Thunderful Group AB

Hi, and welcome to Thunderful Group's Q1 presentation. My name is Anton Hulf, 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, please use the form below the stream. And with that, I'll leave it over to you, Martin and Paj. Please go ahead.

Good morning and thank you, Anton. My name is Martin Wollfisch and with me today I have Per Ahlnefelt, our CFO. Good morning. We will go through the Q1 report for Thunderfield Group and also provide a brief introduction to our different businesses. And then I will end with some additional CEO comments. So without any further delay, let's move on to the Q1 report. So the key highlights, the financial highlights for the quarter, our net revenue came in at 392 million SEK. Our adjusted EBITDA landed at minus 29 million. Our EBIT is minus 184 million, which includes substantial write-downs of capitalized development cost. Our cash flow from operations amounted to minus 156 million. This is due both to negative cash flow from our operations and changes in net working capital, which Per will explain a bit more about in a moment. Our investment spend was 45 million SEK, which is significantly lower than the comparison quarter and directly attributed to our restructuring and cost savings program. Moving on to some highlights in our two segments. So if we start with distribution, I'm glad to note that Armo Toys has continued its good performance into Q1. The soft toys category in particular continues to deliver, but Armo is also increasing its market share in other categories. Barisala, on the other hand, has decreased its revenue, which is primarily due to declining demand in the gaming console market. We've also had fewer large Switch game releases in Q1 this year compared to last year. This is not really surprising, as the Switch is in its eighth year in the market and starting to show its age. Either way, we're very glad that we've extended our agreement with Nintendo for another two years. Nordic Game Supply continued its decline, but as we announced some weeks back, we found a good solution to divest the business, which is subject to shareholder approval at a general meeting on May 22nd. So moving on to the game segment. On the development side, we've seen a decline in CodeSync's revenue. The studio continues to do great work overall, but they had an unusually strong Q123 with substantial one-off revenue related to phasing of different co-development projects. And this has not been possible to repeat in Q1 of this year. Moving on to the restructuring program, it is almost fully implemented, and although the full effect of the cost savings will not be seen until Q3 this year. As part of the restructuring, we've also reached an agreement to divest HeadUp, subject to shareholder approval on May 22nd. We've also unfortunately had to decide to close down StageClear Studios in Madrid. They were a very talented team, but we couldn't sustain the necessary investments going forward. And we've also terminated several third-party projects with external studios, leading to significant write-downs of balanced development costs. On the publishing side, we'll start with the good news. Transactional sales continue to increase year on year, which is highly reassuring. Transactional is when we sell our games directly to consumers through online stores such as Steam and PlayStation Store. Our back catalog, which are titles that we've launched more than two years ago, is also showing strength in a quarter when we have not had any new significant releases. The back catalog really is becoming an important backbone of our games revenue. SteamWorld Build, that was released on December 1st, got off to a weaker start than we expected, and it has not managed to recover and reach our expectations during Q1. It is still a highly regarded new installment in the SteamWorld universe, and we expect it to keep selling for many years, of course. And finally, a few words about our partners' revenue, which continued to decline. In Q1 last year, we had revenue of 20 million SEC from a one-off project in Robot Teddy, which we couldn't repeat this year, unfortunately. All right, before Per dives into more financial details and I conclude with some additional CEO reflections, I'd like to give a brief introduction to Thunderfall for those not fully familiar with our business. So looking at the high level and all these numbers are as of end of March this year. So at the end of the quarter, we had a bit above 500 employees on payroll, but around 100 of these are in notice period or will leave with the ongoing divestments as part of the restructuring program. We expect to be just above 400 people at the end of Q2. We have eight internal game development studios, and they are working on 12 different games for release in 2024 and beyond. And our Thunderful publishing business is also working on four games with external third-party studios. And to be clear, these numbers do not include external projects that are part of HeadUp, which is, as mentioned, being divested. Our revenue for the last 12 months was around 2.7 billion SEK. Across the group, we work with many different brands and partners. Some of the more significant ones are Nintendo, of course, Squishmallows with Amo Toys, a soft toys brand, and we also work with Meta, where we do VR games together with them. We are, of course, also developing our own brands and IPs, and with the SteamWorld franchise, which was first launched in 2010, being the most successful of our own brands. So the distribution segment is one of our two segments. It consists of Amo Toys, distributing toys in the Nordic market, Beisala, that has distributed Nintendo products since the early 80s in the Nordics and the Baltics, and Nordic Game Supply, which, as mentioned, we are divesting, assuming positive shareholder approval on May 22nd. The game segment has three operating areas. Publishing is where we market and sell first and third party titles. Studios in development is where we manage our internal studios and our projects, both internal and external. And then co-development and partners is where we do services for clients, both in co-development, work for hire, and also helping clients with self-publishing. Some titles that we have planned for release this year. So we have Asuka coming out on Steam Early Access on PC on June 20th. It's a Viking-themed survival game, and I think it's great to develop and evolve this promising game together with the Steam community in the early access style or type of launch. SteamWorld Heist is obviously our biggest launch for the year, and it's a sequel to the highly regarded original from 2016. It's coming out in August this year, and I'm glad to say that we're seeing great initial response from early playtesters. And finally, a game I want to mention is Replaced. It's a sci-fi retro-futuristic action platformer. That's a mouthful. And it's developed by a very talented team located in Ukraine and Poland. And I can myself not wait to play the full experience. All right, it's time to move on to the financial details of the quarter.

Pat? Thank you very much, Martin. I will now take you through the financial section of the report. Net revenue decreased by 28% to 392 million, explained by the decline both in distribution and in games. I will come back to the performance of each segment in a moment. Gross margins were stable at 38% compared to last year as we had strong margins in several of our businesses which compensated for a weaker margin in NGS. Adjusted EBTA amounted to minus 29 million, which was significantly lower than last year, mainly explained by the revenue drop, lower capitalization of development cost and higher personnel costs related to increased headcount in the game segment compared to last year. The EBTA adjustments consisted mainly of restructuring cost of 18 million and a write-down of 72 million due to further reviews of the acquisitions and investments made in recent years. Depreciations amounted to 66 million, which was higher than last year, mainly due to the release of new games. The write-downs have no impact on the cash flow, of course, but our results were affected by this, and we reported an EBIT of minus 184 million in the quarter. Moving into the segments and starting with distribution, net revenue decreased by 26 million to 323 million. Armo Toys Q1 was very strong with 14% growth. We're pleased to see both improved sales, but also high margins driven by healthy product mix, especially from Soft Toys. Paris Sala, on the other hand, decreased by 33% in the quarter. And this is mainly due to lower hardware sales as the Switch console is now at the end of its product life cycle. The contribution from Berg Sala decreased from 10 million to a negative 3 million. And Nordic game supply continues to have difficulties in the market. Continued price reductions in order to decrease the high inventory levels has resulted in negative adjusted EBTA on the quarter of 14 million. All in all, in distribution, the adjusted EVTA amounted to minus 2 million. And this is 21 million lower than last year. And this is hence explained by the weak result in NGS as well as in Barisala. Moving over to the game segment. Net sales decreased by 36% to 69 million, mainly due to one-time revenues of about 20 million in Q1 last year. in Robert Teddy, but also unusually strong quarter in Coatsink in 2023. And all in all, you could say that the publishing and Coatsink were the main drivers behind the revenues in the quarter. Adjusted EBITDA was minus 20 million, which was significantly lower than last year. This is mainly explained by reduced volumes, lower capitalization and higher personnel expenses. EBIT for the game segment was minus 155 million, largely due to write downs, as explained earlier, amounting to almost 72 million. Let's take a look at the cash flow. Cash flow for the period was negative by 142 million, mainly due to cash flow from operation and change in working capital. The cash flow from operating activities after changes in working capital amounted to minus 156 million, where a large part came from change in working capital and specifically settlements of accounts payables. Investing activities amounted to 45 million and consisted of capitalized game development and investments in publishing rights. Financing activities amounted to 58 million, mainly due to higher utilization of the credit facilities. That took us to cash at the end of the period of 71 million. Available liquidity at the end of the quarter was 131 million compared to 329 million last year. As you can see in the chart, cash and unused credit facilities dropped compared to the previous period. In Q1, net debt increased from 402 million to 647 million. In addition to cash flow for the period, we've had increased leasing debt and unrealised currency effects on financial items. That has an impact on the net debt. Leverage ratio was 4.6 times at the end of the quarter. Thank you very much and back to Martin.

Thank you, Pat. So I will now conclude with some additional CEO reflections. So general comments on the group. First of all, our initial improvements in how we manage the company are starting to take effect. I'm impressed with how the organization is coping with the restructuring program and ongoing changes. And it's great to see the professionalism, talent and engagement of each individual, despite the difficult situation we are in. We all really want to make Thunderfell the best it can possibly be. With that said, as you've seen, our liquidity is still strained and we are continuously assessing our needs. Our bank has issued a waiver which is conditional upon the divestment of additional assets, and we continue to evaluate various divestments opportunities and have a close dialogue with the bank. Given that, we deem that our current and available funds will be sufficient for our continued operations. Either way, I've said it before, 2024 is a transition year. All the improvements we are making, it will take time to see full effect. But compared to where we were end of last year, I'm seeing important progress within the organization. Some comments on distribution. So once again, after also a great Christmas season, Armo Toys really continues to perform well in Q1. It's really great work by the Armo team. Well done. I'm also happy to see that we have agreed to divest Nordic Game Supply, and it will provide additional short-term liquidity for the group. But I also think it's the best possible future for the NGS business and team. And I really wish NGS great future success in its new constellation. In the buy-seller business, we're seeing decline, primarily due to a decrease in demand from the Switch console market, as mentioned. This is not really unexpected, given that Switch is in its eighth year in the market. And quite recently, Nintendo said that they will announce the successor to Switch within their fiscal year, which ends March 2025. Exactly when the Switch 2 or whatever it will be called comes is not yet clear, though. On the game side, first of all, I want to say that I'm very glad to see that our transactional game sales are increasing. This is in many ways the most important part of our games publishing business. It proves that consumers increasingly want to buy the products we have on offer. Also, after all the restructuring, divestments, product reviews and recent write downs, we're starting to see a much more focused and clear product slate for the coming years. In short, we have streamlined our pipeline so that each game can get better support from our production and publishing teams. Moving on, unfortunately we see a decline in the Robot Teddy Partners business as some engagements have come to their natural end in their consultancy lifecycle. Nonetheless, we remain committed to offer support to the self-publishing development community and the Robot Teddy business continues to be an important part of our strategy going forward. And on that note, I want to briefly reflect on our ongoing process of defining a new strategy for games. So although we haven't been able to spend as much time as we'd like on this, I still want to share a few examples on strategic areas we are exploring. So going forward, we will have an increased focus on supporting and nurturing our core development teams, empowering their creativity, but in combination with stronger commercial accountability. As part of that, we will also establish better playtesting methodologies, allowing our development projects to early and continuously validate their ideas with the target audience. From personal experience, I know that this is as close as you can get to a silver bullet in this industry. And last but not least, we are introducing a clearer and stricter go-ahead gating process. It will ensure better control of our product development investment decisions, avoiding situations where we just continue to spend without seeing the necessary progress. Anyway, this is just a teaser. We'll reveal a lot more about our strategic approach later in the year. So, to summarize some key takeaways. The restructuring program is concluding, although the effects will not be fully realized until Q3. AmoToys is showing continued growth and capturing additional market share, which is great to see. The games back catalog and transactional sales are showing healthy growth. And we're working on a focused game strategy that combined with better operational efficiency will improve the segment considerably in the coming years. But to be clear, we are still in a transition period. It will take some time to establish a more sustainable and focused company. And that's all from me and Per. And now we move on to a Q&A session. Anton, take it away.

Yes. Okay. Thank you for that. And let's start with the distribution. I mean, Baguio Sala saw a yearly decline of 30%. Can you give some more details on the primary drivers behind the decline? I mean, are there any extraordinary events that have impacted sales or is it just weaker markets?

It's a weaker console market, really. It's really connected to the Switch and the console market overall. And it's not really surprising. Like we said, the Switch is on its eighth year in the market. Nintendo has now said that there is a successor in the works. And it's very natural that the Nintendo business declines. And that's obviously the most substantial part of Beisola.

And I know that you don't give any guidance, but given the sharp decline, should we expect similar year-to-year decline throughout the year, or are there any events that could support Bagusala's sale in the coming quarters?

Yes, like you said, we're not giving guidance on Thunderfall, but on a general level, it really is connected to how the Switch performs, both obviously in the Nordics, but also on a global level. And unless Nintendo has any nice surprises in the works for this year, which they sometimes have or even often have, We should probably expect that the general overall switch business really across the world will be in decline this year.

And did the decline surprise you and have you taken any measures due to the low sales in Barisala?

It hasn't really surprised us. Again, it's a natural point of the console lifecycle. We are, of course, always looking to optimize the buy-seller business, but we also need to be prepared for the successor to the switch. So it's a fine balance to strike.

And moving forward to Amatois, it continued to perform well, both in terms of sales and margins. Anything here you want to highlight?

No, really just great work by the Amo Toys team. The soft toys category continues to perform, but Amo is also capturing market share in other categories. So overall, just really, really good work by Amo.

And NGS continue to show negative numbers and you have decided to divest their company. And at the time of transaction signing, NGS had roughly one million in inventory. One hundred million. One hundred million. And this can be compared to your inventory level of, I think, 500 million at the end of Q1. So are you satisfied with your inventory level if we exclude NGS?

Well, we are always working to improve the inventory level and find the right level. Historically, I think Thunderfall has been a bit high. So it's something we're tracking on a continuous level. a continuous basis. So yeah, we'll see where it ends up, but it's something we're very focused on optimizing continuously.

And given Nintendo's new console, can you give us a brief reminder of how the pattern typically looks like when they come with a new console? I mean, do you have to build inventory ahead of this?

I think all console releases are different. The original Switch had supply constraint, so then we couldn't build up a big inventory. So it's really hard to predict what happens when the successor to the Switch comes.

And moving on to the gaming segment, you have limited the contribution from new game releases in the quarter. In absence of new releases, are you... satisfied with your sales level or how should you view it?

Yeah well given that we had some one-off costs in Robot Teddy and in CodeSync last year and that SteamWorld build hasn't really performed as well as we hoped I think apart from that we should be reasonably satisfied with the top line absolutely.

And in terms of margins, adjusted EBITDA turned negative. Here I think we need more clarification what actually explained the negative EBITDA.

As I explained in the presentation, the main part comes from the revenue drop in games. Compared to last year, that's almost half of the drop basically coming from revenues. And then it is the capitalization level which is much decreased compared to last year as well. And this is partly due to that we have people on the restructuring program that are not productive in that sense. We have not been able to capitalize as much as possible. And maybe the final part is a higher staff level than the comp period last year. which is obviously something that we are taking actions to counter handle.

And what expectations should we have from the gaming segment regarding underlying cost structure from now on? You mentioned 400 employees at the end of Q2. Yes. What should we think about underlying margins?

The underlying margins that we aim to reach sort of in the midterm is about the 35% EBITDA margin. We're not there yet. And as we've said several times, 2024 is very much a transition year. But that's a level we absolutely think we can reach.

And we have also seen that you have made some changes in terms of your games pipeline, where you have decided to divest or close down several games projects. Can you give some more color on what type of games you have decided to not close down?

Well, we are keeping a lot of our internal development. We think that's very important going forward. And we have also kept some third party projects. And I guess the a bit fluffy answer is that we've kept the projects that we think are the best fit with our strategy going forward. But we haven't said so much about the strategy, so we'll come back to that later in the year.

But we can see that you have not closed down all your mobile games. How should we view that? Are you going to invest into more mobile games going forward?

Mobile games investment, we've decreased investments in mobile games and mobile games is not a core part of our strategy going forward.

Moving on to the games pipeline, you have revealed both Asuka and SteamWorld Heights 2. Can you provide some more information here? What should we think about Asuka, given that it will be launched in Early Access?

Yes, so Early Access is when you launch a game... Launching a game in Early Access basically is a signal to say this isn't a fully finished game. And we want to involve the community on Steam to help us give feedback and help us evolve and develop the game together. And I think a game like Ask, a survival style game, it's a perfect type of game to launch in early access and really have that collaborative development effort and evolve together with the community. So I think it's absolutely the right approach for this game.

And I guess that impacts the price point also, so what kind of price are we talking about initially?

I don't think we've announced the price point for Aska yet, so I will let the publishing team do that when they are ready.

Okay, and maybe if you can remind us of the first in-world heist game and how it performed.

Yes, so SteamWorld Heist was released in 2016. We're not going to mention anything about how it sold, but it has an 86 point Metacritic, so it's a fantastically rated game. And I think it's a 96% on Steam review score. So it's obviously that it was a great game back then, and the SteamWorld fans and we have high expectations for SteamWorld Heist 2.

And do you expect the older Nintendo console to have a negative impact on the sales?

I don't think the decline in the Switch sales, if I understand your question correctly, I don't think the decline in Switch sales really affects negatively the sale of our games. I mean, what's happened is that the Switch has a huge install base and it's also only one of the many platforms releasing the game on. So no, I don't think Switch decline has any impact on SteamWorld Heist 2.

And a broader question, I mean, what is your perspective of the overall gaming market and the pipeline for H2 2024? Is it

is the competition lower compared to last year or what is your view well the games industry overall is in a big shift there are many companies doing various restructuring and cost savings programs and i i'm sure we'll see an effect of that in in at least from 2025 and beyond that basically there are fewer games in development so the product launches will be fewer Exactly if we see an effect of that already at the end of this year, I'm not sure. I think it's going to be more in 2025 and beyond.

Okay. Let's turn to some web questions. Will Jump Ship remain as an independent studio?

It all depends on what independent means. JumpShip is very much a core part of our development studios and efforts.

Yeah, so I'm not sure I understand the question really. Okay, we're moving forward. Yes, thank you. Do you still have engagement in Starkey 2 through robot study?

I'm not sure about that, to be honest. It's a good question, and I know we had, but I don't remember. No, I'm not 100% sure, but I think that sort of involvement ended last year.

In the report you also disclose that you have received a waiver from the bank, which is unconditional of further divestments. Is that related to NGS and HEDUP, or how should we view that?

We have a good dialogue with the bank and they've asked us to look at other additional divestments as well. So it's something that we are assessing what opportunities we see out there.

And a last question from the web. Is a capital increase being considered?

Like we said, given where we are, we still deem that the funding and financing that we have right now is enough for continued operations. But this is something we are assessing continuously. So yes, that's the situation we are in right now.

Okay, so that was the final question. So I leave it over to you for any final remarks. Thank you, Anton.

I don't think we have anything more to add. So thank you everyone for listening. Have a great day. Cheers.