Thunderful Group AB

Hi and welcome to Thunderful Group's Q3 presentation. My name is Anton Hof and I'm an equity analyst here at Redeye and I will moderate today's Q&A session. 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 Paj.

Thank you very much, Anton. So the agenda for today is that we will be presenting our Q3 highlights and financial results. But perhaps more important, also share more details about the strategic restructuring program that we announced this morning. And my name is Martin Walfisch. I'm the CEO. And with me today, I have Per Ahlenfeldt, our interim CFO. And then after the presentation, we will end with a Q&A session moderated by Anton, as Anton said. So if we look at the Q3 highlights and begin with the financial highlights, I will briefly summarize the numbers here and then Per will go into a bit more detail. But our net revenue came in at 74 million SEC and that is a bit lower than last year and primarily due to us not having any platform deals revenue in this quarter. However, once again, I am happy that good performance in transactional sales is helping to keep the revenue up. Our adjusted EBITDA is minus 2 million and our EBIT came in at minus 69 million, obviously explained by quite substantial depreciations and write downs in the quarter. We invested 36 million SEC in capitalized ongoing game projects developed by our internal studios as well as with third-party studios. Cash flow from our operations was minus 36 million SEK for the quarter, which is similar more or less to the cash flow we had in Q2, the operational cash flow we had in Q2. And our available liquidity as of end of September was 120 million SEK, which includes a bank credit facility of about the same amount. So moving to our operational highlights and starting with the publishing segment. So SteamWorld Heist 2 was released in early August and it's received great reviews, over 80 in Metacritic and 95% on Steam. But despite being well reviewed, it has lacked commercial success and it is performing below our expectations. It's proven difficult to reactivate the fanbase of the previous game and to reach new audiences. Asuka was launched in Early Access just at the end of Q2, I think it was June 20th, and it has continued to perform well during Q3. It is developed by an external third-party studio, Sand Sailor Studio, and they are doing a great job to prepare the game for full launch next year. And again, like I said on the previous slide, I'm very happy that our transactional sales are improving. And transactional sales is when we sell our games directly to consumers through online stores. So it's really the backbone of our business. And finally, I'm happy to mention that we announced two games at Gamescom in August. Both are coming out in 2025. The Eternal Die is a roguelike spin-off from our great Lost in Random universe. And Rainbreaker is also a great-looking roguelike game and developed by our studio Fizzbin in Germany. Moving on to our co-development and services segment, the great teams at CodeSync continue with their close collaborations with Meta and other global partners. And they worked on the VR game Batman Arkham Shadow, which was launched in October and has a fantastic 85 score at Metacritic. So well done by CodeSync and other studios who helped develop that game. On our services side with Robotetti, we're happy to mention that our partner Doborog recently announced Clone Drone in the Hyperdome for launch in mid-December on MetaQuest and SteamVR. And that game is a much anticipated VR exclusive follow-up to the indie hit Clone Drone in the Danger Zone, which was first released in 2017. All right, that was my brief update on the operational highlights. Now we're moving into a few more details on the financials. Per, take it away.

Okay, thank you, Martin, and hello, everyone. So let's get straight into the numbers for the quarter and a bit of repetition here. Net revenue amounted to 74 million compared to 83 million in Q3 last year. The drop is mainly due to lower sales in the publishing segment. Adjusted EBITDA for the quarter amounted to minus 2 million compared to 32 million last year. And again, this drop is mainly explained by the revenue drop itself, lower capitalization of development cost, I think you heard me saying that last time that we are not anymore capitalizing for other expenses apart from our own staff costs, which wasn't the case last year. And they released premium fund last year, which boosted the EBITDA numbers in that period. EBIT amounted to minus 69 million compared to minus 10 million last year. And that includes the write downs as Martin mentioned. We have written down one game and we have also two games that were recently launched and therefore they are in their sort of highest depreciation level on the depreciation curve. We do depreciate 33% of the total value of the game in the first quarter after launch. So let's move to the next slide, please. Which is about the headcount development. At the end of Q3, the number of FTEs, which is short for full-time equivalents, counted for 315 people. And that was a reduction of 14% compared to the same quarter last year and a drop by 25% compared to Q4 2023. And again, this is in line and even a bit below the restructuring program as was communicated in January this year. Let's take the next one. Moving into the segments and starting with the publishing segments. Net revenue amounted to 44 million, which was 11 million below last year. And this was mainly due to lack of platforms deals, which we had quite a bit of last year. Adjusted EBITDA amounted to minus 8 million, which was a drop by 18 million compared to last year. This was primarily due to lower revenue, lower capitalization of development cost and higher royalty cost. But this was partly balanced by low personnel cost in the publishing segment. uh ebit amounted to minus 72 million uh and the larger deviation versus last year on the ebit level is due to the write downs of capitalized development cost of nine million uh for one game that i mentioned and uh and the the uh two game uh games that uh were in the first depreciation period. And that represented 19 million of depreciations in those two games only. And moving over to co-development and services segment, net revenue increased by 2 million to 31 million. So there's a minor growth in this segment. on the revenue level. Adjusted EBITDA amounted to 6 million, which was 70 million below last year, and this is primarily explained by higher staff costs, as well as the release of provisions last year. EBIT for the segment was 3 million, also 17 million below last year. Let's move over to the cash flow. Cash flow from operating activities after changes in working capital amounted to minus 36 million, out of which 28 million relates to discontinued business, which included the net working capital price adjustment of approximately 40 million, which relates to the sale of the Barry Sahl and Aomo distribution business in Q2. Investments of 36 million was primarily capitalization of development cost, but also about 7 million in publishing rights. Among the financial activities, repayments of earnouts was the most significant item amounting to 58 million. And the last slide from my side, the available liquidity at the end of Q2 amounted to 120 million, which includes unused credit facilities of 100 million. And that amounted to 23 million SEK at the end of the quarter. That's all that I was going to mention. So thank you and back to you, Martin.

Thank you, Per. So now let's move into talking about the strategic restructuring program that we announced this morning. So I have a couple of slides to share and add some more details. So first of all, just as a reminder, Thunderful is divided into the two segments we talked about previously. The publishing segment covers all publishing activities. but also includes all our development studios that are not working on co-development. And then, of course, the co-development and services segment primarily focus on co-development for global clients. So to be clear, the strategic restructuring that we announced this morning only impacts the publishing segment. And to give a bit of color and detail on the current situation, why have we decided on implementing another restructuring program? So we have a number of reasons. First of all, our revenues this year have come in below our expectations. They haven't improved as much as we hoped they would. We are seeing important improvements, but looking at the cash flow, it is not increasing fast enough. And in addition, we have some delays in game projects that are putting a clear pressure on our short-term liquidity balance. So in essence, our forecasts internally show that Thunderfall is not currently on a state or in a path towards a sustainable future. And when we made a more detailed sensitivity analysis, meaning we've made different business modeling with changes in our revenue forecasts, we see that there is a clear risk of moving into negative liquidity, which we, of course, want to avoid. So we have worked on a number of mitigations to avoid this situation. So obviously working hard to increase our revenue levels. That is an important part, but it hasn't been enough. We have also looked at various financing opportunities, both on a company level, but also on finding co-development work for some of our teams. But unfortunately, nothing has materialized in time. What is left now really is to reduce our cost side and also rethink our investment strategy. So that's why we have this strategic restructuring program. And one of the things we have considered quite clearly when it comes to this program is the balance between internal versus external development and realize that we need to do a strategic shift And I want to go into a bit of detail into our thinking about this. So if you look at the pros and cons, if you start with internal development, so of course, sole IP control, owning and controlling the IP is a big pro in internal development. we also get all the revenue we don't need to share the revenue with any external partner and also very important is the long-term expertise building that over time we build up more and more expertise in our internal teams So all of that is great in internal development, but we also have a number of cons and a number of negatives. And the first one is, of course, that internal development means a lot of fixed costs. And those are particularly affecting cash flow negatively during off and on ramping between projects when we have people in the company that don't necessarily have anything very concrete to do and to work on. And another concern with internal development is that it typically takes longer time to market. We need to include all the concepting and the prototyping of such projects. So those projects typically take a lot longer time. than externally developed projects that we can assign. So if we look at external projects, so the pros that we see them, first of all, there is obviously many, many, many more teams and studios available outside of Thunderful. So there is a big amount of potential opportunities to pick up. It also allows us to be a bit more diverse and plan a bit more around our portfolio and also allows us for go-to-market flexibility when it comes to picking the right titles into the right launch slots. So if we know that, okay, we have an available launch slot here mid or end of 2026, we can look at what is available from third-party developers and see if something fits our slate perfectly. Then of course there are some negatives connected to third-party development as well. First of all, we're not the only publisher out there, so there is competition for the opportunities. Then also revenue sharing, the royalty component, so that when we release a game with a third-party developer, We first recoup our investment in the actual development of the game, but then we share everything that comes after that. So obviously we don't have revenue sharing in our internally developed titles. And then with external titles, the rights for the IP are typically limited or not entirely ours at least. And sometimes they are entirely kept by the development team. So to summarize this very simply, internal development requires typically higher investment levels upfront and thus increases the risk profile, whereas external development is lower on upfront investment levels and thus has a somewhat lower risk profile. So how this will play out is that we will increase and start signing external third-party games again. So even though we haven't signed any title recently, we have been scouting and have good contacts with very interesting teams. And the idea is to start signing new titles again soon. And as mentioned, even though we are downsizing our internal development studios, we will still retain some internal development capacity. And those projects, we will typically have slightly bigger budgets or somewhat bigger budgets for our internal studios compared to the projects we signed with external studios, external partners. And also one thing that we will be looking at to mitigate the risk level of internal studios is to see if there are interesting IP acquisition opportunities from external developers. Sometimes you have a good external studio, they make a great game, but they're not so interested in making a sequel. Those kinds of opportunities could be potentially interesting for Thunderful to pick up and see what we can do when we add more production values and budgets to those projects. Yes. Okay, so the effects of the restructuring of the publishing segment. So the immediate change, and I'm repeating myself a bit here, but we are decreasing our upfront risk profile, and refocusing the organization on third party publishing. This means that we will have redundancies of between 80 and 100 people, and primarily in our internal development studios. We will also do some additional overhead reductions and cost optimizations. And then, of course, increase our investments in third party publishing and sign new titles for launch in 2026 and beyond. And then, as I've been saying, I think in every quarterly report, an important part of improving Thunderful is to make continued improvements in our operational processes and structures and methods. The expected outcome of this is, first of all, that the announced titles we have for 2025, they will still be launched as planned. We will have a release cadence of 45 games per year, which is similar to our plans before as well. And as mentioned, we'll keep some internal development capacity, but we will decrease the average investment levels per game that we produce. And we really need to improve our average return on investment for our upcoming releases. That is the foundational shift that needs to happen for Thunderfall. The financial impact of this restructuring. So we estimate one-off costs for implementing the program of about 25 to 30 million SEK. One-off write-downs of between 220 and 240 million. We will have annual cost savings of about 80 to 90 million. But then as part of this strategic shift, we will increase our investments in external publishing rights to 30 to 40 million. So on balance, this will improve the cash flow with about 50 million per year. Okay, so key takeaways. Q3 overall, I would say, has been on track, but obviously the sales of SteamWorld Heist 2 has been a bit disappointing and below our expectations. Again, saying I said this many times before, but our transactional sales continue to improve. Very happy to see that. And then the strategic restructuring of the publishing segment will shift our investments to third party publishing. And in that sense, de-risk our investment strategy. And then, of course, we still need to improve the organization. We need to improve everything we do so that our games that are coming out in 2025 are both creatively fantastic, but not least also commercially successful. All right. That was the presentation. So moving on to the Q&A with Anton.

Okay, thank you for that. And yeah, we have to start with the updated strategy and the restructuring program. If I understood it correctly, the pipeline that is shown in the Q3 report is not impacted at all, or can you elaborate on this?

The announced title, so the titles that don't have a code name, they are not impacted, but we will have an impact on other lines of the titles in the report.

Okay, but those titles are most tilted in late 2025 or 2026 or... Yes, the biggest impact is on titles beyond 2025. Good. And you also mentioned here in the presentation that maybe we can expand on the balance going forward in terms of external versus internal IPs.

Yes, so... I mean, Thunderful right now has a big focus on internal IPs and internal development. So that is what needs to shift so that we invest comparatively a lot more in third-party development and less in internal development. i don't know if that really answers your question i mean does third-party games equals to external ips or can it also be internal ips that you shift to external studios right good okay now i understand well yes so i think third-party games will typically be ips from those developers But sometimes we might find opportunities where we have one of our internal IPs and find a great developer to do that. So I would say both. But on balance, I think it will be a little bit more on IPs developed by the external third-party partner.

and also if i understood it correctly you're going down in size in terms of project value in external studios and also when it comes to internal projects you mentioned two to four million euros now

Yes, correct.

And I mean, if we're moving on to the report, we see that the publishing segment continues to have some headwinds and we see that SteamWorld Heist 2 did not meet your expectations. I mean, how does this outcome and the new strategy impact the SteamWorld franchise going forward?

Well, the SteamWorld franchise, I still think it's a fantastic franchise, but obviously we are disappointed that the last two launches haven't been commercially successful, or at least not to our expectations. So it is definitely something that we are reviewing internally and trying to figure out what is the best approach for the future.

Okay. And on the positive note, you highlight Aska, which has continued to perform well. Can you give some more flavor here? I mean, what are your expectations of the title going forward?

Well, I think we were very happy with the early access launch in June. And yes, it has continued to perform. And we and SandSailor Studio are gearing up for a full launch sometime next year. And I think this is the kind of game that can live on for many, many years. So yeah, we have high hopes that it's going to continue attracting players and generating nice revenues for many years to come.

So just make it clear they are not impacted by today's news?

They are not. They are an external development studio, so they are a perfect example of what we want to do more of.

Good. And I mean, if we take a broader view, do you think it will be easier to release games in 2025 compared to 2024? If so, why?

Well, I don't think... It's never easy to release games. This industry we operate in, there is a lot of content available. So I do think that we will see an effect of the overall industry challenges and see sort of a downward pressure on the amount of games coming out. So that will make it a bit easier perhaps to stand out in a crowded market. But the core of it is just us. We need to do a great job with the games we launch and make sure that the games themselves are fantastic and that our publishing and marketing teams really connect, make sure that the games and the marketing connects with a substantial audience.

And if we move on to co-development and service segment, here we see that sales rebounded somewhat from Q1 and Q2 levels. Can you give some more color here? What drove sales in the quarter?

Well, the segment obviously mostly consists of CodeSync, revenue from CodeSync. And, I mean, that is a relatively stable business. So there will always be some ups and downs between workers because of periodization, is that the word in English, of when the revenue comes in and is recognized. But overall, it just continues to be a good, stable business at CodeSync.

But you mentioned that Robotele had some struggle in Q2 or in the past quarters. Have you made any progress there?

Robotelli has absolutely declined quite a lot from its peak a year or two years ago. And I think I've said it before, we very much still believe We very much still believe in the strategy of RoboTeddy. So we're continuing to implement that strategy, but it's going to take a while to get back to the levels we have been at before.

And if we once again broaden our view, what long-term margins are you satisfied with within these segments?

Well, we're not really giving any guidance, so I probably shouldn't. We said earlier a few months ago, or I think it was in the Q2 report, that we're not going to set any financial targets, so let's not go there now. We'll come back with financial targets when... But Thunderful has stabilized and we feel ready to talk about that.

Good. And we will move on to some questions from the audience. And I think we have touched on this before, but will Thunderful benefit from a successful launch of Stalker 2 as Roboted has worked on the titles?

uh no as far as i remember the the deal regarding stalker 2 had more of a one-off one-off effect uh in if it was earlier this year or if it even was in 2023 i don't remember apparently you know no but but it was a a one-off effect not a continued effect

Okay. And we move on. In the Jamship deal, there was an earn out component. How much has already been paid here and how much do we have left?

Per, do you remember the number we have paid out?

Sorry, in total or?

The question is about the jump ship deal. So that's quite specific.

Are we sharing? I don't know if we're sharing.

No, we don't share sort of specific subsidiary data like that.

No. And I guess that you also cannot disclose what the re-evaluation of earnouts in the quarter are referred to.

No, not specifically. It's more, you know, the sort of the theory behind it is that we've taken new views. We know more today and we've evaluated based on the most likely sort of outcome.

Yeah. Another question is about Capital Markets Day. Will you have that soon to present the new strategy going forward?

We have not planned for any capital markets day right now. And obviously on a day like this, when we've announced a big restructure and big changes inside the company, that is what we will be focusing on in the coming period. And then once that is done and we can focus more on the future, we will definitely come back to the idea of having a capital markets day.

Good. And the last question from the audience is about if you have any plans to make games that are more mod-friendly. Martin?

I would love for us to do games that are more mod-friendly. I think that's a fantastic way to engage the gaming community and increase the longevity of the game in the market. So the short answer is yes, I hope we can do that, but it also requires investment upfront to make a game mod-friendly. So it's always a balance. How much do we think making it mod-friendly, how much do we think that can actually generate and help improve sales over time?

Good. And that was the final question. So I leave it over to you for any final remarks.

Thank you, Anton. Well, we don't really have any final remarks, so thank you for good questions and