Remedy Entmt Oyj

Hello everyone and thank you for joining this Remedy Entertainment webcast. My name is Liisa Eloranta and I run the investor relations at Remedy. Today we will go through Remedy's half-year financial report for January-June 2024. With me here are Tero Virtala, Remedy CEO and Paula Fedorov, Finance Manager. We will have a Q&A session after the presentation. Tero, the floor is yours.

Thank you, Liisa. Welcome, everyone, also on my behalf. So, Paula will later go in more detail through the financials. Just a few words on our second quarter and the highlights. In the second quarter, our revenue was 10.3 million euro, which is 16% higher than it was last year. We still did make an operating loss minus 3.2 million euro, but it's clearly less than in the comparison period, so overall the direction is right. Gas flow from our operations was positive, like it was in the previous quarter. An important milestone for this quarter specifically was the Night Springs expansion for Alan Wake 2, which was released and got a very good reception. I'll later explain Talk a bit more on our game and project portfolio and multi-project model. Overall, our projects have been progressing better in 24 than they have done ever before. There is always, of course, room to improve, but our multi-project model works now fairly well. This also means that we don't anymore need to grow the organization in the same way that we have done in the past, which means less newcomers into the company, less onboarding in our game teams, more stable development teams, and all the time improving ways of working. We are clearly now getting more and better output without needing to grow the organization. In fact, with the aim to increase our focus that we also discussed in the quarter one, we have been also reviewing our operations and costs to see what are the most important things that our talented people should focus on and what not. That has given an additional focus for us and supports our game projects and has also started to create some cost savings. The main reason for all this is to ensure that we can create excellent games in schedule and budgets and get also into profitable growth that has been our big game. But now when the industry overall has had tough financial times, and we have seen that in our partners as well, additional cost controls has been good for us as well. Few words on Alan Wake 2. As I mentioned, the Night Springs expansion was launched and the reviews have been excellent. Metacritic average is currently 85. The well-received expansion is highly appreciated by players and the fans of Alan Wake. It gets players back into the game and boosts the visibility of the overall game. And with the expansions, we are also driving the sales of the deluxe upgrade for the whole game, which gives access to both two expansions of the game and also to some additional content and content items. So we are not selling expansion separately, but the players who want to get the DLC expansion need to upgrade to the full deluxe version. We also announced in quarter two that the physical deluxe edition of Alan Wake 2 is coming out in October and collector's edition is shipping in December. Pre-orders for both of these editions have started right away. With our partner Epic Games, we have been actively promoting the game and have also been preparing for the fall time and end of the year, which always are the year's biggest sales phases. We have been able to keep a fairly high price point for Alan Wake 2 so far, which then also means for the later life cycle that there is still a lot of audience that we can reach with the game. The game and its sales has now recouped most of its development and marketing expenses. We previously in the first quarter said that the game had recouped significant part, which indicated recoupment of 50 to 80 percent. So now the game has recouped more than that. Then let's go through the status of our game and project portfolio. As said, in Alan Wake 2, we launched Nightspring's expansion and are now developing the second expansion, The Lake House. Codename Gondor is in full production. This is the last big leg of the development. In Quarter 2 specifically, the development team has worked on multiple maps and different mission types with also growing amount of playtesting. Control 2 progressed to the production readiness stage during the second quarter. Moving to a next stage always means that the development team reaches a bigger milestone in which the progress of the game, the development so far, the status of the game, the updated plans are all reviewed to make sure we are set to succeed also in the next development phase. The game build that this team had included several important features and parts of the game now in playable form. This actually also coincides very well with the ongoing business negotiations with potential future partners. The game is starting to show its potential more and more concretely. Max Payne 1 and 2 remake also progressed to next development phase from production readiness to the full production stage. The development team has been working towards developing the game to an early functional state from beginning to end. What you can all see is missing from this slide in comparison to our previous presentations is code name Gestrel. In May, we canceled that project. This gave more focus and synergies to our game portfolio and overall operations. We also got experienced additional developers from Gestrel to help with our other game projects. So it's fair to say that during 2024, our game projects have across the board been progressing clearly better than before. Growing the organization and building the multi-project model isn't an easy endeavor, and there is all the time, room to improve, but we now have production-wise reached quite well, a well-functioning multi-project model. This is also important as now we have two games in full production and one in the production readiness stage. Now, another viewpoint to this project and game portfolio is that we have for years been building a multi-project model. In addition to creating great games, an important aim has been to be able to launch these games more regularly. Step by step, we are getting there. One year ago, we actually had no games live and in the early sales phase. Alan Wake 2, a year ago, was in production phase, but all our other games were in the earlier pre-production phases. meaning we were still quite far away from other launches than Alan Wake 2. When we look at the situation now, Alan Wake 2 is out and it's still in fairly early sales phase. Alan Wake remastered and Control continues selling. We can see from Control, which launched already five years ago, that the good quality games can have a long sales life cycle. For the first time in development phases, we now have two games in full production and one game on late pre-production phase. This then also means that those games are in their last phases before they then one day launch. Our aim as a company has been that we would have well-advancing portfolio of promising game projects in development that can be launched at regular intervals And with that, we would have a growing portfolio of games in the market that keep on selling for a long time. Business-wise, now when we are advancing in this model, it means that we are moving from business-to-business lower margin revenue business more towards business-to-consumer business, where the potential for growth and higher profitability is much better. Even though with live games, some development and marketing investments are needed, they are much less than what they are in actual game development phases. The developments that we have taken as a company with our multi-project model, how our games have been advancing lately, what we have now done with Alan Wake 2 and its expansions are good steps which are all taking us into this direction. And now when we move then towards a more balanced business model of business to business and business to consumer revenues, games in development, more regular game launches, growing portfolio of live games that keep on selling, a very important consideration naturally is how do we commercialize and publish our future games? This directly affects on the share of revenues we can get from these games and also on the investments we need to make. Also to consider is the right partnerships may then also open up possibilities as an example to reach new audiences. With Alan Wake Overhaul, we can freely choose the future model for us. Early this year, we also bought back all the commercial rights from 505 Games to Control Games and are now free to decide the best way forward. We have been weighing self-publishing and related business model as well as discussing different partner publishing opportunities for Condor and Control 2. These models have their own characteristics with different reward potential and requirements for our own investments and therefore risks, as well as what are the publishing capabilities that would be needed in these different models. When we work with the partner-owned IP like Max Payne, partner pays the full development and we have a royalty upside, but it's naturally more limited than it would be with our own IPs. The first step in our transformation to multi-project and stronger position in the value chain years ago was that we wanted to get back into creating our own IPs and also to partially investing into them. The games that we then decided to start doing were still brought to market by our publishing partners. So all the games that we have launched in the recent years, Control, Alan Wake Remastered, and Alan Wake 2 are with these models. Partners have handled the marketing and sales, they have collected the revenues, and then after deducting their cost, the net revenues have typically been shared 50-50. Now, already, during the last years with Vanguard and with Control Games, with 505 Games, we have been aiming to take the next step in the value chain, going to co-publishing. Now, during the past years, we have gained a lot of learnings. We have built our competencies in publishing further, and we have now had the opportunity to take a step back and once more evaluate and negotiate with potential partners what would be the right long-term model for us. We have taken the time, we have had good considerations, and we have had a lot of valuable and good discussions and negotiations with potential partners. Now, These negotiations, they are still at this very moment ongoing. But what we can say is that with Condor and Control 2, we are not anymore going to the more traditional, we develop the game, partner publishes it model. We are preparing to take a more significant role in growing our games franchises and how we commercialize and publish our games. As said, these negotiations are still ongoing and we will share more info on this strategy towards the end of the year. Then another topic to highlight that now we are definitely moving to a new phase as a company. In relation to that, we have also strengthened our core management team. It already started in 23 and has now continued in 2024. With more own and launch games, important games currently in development, we earlier introduced the chief product officer role and also had a new chief technology officer who leads a deep defined our proprietary Northlight engine. There have also been additional changes and developments in their respective teams. We also, earlier this year, appointed Mikael Kasurinen as Remedy's creative director, who shares the creative director responsibilities with Sami Järvi. Our previous CFO stepped down this summer, and we just this week announced a new CFO, Santtu Kallionpaa, who will start in October. He has, of course, financial expertise, but additionally has really valuable experience in consumer business, leading related strategic projects, business development, and performance management of different product development, production, and marketing operations. These are all relevant competencies and skills for Remedy's next phase and needs. Personality-wise, I believe he will be an excellent match for us and our teams. I'm personally really happy with the core management team we have in place for leading the company into the next years. And then to conclude this part on my behalf, as said earlier, we look forward to being able to give an update on our strategy towards the end of the year. In the last quarter one presentation, we said that there are selected guiding principles we are following, and that has been the case. One of these principles is that we have all the time wanted to ensure sufficient focus and use of synergies so we can step-by-step develop and commercialize games that can become larger successes. We have been following that principle and continue to do so. In relation to financial targets, which is one part of any Remedy Games planning process, the minimum target is to earn back at least double the money we invest into a game. We now then also have two franchises fully owned by us, Control and Alan Wake. A key part of our strategy will be on growing them into much bigger and successful franchises. And as we have done for the past six years, we continue to look for the opportunities to strengthen our value chain position, which we just discussed, so that our franchises would reach bigger success. And when that happens, Remedy would succeed in a bigger way. But as I said, we will get later this year to a more comprehensive strategy update. And at this point, I'll hand over to Paula to talk on financials in more detail.

Thank you, Tera, and good afternoon on my behalf as well. Let's have a look at the second quarter and first half year financials. In the second quarter of 2024, our revenue was 10.3 million euros. The development fees were 9.4 million euros and higher than in the comparison period. This was due to development fees related to Max Payne 1 and 2 remake. Main sources for royalty income were game sales from Control and Alan Wake Remastered. When looking back at our historical revenue breakdown, the revenue level during the both first quarters of 2024 has been higher than in their comparison periods in 2023. We canceled Project Kestrel in May and purchased publishing rights for Control franchise. earlier in the year, which both of course affect the revenue accruals as well. Revenue levels overall vary quarter to quarter based on milestone timings. Comparing to the second quarters, the difference year on year was 16.2%. Alan Wake II hasn't yet filled its recoup and thus it doesn't yet generate royalties to us. The operating profit of the second quarter was negative 3.2 million, yet, as Tero said, improving from the year before, when it was negative 4.8 million. The improvement was due to higher level of revenue as described on the previous slides. Operating profit margin was minus 31%. In the first half of 2024, our revenue grew year on year by 34% to 21.1 million euros. Development fees were 18.4 million and higher, again, than in the comparison period. As in the second quarter, this was also due to the development fees related to Max Payne 1 and 2 remake. Royalties formed 2.7 million of the revenue. Amount of royalties from control was higher than in the comparison period. And the growth of the amount is also due to royalties from Alan Wake Remastered, which started to generate them in the third quarter of 2023. In the first half, our operating profit was negative 5.3 million, improving 5.1 million from the comparison period. The improvement was mainly due to higher revenues, but also slightly lower amount of expenses. Comparing to the comparison period, the operating profit is also affected by depreciations related to capitalized development expenses of Alan Wake Remastered that were also started on autumn 2023. Here we can see the analysis of unnetted amounts of expenses and capitalization for transparency. External work expenses were 5 million euros, approximately 5% higher than in the comparison period when they were 4.7 million. Our personal expenses increased year on year by 7.7%, while the increase in our own employees was about 4%, from 347 to 361. From the headcount growth of 14 people, 10, which is over 70%, was in Sweden, where the personal expense level is higher than in Finland, which explains the higher increase in the expenses related to the personal growth. Capitalized development expenses were 77% higher than in the comparison period. The growth is visible already from the first quarter of this year, and it is due to higher capitalization percentage and thus higher amount of capitalized expenses related to Codename Condor and Control 2 game projects. The capitalization percentage was raised as we purchased the publishing rights for Control franchise. For third quarter in a row, our operating cash flow remained positive. In the reporting period, the operating cash flow was 0.9 million euros positive, as in the comparison period it was negative by 7 million euros. The main reason for positive operating cash flow is the development fee payments related to Max Payne 1 and 2 remake, but also lower level of outgoing payments. Part of the lower level of outgoing payments was due to the quarter ending on weekend and pushing some of the month end payments to the third quarter of this year. In the second quarter, our total cash level was 26.1 million euros, decreasing by 1.3 million from the previous year. This amount includes 3.7 million of cash management investments. During the period, we liquidated 6.8 million of these investments for the use of our operations. When looking at the historical revenue and profitability profile, we can see that the current profitability level is still impacted by the level of our own investments to game development. The beginning of the year, we have been funding the development of control franchise game projects ourselves while weighing the business models for them, as Tero mentioned earlier. That's all from the financials. Tero will continue about the outlook next.