Starbreeze AB (publ) Q3 report July 1 2016 – September 30 2016

The full Q3 report in Swedish is available at www.starbreeze.com/investor-relations/. The English version of the report will be available within a week. Financial statements in English are available at the end of the attached PDF.

CHANGED FISCAL YEAR 

Note that in accordance with the decision taken on the Annual General Meeting in November 2015, this is the third quarterly report after changing the company’s fiscal year to calendar year. The comparative period Q3 2015 corresponds to July-September 2015, previously named Q1 2015/2016.

The next report to be issued will thus be Q4 2016 and released on 16 February 2017.

THIRD QUARTER (JULY - SEPTEMBER 2016)

• Net revenue amounted to SEK 102.7 million (SEK 49.9 million), representing a growth of 106 percent. Total revenue amounted to SEK 147.4 million (SEK 75.9 million).
• Net revenue includes a minimum guarantee of SEK 32.5 million relating to RAID: World War II.
• During the quarter, PAYDAY 2 represented SEK 20.2 million (SEK 48.4 million) of net revenue.
• During the quarter, Dead by Daylight represented SEK 49.2 million (SEK 0.0 million) of net revenue.
• Operating income before depreciation and amortization, EBITDA, amounted to SEK 19.2 million (SEK 8.4 million), implying a margin of 13.0 percent.
• Pretax income amounted to SEK 11.0 million (SEK 7.2 million).
• Net income amounted to SEK 20.4 million (6.4 million).
• Earnings per share before dilution were SEK 0.08 (SEK 0.03) and earnings per share after dilution were SEK 0.08 (SEK 0.03).
• Cash flow from operating activities amounted to SEK 37.0 million (SEK 49.5 million).
• As of September 30, cash and cash equivalents totaled SEK 376.0 million (SEK 123.7 million). 

INTERIM PERIOD (JANUARY – SEPTEMBER 2016)

• Net revenue amounted to SEK 246.1 million (SEK 169.5 million), representing growth of 45 percent. Total revenue amounted to SEK 357.6 million (SEK 229.9 million).
• Operating income before depreciation and amortization, EBITDA, amounted to SEK 42.4 million (SEK 34.3 million) equivalent to an EBITDA margin of 11.9 percent.
• Pretax income amounted to SEK 23.6 million (SEK 29.1 million).
• Net income amounted to SEK 26.9 million (24.0 million).
• Earnings per share before dilution were SEK 0.11 (SEK 0.11) and earnings per share after dilution were SEK 0.11 (SEK 0.10).

KEY EVENTS DURING THIRD QUARTER (JULY – SEPTEMBER 2016)

• In September, Starbreeze and Digital Bros reached an agreement on worldwide and exclusive distribution rights relating to RAID: World War II for consoles. The rights only cover physical console games and are granted to 505 Games, a subsidiary of Digital Bros. Accordingly, Starbreeze retains the digital distribution rights for both PC and Console. The agreement includes payment of a minimum guarantee, relating to royalties of USD 4 million (SEK 32.5 million) in total that will accrue in full to Starbreeze. Besides the distribution agreement signed with Digital Bros, it was also announced that the game will be released on PC, Xbox One and Playstation 4 during summer 2017.
• Starbreeze has come to an agreement with Smilegate Holdings Inc., the holder of the convertible bond of SEK 215 million that was issued in February 2016, to modify the terms of the bond to increase financial transparency for Starbreeze. The agreed changes are of a technical nature and does not alter the original commercial agreement. This information was earlier presented in the   half-year report.
• During the quarter Starbreeze held an extraordinary general meeting. The meeting decided to issue a convertible loan of SEK 75.5 million to Acer. Given that the general issue authorization, which the Board received at the Annual General Meeting on May 25 2016, had essentially been used in significant part due to technical reasons surrounding the Smilegate convertible bond, the meeting also decided to give the Board a renewed authorization to issue shares not exceeding ten percent of outstanding shares at each time.
• In August during Acer's product presentation in Berlin, Starbreeze and Acer announced that the first delivery of StarVR HMD to IMAX had been shipped, in preparation for the opening of the first IMAX VR Center in Los Angeles.

AFTER THE PERIOD

• In October, revenue from PAYDAY 2 sales via the PC platform Steam amounted to SEK 16.3 million (SEK 10.9 million). Note that Starbreeze, after the changed terms of the contract with 505 Games, now receives 100% of revenues generated by PAYDAY 2 on Steam. 
• During October, revenue from Dead by Daylight sales via the PC platform Steam amounted to SEK 17.8 million (SEK 0.0 million).
• In October Starbreeze conducted a directed share issue targeted towards institutional investors, where Första AP-fonden acquired the majority of the shares issued. A total of 16,452,991 shares were issued at a price of SEK 23.40, equivalent to a total amount issued of SEK 385 million.
• In October, Starbreeze announced the acquisition of Nozon, a Belgian Visual Effects (VFX) studio and the developer behind the PresenZ technology. The consideration amounted to EUR 7.1 million, of which EUR 4.6 million was in cash (about SEK 44.6 million) and EUR 2.5 million in Starbreeze B shares. In addition, the parties also agreed on a 10-year earnout, based on PrezenZ’s financial performance, which only takes effect after Starbreeze has recouped EUR 2 million of the consideration.
• After the period’s end Starbreeze chose Carnegie Investment Bank as advisor for its relisting to Nasdaq Stockholm's main list. Starbreeze intention is to complete the relisting during 2017.
• In November, a new brand was announced in the Publishing division. The new label “Starbreeze IndieLabs” aims to help projects, which are smaller in scope to reach the market. Together with the Croatian studio Lion Game Lion, Starbreeze has agreed that the company will invest USD 300,000 to bring the game “AntiSphere” to PC and other platforms. The agreement means that Starbreeze will receive 30 percent of the sales revenues, after the initial investment has been fully recouped. Lion Game Lion and Soap Interactive in turn will retain 100 percent of the IP rights. Antisphere is a top-down competitive arena battle game in which players use their skills in order to catch each other out, and win the match.
• During New York Comic Con, Starbreeze and Lionsgate showcased the upcoming VR first person shooter John Wick Chronicles. Attendees had the opportunity to demo a 7-minute preview of the first mission.  The experience and game were very positively received with good reviews from gamers and gaming journalists. 
• The game John Wick Chronicles will be released on Steam in February 2017 and is compatible with HTC Vive. It is already available for pre-order for USD 19.99 via the platform.

REVENUE RECORD

CEO BO ANDERSSON KLINT GIVES HIS COMMENT 

Starbreeze Publishing has completed its first sales pulses for Dead by Daylight. We have successfully invested, published and marketed both the base game and following DLCs including the tie in with famous movie franchise “John Carpenter’s Halloween”. The game has now generated over 20 MUSD in gross sales on Steam, which has given Starbreeze and Behaviour a total return on investment of several hundred percent.

This is a great first chapter for our Starbreeze Publishing business unit. With investment in third party IP’s such as RAID, Antisphere and others, we see this as a growing and exciting segment for the company. A segment that will bridge our cash flow between our own future large scale releases such as OVERKILL’s The Walking Dead, CROSSFIRE, PAYDAY 3. We will continue to be on the lookout for new projects, also under the new Starbreeze publishing label, IndieLabs. With these smaller in scope IndieLabs projects to complement the larger Publishing business, we will create the bedrock for a future flow of content into our publishing business and overall eco systems.

The significance of this third quarter was even greater than the release quarter for Dead by Daylight. Our PAYDAY business model has been tested and proven on an external IP with our fantastic partner, Behaviour. Today’s industry has had a hard time adapting its mind-set to this model, but we have created it, we are in the driving seat and we are successful.

For us, it is now full steam ahead along the road we have staked out, in collaboration with our many external partners for upcoming PC- and console games, IMAX VR centers and mobile game efforts.

Starbreeze third quarter net revenues remain on a high-level amounting to 102.7 MSEK, which is on par with Q2 and the highest net revenue number in Starbreeze history. Compared to the corresponding quarter last year, Starbreeze has more than doubled its net revenues. The effect of an aggregated business is starting to show, and it serves as an important reminder for the company to retain its long-term focus when it comes to investment in its product strategy.            

The main driver for the growth is the broadening of our revenue base where RAID: World War 2 contributed with 32.5 MSEK from the minimum guarantee received when we signed the agreement for the physical console distribution rights to Digital Bros and their subsidiary 5050 Games. Another great footprint of how we can create financial leverage of game IPs both pre- and post-release.

We have earlier announced that Dead by Daylight quickly reached over 1,000,000 units sold and the positive reception generated 49.2 MSEK in revenue during the quarter as a whole. Last but not least, PAYDAY, for which we after the repurchase from Digital Bros get full digital distribution royalty on, contributed with 20.9 MSEK.                                                                           

As we continue our growth, our operating expenses excluding royalties to publishing partners has increased with 36.2 MSEK or 54 % compared to Q3 2015. The incremental spend is in all material aspects derived from employee related expenses as we’re ramping up the teams for delivering according to our ambitious plans for our own games, our publishing business and our establishment in the VR industry. Despite the increase in costs we stay positive on bottom line and the EBITDA margin reaches 13 %.  

Bold plans need the right partners and appropriate funding. Acer has not only partnered with Starbreeze for the manufacturing, marketing and sales of StarVR, they did also invest 75.5 MSEK during the third quarter and we’re exiting the period with a solid cash position of 376.0 MSEK.

After the end of the quarter Första AP-fonden, one of the major Swedish Pension funds, amongst others participated in a new share issue amounting to 385 MSEK, which leaves our total cash position at more than 700 MSEK. These funds will be put to good use in building revenue generating products and strengthen the future technology base in the company.

RELISTING IN 2017

Starbreeze is fully focused on delivering on our promises and one of these is to take the company to the next level in its public offering. In 2017, we will aim to bring Starbreeze to the fully regulated main market in Stockholm. As our plans grow and expand outside of the traditional games developer role, we feel that the time is right to take a step up and expand our horizons. A relisting to the main market will also ease the process for foreign investors wanting to invest in Starbreeze.

GEMINOSE

We initially intended to bring the kids game Geminose to market with a full set of physical toys in the same mindset as we always have; by finding a strong partner with the right complementary competencies. We’ve been in numerous discussions with respectable companies, including major toy manufacturers, distribution and production partners. Unfortunately, the climate for toys-to-life with inventory requirements are colder than it was just two years ago. We have been negotiating with a prominent potential partner in the toys manufacturing business long and well up until very recently, but has jointly agreed not to proceed. This will make it challenging for us to release Geminose on the timeline we earlier proposed together with a physical toy offering.

The positive out of these many conversations we’ve had in the past months, is the well-received feedback we’ve gotten in regards to the IP and gameplay. We believe that there are other ways and opportunities for us to deliver on the physical toys component of Geminose and be true to the initial vision for the franchise, but we need time to re-start the process. In the meantime, we are contemplating the possibility to re-tune the current working version of the game to function as a stand-alone product, without the physical toys. Production of the game is outsourced to our great partner Behaviour Interactive in Canada, and we will continue to work diligently to bring Geminose to market and will in the short-term focus to launch the game digitally first and then consider the physical toy part as an extra component to the product.

TECH

In Los Angeles, the last coat of paint is being put on the pilot IMAX VR Center, which has had a sneak-preview opening in the past few days for friends and partners in preparation for the public opening, now taking place shortly after the New Year. We’re fully operational with the Acer joint venture and focused on setting the manufacturing process for full scale production in 2017. For now, the first batch have been delivered to IMAX, where we further aim to have two iterations of development kits produced for close partners before the final specifications are locked in for the full production run and larger availability. As previously noted, we aim to be the premiere high definition brand of the VR industry, and as such our HMD will continuously evolve to stay on the top of the scale in the fast-moving specification focused tech industry.

For our location based initiative, we are as eager as our partners to roll out the concept but are also aware of the need to establish the pilot center, test the setup, venue design, customer flows and onboarding thoroughly and secure the volume of HMDs needed to support the global rollout in the next phase. We’re in close dialogue with all partners to establish understanding of our goals and to ensure that we deliver in line with the high-quality bar we set out for our VR initiatives. The roll-out schedule apart from the pilot center is still fluid and under discussion.

DEVELOPMENT PROGRESS

In terms of our in-house game development, OVERKILL’s The Walking Dead is taking shape and we’re in full production speed in Stockholm. The general concept is locked and we’re working diligently to iron out gameplay mechanics, level designs and systems. As always, the primary goal is to make the game fun to play with friends, being re-playable, with an engaging story taking a page out of the wealth of stories available in the Walking Dead comics and with just the right amount of scary.

The design phase of Crossfire is ongoing in close collaboration with Smilegate. We’re still working on scope and overall concept to ensure that we pay homage to the original game, but at the same time tuning it for the western audiences.

With our latest acquisition of Belgian visual effects company Nozon, we look forward to bringing high quality trailers to our games as well as creating new exciting computer generated movies for the IMAX VR centers. Using the PresenZ technology together with the rest of our technology stack will propel our VR offering forward into the premium content space and on par with the best competitors in the world.

Our collaboration with Lionsgate on John Wick VR and PAYDAY is steadily following its plan with great reception from gamers worldwide. We look forward to launching the John Wick VR experience online and in IMAX VR centers during 2017.

Lastly I want to thank our growing global team for their great efforts and congratulate them on a yet another well done quarter.

Let’s do this! 

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This information is information that Starbreeze AB (publ) is obliged to make public pursuant to the EU Market Abuse Regulation and the Securities Markets Act.

The information was submitted for publication, through the agency of the contact person set out below, at 08:30 a.m. CET on 24 November, 2016

For more information, please contact:

Maeva Sponbergs, EVP of Communication and Head of Investor Relations, Starbreeze AB

Tel: +46(0)8-209 208, email: ir@starbreeze.com

ABOUT STARBREEZE

Starbreeze is an independent creator, publisher and distributor of high quality entertainment products. With studios in Stockholm, Paris and Los Angeles, the company creates games and other virtual reality entertainment products, based on proprietary design and licensed content.

Starbreeze's most recent games include PAYDAY 2® , the upcoming John Wick VR shooter and upcoming survival co-op FPS OVERKILL’s The Walking Dead. Under its publishing initiative, Starbreeze has together with Canadian studio Behaviour Digital successfully launched horror thriller Dead by Daylight. 

Starbreeze has set out to develop truly immersive virtual reality experiences, by integrating software and hardware in its StarVR® head mounted display, to be produced together with Acer, displaying a unique field of view and a mission to bring top-end VR to large audiences. Together with IMAX, Starbreeze aspires to dominate the location based VR market with the IMAX VR centers, set to premiere in its first location in Los Angeles during 2016. 

Headquartered in Stockholm, Sweden, Starbreeze's shares are listed on Nasdaq Stockholm First North Premier under the tickers STAR A and STAR B with the ISIN-codes SE0007158928 (A-share) and SE0005992831 (B-share). Remium Nordic is the company's Certified Adviser. For more information, please visit http://www.starbreeze.com, http://www.starvr.com, http://www.overkillsoftware.com

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