Thunderful Group AB

Hi and good morning to Fundful Group's Q2 presentation. My name is Anton Hof and I am an equity analyst here 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 web form below the stream. And with that, I'll leave it over to Martin and Per. Please go ahead.

Thank you, Anton. And good morning, everyone. And greetings from Cologne in Germany, where I'm attending the Gamescom conference together with about 10 colleagues from Thunderful. We are here to meet with partners, scout for new business, and of course, show some of our games. And also eat affogatos. Anyway, let's move on. My name is Martin Wollfisch and with me today on this call I have Per Ahlnefelt, our interim CFO. We've had a very eventful second quarter this year and we will present the highlights, not least the big changes, and then end with a Q&A session moderated by Anton. Now before we move into the actual results from Q2, I'd like to summarize the big changes that happened in the quarter. So as of the end of Q2, we are now a pure play games publishing and development group. We have completely divested our gaming hardware and toys distribution businesses, and we have also divested the German-based indie publishing business HeadUp. The group is now much more focused and consists of a publishing department working closely with our eight development studios. And we also have a services business. It's important to note that in the Q2 report, the divested businesses, the ones on the right here, are reported under discontinued operations, so they are not included in most of the numbers and results we will be reviewing in this presentation. And as a consequence of our new focus, we report the group operations in two newly defined business segments. The publishing segment focuses on all our efforts to develop, market, and commercialize our games and IPs. This includes the creative output from our eight studios, as well as the game projects we do with external third-party studios. Our second segment includes the co-development and services businesses. CodeSync, one of our studios, does a lot of full-service creative development work for external clients, such as Meta and other big global companies. And in our Robot Teddy business, we tap into the resources and expertise we have in publishing to provide tailored services to third-party game developers who seek help with their self-publishing efforts. Among our services, we can help with marketing, release management, business development, and strategic planning. And speaking about strategy, As Thunderful now transitions into pure publisher and development business, we are working on defining and implementing a more focused strategy for the group. And first of all, we are clarifying our publisher identity. So going forward, we will be focusing on the space between indie and AA games, investing between 2 to 8 million euros in our various productions. We will focus primarily on PC and console games with mostly single player experiences and the games we produce will have strong emphasis on characters, amazing worlds and emergent gameplay. All of this is building on the strengths of Thunderfall. We will stay with a premium business model and also ensure that we offer DLCs and other upsell opportunities. And finally, a key to success is to build and nurture a good relationship with our community of players. So we will increase our focus on that going forward. And although most of our ongoing projects and investments fit this approach, it will still take some time to fully establish this strategy across the group, as we have plenty of legacy decisions still to manage. And in addition to clarifying our strategy, we are also working diligently to improve our operational excellence. So improving our management structures and processes is key to success. This includes a stronger focus on establishing and supporting our core development teams and also being smart with resource allocation, trying to stay lean and not falling in the trap of overstaffing projects just because we can then temporarily increase our capex. Another aspect we call repeat to master. And in essence, it's ensuring that we continuously increase our expertise across select focus areas. We also aim to increase our efforts in smarter prototyping and player testing to continuously validate our development output and identify invalid assumptions as soon as possible. This is something that I have in my career seen working time and time again, getting early player testing to make sure that our games have better quality and fit the market. And finally, we're convinced that continuing to commercially explore our own core IPs will bring additional long-term success. Now, a few words about growth plans. So although Thunderfall has been going through a lot of difficult, much needed change lately, we are still committed to delivering long-term success and growth, of course. So we see our future achievements and expansion primarily coming from a few growth areas or a few growth drivers. First of all, and this comes as no surprise, we need to make the right IP bets and investments, and this will be based in part on our focus strategy, but also in combination with relevant market data and our strong creative capabilities. We will also continue to publish third-party titles to offer continued variety and a regular cadence of games complementing our own studio's output. And also over time, we will increase our internal development capacity and expertise. Furthermore, continuing to provide services to self-publishing partners is also something where we see future growth potential. And very interestingly, of course, we believe that emergent technologies, most notably AI, generative AI, and cloud gaming will bring exciting growth opportunities as well in the coming years. And not least, of course, we expect stable and predictable revenue growth from our increasing back catalog business. Now, let's move on to the highlights of what actually happened in the second quarter. So let's start with some financials. Our net revenue came in at 83 million SEC. And this is somewhat lower than last year due to decreased services revenue and us not having any platform deals revenue in the quarter. However, good performance in transactional sales definitely helped keep the revenue up. Our adjusted EBITDA landed at 4 million SEC, providing an EBITDA margin of 5%. And the lower EBITDA is of course due to the lower revenue, but also partially explained by us applying a stricter capitalization policy than before. Our EBIT came in at minus 60 million SEC, and this is partially explained by write-downs of 19 million SEC of two games with poor sales performance, but also write-downs of 12 million SEC of two game projects that were cancelled as part of our restructuring program. This quarter, we invested 55 million SEC in capitalized ongoing projects developed both by our internal studios as well as with third-party studios. So this is substantially lower than last year and is an effect also of our restructuring program. Cash flow from operations, excluding the discontinued businesses, came in at minus 33 million SEC for the quarter. Our available liquidity as of the end of June was 255 million, of which 119 million are unused credit facilities. But to give a more complete picture of our cash position, Per will dive a bit deeper into it later in this presentation. Moving on to operational highlights. At a group level, we have, as mentioned, made substantial divestments, and Thunderful now is a pure play game publishing and development operation. So this restructuring program that we started at the beginning of the year has now concluded, and the annualized savings amount to 90 to 100 million, just as was planned in January. Also, as noted earlier, we are putting considerable leadership focus on defining our new strategy and operational methodologies. And as part of that important work, I'm happy to announce that after the end of the quarter, industry veteran Jenny Wielund has joined us as new EVP of operations. Now looking at the publishing segment, we had the launch of Aska in early access at the very end of the quarter. The game has been received well by the players and even sold a bit better than we expected in those first days. So big kudos to the developers at SandSailor Studio and our publishing team. Also to be noted is that our transactional sales have increased compared to Q2 last year. And transactional sales, for those of you who don't know, is when we sell our games directly to consumers through online stores, such as Steam or one of the console stores. And this is the very backbone of our revenue, and the good results are an initial sign of our increased commercial focus, I believe. So I really want to applaud our publishing team, which is working hard every day to deliver these results. To further improve our commercial publishing activities, I have asked Catherine Strangfeld to take on the permanent role of EVP of publishing. Catherine has been with Thunderfield for almost three years in executive roles, and she will continue to work together with our various teams to improve our structure and processes. And as I've said a few times before, our future success will come from the right collaborations and balance between our creative and commercial operations and mindset. And then to conclude the publishing segment, after the end of the quarter, we launched SteamWorld Heist 2 to great critical acclaim. It scored over 80 on Metacritic and an amazing 96% positive player reviews on Steam. So fantastic work by our teams, and I can recommend you all to go buy it and play it. An important part of the commercial success of Heist 2 will be connected to how well we can re-engage players and fans who played the original Heist almost 10 years ago. So we have various marketing activities with the aim of achieving that. Now on to our co-development and services segment. So CodeSync is continuing their great co-development work with different global partners and we are happy to note that they just signed a large 18-month contract extension with one of their long-standing partners. This work covers a substantial portion of CodeSync's talented and experienced developers. Moving on to services business, Robot Teddy has seen some market decline in the revenue compared to last year, but the team is working hard to redefine and expand its services offering. And I'm hopeful that the future of the business, or I'm hopeful for the future of the business as the services that Robot Teddy provides are sorely needed by many third-party indie developers. Now, before Per gets to dive into more financial details, I will make a brief introduction to Thunderful for those of you not fully familiar with our business. So by the end of June, we had a bit over 300 employees on payroll, most of them working in our eight internal development studios. And we are working on 10 different games for release in 2024 and beyond. And our Thunderful publishing business is also working on three games with external studios. Our net revenue for the last 12 months was around 331 million, coming primarily from the sales of our games and development services. Across the group, we have many different games and IPs. The most long-running is the SteamWorld franchise, where the first game was launched in 2010. And since then, seven different SteamWorld games have been released. More recently, we have also launched great games such as Lost in Random, Planet of Lana, and Viewfinder. And we also work and collaborate closely with some of the largest companies in the world, such as Meta, Microsoft, Sony, Nintendo, Steam, and others. And as mentioned earlier, our operations are divided into two segments. The publishing segment also contains all the development operations for our own games and IPs. And we have operations in the co-development and services segments where we work with external clients and partners. And our teams and studios are mostly located in Northern Europe, so in Sweden, UK and Germany primarily. And moving on to perhaps the most exciting part, our recent and upcoming game releases. So as already mentioned, ASCII was released in Early Access in June, and SteamWorld Heist 2, the sequel to the much beloved original, was launched two weeks ago. And we just last week launched the futuristic racing game Phantom Spark. So we're of course working hard to maximize the potential of all these titles. And as for upcoming games that we are publishing, so yesterday evening, late last night, we and studio Fitspin announced Rainbreaker. It's a medieval punk action roguelike coming soon to PC. And Fitspin is a highly talented German developer that joined the Thunderful family last year. So I'm very much looking forward to seeing the results of our first game together. And Replaced, that I've mentioned in previous earnings calls, looks to become a great game, but it's unfortunately being delayed into 2025. The team needs more time to meet the high standards that they, we and the fans expect from this amazing looking game. The game was featured earlier at Summer Game Fest to great response, and it will also be available to play at Gamescom this week here in Cologne. And finally, a slight tease, we are very, very, very soon announcing a new title that is slated to come out in 2025. So stay tuned for that. And as mentioned, we have other titles in the works as well, and additional details will come when we are ready to share more. All right, that was it for me for now. So Per, over to you.

Thank you, Martin, and good morning, everyone. Before we dive into the numbers, I just want to repeat what Martin described about the transformation of Thunderfall. We are in a transition year with major divestments and a restructuring program that creates challenges in analyzing the numbers on a year-on-year basis. The discontinued business is reported on separate lines below EBT in the P&L. and under each section in the cash flow statement. And the comparable periods have been restated. So let's go through the numbers for the quarter. Net revenue amounted to 83 million compared to 97 million last year. The drop is mainly due to lower sales in the co-development and service segments. The adjusted EBITDA for the quarter amounted to 4 million compared to 55 million last year. The decrease is mainly explained by the revenue drop, lower capitalization of development costs and higher royalty costs than last year. EBIT amounted to minus 60 million compared to 13 million last year and includes a write-down of capitalized development cost as Martin mentioned for a total of 31 million. And now let's take a look at the headcount and the full-time equivalents to be a little bit more precise. At the end of Q2, the number of full-time equivalents counted to 329 people. This was a reduction of 20% compared to the same quarter last year, and a reduction by 21% compared to Q4 2023, which was also the basis for the, or starting point for the restructuring program. And it can also be mentioned that this is in line with the restructuring plan communicated in January this year. Moving into the segments and starting with publishing. Net revenue amounted to 58 million, which was almost in line with last year. Q2 2023 contains significant platform deals. which was not the case this year. However, that shortfall was largely offset by a healthy level of transactional sales. Adjusted EBITDA amounted to minus 2 million, which was a drop of 36 million compared to last year. This was primarily due to lower capitalization of development costs and higher royalty costs this year. EBIT amounted to minus 64 million. The larger deviation versus last year on the EBIT level is due to the previously mentioned write-down of the capitalized development costs of 31 million. And now over to the co-development and services segments. Net revenue decreased by 12 million to 25 million, which was due to the revenue drop in Robert Teddy. Good news, as Martin mentioned, is that CodeSync signed a new co-development agreement with a major partner during the quarter. Adjusted EBITDA amounted to 6 million, which was 15 million lower than last year. And this is also primarily explained by the revenue drop. And EBIT for the segment was 4 million, which was also 15 million below last year. And now we come to the cash flow and The cash flow statement, as you might have seen already, is largely affected by the divestment of the distribution business at the end of the quarter. So it can be a bit hard to approach these numbers, but I would like to point out a couple of things. Firstly, the cash flow from operating activities after changes in working capital amounted to a positive 411 million. out of which 444 million relates to the discontinued business. As Martin mentioned earlier, this means that the operating cash flow excluding the discontinued business amounts to a negative 33 million. And secondly, in essence, the divestment have enabled us to repay all the bank debts. The final slide from my side is about the liquidity situation. And available liquidity at the end of Q2 amounted to 255 million, which includes an unused credit facility of 119 million. Net debt amounted to positive 108 million SEK. end of June and this was a consequence of the divestments, obviously. Worth mentioning is that there will be significant outgoing payments in Q3 this year. All of them reported as short-term debt in the balance sheet. Firstly, we will pay short-term earners of some 60 millions during the quarter. So 60 million out of this total 70 million as is reported as short-term earnouts will go out in this quarter. And secondly, we will also pay a networking capital price adjustment of approximately 40 million as per the agreement of the sale of the distribution business. As part of the same agreement, Thunderfall will receive a payment of 39 million, so almost the same amount, but at a later stage that will happen in Q2 2025. To conclude, Thunderfall's financial position forms a good basis for implementation of the new strategy. Thank you and back to Martin.