3 different options. We may go with the publishing by a partner. It would provide us major partner financing in which partner would then also lead the commercial actions. Of course, then the partner typically would recoup and the revenues would be shared after their recoupment. This would be a lower risk model for us. It would provide constant revenue during development.And of course, with the right partner, with right marketing and sales skills, it may end up game selling even more. That is then, of course, comes with the fact that we are serving the revenue. So in case of a bigger success, we are also serving a big part of that with our partner.Co-publishing is another food that we are looking into. This was the model that we had also with 505 Games in which the financing would be shared. It would provide a bigger commercial role for us. And both parties would typically then recoup their investments. And after that, revenues would be shared.And then we are also looking very seriously into potential for self-publishing. It would require that we are fully funding the development. We are leading the commercial activities. It does come with higher risks, but also higher upside when less or none of the revenues are shared with the partners. This would then self-publishing also require selected different financing options on how we would be able to fully fund the development and also marketing activities. But there are a number of rules which we are exploring on that front.We are now as a company in an exceptionally good position that we have different options to choose from, and we will carefully consider and evaluate them. In any case, we aim to have a model and deals for Condor and Control 2 that are better for our future than what we had just 6 months ago.Another development that happened after the first quarter, we just announced last week changes to our core management team. First, our Chief Operations Officer, Christopher Schmitz, has resigned and will leave Remedy at the end of May. The COO role has been a collection of different duties at Remedy during the past years. Chris has been helping in building the foundations of our multi-project model, developing our project leadership, and supervising selected support functions.At the same time, we have been growing as a company, and we have been developing well in many fronts. Now when we have more launch games already out there in the market, there are more games that we own and are thriving, and we have multiple games in development. We made management reorganizations already in 2023, and now we have continued in 2024. These include Markus Mäki taking full and focused responsibility of the Chief Product Officer role, and we have a new Chief Technology Officer, Mika Vehkala.Additional changes have also happened and development in their respective teams. And with all these developments, we see that we are now in a position where we can better manage and support our game portfolio and game development personnel overall. Therefore, now when Chris leaving us, the different COO duties are distributed to other team members, and we are not looking for a replacement.Another important development is also that Mikael Kasurinen was appointed as Remedy's Creative Director. He shares the creative director responsibilities with Sami Järvi that many know as Sam Lake. These 2 gentlemen are 2 very experienced creative leaders. They have complementary skills, and they know each other and Remedy very well. Both of them continue in Alan Wake and Control in their respective roles in these franchises, and then share the company-wide creative director responsibilities.With this arrangement, we can ensure good focus on Alan Wake and Control, and also the right type of creative guidance and support that all our game teams can benefit from in a way that is aligned with Remedy's strategy and priorities.And now, lastly on this part, speaking of strategy and priorities, we said 1 month ago in the '23 results info that we are currently in the process of updating our strategy. Just to reiterate, in that planning process, there are certain topics that play a key role in defining our future direction.First of all, we are all the time evaluating on how to ensure sufficient focus and use of synergies so that we can step-by-step develop and commercialize games that become larger successes in the future. In relation to financial targets which is 1 part of any game's planning process, the minimum target is to earn back at least double the money we invest into a game. We also have the unique ability to create and develop new IPs and brands that provide the basis for long-term expanding experiences and growing fan base that can 1 day become wider franchises.We now have established, created the basis for 2 franchises, Control and Alan Wake. A key part of our future strategy will be on growing these 2 franchises into much bigger ones. And as we have done for the past 6 years, we continue to look for opportunities to strengthen our position so that our franchises would reach bigger success. And when that happens, Remedy would also succeed in a bigger way.So this is my part. I'll hand over to Terhi to talk more on financials.

[Terhi Kauppi, executive]

Thank you, Tero, and good afternoon to everyone also on my behalf. So, our quarter 1 this year, our revenues grew. They grew by 56% to EUR 10.8 million. And our development fees were EUR 9 million. And they were significantly higher than in the comparison period. And that is due to the Max Payne 1 & 2 remake development fees received.And our royalty income from Control was higher than in the comparison period. And also, we had now the Alan Wake remastered, which started to generate royalties in autumn '23.And here is the historical breakdown of revenue. And when looking back 12 months, the overall trend in revenue development has been positive. And to say, like Tero also mentioned, Alan Wake 2 hasn't yet filled its regroup and thus doesn't yet generate royalties. But the royalties were clearly higher than in the comparison period now in the level of EUR 1.8 million versus EUR 0.5 million in the comparison period.And then in the profitability, it is clear that it is impacted by higher revenues, especially the higher subcontracting revenues than in the comparison period. And our operating margin then resulted in minus 19.3%.Yes, then some analysis of unnetted amounts of expenses. Our external work performed was on 23% higher level than in comparison period. It was EUR 4.6 million versus EUR 3.8 million. And the IFRS format, the netted amounts corresponding to these are EUR 3.8 million versus EUR 3.4 million.Our personnel expenses developed so that we had a 1.5% increase in the expenses, while the increase in our own employees was of about 5% to 360 people from 342 persons. Also affecting the personnel expenses were costs recognized from option programs based on IFRS 2 valuation. They were on a lower level than in the comparison period. And also, we had a change in the national unemployment insurance contribution rate in Finland, which was lowered to this year '24.Our capitalizations were clearly on 100% higher level than in comparison period. And that is due to higher amount of capitalized expenses and higher capitalization percentage related to codename Condor and Control 2 as the publishing rights were acquired fully to Remedy.And our operating cash flow in the first quarter of '24 was EUR 3.3 million. And in the comparison period, it was EUR 3.9 million negative. And reason behind this change is from 2 sources. We had due to higher revenue, also higher amount of incoming payments. But there was also timing related reason as the comparison period quarter 1 '23 at higher amount of outgoing payments overall. And the last quarter of '22 ended on a weekend, leading the month end payments to pay to be on the first day of the quarter, meaning the quarter 1 '23.Our total cash level was EUR 28 million, including the EUR 10 million investments. And our cash position was decreasing by EUR 3 million in the first quarter. We made a payment of EUR 3.8 million to 505 Games regarding the acquisition of publishing rights of Control franchise. This was the first of 3 payments, the rest of which will occur in autumn '24 and spring '25. And without this extraordinary investment payment, our cash flow would have been slightly positive during the first quarter.And clearly, our current profitability level is still impacted by increased own investments to product development. And again, also like Tero mentioned, when thinking about the future business models, balancing the risk and reward is the key. And currently for Condor and Control 2, the model is open after we have bought the publishing rights from 505.So that was shortly the financials. Thank you for listening and back to Tero.

[Tero Virtala, executive]

Thank you, Terhi. So outlook, it's the same as the one that we gave approximately 1 month ago. We are expecting our revenue to increase from the previous year and operating profit to improve. But we have also said that, the revenue growth rate and EBIT improvement are naturally dependent on the choice between self-publishing. And if we choose a new publishing partner for codename Condor and Control 2. And once these are clear, we will specify the outlook.

[Liisa Eloranta, executive]

That was all from our part. Now, it's time for the Q&A. Speakers will now take questions from the investors, analysts and media representatives. Please type in your questions. I think we can start with a few Alan Wake 2 related ones. So have the Alan Wake 2 sales developed according to your plans in Q1?

[Tero Virtala, executive]

Alan Wake 2 sales have been according to our own estimates. So, yes, no kind of like radical changes in either of the directions. We are now actively with our publishing partner Epic Games all the time promoting, doing supportive activities so that the game also continues to sell well. It's also something that needs to be taken into account that in the gaming market, typically the different parts of the year provide different opportunities.Typically, the early part of the year, January, February, March is a bit more silent as the end of the year has been so active. And the holiday sales period typically ends in the early part of January, latest mid-January. Then the spring sales typically start becoming more active in April, May, early June. Then comes the summer sales period and then starting from the fall, ending up into the holiday period, it's even more active. And we have our plans how we are progressing with Alan Wake 2 sales. And we are following that plan with our partner. And so far we have been able to retain the quite high price point of Alan Wake 2, meaning that we haven't had to go into any deeper discounts yet. And that then also implies to us that, there is still good potential left with Alan Wake 2, and also a lot of audience to be reached.

[Liisa Eloranta, executive]

So, can you comment on how many copies have been sold to-date?

[Tero Virtala, executive]

We last time updated the sales amounts in early February with Epic Games. So that is the most recent information, 1.3 million units by the early February that has been given out.

[Liisa Eloranta, executive]

Then to Condor Control. So, you have mentioned that there is funding available to self-publish Condor and or Control 2. You also clearly have strong faith in Control franchise's future. In that sense, self-publishing seems like the only logical option. So, why would you choose to take a new publishing partner?

[Tero Virtala, executive]

Well, first of all, we definitely have strong confidence in Control. Self-publishing is one of the 3 options that we have on the table. At the same time, also the investment needs that are needed for these 2 games, both for developing them and then the commercial parts, marketing those games. They are quite significant. We see opportunities to get that funding. But of course, in the end, it will then depend on the terms, if it makes sense or not. We are considering 2 things.First of all, the business cases for both of these games, but also then the larger picture of what it means for the Remedy portfolio and for these franchises in the long term. And typically, it's not the black and white choice between just going with a publishing partner or going with fully funded self-publishing. There are typically a lot of shades of grey in what areas different partners could help if we lean more on one of these directions. And we need to also bear in mind that, we have 2 games that we are considering.So it's a good thing that there are a lot of options available. Self-publishing is definitely one strong alternative for both of these games. But we are now taking our time and patiently finding out what are exactly these options, what do they offer, what would they require from us and what the consequences would be. So, we are working on that and that process is all the time progressing.

[Liisa Eloranta, executive]

So what is your schedule for concluding upon the model for further development of this game?

[Tero Virtala, executive]

We are concluding it in a time schedule that is best for us, but haven't yet speculated publicly in more detail what the schedule is going to be.

[Liisa Eloranta, executive]

What are your thoughts on Tencent increasing its stake in Remedy almost to 15%?

[Tero Virtala, executive]

Well, we announced that transaction as we need to do end of last week. And it's good to highlight that that was a capital market transaction in which Remedy played no role. Tencent has been an owner at Remedy for a longer time. And Tencent naturally being in many senses the biggest gaming company in the world, they have ownerships in a lot of companies. And after they had done these transactions, they reached out to us just to say what was the driver.And it was mentioned that, this was a financial investment for them. They said that, they have strong belief in our future potential and saw this as a good investment. And that's where we are at the moment. We are continuing according to our strategy. That's what's best for the company, what's best for any shareholder. And we don't see this at the moment changing anything.

[Liisa Eloranta, executive]

So continuing with the same theme, in the future, how possible is a purchase offer for the whole share capital if they or someone else keeps acquiring large quantities of shares?

[Tero Virtala, executive]

Well, that's a lot of speculation that we won't do. Of course, any publicly listed company, shares are being traded every day on the public markets. But not going to speculate more on that.

[Liisa Eloranta, executive]

Getting back to games, could you brief us what is the headcount of your different game projects at the moment?

[Tero Virtala, executive]

We haven't given the exact headcounts out now, but now when Alan Wake 2 launched, it had at its peak 130 internal developers and then quite a lot of external developers.Now, of course, the majority of those developers are with our other projects. Alan Wake 2 team continues developing the DLCs and some updates, and that team size is quite clearly below 50 people. Our biggest project now headcount-wise is Max Payne Remake. That project has now started to ramp-up. It's not yet anywhere close to where Alan Wake 2 was at its peak, but it's already our biggest one based on headcount. The next one at the moment, understandably, is Control 2.Codename Condor is approximately on the size of the Alan Wake 2 team at the moment. It's a new type of multiplayer game that's progressing well. A bit more service-focused, so it's also a different focus in game development than in some of these single-player AAA games. And then Kestrel is a small team. It's 15 people now doing the concepts and work.

[Liisa Eloranta, executive]

Are you still expecting to release the first Alan Wake 2 DLC during spring 2024 and the second in autumn 2024?

[Tero Virtala, executive]

We haven't announced any exact schedules for the launch, and that will at some point then happen together with our publishing partner Epic Games.

[Liisa Eloranta, executive]

Yes. Will Alan Wake 2 be available in other PC platforms at some point, for example Steam?

[Tero Virtala, executive]

That's also a speculation that we cannot at the moment do. At the moment Alan Wake 2 is available in Epic Games Store. And we hope that PC gamers will find it there.

[Liisa Eloranta, executive]

Yes. And then one for Terhi. Did you receive any development fees for Condor, Control 2 or Alan Wake 2 still in Q1?

[Terhi Kauppi, executive]

Yes, so basically we are not disclosing on a quarterly basis our distribution of revenue per project. But when thinking about the fact that Alan Wake 2 was completed in October, so the development was done. And the fact that, we are actually paying back to 545 Games the development fees we received for Condor and Control 2. I'm sure you can come to the right conclusion about that.

[Liisa Eloranta, executive]

There's at least one more. You have mentioned that Max Payne Remake's development budget is in the same ballpark as Alan Wake 2's. Is your development margin coming on top of that, or is this included in the budget?

[Terhi Kauppi, executive]

Well, we are not disclosing any details of our publishing agreements and commercial terms on those. So, I cannot comment on that, unfortunately.

[Liisa Eloranta, executive]

All right. I think that's it for the questions. Thank you for the call everyone. We will be back with the next earnings webcast, which is our half-year financial report, January-June '24. And that will come out on August 9. That's all for now. Have a great week, everyone.