Thunderful Group AB

Good morning. We would like to welcome our existing shareholders, potential new shareholders, and the general public to this presentation of Thunderful Group's first quarter 2022. Go to slide two, please. We are the ones presenting to you today. My name is Brian Sjogason. I'm the CEO of Thunderful Group. Also with me is Anders Maikvist, the CFO of Thunderful Group. Go to slide three, please. Let's start by looking at the key events for the quarter. And go to slide four, please. It's been a financially tough quarter for Thunderful Group, and we'll go into the financials shortly. We secured a new RCF worth 55 million euros with Danske Bank. We intend to use it for new acquisitions and for game investments. We extended the distribution agreement with Nintendo. Just as always, it's Bergsala, our subsidiary, that extends with Nintendo Europe. The new contract will run from April this year until the end of March 2024. And it's basically the same contract as before. We signed a new agreement with Meta for additional development projects As you may recall, last year we signed a large contract with them worth over 20 million US dollars for VR and tech development projects. That's going great, and so we've now deepened the relationship. Also, we're currently in multiple negotiations with platforms and partners regarding upcoming games. Making this kind of deals will become increasingly important as the gaming landscape evolves. Go to slide five, please. For the first quarter, we had an operating income growth of 7.3%, where the game segment grew by 44.2%, while the distribution segment grew only slightly by 1.5%. We are down on EBITDA and EBITDA margins for both segments. For the game segment, the primary reason for the lower result in margin is that we, in the comparison quarter, received external partner financing for the development of several titles. Those titles have now been released and sales have been disappointing. In addition, late-stage delays to those projects meant that the development of our new games also was delayed. Prototypes and playables for those games, those new games, are now ready And our negotiations with platforms and partners are starting to show results. We had hoped to showcase the new games to platforms and partners earlier so that we already today would be in a position to obtain external financing for the title. For the distribution segment, there are various factors that have affected the results this quarter. Andres will go through the figures in more detail in the financial portion of this presentation. But in short, the overall result for the quarter is a disappointment to us, and our two business segments are underperforming for different reasons. We have anticipated this, and we have a strategy moving forward. We wanted to have executed more on our strategy at this stage, but in a longer perspective, the changes and growth that we have undertaken in the past year are paving the way for a much stronger company. Go to slide six, please. Let's have a quick look at Thunderful Group and our strategy. Go to slide seven, please. We operate in two segments, games and distribution. While the distribution business covers the Nordics, the games business is global. We sell our games all over the world. We're now more than 430 co-workers across the world. We have 14 internal games in development at this moment, and around twice as many from external developers in our pipeline. Across the segment, we manage a portfolio of around 100 brands, and we've kept our famous Nintendo partnership for 40 unbroken years. The recent extension within Nintendo is, as such, business as usual. Go to slide eight, please. Our business rests on three main strategies. For starters, we accelerate investments. We want to increase our investment in game development and publishing, both internal game projects and external. We want to acquire complementary businesses and IPs. We also want to acquire gaming companies that continue to operate with a great deal of independence. We make sure to keep our IP right. There's so much you can do when you own your own content. We make sure our games are available on relevant platforms and that the products that we distribute appear in the right channels. In gaming, we maintain our own IP. In distribution, we work to increase our share of own brands. And finally, quality is at the core. Not only in our products, but also in how we do things. We maintain a can-do culture, we make sure to keep and develop our staff, and we make sure to keep and develop our collaborations and partnerships. Go to slide nine, please. Let's have a look at our two segments, games and distribution. So let's go to slide 10, please. The overall strategy of the group is to invest all earnings from distribution and gains into the games segment. Our net sales are comparable to last year, and we see that games is outperforming the distribution segment in terms of EBITDA in the quarter, which is a trend that will continue. Let's go to slide 11, please. Our distribution segment consists of three companies. First, there's BergSolar that has held the license to sell all Nintendo products in the Nordics and Baltics for 40 years straight. Then there's AmoToys, our toy distributor that holds the Nordic MGA license with products such as LOL Surprise. And finally, there's Nordic Game Supply that distributes consoles, games, and gaming accessories, where we hold the Nordic licenses for Razer, HyperX, SteelSeries, and others. Let's go to slide 12, please. Within games, we do a few different things. We develop games mainly based on our own IP. As mentioned, we're convinced that quality is vital to earning success. Our recent Metacritic scores are best in class among our peers, and we're now around 280 game developers across Europe. But we can only work on so many games at any given time. We publish our internally developed games, but we also publish games developed by others. Publishing is more hands-off than development, so that means that we can publish more games that we can develop. And as part of the publishing process, we often invest in the externally developed games that we publish. But we want to be involved in even more games, and that's why we started Wonderful Investment to invest in game projects around the world. That ticks an important box for the game segment, And we believe that there are strong synergies with development and publishing. We're now a 360 degree game company that offers development, co-development, work for hire, publishing, investment, and mergers and acquisitions. Go to slide 13, please. A bit about our pipeline. So we released four titles in the first quarter and an additional four after the end of the quarter. This period typically isn't release heavy, and none of the titles had a standout performance at launch. But there are of course positives as well. Development moves along on all titles, and we've finished prototypes, secured titles for publishing, and have signed co-development agreements. Let's go to slide 14, please. Here are the 14 titles that we have in internal development, and there is a good spread among genres. Noteworthy is that Early Morning Studio have added development time to Evendir, which is now scheduled for the second half of 2022. We've moved Wavetail to fit our publishing pipeline, and the game codenamed Mango has been moved into pre-production. Let's go to slide 15, please. At Thunderful World, we also showcase some of the 25-plus external games in our release pipeline for the next two years. Now, these titles are in addition to the 14 games that we are developing internally. Let's go to slide 16, please. Among the already announced ones, in 2022 and 2023, we have anticipated releases like Replaced, Togges, and Planet of Lana. A game like Bridge Constructor Plus has had a very good launch on Apple Arcade and has secured top chart position. We've also announced Lego Brick Tales, which has had a very good impact in media. And that's it for the business segment. Now go to slide 17, please. And our CFO, Anders, will go through the financial section.

Thank you, Brian, and good morning, everyone. Move to slide 18, please. As Brian mentioned, the first quarter in 2022 has been a weak financial quarter for Thunderful Group, but there are some mixed effects and some positive signals for the future. To guide you through the details, we start with the next phase development, where we have seen a positive growth of 1% year over year, reaching 546 median SEC in this quarter. The game segment has a growth of 21% and the distribution segment has negative growth of minus 2%. For adjusted EBITDA, the negative growth is minus 27 million SEK or minus 50% reaching 27 million SEK in this quarter. The game segment has negative growth of minus 5 million SEK and distribution minus 21 million SEK. The cash flow from operating activities was significantly better in this quarter versus the comparison quarter. We reached a positive cash flow from operating activities of 203 million SEC compared to 66 million SEC in the comparison quarter. Move to slide 19, please. For Thunderbolt Games, we've seen a growth in net sales year-over-year of 21%, reaching 82 million SEC in this quarter. Organic growth in games is 2% and growth from companies acquired in the last 12 months is 20%. Breaking down organic growth, CodeSync and HeadUp is contributing with organic growth numbers significantly higher than for the entire game segment. But the old core Thunderbolt games companies, they have negative growth percentage well in excess of minus 50%. And the reason for this is that Thunderbolt Development had external financing for the three AA titles Lost in Random, Wavesail and The Gunk in the comparison quarter, while they haven't had any external financing for the development projects in this quarter. And also the revenues from sales of the titles that was released by the end of 2021 has been very limited. And this also explains the development year over year for adjusted EBITDA, which is minus 5 million SEC, or minus 19%. Move to slide 20, please. For investments in games, we've reached total investments of 48 million SEK in the first quarter. For development capex, we've reached an all-time high of 35 million SEK. This is partly because we have more developers employed. We've now reached 282 developers in the group. But the main driver is that most developers are now working on games that are not being externally financed. And as mentioned in the last quarterly presentation, we've now signed a new secured revolving credit facility with Danske Bank of 55 million euros. And by the end of the quarter, we had 410 million SEK in total available cash if we include unutilized credit facilities. Slide 21, please. For the segment distribution, we see an overall negative growth year-over-year of minus 2%. Breaking it down into the different subsidiaries, we see that Bergsala is decreasing with minus 3%, driven by lower availability of hardware than in the comparison quarter, but also with improved software sales. Nordic Game Supply is decreasing with minus 15%, and the late Q4 deliveries to our key retailers led to inventory buildup negatively affecting the retailers' open-to-buy budgets. We weren't really able to compensate for this at the end of the quarter, and we will have difficulties matching the comparison quarter also in the second quarter this year. Almost always, on the other hand, showing a growth of 29%. In comparison quarter, we suffered from late deliveries of spring-summer products, but in this quarter, availability of products have been good, and customer demand for our new brands is looking promising. For profitability in distribution, the segment has an overall negative growth of minus 18 million SEK or minus 56%. Bergsal's EBITDA delta of minus 5.7 million SEK is primarily explained by FX effects of 2.9 million SEK and increased marketing expenses of 2.1 million SEK. And even though net sales is down with the minus 3%, the gross profit is only reduced by 0.5 million SEK. In Nordic Games Supply, the EBITDA delta minus 7.1 million SEK is primarily explained by lower gross profit and higher personnel costs. So the lower gross profit comes from lower net sales. And for almost always, the key cost driver is the higher logistics and warehouse costs, which explains almost 9 million SEK of the cost increase year over year. So to sum up the profitability challenges in distribution, it's important to understand that the EBITDA margin pressures that we are guiding for in Q2 and Q3 is affecting nordic game supply and almost always only for bergsala it will be business as usual and the lower ebitda margin in this first quarter is primarily driven by the fx effects of 3 million sec so we are working hard on reducing the inventory levels and we'll continue to do that throughout 2022 opex will be affected for nordic game supply and almost always in q2 and q3 But in our most important quarter, the fourth quarter, we are now working hard to be in a better position in terms of the number of pallets in the warehouse when the fourth quarter starts. It's also important to remember that the planned reduction of inventory levels should contribute to improved cash flows in 2022. So move on to slide 22, please. Thunderfall's games segment achieved 2% organic growth. But as mentioned before, Codesync and HeadUp, the companies being organic as from Q4 and Q1, are showing significantly better organic growth percentage than this. The old core Thunderfall games companies have negative growth percentage well in excess of minus 50%. And the reason here again is that we had external financing for three double A games in the comparison quarter. Looking ahead, NetSafe's development in HeadUp and CodeSync looks promising also for the next quarter, as HeadUp is the company that has been signing the Apple Arcade deal for Bridge Constructor, and CodeSync is the company signing the new Meta deals. Brian will tell you more about the deals that we have signed now after the quarter, after the financial section. And for the old core Thunderbolt games companies, the ongoing deal discussions worth $15 to $20 million involves games from both Thunderbolt development and Thunderbolt publishing. And this is also something that Brian will present more in detail after this section. Move to slide 23, please. For adjusted EBITDA, the situation for the organic games companies is similar to the NetSense development. The code sync and head up brings 36 organic positive evisa growth but the entire game segment has negative organic evisa growth of minus 43 percent and again the old core fund for games companies are affected by the lack of external financing which they had in the comparison quarter For the acquired gaming companies, RoboTeddy and Early Morning Studio had a similar EDITA contribution, while StageClear Studios had its first loss-making quarter in this first quarter, but they're on good track for the next quarters with a new deal coming in here in the second quarter. Move to slide 24, please. As mentioned earlier in this financial section, the cash flow from operating activities was significantly better in this quarter versus the comparison quarter. We reached a positive cash flow from operating activities of 203 million SEK compared to 66 million SEK in the comparison quarter. The key driver behind this is the net effect from accounts receivables and accounts payables from the distribution segment with a positive net contribution of 231 million SEK. By the end of the quarter we had 410 million SEK in total available cash if we include unutilized credit facilities. In the first quarter we have made cash earn up payments of 97 million SEK to the sellers of five of the companies that we've acquired since the fourth quarter 2019. And finally, the net theft by the end of this quarter is 158 million SEK, resulting in a net theft over LTM EBITDA ratio of 0.5. And that was the end of the financial section. Over to Brian again.

Thanks, Anders. So let's go to slide 25 first, and then to slide 26, please. So after the quarter, we have done a number of things. And now I'd like to share some of the positive signs that gives us good cause for optimism and shows how our long-term strategy is now beginning to pay off. First, we have signed platform and partner deals worth more than $6.5 million after the quarter. Parts of this are a new and additional development project with Meta and a platform deal for the game Codename Coconuts. Of these revenues, $5 million land already in 2022. We expect to sign additional deals worth between $15 and $20 million in the next few months, and we are involved in multiple discussions beyond that as well. It's too early to say if we sign some of these additional deals in the second quarter and the deals may start benefiting us in the third quarter. Again, this exciting progress comes from our 360-degree strategy, which means that things are moving in all companies of the games segment. We've also acquired the Islanders IP. The game was originally developed by Grizzly Games and released by Codesync on Nintendo Switch last summer. The game has been a resounding success and has sold over a million units with a Metacritic score of 80 across platforms. We think that Islanders has great untapped potential and acquiring strong IPs is a direct way to increase our reach. We will expand the original Islanders game we will bring it to more platforms and release future versions and grizzly games will continue to collaborate with us on the game and as another example of ongoing collaborations and relationships tunnel for publishing has announced the exciting title lego brick tales the game is developed by the veterans at clockstone and will be released in the summer of 2022. Naturally, it's a great privilege to be collaborating with one of the most beloved toy brands in the world, and we have high commercial hopes for this title. Thunderfall Publishing released Bridge Constructor Plus on Apple Arcade, and the game has generated substantial net revenues after inclusion. Again, this shows that content and IP ownership truly is king. The Bridge Construction Plus deal also illustrates the shift that is ongoing from transaction-based to deal-based revenue. And Thunderbolt Investment has financed the first game project. Of those two, we have announced The Last Clockwinder, which is slated for release this summer on Oculus Quest 2 and SteamVR. So yes, the first quarter has been a tough quarter But I am confident that we have good reason to be optimistic going forward. And finally, we would also like to welcome Lennart Sparud, who starts working as our new CFO on Monday, May 23rd. That's the end of this presentation. Thank you very much for listening. And we're now ready for your questions.