Thunderful Group AB

Hi, and welcome to the Fundafull Group's Q4 presentation. My name is Anton Hof, and I'm an equity analyst at Redeye, and I will moderate the Q&A session following the presentation. And just a quick reminder, if you want to ask a question, use the form on the web page below the screen. And with that, I'll leave it over to Martin and Henrik. Please go ahead.

Thank you, Anton. My name is Martin Walfish. I'm the CEO of Thunderful Group. And with me today, I have Henrik Lundqvist, our CFO. The agenda for today is to go through our Q4 key highlights. Then I will give an introduction to Thunderful briefly. Then we move into a bit more financial details that Henrik will cover. I will end with some CEO comments and also summarize the key takeaways before we move into the Q&A with Anton. So if we look at the key highlights for the quarter, if we start the financial highlights, our net revenue came in at 953 million SEK, while our adjusted EBITDA landed at 3 million SEK. Our EBIT is minus 678 million SEK, primarily due to significant write-downs of goodwill and balanced development costs. I and Henrik will explain a bit more about that later in the presentation. Our cash flow from operations amounted to just over 300 million. And our investment spend was 60 million SEK, which was significantly lower than the comparison quarter in 2022, which is when we acquired UK-based game studio Jump Ship. If I add some highlights in our two segments, so if we start with distribution, AmoToys had its best year ever in 2023, especially the soft toys category performed really well during the year, so we're very happy for that. Baresala has continued to show solid margins despite somewhat decreased revenue. This is primarily due to Nintendo Switch sales decreasing somewhat during the year. Nintendo Switch is moving into its eighth year as a console in the market, so it's definitely starting to show its age. As for Nordic Game Supply, it has unfortunately underperformed significantly. We shut down the German business during the year, and parts of the product portfolio, private label, was divested at a discount in the quarter. So it's clear that NGS cannot continue performing like this, and we're reviewing the business to see how we can best capture the existing value. Moving on to the game side, I first want to mention that we've announced a major restructuring program on January 17. We are basically consolidating the company and decreasing costs and investments in the short term, and the goal is obviously to improve our competitive position in the long term. In total, we are reducing around 20% of our work staff, plus canceling some external third-party projects. This will achieve annual savings of about 100 million SEK. On the development side, in the quarter we continue to invest heavily in our own projects, but this is at a level that is not sustainable, given the cash flow we are generating. So the restructuring program obviously aims to address that. And during this year, 2024, we will decrease our investment levels considerably. I also want to mention that we've put development of SteamWorld Headhunter on hold. We've reviewed its progress and it's clear that the project has not delivered as planned and it will not be ready for 2025 as we have previously indicated. A substantial part of the write-downs in Q4 are related to SteamWorld Headhunter. I also however want to say that I think it's a very interesting concept and we aim to revisit Headhunter in the future. Ideally we can recapture some of the work and assets already created. Moving on to the publishing side, we launched two highly anticipated titles in the quarter. SteamWorld Build, which is the first new SteamWorld game since 2019. I think it's a very good game, but sales in December have been somewhat below our expectations. We believe that the genre hasn't really attracted the SteamWorld core audience as much as we hoped. And it's also not a genre that works well on Nintendo Switch, which is where we historically have been quite strong. On the other hand, LEGO Brick Tales VR has sold more than we anticipated. It just shows how important it is to have a portfolio of many titles, then we can balance our commercial expectations across several games in the portfolio. LEGO Brick Tales is, however, a game with lower profit margins, as we share royalties with several other parties, with LEGO, Meta, and, of course, the game developer Clockstone, in this case. Moving on to partners, which is our robot teddy business, we've seen a continued decline. We have not managed to get a new client. And as part of the restructuring program, we've decided to focus on our existing clients. I do, however, believe that the strategy of Robot Teddy is still very interesting. We just need to find a better way of executing in the future. So we'll surely come back to that at some point. Finally, as announced already in November, we are looking to divest our subsidiary HeadUp. We don't need to have two separate publishing operations within Thunderfall, and the smaller indie titles that HeadUp has focused on is not really part of the strategy that I see us having going forward. I hope we can share more details about the divestment later in Q1. Okay, so a brief introduction to Thunderfall. Some numbers at a glance, and all these numbers are as of end of December last year. So we were 519 employees, had 10 internal game development studios that are working on 14 internal games, internally developed games. And our publishing businesses are also working on 14 externally developed games with third party developers. Our total revenue for 2023 came in at just above 2.8 billion SEK. Also, a quick note on some select brands and partners. We're of course very proud and happy for our relationship with Nintendo that's been going on for more than four decades. In our Amo Toys business, we work together with Squish Mallows, which is a very successful brand. SteamWorld is our own game IP, our most important IP on the game side, and Meta is a key partner that we work closely with, with co-development projects. I do want to say that an important note is that as we're implementing the restructuring program, the number of people, studios and projects will decline. We're refocusing on fewer game projects where we can have sustainable investment levels. So you'll see the effect of this in our Q1 2024 report. So Thunderfall has two segments. So the distribution segment, as mentioned already, Arma Toys, distributing and selling toys all across the Nordics. BergSala is our Nintendo business, selling Nintendo products in the Nordics and Baltics. And Nordic Game Supply sells PC and gaming peripherals and accessories all across the Nordics. On the games segment, we have historically talked about four different revenue streams. IP building, that's when we invest into creating games either in our internal game studios or with external third party studios. Co-development is when we work with external partners to develop games together with them. Meta, as I mentioned, is an example of that. Partners is our robot teddy business, and that's where we help indie developers to improve and optimize their business, basically help them become even more profitable. And then, of course, investments is where we invest in share acquisitions and also acquiring various IPs. Going forward, we're also going to talk more about the operating areas in the game segment. So we have the development side, that's where we manage our own internal game studios and of course develop games, both our internal games and also third-party developed games. And of course the publishing side is where we market and sell both internal and third-party games. Finally, I want to mention a few titles that we have planned for this year. So as previously announced, without going into any more details, we have a new SteamWorld game coming out this year. So very much looking forward to that. We have a game called Replace that I think looks very interesting coming out at the end of the year. And we're also launching Planet of Lana on new platforms, on PlayStation and Switch. And as you can see in the middle here, new title soon to be announced. So we have something cooking that we're going to start talking about very soon. So stay tuned for that. All right, that was introduction to Thunderfall and our Q4 highlights. Now Henrik will go into a bit more detail.

Thank you, Martin, and good morning, everyone. I will now walk you through the financial section of the report. Net revenue decreased by 18% to 953 million, explained by a decline in both distribution and games. I will come back to the performance of the different segments later in this presentation. Looking at the gross margin, it was stable compared to last year as we had strong margins in several of our distribution businesses, which compensated for a weaker margin in NGS. Our adjusted EBITDA amounted to 3 million, which was significantly lower than last year, explained by higher cost base in games related to personnel, but also unusual high royalties in the quarter. And also losses in NGS, which I will come back to later. We should also mention that in the comparison period, there was acquired revenues of 75 million connected to the game release, which had a large impact on the profitability last year. After a review of the acquisition and investments made in recent years, also in relation to the current market situation, our assessment resulted in a write-down of 500 million of the goodwill and 98 million of the capitalized game development cost. The write-downs have no impact on cash flow, but our result was affected by this, and we reported an EBIT of minus 678 million in the fourth quarter. Okay, moving over to the distribution business. Our net revenue decreased by 14% to 832 million. Armo Toys delivered all-time high year and Q4 was also a very strong period with 13% growth. We are very pleased to see both improved sales but also higher margins driven by healthy product mix, especially from Soft Toys. BergSala sales decreased by 26% in the quarter, mainly explained by lower hardware sales as the Switch console is now around 8 years old. The contribution from this business continues to be very good and the adjusted EBITDA for the full year increased by 14% up to 106 million, driven by strong game releases during the year such as Super Mario Bros. Wonder and the new Zelda game. We should also mention that we have 48 million in other operating income for BergSolar, which is a reclassification we have done during this year. Those 48 millions is mainly a marketing contribution which we received from Nintendo. Regarding Nordic game supply, we continue to have difficulties in the market. The close down of the German business and close down of private label business in combination with reducing the high inventory levels with discounted prices has resulted in a very large negative EBITDA in the quarter of minus 54 million. Our adjusted EBITDA for segment distribution amounted to 6 million, which was 51 million lower than last year. This is entirely explained by the weak result of NGS. And as Martin earlier said, we are currently performing a business review of NGS. Okay, let's move over to the game segment. In our game segment, net sales decreased by 39% to 121 million, whereof new releases contributed with 26 million. Last year, we had acquired game revenues of 75 million connected to the acquisition of Jump Ship and the release of the game Summer Will. Adjusted for these, the sales level was in line with previous year. Adjusted EBITDA was 7 million, which was significantly lower than last year. This is explained by higher personnel expenses and also unusual high royalty expenses in the quarter. And as earlier mentioned, we didn't have the one-off effect from Jump Ship. EBIT for the segment game was minus 658 million due to the large write-downs earlier explained of almost 600 million. A brief look at our cash flow. The cash flow from operating activities amounted to 304 million after changes in working capital. A large part of the cash flow came from improved working capital where the largest improvements came from increased accounts payable of 266 million but also lower inventory levels compared to previous periods. Investing activities amounted to 60 million, which was pretty much the same amount as last year. The capitalized game development amounted to 37 million, which was on par with last year, and investments in publishing rights amounted to 21 million, which also was in line with last year. Our financial or financing activities amounts to minus 70 million, mainly due to reduced usage of the credit facility. Cash at the end of the period amounted to 209 million. And then one slide on our available liquidity and net debt. So our available liquidity at the end of December was 320 million compared to 494 million last year. And as you can see in the chart, Q3 is the quarter when purchases are made ahead of the peak season in Q4. In Q4, net debt has reduced from more than 500 million down to around 400 million. And net debt to EBITDA, the ratio between net debt and EBITDA was 1.7 at the end of the year. And by that, I will hand over to Martin again.