Embracer Group AB

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Earnings Call Transcript 2019-Q4

[Oscar Erixon, Financial Analyst]

Hello. Welcome to this Q5 presentation by THQ Nordic. We have Lars Wingefors here today, CEO and Founder of the company. And he is here to present record strong sales and earnings, very strong performance from all the game segments, have to say, Deep Silver perhaps as the star performer this quarter. Also another acquisition with very interesting IPs, so it will be interesting to hear more about that as well.Without further ado, I'll leave it over to you, Lars. Go ahead.

[Lars Wingefors, Founder, CEO & Director]

Thank you, and good morning, everyone. I'm happy to announce another stable quarter.The revenues grow 158% to a bit more than SEK 1.6 billion. We had a stable growth in operational EBIT as well with about 200% to SEK 396 million. Also happy about the stable cash flow from operating activities being SEK 777 million in the quarter. And the quarter results, especially the profitability, was driven of a good performance of Metro Exodus and Satisfactory. Profit-wise, the digital sales performance was notable on Metro Exodus and especially on Satisfactory.Also during the quarter we, as previous communicated, we raised SEK 2.1 billion in new shares. We acquired Warhorse Studios and 18POINT2 in Australia. But also in the report this morning, I noted 2 agreements, one new development agreement with the brilliant developers, 4A Games for unannounced AAA project, along with a wording in the report about that we have signed multiple deals with digital distribution platforms for subscription, streaming and download services since the beginning of the year, and they will have a notable impact for the years to come.Looking at the P&L, the EBITDA grow 174% to SEK 619 million in the quarter. Again, the operational EBIT grew 217% to SEK 396 million, and operational EBIT margin being 24%.On a trailing 12-month basis, the business grew 384% to SEK 5.1 billion and the EBITDA to more than SEK 1.3 billion and the operational EBIT to SEK 777 million, (sic) [ SEK 755 million ], the operational EBIT margin being 15% for the trailing 12-month period.Diving into the games business areas, we had a star performer in the quarter being Deep Silver with total revenues in the quarter of SEK 794 million. And the performer again was especially in the absolute majority being Metro Exodus that had a great reception in the market from both critics, but especially from consumers.Looking at Coffee Stain, our great team in Skövde that we acquired in November, had a satisfactory release of their early access product developed in Skövde. In total, they generated revenues of SEK 98 million and largely driven by the digital sales performance of Satisfactory on Epic Games Store. Also at the Deep Silver again, we in the end of the quarter had a notable -- smaller, but notable release of Outward, a fantastic open world survival RPG developed by a very small team in Canada that came as, I would say, exceeding our more modest expectations. And it's continuing to perform on digital platforms.THQ Nordic in Vienna, our founding business, had a stable quarter with revenues of SEK 143 million. Not really driven by any bigger title, they had 11 releases in the quarter. In the comparable period last year, we released, I would say, a notable release of MX versus ATV, so the comparable period was a bit more tricky this year.Looking at the breakdowns of the publishing, the overall publishing segment, the digital sales was 61% in the quarter. Looking at the new release, again driven by Metro Exodus and Satisfactory, was 75% of total revenues. And owned titles represented 84% of the revenues in the quarter.Looking at the partner publishing business area, we had a number of notable releases in the quarter. However, the first quarter, calendar quarter in the year doesn't have the holiday season business, so it's really driven by any notable release you would have. And we have 4 titles I would like to point out, being Kingdom Hearts from Square Enix, Resident Evil 2 from Capcom in certain territories, Dirt Rally 2 from our friends Codemasters in the U.K. and Devil May Cry 5 from Capcom. Total revenues in the quarter was SEK 596 million.Now looking at the depreciation and amortizations in the fifth quarter, again, I would like to point out the operational EBIT and how it all works. So starting with the EBITDA in the quarter being SEK 619 million, we're having the amortization of our games development being SEK 192 million, and then other intangible assets being mainly films, and then a bit of other. And then it becomes the operational EBIT. And then under operational EBIT and because we are reporting under K3, the Swedish accounting standard, we amortize all acquisition-related intellectual rights on a 5-year straight period. So in the quarter, we had IP rights amortizations of SEK 166 million and goodwill of SEK 43 million and surplus value of SEK 15 million. And then the reported EBIT becomes SEK 172 million. If we were to report under other standards, we would not have this in our books.Also in the quarter, we finalized the PPA for the Koch Media acquisition. And we were allocating SEK 479 million to IPs that are being amortized from the acquisition date on a 5-year straight period. And that decision was made in the quarter, and that then became additional amortization of SEK 108 million, whereof SEK 84 million relates to previous quarters. We also had preliminary PPAs of the 4 recent acquisitions of Coffee Stain, Bugbear, Warhorse and 18POINT2. And we currently have SEK 1.4 billion in acquisition-related that will be amortized over 5 years relating to those 4 acquisitions.So investments. Total investment was SEK 326 million, the absolute majority being obviously our games investments. Internal capitalized development, and we capitalize all development until release, for our studios was SEK 116 million in the quarter. And looking at the external games development was SEK 189 million in the quarter. The completed games development was SEK 220 million in the quarter for games completed.And looking at this graph here, investments in games development by quarter, you can see we are having a growing investment every quarter into games development. And this will be a key driver for organic growth in both revenues and profitability going forward.Cash flow. We had a stable cash flow, SEK 777 million in the quarter. In the comparable period last year, we had SEK 700 million, but that number was driven, if you remember, by a big part being forfeiting that we had in our company at Koch Media. This quarter, we had a very small bit of forfeiting but -- so that is the difference.Looking at the balance sheet, total assets, SEK 8.6 billion, so I think it's relevant just to comment a bit on that, especially on intangible assets being SEK 3.7 billion. I would like to break that down to -- in the balance sheet. As end of the quarter, we had SEK 394 million of finished completed games. Those games that are being amortized over the 24-month period: 43% the first 3 months, 43% 9 months and 43% 12 months. And then we had ongoing game development projects in the balance sheet of SEK 1.1 billion. Other intangible assets, mainly films, were SEK 150 million. IP rights now being SEK 1 billion, about SEK 1 billion, that is including the PPA from Koch Media. And other surplus values relating to the business areas, films and partner publishing, being SEK 168 million; and then finally goodwill being SEK 830 million.And here, you can also see the current receivables in the quarter was SEK 1.3 billion compared to SEK 600 million in the comparable period last year. Cash end of the quarter was close to SEK 3 billion. And including the credit facilities, we had SEK 4.5 billion available.So M&A. I was happy to announce another acquisition 30 minutes later, and I will talk more about this very soon. But don't expect acquisitions every quarter. It just happens, turn out to be that way. But in general I would say we are having a good position in M&A. This is something we're working every day on at the mother company level. I spend a lot of time on M&A. We now raised capital, but we are patiently executing this. For me, it's very important to find the right companies and teams to join the group. And it's important we find what we say reasonable terms for both parties, that is delivering value for both parties, along with understanding the sellers and their culture and values. We have a very long list of companies within development, within publishing, within partner publishing as well as IPs. So there is no shortage of potential targets.But this is not something I would like to rush. So patiently, we will execute this. And I think our strategy of giving autonomy to the local management and empowering them to make decisions is a winning formula when competing with companies and groups that are substantially bigger than we are.Mentioning M&A, I was very proud and happy to welcome Warhorse to the group. I've been down to Prague. And I would say even more after the acquisition, I'm really happy to have them on board. They are really a fantastic development studio. So they have the winning formula to create some amazing games. And they're now currently working with the final DLC for the Kingdom Come: Deliverance, and then they will start into full production of the next coming big project.Also happy to have 18POINT2 from Sydney on board. And the team, management team are valued in the industry and the integration has been very smooth.In the quarter, we were raising SEK 2.1 billion. And I was proud, happy to see participation from the majority of our existing institutions, along with a handful of new long-term owners such as Första AP-fonden, Andra AP-fonden and ODIN Fonder. All of you are very important for our coming growth of the company, and I will take care of your capital well. That's my ambition.So looking at the pipeline, here you can see a picture of Wreckfest. And Wreckfest is coming soon on console. It's a fantastic product, but it's not a very big team. And again, I would like to state it's very, very important whatever content we bring out that we polish and make sure we're delivering an experience to the consumer that could be sold for many years and well received on the market.Looking to the closest periods, we have a number of releases. We have SpellForce coming up very soon from our teams in Munich, Grimlore, our internal team. SpellForce is the title they've been working on since the release. And I would say it's performing, and they have some great ambitious plans for the future.Kingdom Come: Deliverance would have a royal addition along with the DLC very soon.Monster Jam from our dear friends. We have licensed Monster Jam from Feld Entertainment. And our internal studio, Rainbow Studios in Phoenix, are delivering a new game end of the current quarter.Wreckfest, I mentioned. Shenmue III from YS Net in Tokyo, we are working hard on. It will be published both digitally and physically from Deep Silver. Biomutant from our internal dear friends here in Stockholm, Experiment 101. I'm as always quite -- I would like to use excited for these products, but I will also make sure the game will be released when it's ready.Dead Island 2, still being worked on, stay tuned. Wasteland 3 from our friends at inXile that now are part of Microsoft. We will publish their title when that title is announced to be published. Desperados III coming out from Mimimi Production, not our but the external team in Munich.Iron Harvest is a new signing in the quarter from the old friends of KING Art, their, I would say, good-looking RTS upcoming title is a new IP.And then we have 4 top secret projects being mentioned here in the presentation, one being the already mentioned new project from Warhorse that will come out in the future. We have a project of the guys and women at Volition. We have another top secret project that I'm very excited about at our friends at Coffee Stain North here in Stockholm. And again, the signed projects from 4A Games to come in the future. In total, we have 80 games under development, whereof 32 are announced and 48 is unannounced.In the quarter -- first quarter of the fiscal year, the current quarter, April to June, we also had a few notable releases from our business partners at partner publishing I would like to mention: Team Sonic Racing from Sega. We have F1 2019 now coming end of June this year from Codemasters. We have Wolfenstein: Youngblood from Bethesda in certain territories. And MotoGP 19 also in June from Milestone in certain territories, along with a number of other releases.That is the Q5 presentation. If we don't mind, Oscar, I could go on with the Piranha Bytes presentation or would you like to follow up exactly on Q5, you're welcome to.

[Oscar Erixon, Financial Analyst]

I will leave it up to you, later.

[Lars Wingefors, Founder, CEO & Director]

I think we can continue with the Piranha Bytes presentation, and then we can have a full Q&A for both presentations.So I'm glad to announce and welcome Piranha Bytes to the family. At 6:30 this morning, we announced the acquisition of all assets, IPs, and the start-up of a new company with all the employees of Piranha Bytes.Piranha Bytes is an iconic, legendary RPG studio from Essen in Germany. They have made one of the most iconic RPGs ever, Gothic. And Gothic, they followed up with Risen, and Risen was a game series published by Deep Silver. And after Risen and Deep Silver, our guys at THQ Nordic in Vienna signed their new franchise, ELEX. And ELEX, for the shareholders that's been with me from the beginning, was one of our first major releases that was delivering great Q4 results 2017 -- not great, stable.So looking at the transaction, it's a true veteran studio that has very experienced people making these games. And the assets includes as stated, Gothic. And Gothic is very iconic if you are into this market and especially RPGs and if you're into the markets of Europe, Gothic is one of the absolute first benchmark products in the industry.We are communicating here that the portfolio has generated approximately EUR 18 million in net revenues the past 3 years. And we are not disclosing the exact purchase price, but it's estimated to be about similar to 3 years of royalty payments for the upcoming releases of Piranha Bytes.As all studios that we are acquiring, we are buying a great team, and we are giving them a lot of autonomy and creative freedom to operate. We are supporting them in the ways they like. And obviously we are keen that their next projects will be delivering even more exciting product. Now having all IPs under one roof, I think we have great opportunities to work with old assets and IPs and the team and the group to make Piranha Bytes and these IPs something that will delivering great experiences and numbers for years to come. Looking at the products, if you are into single-player RPGs, I could really recommend it. It could be a bit harsh or tough in the first hours, but if you're into it, you're really getting sucked into the experience.The team will be -- still be led by the current CEO, Michael Rüve that has been with the company for 26 years, along with Björn Pankratz and his team that has been one of the founders and is one of the absolute key persons to manage this business.So please stay tuned for the future. Thank you.

[Oscar Erixon, Financial Analyst]

All right. Time for some Q&A. And I'll start with a few questions and then leave it over to the web for some questions as well.So first of all as we've already concluded, Metro Exodus was the big driver in this quarter. Can you speak a little bit about how happy you are with the performance on different platforms, physical and digital, shed some light on the performance?

[Lars Wingefors, Founder, CEO & Director]

I think I would point out, we are especially happy with the digital performance of Metro Exodus. Obviously, this being a single player, a huge game, it has a substantial physical revenue as well. And it's been okay business, but I think the digital performance in this case was a bit overachieving the overall expectations within Metro Exodus.Platforms, well, in general, I would say Metro Exodus is a console game, and the majority, absolute majority of the revenues being console. And we've been working with Microsoft in a number of years. So it has been a strong performer on both Xbox and PlayStation. And then you can see a growing fan base on PC.As you noted, we made decision to give exclusivity to Epic Games Store, however, delivering the already preordered units on Steam.

[Oscar Erixon, Financial Analyst]

Yes. There's a lot of stuff happening in the platform space. I mean first of all, what do you expect to have the largest impact on the industry in terms of subscription, streaming and these more download-oriented platforms such as Epic in the next 2 years?

[Lars Wingefors, Founder, CEO & Director]

It's not really the way I see it for me to comment on. We are partnering with the industry in many ways. We are partnering with them within partner publishing, but they also partner to deliver our content on various digital platforms. And our strategy is to deliver our content on whatever platform that arises, that reaches the consumers, and that we can have reasonable terms.I don't think anyone could foresee how the future will look. There is a great trust and belief in the streaming technology. And we could now see Google has announced their entrance. There is other players as well. There is substantially bigger companies entering the market. I don't want to, like -- to be in the middle of a dance floor standing, watching and delivering the content here. We do not have a strategy to reach these consumers on our own, with our own platforms.

[Oscar Erixon, Financial Analyst]

Okay. Very good. And I mean some of these -- just one last question on platforms. Some of these content platforms are, have been and continue to be quite aggressive. In general, I mean, as a developer and publisher, when do companies sort of recognize revenue in general? Is it when games are delivered to platforms or is it for a longer period of time or how does that work in general?

[Lars Wingefors, Founder, CEO & Director]

Yes, I think, first of all, I would like to point out is that we have signed multiple deals that has a notable value for us. That will lower our financial risk going forward for a number of projects. And it's not to only one party here. We have signed deals with multiple companies since the beginning of the year. And the agreements are, first of all, confidential. Secondly, for business reason, I would like to keep them confidential, but also the kind of agreement varies. You can make guarantees. You can make some commitments. You can make marketing commitments. You can make contribution to development. So there is not a single kind of agreement in this. And obviously we are having accounting standards. And we're working hard with our auditors to, if any revenue is to be booked, to be booked according to what's relevant. But I would say there is not extraordinary income in the quarter.

[Oscar Erixon, Financial Analyst]

Okay. That's very helpful. And Metro Exodus, very successful, but obviously being a single-player game which perhaps is a bit front-end loaded. And you mentioned Satisfactory has continued strong momentum. Can you say something about Metro Exodus?

[Lars Wingefors, Founder, CEO & Director]

I don't think I used the word continued strong momentum. I think that is your word, Oscar, but...

[Oscar Erixon, Financial Analyst]

Possible.

[Lars Wingefors, Founder, CEO & Director]

I was happy to see the successful release of the early access Satisfactory in March. And obviously as all releases, you have a good number of players coming in the first hours and days, and then it's kind of declining. Satisfactory in theory is a product that could live for many years and to be sold to many, many more consumers. But I think we should be reasonable here and don't expect too much too soon. Let's wait and see how this progress over the coming quarters.

[Oscar Erixon, Financial Analyst]

And switching over to Satisfactory, which I suppose was the other very positive thing in this report.

[Lars Wingefors, Founder, CEO & Director]

Yes, that was Satisfactory I was just talking about, yes.

[Oscar Erixon, Financial Analyst]

Yes. What makes this game unique? And the game was released quite late in Q5. I suppose it's a word of mouth sort of effect that could have a positive effect for the rest of the year as well.

[Lars Wingefors, Founder, CEO & Director]

Yes. I think it's a game you're coming back to and it's a game you can play for, in theory, endless number of hours. In comparison to a game like Darksiders and Metro Exodus, that's a big difference. That opens up other kind of opportunities in terms of communication, how the word of mouth is spread between players and friends that are engaging with the game. You can see a great engagement from Twitch and YouTube audience on this game in particular.

[Oscar Erixon, Financial Analyst]

And Satisfactory, the studio behind Satisfactory, Coffee Stain, they released a game last year as well in early access, and that is not yet out in the full version. What can we expect? When is it finalized? And also what type of business model will it have, with expansions or something similar?

[Lars Wingefors, Founder, CEO & Director]

I think Deep Rock Galactic is a fantastic product and that it has a great team in Copenhagen, Ghost Ship Games. And together with Coffee Stain, they're making decisions, what content, pricing. And whenever the game is ready, they will announce and release the product. You can see it's still performing reasonably well on bigger performance, especially on Steam. So I think the team are key into delivering a true great product. And when they feel they have that, they will release the full version, but I don't want to disclose that here.

[Oscar Erixon, Financial Analyst]

Okay. And both these titles that we discussed, Satisfactory and Metro Exodus, were released on Epic Games exclusively. What can you say about their start? I mean how happy are they with the start they've had?

[Lars Wingefors, Founder, CEO & Director]

Well, I think Epic is a great business partner. I don't want to comment about their platform. I'm just happy to see they are investing and they are delivering a product that, I would say, a notable number of people have bought our games on. So that is really what I'd like to say about that there.

[Oscar Erixon, Financial Analyst]

Okay. Switching over to partner publishing quickly, a strong quarter in a seasonally weak quarter, I suppose. Now I think the next generation of consoles is obviously coming sooner or later is everyone's best guess, I think. What do you hear about the discussions? And what can we expect? When will it be released? And what impact will it have on your different segments?

[Lars Wingefors, Founder, CEO & Director]

I think it's a general expectation of a new generation of consoles in the future. Obviously, we are in a number of -- well, we are in discussion with all the industry, and we can't disclose any details before they announce anything. But I will say in general when you have the shift of generations, you need to be careful and mindful about how you are releasing content. If there is a new generation, are you kind of releasing that big new content on that new generation or are you kind of in the end of it on the current generation? And this is decisions, and we have 80 products under development. So along with new technologies such as streaming, there's a lot of decisions to be made on when and how to release things. In general I'm excited about the industry. I think it's vibrant and dynamic. And I think we are again very well positioned in the industry to capitalize on this.

[Oscar Erixon, Financial Analyst]

And I'm going to try to ask this, although I might not get an answer. But Stadia, you mentioned briefly. Very exciting, I think, and seems like the future of gaming, at least to me. Can we expect more news about this during E3, yes, in particular E3, I guess?

[Lars Wingefors, Founder, CEO & Director]

I don't want to comment on Stadia alone, but I think we have a presence on E3. THQ Nordic in Vienna has a presence. Deep Silver and Coffee Stain does not have that presence on E3. So it's THQ Nordic as a publisher has the presence. We will announce our lineup and news along the way, and I let my companies and great teams doing that when they are ready.

[Oscar Erixon, Financial Analyst]

Sure. And M&A, Piranha Bytes, interesting acquisition, 3 strong IPs. What is the scale of this acquisition? I mean you mentioned that you had revenues through Piranha Bytes of, I think, SEK 180 million. Have they scaled up the operations since then? And is this to be considered smaller acquisition?

[Lars Wingefors, Founder, CEO & Director]

I think this sort of business is driven by the release of their development. And they made a game in 2017 that we published and we had the revenues and then they had the royalty. They have a new product unannounced under development and we'll release it. And we are working hard to expand their audience, and potentially it could be other things in the future as well. But the company alone, it doesn't really have that revenue, that is really channeled through THQ Nordic.In the overall group, this transaction alone is not like a key driver financially because. If it were, I would having this as an insider transaction and disclosing the numbers better. But for me, it's very valuable, Piranha Bytes being part of the foundation of the whole group. And it's a great team, and I like them as people so I'm happy to have them on board.

[Oscar Erixon, Financial Analyst]

Yes. And you mentioned also in the report, I think, an interesting M&A pipeline or an extensive one at least. And you have a net cash position of around SEK 2 billion still at the end of Q5 before this acquisition.

[Lars Wingefors, Founder, CEO & Director]

SEK 3 billion.

[Oscar Erixon, Financial Analyst]

Enough cash, acquisition. How are, I mean, price discussions and valuation discussions going? Is it quite stable between quarters and years or is it increasing?

[Lars Wingefors, Founder, CEO & Director]

Yes. My preferred way of getting more companies within the group is that I get to know people over a number of years and preferably doing business with them. And get to know them on trade shows. And that's the way I prefer and then directly engage with the management/owner preferably without advisers. Then you can do direct communication and then get all the advisers in, yes? So that is our preferred route, an efficient route to get more companies to the group.And I would say, Koch Media added a lot of business relations that potentially could become partner, part of the group. So as long as we're growing the group, the more the relationships we get that we could potentially add to the family. Coffee Stain had added also a lot of new, younger companies into the group. So yes, there is a growing pipeline. I'm not rushing. I'm keen, reasonable terms, understanding and respect each other. That is the key.

[Oscar Erixon, Financial Analyst]

Perfect. I have one more question, and then I'll leave it over to the floor for a bit. I have a question here from the web from [ Ola Lindgren ]. He asks, why do you use K3 and operational EBIT instead of a method that is directly comparable to peers?

[Lars Wingefors, Founder, CEO & Director]

Well, the discussion about doing the main listing in IFRS, I think that is really the discussion. We listed in November 2016, and we have been spending time actually to do business and acquiring businesses and trying to be very transparent, disclosing KPIs, explaining how we are doing our business. And we have a number of time discussed if we are to implement IFRS and do the main listing. And the conclusion has been, no, it's not a driver of shareholder value for me and my management team to spend 6 to 12 months on to do a main listing with IFRS.When analyzing my peers, I would say I respect my peers fully, but I think each and every company has their own way of recognizing revenues and doing amortization. I think whatever method you're using, you need to understand the business. Building a group as this with so much of acquisitions requires a lot of controlling and processes in place. And we are working hard to get even better in compliance. But to make this as a listed company, every quarter at the current -- it's a lot of -- requires a lot of efforts. And I think I don't want to rush into this. I just want to improve on the processes we're having. And I don't want to make a promise if we are to make IFRS or a main listing one day. I think that is, at the moment, not something on the table. I'm focusing on the processes and compliance and the controlling in the business along with further growth in the businesses and M&A.

[Oscar Erixon, Financial Analyst]

Fair enough, seems smart. With that, I think we'll leave it over to the telephone line and also to the web, see if we have any questions there.

[Operator]

[Operator Instructions] We have one question on the phone so far. That's from the line of Lars-Ola Hellstrom of Pareto Securities.

[Lars-Ola Hellstrom]

Lars, let's start with Metro and the Epic performance. Would you say that the sales on the Epic Games Store has performed in line or better than what you expected in the beginning of the year?

[Lars Wingefors, Founder, CEO & Director]

I think Epic along with other digital platforms has in general performed a bit better than we expected in the beginning of the year.

[Lars-Ola Hellstrom]

And do you see a continued strong take-up at Epic for the game?

[Lars Wingefors, Founder, CEO & Director]

Well, in a way, yes. However, you need to remember, this is a single-player game. You have a substantial part of the revenues coming in early. And then the revenues are driven by promotions.

[Lars-Ola Hellstrom]

And what do you think about additional sale spikes for the game once you release the DLCs? It will be 2 major DLCs as far as I have got it. Will there be a potential boost of sales then for the original copy as well?

[Lars Wingefors, Founder, CEO & Director]

Yes. We do have an expectation on the DLCs. And normally you release DLCs, you have a pickup. But you're also delivering new reasons for the consumers to come back to the product and share it with their friends, the experience. But along the line, you can also make new bundles, new gold packs in the future when releasing more content. So that is also a driver looking forward.

[Lars-Ola Hellstrom]

And another Epic Games Store product, Satisfactory, had really strong results. So if there is no one-off fee, the strong results from Coffee Stain is mainly due to sold copies of the Satisfactory game at Epic Games Store?

[Lars Wingefors, Founder, CEO & Director]

Yes. That, I would say, is the right way to put it, yes.

[Lars-Ola Hellstrom]

Yes. And it was late -- published late in the quarter as well.On new signed products, you have signed a new product with 4A Games. And you have signed a game for Iron Harvest with KING Art. Will you be investing in both these projects?

[Lars Wingefors, Founder, CEO & Director]

Investing, yes. Otherwise, we shouldn't count on it.

[Lars-Ola Hellstrom]

Yes.

[Lars Wingefors, Founder, CEO & Director]

So all 80 products are games we're investing into on the balance sheet. But it's a fair point. We do release products that we are not investing into, and they are not counted in this 80.

[Lars-Ola Hellstrom]

So possibly a Metro 4. Okay. And then on partner publishing, Q2 will be lower than last year, comparable calendar Q2, but how about the pipeline? How is the pipeline building up for H2 2019?

[Lars Wingefors, Founder, CEO & Director]

Well, for the current quarter seasonally is a weaker quarter, and we don't have the same number of releases, either in our own publishing or partner publishing segment. So please don't expect too much out of the quarter. We have a number of things coming out. We do have a business, but please be reasonable.

[Lars-Ola Hellstrom]

Yes. And the pipeline for Q3 and Q4, how is that building up?

[Lars Wingefors, Founder, CEO & Director]

Well, it is building up. I think notable, what I could see, we would have reasonable quarters, but not as strong potentially in the release lists as previous years in our fiscal year Q2 and 3, but Q4 at the moment looks very strong release list. But release lists are changing more or less on a daily basis, obviously perhaps not the biggest products, but there is a lot of changes. So preferably we are communicating the upcoming quarter closer to the quarter. And we're also signing new products along the year. So it's a bit hard to have full insight exactly on each quarter.

[Lars-Ola Hellstrom]

And 2 more game-specific question for me before I hand it over. First of all, preorders on Monster Jam, is it tracking according to expectations or what do you see?

[Lars Wingefors, Founder, CEO & Director]

Well, I think -- well, I do have some expectations personally on this game and the team to deliver an experience from the Monster Jam fans they would be pleased with, to start with. And there is a great number of fans for Monster Jam, especially in North America, but also in Europe. That's my expectations.In terms of number of units, I don't think this is a title you are preordering that much. I think this is a title you are buying when it's available and especially on -- partly in American physical channels. But it's a title that could sell for a good number of periods and years to come. So yes, that's my expectations.

[Lars-Ola Hellstrom]

And finally, Biomutant, it seems like a perfect fit for Asia. Have you been trying to promote the game in Asia? And have you seen increased interest for the game worldwide?

[Lars Wingefors, Founder, CEO & Director]

I would say in general overall, Asia is a great opportunity for us that we haven't engaged in. We don't have an office down there. To be honest, we haven't signed big deals with big companies in China or Korea. We are engaging a bit in Japan, but I think that is a stable opportunity for us going forward. But we don't have the manpower to do everything at once. So I think we are right now just focusing on delivering a great product to the audiences we have communicated really in the West. Let's see what happens, if anything happens in Asia.

[Operator]

[Operator Instructions]

[Lars Wingefors, Founder, CEO & Director]

Okay. Well, yes, do we have any more questions?

[Operator]

I was just going to say, there's no further questions on the phone at this time.

[Lars Wingefors, Founder, CEO & Director]

Great. Thank you. I think we have one question from the floor here. Go ahead.

[Kenneth Charles Rumph, Equity Analyst]

Ken Rumph from Jefferies. Lars, firstly, that slide of the major games and the top secret games, are we meant to take it that, that's a guide to the most important games as you see them at the moment, and that it's in this fiscal year?

[Lars Wingefors, Founder, CEO & Director]

No.

[Kenneth Charles Rumph, Equity Analyst]

Right. So it could be extending...

[Lars Wingefors, Founder, CEO & Director]

I would say the 4 bottom ones are notable, my preferred word.

[Kenneth Charles Rumph, Equity Analyst]

So worth mentioning, even though...

[Lars Wingefors, Founder, CEO & Director]

Definitely worth mentioning, but we do have an extensive other line of other notable releases that I, for some reason, couldn't fit into the slide here. They are not all coming out this year. There is no links to the financial year of that top secret project.

[Kenneth Charles Rumph, Equity Analyst]

Yes. Okay. And on Piranha, a couple of questions, appreciating that it's modest in size. Firstly, having had a look at what people are saying, it's hard to separate kind of fact from speculation. It seems that ELEX 2 is confirmed, but a date is not. But there's also speculation about a Gothic sequel and so on. Can you separate kind of what's released from what's speculated?

[Lars Wingefors, Founder, CEO & Director]

Well, there is no official release statement, communication about the ELEX 2. I think that is not the information I have on my desk. But they do work on a project that will be announced.Gothic is an absolute iconic IP. I see this super long term. So Gothic has pros and cons and opportunities, but I think there is a huge expectation from the fan base. And I think we need to be cautious and careful what to do here and when and how. So if anything are being done, that will be communicated from Piranha Bytes and THQ Nordic in Vienna.

[Kenneth Charles Rumph, Equity Analyst]

And in using it as an example of why businesses choose to join the family as you describe it, sell their businesses, I think there's a reference in the statement that kind of implies that some of the people who have sold the business are staying and perhaps some aren't. So this is a chance for some backers to kind of exit financially, but for the key people staying there or why are they choosing to sell the business?

[Lars Wingefors, Founder, CEO & Director]

I think the ones that are working there and being owners are staying on board.

[Benjamin May, Analyst]

Benjamin May, Berenberg Bank. Just a couple of questions from me, Lars. Firstly, with relevance to Epic store, clearly, they have lower platform fees. And you've had some good success on the Epic store in the last quarter. Do you envisage that platform fees will continue to reduce across other platforms as a result of the success of this store?And just secondly on M&A, clearly, a smaller acquisition here. You've got considerable cash and debt facilities if you choose to exploit them. Is your focus not going to be on larger transactions from here going forward given I would assume it takes a considerable amount of time to do a small deal as well as a large deal?And then just lastly on financial reporting, there's been a lot of discussion about calendar versus financial year. Just to clarify, you will be reporting March or April to March going forwards?

[Lars Wingefors, Founder, CEO & Director]

Yes. April to March going forward, yes. That's our next financial year.First question, Epic Games Store, do I expect other platforms to lower their fees? Well, I don't know. I don't know. I don't think we should comment on that. I think in general I would embrace anyone that are delivering us higher gross margin and profit on our content obviously and delivering the same value.I think competition is always good. I have competition. I think competition in general is good. So we are embracing Epic at the moment in a number of ways. But I don't know. To answer your questions, I don't know.

[Benjamin May, Analyst]

So you don't know if the other platforms are feeling the pressure?

[Lars Wingefors, Founder, CEO & Director]

No, there is nothing announced on that. So second question was...

[Benjamin May, Analyst]

Just on M&A, how in terms of looking at large versus small?

[Lars Wingefors, Founder, CEO & Director]

Yes, well, to be honest, where does the work take place? We do M&A from the group level. We're supporting our groups to do their M&A, but they are doing a lot of the M&A. Piranha Bytes will be part of the THQ Nordic Group in Vienna. So we are not spending a lot of time in the mother company on that transaction. I am focusing on game-changing transaction for us that could add a fourth or a fifth pillar to the group. But I do like the small, nice, built-on acquisitions, and I will continue doing them within the group.

[Oscar Erixon, Financial Analyst]

So I think we have a question from Pierre.

[Pierre Mellstrom, Small Cap Analyst]

Pierre Mellstrom from Handelsbanken. Just on the deals you mentioned that you've been signing during the year that sort of reduces your financial risk going ahead. It seems to me that these kind of deals, the activity has increased. Would you say that's a result of sort of increased competition among distributors or is that more like that they're recognizing that you are important, increasingly important as a content creator going ahead?

[Lars Wingefors, Founder, CEO & Director]

I think it's driven by a handful of really big companies are entering the market space, and they want to build their own platform, and they are investing into the market. That is the key driver here. We are still a small humble player from Varmland. But along the way we've been growing a bit, and I think we are having a notable range of products now for partners. And the biggest peers we have, they have their own platforms partly. And we don't have our own platforms. And because of that, we're becoming a relevant partner, I would like to say. Still, the business decisions, what platforms, pricing, release dates, et cetera, and content being built are made in the groups. However, we are sharing information obviously.

[Erik Lindholm-Rojestal]

Erik from Nordea. A question on the Epic Games Store. Do you or do they dictate the pricing of the products you put there? Because there have been some feedback from other developers saying they're unhappy with the discount schemes they have done. So how does this work for you guys?

[Lars Wingefors, Founder, CEO & Director]

I think in general we, as publisher, always dictate the price from the beginning. And then we are working together with the platforms with their promotions so.

[Erik Lindholm-Rojestal]

And on the acquisition of Piranha, could you say how many years typically they take for the development of each game?

[Lars Wingefors, Founder, CEO & Director]

I think games like this in general are taking like 3 to 4 years, but it varies a lot.

[Erik Lindholm-Rojestal]

And listening to the reports and looking at the reports for your biggest peers, several of them, Activision, Ubisoft and Take-Two have commented that the free-to-play platform has been a bit troublesome for them and that they might go that route as well. What is your thinking on this changing market dynamic?

[Lars Wingefors, Founder, CEO & Director]

Well, first of all, we are a smaller player. And for us, smaller games make a bigger difference. And we are very diversified, 80 products, 3 groups in many genres and business models. And when other people are leaving the field, it creates bigger opportunities for us. I think I'd love to have amazing, big hundred million player base free-to-play game with consumer spending. However, it requires a substantial investment to even think about that. So I think we are building on our knowledge and IPs and the teams we're having. And I'm sure we will exploit new business models in the future. And it's always a consideration when you're starting up a new development project what business models obviously there will be.

[Erik Lindholm-Rojestal]

And you said something about adding a new pillar -- growth pillar for you segment, call it.

[Lars Wingefors, Founder, CEO & Director]

A new pillar, we have 3 pillars. We have an ambition to grow through M&A, so whether that being a publisher or being something else.

[Erik Lindholm-Rojestal]

Can you give any flavor as to what do you think the group is lacking now? Is it in terms of geographical footprint or better in terms of genre?

[Lars Wingefors, Founder, CEO & Director]

I think that there is, if you look from that perspective, we are stronger in Europe than in North America. We don't have any presence in Asian markets yet. We don't have any presence in all business models in the industry. I think there is plenty of room to grow within what we understand and know, premium games in the West. That is a huge market that we are focusing on, on PC and console.For me, the key driver is to find reasonable terms that delivers value for both parties. That is the key driver. As long as you identify the company and people, you can think, okay, they are suitable into the group and we could work together. It's all about actual transaction rather than where they are located, for example.

[Erik Lindholm-Rojestal]

And finally on visibility that you mentioned before, how much more confident are you now in your future revenues? I mean you said it's notable.

[Lars Wingefors, Founder, CEO & Director]

I think it's notable that we signed deals and gives us a bit of better confidence about derisking the financial risk in our content pipeline. It makes a difference. However, there is explanation. I'm sure new product has an expectation on certain games in the future. So I don't think this is on the top of things. I think it's just derisking some expectations, I would say.

[Oscar Erixon, Financial Analyst]

Right. And we have a question from the webcast, which I will read here. It's from Tom Singlehurst at Citi. He asks, it feels like there's a tidal wave of AAA titles coming down the pipe from across the industry in the next few quarters. Is there a danger that the consumer is overwhelmed? And structurally, does this mean that marketing costs are coming up?

[Lars Wingefors, Founder, CEO & Director]

Well, it's a tricky question. I think first of all, again, you need to focus on delivering experience that our consumers are willing to buy into. If you do that, there is still a huge market and you could beat or prosper within the competition. I don't see the marketing costs coming up from my view here. I think there is a very strong support in terms of marketing from various platforms as well. When you are doing premium games, AAA games, you can get strong support from platforms. So that I think that is one of the key drivers.

[Oscar Erixon, Financial Analyst]

Okay. Great. We have a question down here.

[Kristoffer Lindström, Equity Analyst]

Kristoffer, Redeye. You mentioned Asia, and I think I saw an interview with Klemens regarding Japan. What's your view there? Will you dip your toes with more possible publishing these or are you looking for M&A? So what's the strategy?

[Lars Wingefors, Founder, CEO & Director]

Well, I think first of all, is THQ Nordic in Vienna as a publisher establishing a marketing office kind of in Japan? I don't think we should overestimate the financial impact of that. And they are now directly thinking of publishing some content and working closer to the Japanese premium games industry. It's not us as a group. It's like the Vienna guys finding their base in -- but we are sharing the same name, and there's a bit of confusion here. I love Japan. I love what they're doing there and their ambitions there. But financially, I think it's a long way to go until there is a notable revenue stream for the group.

[Kristoffer Lindström, Equity Analyst]

And with E3 coming up, it looks like there will be 2 announcements at least. But that will also...

[Lars Wingefors, Founder, CEO & Director]

Well, that is THQ Nordic guys in Vienna.

[Kristoffer Lindström, Equity Analyst]

Yes, it's from Vienna.

[Lars Wingefors, Founder, CEO & Director]

Yes, question here?

[Jesper Birch-Jensen]

Jesper at ABG. It's another streaming question. And I've noticed that your games are on GeForce Now, which is obviously NVIDIA's streaming platform. Is that one of the deals you've mentioned earlier or is that something that 4A has done on themselves?

[Lars Wingefors, Founder, CEO & Director]

No, we are publishing the game. So any deal for selling the game would be under us.

[Jesper Birch-Jensen]

Can you comment more on the GeForce Now platform?

[Lars Wingefors, Founder, CEO & Director]

I think NVIDIA is a great partner to us and we're working together on Metro Exodus. Obviously, Metro Exodus being a huge game with amazing graphics and so on has been suitable to do a partnership so.

[Oscar Erixon, Financial Analyst]

Okay. And there is no questions from the floor. I think maybe that's it for today, running overtime a bit. So thank you very much.

[Lars Wingefors, Founder, CEO & Director]

Thank you very much.