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.

Thank you, Per. So before we move into the Q&A section, let's look at some key takeaways. So to summarize this very eventful quarter, fully divesting the distribution business has transformed Thunderful into a pure game publishing and development house. And our unfortunate but much needed restructuring program has concluded as planned. We've seen strong and important growth in our back catalog and transactional sales. We are working on a focus strategy that combined with better operational efficiency will improve our business in the coming years. And all of that is great. But I want to remind you that we see 2024 still as a transition year. And we have many improvements still to make this year and ongoing. So even so, I have absolutely no doubt that with a continued focus and hard work, Thunderful will become a sustainable and highly successful company. It will take some time, but we have the creative talent, we have the drive, and we have the commercial focus. Okay, that's it. Thank you for listening. Let's move into the Q&A session. So Anton, back to you.

Okay, so thank you for that. Let's start with your new strategy within games now that you have divested the distribution business. You disclosed some numbers in terms of publishing versus co-development. Can you give some more color here in terms of the revenue mix going forward? What are you aiming for?

Yes. So I think the revenue mix right now is 70-30 or so. And the revenue, the optimal revenue mix is actually part of our ongoing strategic discussions we have internally. So it's at 70-30 now, and we'll have to come back to you if we believe that's the right mix going forward. But it's very important, of course, to figure out how we want to balance our various businesses and the risk that comes with them.

But is it fair to assume that you will de-risk the games segment now that that's the only segment left?

Well, de-risking the game segment would be great. And that's, again, a part of our ongoing discussions internally. And it's, of course, easier said than done exactly how to achieve that. But it's part of our thoughts and discussions going forward. Absolutely.

And in terms of new game releases in the quarter, Aska was the most prominent one and you highlight that it has exceeded your expectations in terms of sales. Can you give some more color here? What should we think about Aska going forward?

Well, I want to be careful and not to over-promise. We would rather under-promise and over-deliver. But obviously it was received very well by the players. It is still an early access game, so a lot of things will change in it and improve in it before it moves into full launch, hopefully sometime during next year. So yeah, early access games are a bit special as the development team will work closely with the player community to get their feedback, to understand what to focus on and what additions to add to the game.

And I don't know if you disclosed that, but how was the revenues in terms of new releases in the quarter?

We did not disclose that in the report and I'm not disclosing it here either.

Okay, I tried. And after the quarter you have released SteamWorld Heist 2, which has received good reviews both from critics and players. But you also highlight that it has been some challenges in terms of reactivating older players from the franchise. Can you give some more color here in terms of SteamWorld Heist 2?

Well, I think it's too early to say, but obviously to reach the success level that we're hoping for, we need to have the right combination of re-engaging the SteamWorld fans and not least the SteamWorld Heist fans from 10 years ago, as well as new players coming in into the franchise. So this is something we're working very hard on and actively following, of course.

And can you give some more information regarding on which platform the game is performing best on?

Right now, the game is performing best on PC.

And if we look at the games pipeline, I mean, in the previous quarter, you closed down, I think it was 12 projects. How do you view your current pipeline if we take H2, for example, and 2025?

Well, the rest of this year, as mentioned, not least after Replace was moved into next year, it is a bit thin. 2024 is a transition year for us. But from 2025 and onwards, we believe we have a very healthy slate of products. Fewer than Thunderfall has had in the past, but as mentioned, it's about having a bit bigger games that we believe have a higher chance of reaching commercial success in the market.

So in terms of numbers you will still have like 10 games in the pipeline going forward or do you aim to increase that in the long term?

I mean, some of the games or I guess most of the games we have now are sort of old decisions, the investment decisions. So as we clarify the strategy and dive deeper into the details of that internally, we might revisit the size of the games that we develop internally and that might also change the number of games. But all in all, we believe that the sort of current investment level in money, in million sec, will stay about the same.

And in terms of the pipeline, we have got a question from the webcast. And has Yamchip been closed down since there are no games from them in the pipeline?

No, Jump Ship is not closed down. They are a very talented team and they are working on something that we will be ready to talk about further out in the future.

And in terms of replaced, as you mentioned, it has been postponed to 2025. Can you give any more colors here? Is it the early 2025, late 2025 or...

No, I can't or I won't give any more details. But I mean, as I think has been mentioned before, the developer, Sad Cat Studio, they are fantastic, but they are originally based partially out of Belarus. And the war in Ukraine affected their development efforts quite substantially for a time, and to some extent still. So that has caused... And also, as we're seeing, there is so much great expectations for the game. So we and the developer, we want to make sure that the game reaches the high quality level that everyone expects it to be.

And if we move on to code development and services, you mentioned that RoboTED is the primary reason for the decline or is the reason for the decline in the quarter. Can you give some more color here? I mean, how should we think about RoboTED in H2?

Well, in H2, we shouldn't have high expectations, I would say. From my perspective, what I'm really excited about is the strategy around Robot Teddy. It's basically taking the expertise and the resources we have in our publishing operation and then using that expertise to help other third party indie developers, if they need help, of course, but some do with their own self-publishing efforts. So I think it's a fantastic way to sort of find synergies using our resources, but also put that expertise into the hands of great indie developers out there. So I think the strategy is absolutely great. And what we're doing going forward is refocusing the operations and redefining the offering to some extent. So 2024, we shouldn't have high hopes for RoboTeddy, unfortunately, in terms of revenue. But I believe that from 2025 and onwards, we're going to start seeing a shift for the better again.

And in terms of CodeSync, with the new contract there, are we going to see any big jump in the revenues there in H2?

No, I think this contract, I mean, the amount of people at CodeSync working on co-development, because I don't know if I said it in the presentation, but obviously some of CodeSync's developers work on internal games or IP, their own IP, which is part of the publishing segment. But most of the people at CodeSync work in the co-development segment. And I think the sort of amount of people being utilized for various client projects stays about the same. So we shouldn't expect any substantial changes in revenue.

And in terms of cash flow, you invested 42 million in game development and some in publishing rights or projects. Are you satisfied with this level going forward or how should we view that?

Yes, we believe that the cost level we have right now is in line where we should be. After the restructuring program, after the cost savings, we believe that this is a good level of investment. So obviously, we're following the performance of the group as a whole, and that will also affect our investment capability. But...

as a general view and outlook we think that we should stay at about this level and we take some more questions from the web can you elaborate about the difference in game capitalization now compared to before

Well, no. I'm just going to say that our approach is a little bit more conservative now than the company did previously. And obviously, the goal is to avoid or minimize the risk of having to do write downs in the future. So we believe it's a little bit better to be conservative with capitalization and then sort of get it back over the P&L when the product starts selling.

And have you ever thought about expanding your SteamWorld franchise IP to other media, such as series, films, tabletops, card games, and merchandise?

That is always an interesting discussion for any company with a good IP. So absolutely, it's something that's sort of bubbled up internally as a discussion but right now our focus needs to be on the games, the games development and the games publishing and getting that to a level where it's sustainable so merchandising and other stuff with SteamWorld don't expect it in the near term at least but it's absolutely something that would be fantastic to do a bit further out

And then we have a question about earnouts. And you mentioned in the presentation that you will pay out 60 million now in Q3. Do you see that all the earners will be met, or are there any chances that you will not pay out the full earnouts?

Per, do you want to take this?

Yeah, I mean, we've been very prudent in the evaluation of the earnouts. Hopefully, the underlying performance is very good. In that case, we would like to pay out all the owners, but of course, there are connections to the performance. As it looks in the balance sheet, we are basically covering the whole

amount as if they or not will be paid out in full yeah okay and the last question martin as you mentioned you are at gamescom can you give some more information here are you going to announce something exciting and what do you think will be the main topic at this year's event

Oh, the last question is a good question. But Gamescom is starting now, this morning. And as I teased in the presentation, we are announcing something very, very, very, very, very soon. So I will not say more than that about that. As for what will the sort of talks and the discussions in the industry and at the conference... I don't know yet. I mean, I'm sure there will be some discussions between publishers and developers about the sort of trying times that have been for many in the past year or so. But I also believe that I'm starting to see people being more and more optimistic about the future and I am as well. So I hope that that will be a big part of the discussions here at gamescom as well.

Sounds good. So that was my final question. So I leave it over to you for any final remarks.

No, no, no final remarks from us. So thank you, Anton, and thank you, Red Eye.