Starbreeze AB (publ) Q2 report 1 January 2017 – 30 September 2017

Today at 10.00 am CET, Starbreeze CEO Bo Andersson Klint and CFO Sebastian Ahlskog will host a live stream and present the report on Starbreeze Twitch channel: https://www.twitch.tv/starbreeze

THIRD QUARTER 2017

• Net sales amounted to SEK 77.7 million (102.7 including non-recurring revenue of SEK 32.5 million).
• PAYDAY generated SEK 24.4 million (20.9) and Dead by Daylight accounted for SEK 47.3 million (49.2) of net sales.
• EBITDA amounted to SEK -21.9 million (19.2).
• The loss before tax was SEK -35.3 million (11.0).
• Basic and diluted earnings per share were SEK -0.11 (0.08).
• Listing on Nasdaq Stockholm Main Market
• Agreement signed to be lead partner to the new VR center in Dubai.
• New loan financing of SEK 150 million from Nordea.
• Agreements after the period included a new financing plan for StarVR Corp. and finalization of the acquisition of Dhruva Interactive.

JANUARY–SEPTEMBER 2017

• Net sales increased by 5 percent to SEK 257.7 million (246.1).
• PAYDAY generated SEK 99.9 million (124.5) and Dead by Daylight accounted for SEK 134.0 million (89.1).
• EBITDA amounted to SEK -59.9 million (42.4).
• The loss before tax was SEK -108.3 million (23.6).
• Basic and diluted earnings per share were SEK -0.33 (0.11).
• Cash and cash equivalents at the end of the period amounted to SEK 431.5 million (376.0).

CEO Bo Andersson Klint remarks on the report:

LEVELING UP STARBREEZE

This quarter marked an extraordinary event for Starbreeze: we moved lists to be traded on Nasdaq Main Market. Starbreeze, as one of northern Europe’s first independent listed game studios has finally taken the big leap as the first AAA game developer on the main market. In and of itself, the listing is a quality stamp that gives us better access to Swedish and international capital markets and its institutional investors. This is a legacy the company has carried for 17 years and as the company turns 20 next year, we hope to continue to add shareholder value over the next decade and beyond.

11 PERCENT GROWTH
Net sales for the third quarter reached SEK 77.7 million, an increase by 11 percent excluding non-recurring revenue last year. PAYDAY and Dead by Daylight generated revenues on par with the third quarter of 2016, even though the games are one year older. Our Games as a Service is still delivering and generating revenue.

However, RAID: World War II has so far underperformed our expectations. We had expected a larger contribution from the game as of this quarter, although we knew it takes time and is riskier to build a new IP. We are working closely with the team at Lion Game Lion to improve and update the game according to our Games as a Service concept. We are looking at various components of the game and its market conditions and will be tweaking RAID: World War II over the next few months.

EXPANSIVE PHASE ENTAILS SHORT-TERM IMPACT ON PROFITABILITY
We are in an expansive phase of ongoing initiatives in all business areas. Compared to last year, we have significantly higher activity in our core business, with expanded teams in own game development and a higher number of publishing titles. Costs are increasing, but at a slower rate than last year, and have declined compared to last quarter.

Ongoing initiatives are having short-term impact on profitability and cash flow and we are reporting EBITDA of SEK -21,9 million for the third quarter, compared to SEK 19.2 million for Q3 2016. Cash flow from operating activities was strong, however, at SEK 59.6 million (37.0) for the quarter.

INITIATIVES ARE POWERING SUBSTANTIAL VALUE CREATION
We are investing in creating substantial value for our shareholders. In order to more clearly demonstrate our ambitions, we published new financial goals ahead of the listing on Nasdaq Stockholm. One of our targets is to achieve revenues of at least SEK 2 billion in 2020, not including PAYDAY 3. The majority of the revenues will be generated by our own game development. We also see tremendous growth potential in a continued expansion of the publishing game portfolio, new platforms like VR and new geographical markets.

We also expect significantly higher profitability because our business model is scalable in several dimensions, with rising revenues and a relatively constant cost base. Our target is to generate positive EBITDA for the fourth quarter of 2018 and for every subsequent quarter on an annual basis. Our targets reflect our current quest to level up Starbreeze.

FOCUS ON OWN GAME DEVELOPMENT
Although we greatly believe our Publishing arm as well as our initiatives in Virtual Reality will be fruitful and a powerful additive to our revenue mix, the greater margins will in the medium term be found within our own development.

We will continue to develop games where the gameplay sets the stage for ongoing development and new updates for the lifetime of the game. Accordingly, our primary focus is to ensure that the organization has the capacity to develop major game titles while delivering a steady stream of new content that enhances previously released games to extend their lifetime. The plan is to have at least three parallel development teams and to optimize team staffing for ongoing game projects.

THE PUBLISHING BUSINESS IS WIDENING THE GAME PORTFOLIO
We will continue expanding the game portfolio in the Publishing business as we see positive effects from greater scalability through lower risk per game in the development phase and reduced use of internal resources per game. Greater scalability means that we are able to expand the portfolio to bring more games to the market in parallel and over time. With a broader portfolio of games produced by external teams, the risk factor will be mitigated if a project does not perform as we have initially wished.

We have several proven strong titles in our Publishing portfolio to look forward to, including notable IPs such as Psychonauts 2 and System Shock 3.

PARTNERING IN VR VENTURES
The questions we are asked most often about our VR ventures is why we – a game company – should engage in hardware production and how we can compete with other tech giants.

Starbreeze remains fully committed to its virtual reality expansion and the answer is twofold. One, we firmly believe virtual reality is one of the emerging techs that is here to stay and we aim to be one of the future key stakeholders in creating immersive experiences, now and in the future.

Secondly, we found that while the consumer market was alluring, the B2B market has great potential where we have an opportunity to take a strong position. Finding the right partner to bring the product to market has been key, and with our collaboration with Acer and through the creation of the StarVR joint venture, we’re well positioned to take market share in the B2B space.

With the Dubai project getting closer to its launch, we’ll be able to finally show the realization of what a 21st century theme park, all in VR, could be like. With 7,000 m2 of total space and millions of people walking by the location every year, we’re set to take virtual reality arcades to the next level. As lead supplier we will initially have seven experiences in the center.

We remain dedicated to our VR venture. We are looking to be smart about our investments and make sure we get maximum benefit from all of them. We have driven design and technical innovation within the framework of our VR partnership with Acer. The time is now right to gear up the investment in the joint venture company and get the headset onto the B2B market and into VR centers. This phase is capital intensive and Acer will be taking on a larger share of the financing and, accordingly, a larger stake in the joint venture.

With Acer as our strategic partner and with their financial muscle, we can focus our resources on our core business – Content is still king!

For more information, please contact:
Ann Charlotte Svensson, Head of Investor Relations and Corporate Communications
Tel: 46(0)8-209 208, email: ir@starbreeze.com

Starbreeze AB is required to disclose this information under the EU Market Abuse Regulation and the Securities Market Act. The information was provided by the above contact persons for publication on 16 November 2017 at 08:00 CET.

About Starbreeze

Starbreeze is a global game company whose vision is to be a leading provider in the entertainment industry by creating world-class experiences. Starbreeze was founded in 1998 and has since evolved into a well-established developer and publisher of PC and console games and VR products aimed at the global market. With studios in Stockholm, Paris, Los Angeles, Barcelona and Brussels, Starbreeze develops high-quality entertainment products based on proprietary and third-party rights, both in-house and in partnership with external game developers. Operations are organized in three business areas: Starbreeze Games, Publishing and VR Tech & Operations. Starbreeze shares are listed on Nasdaq Stockholm under the tickers STAR A and STAR B with the ISIN-codes SE0007158928 (A share) and SE0005992831 (B share). For more information, please visit starbreeze.com

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