Starbreeze AB (publ) Year-end Report 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

FOURTH QUARTER 2017

• Net sales increased by 4.4 percent to SEK 103.8 million (99.4).
• PAYDAY generated SEK 20.4 million (37.8) and Dead by Daylight accounted for SEK 67.6 million (54.6) of net sales.
• EBITDA amounted to SEK 6.4 million (38.8).
• The loss before tax amounted to SEK -67.9 million (32.3).
• Basic and diluted earnings per share were SEK -0.22 (0.11).
• New financing plan for StarVR Corporation.
• Completion of the acquisition of Indian production company Dhruva.
• Impairment loss on RAID: World War II of SEK 20.2 million.

FULL YEAR 2017

• Net sales increased by 4.6 percent to SEK 361.4 million (345.5).
• PAYDAY generated SEK 120.3 million (162.4) and Dead by Daylight accounted for SEK 201.5 million (143.7).
• EBITDA amounted to SEK -53.5 million (81.2).
• Starbreeze is reporting a loss before tax of SEK -176.2 million (55.9).
• Basic and diluted earnings per share were SEK -0.55 (0.22).
• Cash and cash equivalents at the end of the period amounted to SEK 233.8 million (669.4)
• The board of directors is proposing no dividend for the 2017 financial year.

AFTER THE END OF THE PERIOD

• Directed issue of new shares to Swedish and international investors raised approximately SEK 238 million before transaction costs.
• Decision in favor of a rights issue of SEK 150 million (see separate press release).

CEO Bo Andersson Klint remarks on the report:

A STRONG FINISH TO 2017 AND HIGH EXPECTATIONS FOR 2018

SUSTAINED GROWTH AND POSITIVE EBITDA
We are closing the year with our best fourth quarter to date in terms of revenue, with net sales above SEK 100 million. Even though RAID: World War II (RAID) was a disappointment, we delivered sales growth of 4.4 percent and positive EBITDA of SEK 6.4 million in the fourth quarter. As previously communicated, we may show negative EBITDA and/or cash flow until we release OVERKILL’s The Walking Dead (OTWD).

In the quarter, we continued to add vital components to our business. As of December 22, the acquired Indian production company Dhruva is included in the financial statements. We also invested in building our VR centers in Dubai and Stockholm during the period.

We expanded our game development teams during the year, resulting in substantially higher employee benefits expense than in the preceding year. Notably, there was an increase in depreciation, amortization and impairments during the quarter, year-on-year. This is due to our having more games available in the market, such as Dead by Daylight and RAID, which we are thus amortizing. An impairment loss on RAID of SEK 20.2 million was also recognized during the quarter to match the asset to the anticipated cash flow as game sales have been poorer than expected.

ONE OF THE MOST-PLAYED GAMES IN THE WORLD
PAYDAY 2 is still a highly relevant product and was one of the most frequently played games on the digital platform Steam in 2017. The VR version of the game – the biggest VR game in the world in terms of content – is currently in beta testing. With only a week or two to go, the release for Nintendo Switch is fast approaching and we are already accepting preorders.  Based on the undiminished interest in PAYDAY, we have also decided to extend the development period of PAYDAY 2 into 2019, as a bridge to PAYDAY 3.

GAAS AND THE MULTIPLATFORM STRATEGY ARE DELIVERING
Our most important publishing title Dead by Daylight was a star performer during the quarter and the full year of 2017, proof of the strength of our Games as a Service concept. The game generated revenue of SEK 202 million in 2017, up from SEK 144 million in 2016 when the game was released. We successfully released the game for the Xbox One and PlayStation 4 platforms in 2017 and released no fewer than seven updates, which took prominent brands like Leatherface and A Nightmare on Elm Street into the homes of our players.  The latest update, The Saw Chapter, was released simultaneously for all platforms in January, becoming our fastest-selling DLC ever.

PHASE THREE IN THE VR VENTURE
We successfully established Starbreeze and StarVR as leading brands in VR and location-based entertainment during the year. We are now in phase three of the VR venture we began in 2014 by building the technical platform in the StarVR HMD. In 2017, we continued to invest in location-based VR in order to reach the final goal: to produce and sell games and experiences for external operators of location-based VR operators, such as amusement parks and shopping centers. We have invested time and resources in building the VR locations in Dubai and Stockholm as full-on concept stores to demonstrate how our content and headset can work together to create a superior concept.

Our initiative as the main partner to the brand-new VR Park under construction in the Dubai Mall, is in its polishing phase and we’re very excited to deploy more than 100 VR stations throughout the 7,000 square meter center. As a whole, the VR Park will quite possibly be the largest high-end indoor VR Park in the world.

We are convinced that location-based VR is the optimal business model for VR for the masses in the foreseeable future. IMAX and SEGA are already customers of both Starbreeze and StarVR Corporation.

STARVR JOINT VENTURE TAKES THE HEADSET TO MARKET
As of our latest agreement, Acer has taken on the majority of the financing of the joint venture StarVR Corporation, enabling us to concentrate our resources on producing content. StarVR Corporation has already delivered on the promise to put the headset into serialized production in the current version before Christmas to meet the demands of customers such as SEGA and the Dubai VR park. The next version of our VR headset for a professional customer base will be presented later in the year. The joint venture will move forward as an increasingly independent organization and we are in talks with Acer on the possibility of an IPO for StarVR. We’re in agreement with Acer that this is an excellent way to propel the business into becoming the leading global VR company we set out to create from the beginning.

FOCUS ON VR CONTENT
Our VR publishing partners are ready, and we will continue building the LBE content catalog to ensure the capacity of our new and existing customers. APEX, a VR experience developed by Lucky Hammers, is part of the opening offer in Dubai and proof of the knowledge we have accumulated over the years, and how we can take VR content to new heights, with the right partners. Another example of the value of our content catalog is the license agreement with StarVR Corporation for The Mummy, a VR experience that gave us SEK 5.3 million in revenue for the quarter and will also generate royalties on future revenue.

STRENGTHENING THE WAR CHEST
A little less than a year ago, we decided to adjust the promised release date of OVERKILL’s The Walking Dead (OTWD) from 2017 to 2018 to assure the quality of the game. Combined with poorer than expected sales of RAID, this created a need to secure the financing of our current business plan to the tune of about SEK 75 million until the release of OTWD. Toward that end, we successfully executed a new share issue of some SEK 238 million directed at a number of Swedish and international institutions, with Robur and Första AP-fonden in the lead. We are deeply gratified by the trust they have shown us. We would also like to give our current shareholders the opportunity to participate in a rights issue of SEK 150 million, an issue resolved by the board today, and an EGM will follow. After this capital raising, we have the funds we need to both execute our plan to achieve revenue of at least SEK 2 billion in 2020 and grasp several business opportunities that we believe are going to create significant value for our shareholders. We will, including expanding the marketing campaign for OTWD, be extending the development period of PAYDAY 2 to 2019 and accelerating the production plan for PAYDAY 3. I am also extremely pleased that we have now been able to sign the publishing project 10 Crowns, which is being developed by some of the brains behind Civilization IV and Civilization V.

2018 BELONGS TO THE WALKING DEAD
Looking in the rearview mirror, 2017 was an eventful year, with many milestones achieved. We are now looking forward to 2018 when OTWD will be our biggest release ever and all I can say is that our expectations for the game are high. When we started the campaign at the end of the year, proof of massive interest from the worldwide gaming community was instant, which made our team even more pumped. We are looking forward to revealing more of the game, step by step, and introducing the other main characters ahead of the release this fall.

FOR MORE INFORMATION:
Ann Charlotte Svensson
Head of Investor Relations and Corporate Communications
Tel: +46 8 209 208
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 15 February 2018 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, Brussels and India, 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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