Thunderful Group AB

Hi and welcome to Thunderful Group's Q1 presentation. My name is Anton Hof and I'm 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 Michael. Please go ahead.

Thank you, Anton. And good morning, everyone, and welcome to the Thunderful Group Q1 presentation. My name is Martin Walfish, and with me today I have Mikael Falkner, our CFO. We will be presenting our Q1 highlights and financial results, and also give a brief introduction to Thunderful and our focus for the future. We will then end with a Q&A session moderated by Anton. So, before we dive into Q1, let me give you a brief introduction to Thunderful Group. 2024 was a year of substantial change and transformation for Thunderfall, and we are today a very different company compared to a year ago. We are now a focused games publisher and service provider. We publish PC and console games from our internal studios as well as third-party external studios. And we also have a strong co-development and services capacity working on projects for external clients. And after last year's restructuring program, we will be just above 200 people by mid-year this year. The group is divided into two reporting segments. The publishing segment focuses on all our efforts to develop, market, and commercialize games and IPs. And this includes the creative output from our four internal studios, as well as game projects by external third-party studios. And as mentioned in our Q4 report, our two additional studios, The Station and Studio FISBIN are unfortunately winding down as part of our restructuring program. So although they are technically still part of Thunderfall, they have very limited staff and development operations from Q2 this year. Our co-development and services segment primarily focuses on offering development and publishing related expertise. CodeSync, our largest studio, 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 within publishing to provide custom services to third-party developers who seek help with their own self-publishing efforts. So we can help with marketing, release management, business development, strategic planning, and much more. In our publishing segment, we have a focus strategy, and we are primarily publishing PC and console games in what we call the premium indie space, positioning ourselves between indie games and AA games. And our game investments are typically between 500,000 euros up to 4 million euros. And third-party projects are normally on the mid to lower end of the investment range, whereas internal development projects skew towards the mid and higher end. We also have a strategy and identity around what kind of games we publish. This is divided into our emotional identity, content identity, and commercial identity. And we aim to release around four to six games per year. So I'm not going to go into more details here, but all of this and a lot more that we are talking about internally helps steer our decision-making aimed at ensuring future creative and commercial success. Now, moving on, I want to say a few words about the market we operate in. So we often talk about the games industry as one big business, but it is really divided into several markets with different dynamics. As we see in this graph, most of the industry's growth in the past 15 years has come from mobile platforms, but that growth has stalled a bit in the past few years. And at Thunderful, we have a primary focus on the PC and console part of the market, which also has had its ups and downs over the years, but has had a steady CAGR of around 5% for decades. And it is also expected to continue to grow for many years still. That is, of course, not to say that this is an easy market to operate in. The business dynamics are constantly shifting and there is fierce competition. So we need to be at the top of our game to succeed. Now, if we dive into the indie market within PCN console, within the PCN console market, we see that it is outpacing the general growth, and not least the premium indie or triple I part of the market. So the need for strong publishing services and building attractive IPs will continue to increase in this space. As for opportunities for Thunderful to grow successfully in this market, we see a few interesting paths. First of all, we need to continue improving how we work and execute, and we've made great strides towards that throughout this year and continue to work on making organizational improvements. And apart, of course, from ensuring good quality games, it's all about finding new ways to cut through the noise in the market and attract a large audience for our games. And thirdly, we believe that there are very interesting technologies that will have an impact on this market. Cloud gaming is perfectly fitting for many indie games, and even though it hasn't seen big success yet, we believe it will become increasingly important in the coming years. And lastly, AI is a huge game changer, not just in the games industry. And it's a complex topic, also with some controversy, but we need to continue to learn how we can use it to make better games more efficiently while retaining our world-class creativity. All right, with that said, let's move on to the highlights of Q1. So I'll summarize the high-level financials, and then Michael will go into a bit more detail. So our net revenue came in at 62 million SEC, which is slightly higher than the same quarter last year. Our adjusted EBITDA is minus 9 million, and our EBIT came in at minus 66 million, of which around 29 million are related to write-downs. We invested 29 million SEC in capitalized ongoing game projects, both in internal studios and third-party collaborations. And cash flow from our operations was minus 12 million for the quarter, which still contains substantial costs related to our restructuring program. Our available liquidity as end of March was 83 million SEC. And Michael will elaborate more on our liquidity position later on. So moving on to our operational highlights and starting with the publishing segment, the restructuring that we announced in November was mostly completed during Q1. And I'm very happy that we now can put our attention to building a great organization, creating stability and alignment for the future. Combined with the exciting launches that we have this year, we have every chance to achieve both creative and commercial success. As for revenue, our transactional sales continue to show important stability. This is despite us not having had any new major releases since mid last year, and it really shows the strength of our existing catalog and the good work our sales and marketing teams are doing. And finally, I'm happy to mention that last week we signed a publishing contract with a highly talented developer called Plot Twist. And we're not saying anything more about this project right now, but I'm very excited about this collaboration. And I can also say that last week was a very important and effective work week for us at Thunderful. We gathered our publishing and development teams in our office in Gothenburg to align our plans and prepare for all the launches we have later this year. Moving on to our co-development and services segment, the great teams at CodeSync continue with their close collaboration with Meta and other partners. And there's one thing to note, to ensure the quality of an upcoming project, CodeSync has had to delay some deliverables, which in effect decreases the average billing rate for the project. However, since the game has a nice revenue share component, we are expecting to catch up after the game launches. And lastly, CodeSync is of course also focusing on securing good co-development contracts for 2026 and beyond. All right, that was the highlights for me. Michael, over to you.

Thank you, Martin. And hello, everyone. So let's get into our quarterly numbers. And we will be starting with an overview for the group. So we did see sales in the quarter, about 7%. The sales increased in both of our segments where the majority of the growth is coming from our co-development business and is to a large extent a facing effect driven by certain project delivery times. As previously announced and reported on, Fundafold initiated two restructuring programs last year, one in Q1 and another one in Q4. And the cost reductions from those programs are very much visible in our Q1 numbers, mainly within our personnel cost, which decreases from 75 to 48 million SEG, so a decrease of about 27 million SEG. The lower cost and slightly improved revenue has had a positive impact on our EBIT and EBITDA, albeit it is still negative. The significant improvement that we see on our EBIT level comes mainly from significant write downs in the comparison period and relatively low write downs in this year's Q1. Moving into our segments and starting with publishing, net revenue improved slightly, which as Martin mentioned, given that it is more than six months since our latest game release, indicates a strong performance of our active games and back catalog, where our transactional sales holds up versus the comparison period, which had more newly released games. And transactional sales, to reiterate, is when an individual consumer downloads an individual game, whereas the other revenue component in this business model is platform deals where we do one of deals and the game is later included in a subscription model of that platform. Our royalty costs in the quarter, so the revenue share for externally developed games that goes to the third party studio that developed the game, increased slightly in the quarter as the share of third party developed games were comparably higher. The restructuring programs announced last year, they were both within the publishing segment. So the personnel cost decreases are within this segment and it improves the EBITDA and the EBIT. And in line with group, the EBIT is further relatively improved by less write downs. Moving over to our co-development and services segment. The revenue in this segment is mainly related to co-development. So that's the part of the business where we have some plus 100 FTEs that work for higher games development. And the revenue is mainly connected to certain project milestone deliveries. And Martin mentioned the big component of the rate that we can charge versus the revenue share we agree with some developer or some license holders. But as mentioned before, the positive sales growth we see in this quarter is a facing effect from some of those project deliveries. With increased sales coupled with stable costs, both EBIT and EBITDA improves. Now briefly about our headcount development. So at the end of Q1, we had a headcount amounting to 249 FTEs. And this is around 50 FTEs decrease from the end of Q4. The reductions are connected to the previously announced restructuring programs, and we will see further reductions in Q2. They will be mainly in the very beginning of the quarter. By the end of Q2, we are expecting to be somewhere around 215 FTEs with roughly a 50-50 split between co-development and publishing. Moving over to liquidity and cash flow, Fundraful saw negative cash flow in the quarter. Our liquidity decreased from 150 to 83 million SEK. That is corresponding to around 67 million SEK decrease. To give context to this, and as we know it can be difficult to follow our development with all of the restructuring, I'd like to walk you through a sort of simplified liquidity and cash flow overview. So if we start to the far left, you see our opening balance or our opening liquidity from end of Q4 last year. And to the far right, you see the liquidity from end of Q1 this year. If we look at the first impact of the bridge, our operating activities, we see a summary of the positive cash flow from our revenue, the cost we have for our co-development, our publishing operations, marketing, administration, and so on. Here, excluding the cash flow connected to restructuring programs announced last year, for example, the costs for the studios being wind down that Martin talked about earlier. And this cash flow is more or less net zero. Then we do, however, need to invest in games for future launches. So both internal and externally developed games. And with those investments, that brings our cash flow from what will be our continued core business to around negative 28, 30 million SEG. So less than half of the decrease in liquidity is connected to our continued business, while the other part is more connected to the restructurings and setting the new organization in place. And closing in on the end of a year of restructuring with an exciting pipeline ahead of us, we are cautiously optimistic that we will be able to close this cash flow gap and more in the near future. This was my last slide, so I'll hand back to Martin.

Thank you, Michael. So before we move into the Q&A, I want to say a few words about our publishing slate for this year. So there is no question about it. I think we have an absolutely amazing release late this year. Our first launch of the year was a smaller indie title, Rain Breaker. And it's a very nice game, but it accounts for only a small part of our expected yearly revenue. So everyone at Thunderful is now completely focused on ensuring the successful releases of our upcoming games. It really is an all hands on deck situation where we are doing everything we can to achieve success. And the main revenue effect will come in the second half of the year, as our biggest launches are coming during the summer and the fall. So let me briefly say a few words on each of these games. So Vampires Fall 2 is an open world RPG developed by our internal team, Early Morning Studio. It's a direct sequel to Vampires Fall Origins, which has over 13 million players worldwide. And the community is very eager to get their hands on this new game. It is launching now at the end of May in just a few weeks, and it's the only mobile game in our publishing slate. So don't miss it. Lost in Random, The Eternal Die is a spinoff from our 2021 release, Lost in Random. It's an action-packed roguelike that looks absolutely amazing and plays amazing as well. It is developed by our internal team, Stormteller Games, and the PC demo has received an amazing 97% positive reviews on Steam. It is coming out on PC and consoles at the end of Q2. Next up is Islanders New Shores, the follow-up to the beloved indie hit Islanders. The game is coming out in the summer and is built by The Station in collaboration with CodeSync. It is a beautiful game that follows the zen-like vibe of the original Islanders, and the demo also received great praise by the players when it was available earlier in the spring. Next up, we have Aska. It was released in Early Access last year and is developed by the great team at SandSailor Studio. And the team continues to work with the Early Access players and have launched some great game updates during the past 12 months. A full release is planned for the second half of this year. And if you like survival games, you should absolutely join the Early Access on Steam, available since a year back. Replaced is a sci-fi retro-futuristic action platformer. It is the debut title from the very talented team at Sandcap Studios, and it looks absolutely incredible. Now, the development of this game has had some unfortunate delays, but things are now moving along very nicely, and the plan is for it to come out on PC and Xbox at the very tail end of this year. And last but not least, we have the game codenamed Lemon coming out in the second half of the year. It's the debut title from our very talented internal studio To The Sky. And we can't say more about the game right now, but stay tuned for the announcement soon. All right, those were our super exciting 2025 games. And now let's summarize the key takeaways from this presentation. So in short, Our 2024 restructurings and cost savings are now mostly implemented. And after a lot of turmoil last year, we finally had time to focus on stabilizing the company and preparing for the future, and not least preparing for the many exciting launches that we have this year. And I'm also grateful for the good transactional sales that our existing catalog is showing. It is a very important backbone of our ongoing business, combined, of course, with the stable revenue we have from our co-development segment. So to conclude, we are not out of the woods yet, but we recently made very important improvements to the company, and our key objective remains the same, to reach positive cash flow and ensure long-term commercial sustainability. All right. Thank you for listening. Now let's move into the Q&A session. So over to you, Anton.

Good. Thank you for that. And yeah, let's start with the publishing. I mean, here you grew by 4% year over year, despite some tough comparables compared to last year. What are you most satisfied with in the quarter?

Well, since we didn't have any major new releases in Q1, there is no doubt that the best performing was sort of the stability of the existing catalog that we have. So again, like I said, that's a very important backbone of our business and it continues to perform with a lot of work done by our sales team and marketing teams.

Did you do any specific events in the quarter that boosted the transactional sales?

Well, we have different activities for all our games in all quarters. So this quarter didn't have anything specific, but I know we did some various activities for Asuka and our other games as well that has helped push up the revenue.

And if we look at the Rainbreaker, it has received good reviews from the players, but had some muted sales impact in the quarter. Was this in line with your expectations or how should we view it?

Yes, it was in line with our expectations. We, of course, always hope for more. But Rainbreaker, even though it's a great game, we had quite limited expectations for its financial performance.

and we have a question from the web regarding rainbreaker and that is if you're going to expand the title to consoles or is it just only PC it is only PC for now and we haven't made a decision yet if we want to port it to console or not okay and looking at the games pipeline it seems that you have not added any titles since the last quarterly report you mentioned the plot twist here in your presentation I mean can you give some details here about the games pipeline absolutely so so as you've seen we have an amazing pipeline for this year

But of course, we also already have some games in the pipeline for next year, and we are signing up new titles for 2026 and beyond. So the publishing contract with Plot Twist is the obvious example of that. And we're also talking with many other third party developers to see if there is a good fit for us to publish their future games.

So that will be visible in the Q2 report, I guess.

Yes, it's likely that, well, the plot twist project will absolutely be visible in the Q2 report. And then we'll announce or present other publishing contracts as they happen in Q2 and beyond.

And in terms of new titles, how should we think about internally versus externally developed games?

Jan-Willem Wasmann, You mean you mean the mix so so if we look at investment, we probably will continue to have about 5050 in terms of how much we invest in internal development versus external development. Jan-Willem Wasmann, But in terms of a number of games, we will have we will launch more games that are externally developed than internally developed going forward.

And if we look at productivity, I mean, has productivity improved since your organizational changes recently or? Yeah.

Well, the short answer is yes, absolutely. It's, of course, hard to quantify, and it will really show in the end in our commercial performance. But I'm very happy with the changes we have been making, the improvements, the focus from everyone in the organization on making sure that we step by step become better every day. This is, of course, not something that can just be fixed in one quarter. It's work that is ongoing and will continue to some extent forever. But we are very, very focused on improving our operational excellence step by step.

And moving on to code development and the service segment here, you grew by 11% compared to Q1 last year. But as in Q4, you're right that the segment is negatively impacted by some reduced monthly billing and that it may be compensated by revenue share going forward. How should we think about this segment going forward in terms of this mix?

Well, I think that particular comment I made is connected to one specific game that has had some delays, which brings down the average billing rate and sort of has up to date and will continue until the game is released. But as I'm sorry, as mentioned, we believe we can make up for the lost revenue when the game is launched because there is a very nice revenue share component to it.

And I guess you're not going to mention it, but is that game expected to be released now in H1 or in the later part of 2025?

When it comes to games we work on with external partners in co-development, we leave it up to them to decide when they want to announce. So we're not commenting on any of those games until our partners are ready to talk about it. Sorry.

Yeah. But we can also see that profitability improved in this segment compared to previous quarters. Are you satisfied with these levels or do you think you can improve margins even further going forward?

For the co-development services segment, we're seeing a 17% EBIT on an asset-light business model. So I think that's quite strong. If we could maintain a level like that, we would definitely be satisfied. But of course, in this industry, there will be fluctuations.

Yeah. And if we expand our view, what long-term growth rates should we expect in this segment going forward?

I think the best guidance we could give is to maybe think about this segment as a consulting business. We sell our expertise within games development. What makes it slightly different is that there are sometimes revenue share components, which can boost your sales from time to time if the game is successful. But I think that's the best guidance we can give is to think about this and compare it to how consultancy business in general works.

Yeah. And we can also see that the announced cost program had more effect in this quarter compared to Q4. I think you showed in your presentation that the number of employees will continue to decline in Q2. So how should we think about the OPEX in the Q1 and going forward?

Right. So, I mean, the majority of both the cost coming down and the cash out was done in Q4 and Q1. Then there are some lingering costs and cash flow that will be carried into Q2. But the majority has been done.

And we take some questions from the web. Could you start to report on which platform you make, how you make your revenues here, PC, consoles, mobile, and so on?

Well, we're not reporting on it yet, hence the question. We'll take that with us and discuss if that's a way we want to break things down going forward.

And are there any plans to bring games they want to PlayStation Plus like you do with some games into Game Pass?

That is really a sort of case-by-case situation. What we've had in the past are some very good collaborations with Xbox Game Pass, and hence the games have been day and date with the launches on Game Pass.

um and that can happen with PlayStation as well but the that is on a case by case so we'll see in the future and do you think the current cash position is sufficient to reach free cash flow positive free cash flow the current cash position in I'm not sure I understand the question. If you are going to reach positive free cash flow with your current cash position or if more capital is needed?

I don't think we want to answer on that type of... I mean, we have a very clear goal to not need more money. more investments into the company and to reach positive cash flow with the business we have. But that is very much dependent on how the releases we have this year, how they perform, of course. But yeah, I mean, we know our cash position isn't the best. So this is, of course, something we are constantly evaluating in the company and also with the board.

Good. And what impact do you hope the new creator program Thunderful Insiders will have?

Well, that is a way to reach more influencers and have more sort of community activity about our games. So I think that could be a very important foundation for improving our marketing efficiency and just being closer to the community and the players out there. The exact impact is hard to quantify, but I'm very glad that we've announced it and are working closer with our communities and influencers.

Good. And that was actually my last question. So I leave it over to you for any final comments.

Thank you, Anton. Well, I can just say again that I'm very glad with the organizational improvements that we have been making, and also with all the hard work and dedication that everyone at Thunderful is showing. That is fantastic. And then, of course, the most exciting and important thing for this year is all the game launches that we have ahead of us. As we said, we're putting a lot of focus and effort into doing everything we can to ensure commercial success as well as creative success. Good.

So thank you very much.