Q&A Interim Report Q3 2018
Below questions has been sent to Starbreeze in connection with the interim report. Updated 7 November 2018.
OVERKILL’s The Walking Dead
Q: How many copies of OTWD was sold in pre-sales?
We have not communicated any sales figures for OTWD. We are currently on the top ten Steam lists for both sales and wish lists.
Q: Why is there 2 OTWD games in the Steam top list today? Can you do something about it?
This is due how the products are setup on Steam. We’ve requested an amend but it might not be adjusted. We see no direct impact on sales from the split, however visibility on the top 1-10 positions on the list as a whole matters – for visibility on the first page on the list as well as for the way Steam works with their algorithms, controlling visibility on the platform as a whole.
Q: When do we know if OTWD is a hit or miss?
It is still too early but we have high expectations for the title and are off for a good start. OTWD is using the same games-as-a-service business model as our previous hit PAYDAY 2 and we are releasing a game that we intend to serve with new content over time. For us it is important to gradually build a strong install base to continue serving the community with content over time.
Q: What’s your comment on the E3 trailer?
As we’ve said in the Q2 report, we were not happy with the trailer. At the same time we had a very good E3 attention wise with over 700 articles generated, where the main sentiment was positive. People had fun playing the game which was our single most important proof point. We have however been focusing on polishing the game since E3 and have released a new gameplay trailer yesterday.
Q: I was expecting a hype for OTWD leading up to the launch. How come I hardly see any marketing for the game?
The global marketing campaign of OTWD has started and it will culminate during the launch. Focus is on the biggest markets such as US and others. We’ve tailored the marketing campaign based on a number of factors, for example the timing of surrounding releases and segmentation based on the potential identified customers, but most importantly we’re working with activating our influencer contacts both organic growth (all organic during the beta) as well as paid activations at launch. To be able to compete with the larger publishers with 10x the budget, we carefully chose where and how we spend our marketing budget to achieve the maximum bang for our bucks.
Q: You said in the rights issue that you wanted 50 MSEK in use of proceeds for extended marketing for OTWD? How much have you spent on marketing of OTWD so far and how much more are you planning to invest?
The strategy was to add more traditional/paid marketing to the campaign in order to reach beyond our current customer base (hard core gamers that like our genre). For example we aim to reach the fan base of the brand The Walking Dead. The spend to date exceeds the 50 MSEK use of proceeds statement and marketing spend will continue over the release period.
Q: Why do you not promote your biggest launch in five years towards you existing player base?
It has been important for us to let PAYDAY be PAYDAY, especially considering the latest Crimefest campaign that just played out. We see many players already cross over but will continuously look at how we can make sure to retain and incentivise our older community to look at our newer titles.
Q: Why did not all your PAYDAY users get the opportunity to test the beta? Why did you choose a closed beta?
The closed beta was offered as a part of the pre-ordering offering. We did however make sure PAYDAY players had means to participate in the beta in the final stages. We’re happy with the more limited scope of the beta and were able to service the players participating with quality as well as keeping discussions going and receive valuable feedback for the game. Many changes were applied during the beta, and even more feedback will be implemented for launch and further on down the line.
Q: Do you think that the OTWD beta has followed a similar pattern as for other betas?
We had a closed beta which is a more selective and deliberate process in comparison to the volume approach in an open beta. For us the beta period was important in getting valuable feedback. Compared to patterns we seen before the testers spent more time and we saw good retention. In general the trend is that you’ll get a bit less engagement in betas due to the massive supply of games.
Q: Do you have any plan of offering Season 1 only, for a lower price?
We are looking into multiple options for the product during its lifespan.
Q: Will OTWD be launched in Asia?
It’s a global launch and yes it also includes Asia through the Steam platform. We’ve made sure the game is easy to pick up, from a localisation standpoint, and include texts translated throughout the game for our key identified territories. Asia is already an important market for us (20% of our sales on Steam in 2017 came from sales in Asia) and OTWD will from day one be localised in text for simplified Chinese. Outside of the Steam platform, entering for example China is today almost impossible due to the ongoing revision of how new games are approved for release on the market. We are closely monitoring the current situation in that specific country, but we are continuously working to expand our market and platform selection.
Q: Do you think a delayed release of OTWD on consoles can mute the demand?
The delay in itself is not a blocking factor to the sucess nor demand. We might see a varying result depending on how the PC version is received. The better the game is received the more positive effect we are likely to see on console sales. Moving out of a very intense console release period is a key factor here.
Other games
Q: Why did Payday for Switch not have any revenue from physical sales also in Q3?
Before we receive any revenues from the physical sales, the profits from the release need to exceed the initial payment (minimum guarantee) that we already received from 505 Games. Since the margin, hence the profit, is low for the retail product it often takes an extensive amount of time until the minimum guarantee is recouped. In addition, the lead time from when the end customers purchase a copy until Starbreeze receives its royalty share is significant and can take up to 3 quarters (sometimes even more) until we can recognise the royalty. This is due to that is several links in the value chain but also depending on the size of the minimum guarantee and how the game sells through. The digital sales are represented in the Q3 report (11.5 MSEK in total since release).
Q: When will PAYDAY: Crime War be launched?
The Beta version of the mobile game PAYDAY CrimeWar was tested by 300,000 players and we received great reviews. Like for most mobile games we are now starting with a soft launch in three selected countries before the global launch to make sure we have the key KPI’s, retention and monetaization, in place.
Q: In which countries is PAYDAY: Crime War soft launched?
In three not yet specified countries.
Q: How will the monetazation model look for PAYDAY: Crime War?
Free to play with micro transactions for in-game currency.
Q: When will we get an updated timeline with your other ongoing projects like Crossfire, Geminose etc?
OVERKILL’s The Walking Dead is the first game we are releasing of additional the eight games we have in the pipeline. After OTWD it’s the mobile game PAYDAY: Crime War’s turn and then our children’s game Geminose, which we are releasing exclusively for Nintendo Switch. In addition, we have five major game projects in development, all with the potential to make it to the top lists. We will communicate launch dates when the commercial launch starts for each project. Game development follows fairly long development cycles between the phases, but our current announced projects and statuses are always up to date on our web site: https://www.starbreeze.com/starbreeze-games/games-release-schedule/
Q: Are you happy with the pipeline you have now or is there anything you feel you are lacking and would like to add?
During the past 2 years we have invested SEK 900 million in building up a substantial game portfolio to generate more consistent revenue streams with good profitability. We now have a focused portfolio with 8 titles that span over a number of genres. We are always looking at new potential project that would fit our portfolio and we get approached by a large number of external studios with interesting game projects. But we are selective.
VR
Q: Can we expect the same sales from the VR centers going forward?
We don’t give any forecasts. In Q3 2018, sales from the VR centers contributed with 3.7 MSEK in revenues, compared with 2.4 MSEK in Q2 2018. Revenues generated by the VR centers will vary over time due to seasonality and other changes that might be undertaken. We’re always focusing on getting the most out of our investments and the VR centers is no exception.
Q: What does it mean that you are focusing your resources in the VR content business to clarify the customer offering in location-based entertainment?
It is about the internal organisation to secure focus on optimal customer offering in order to capitalise on the investments we have done up to now.
Q: Will you make any more investments in new VR Centers?
We invested in the two VR centres to show partners and customers what can be done in VR. As for Starbreeze, we are focusing on making and selling premium content for others while our joint venture StarVR Corporation is focusing on marketing and sales of the hardware.
StarVR
Q: Why are you moving your VR tech team to StarVR?
Our joint venture is taking over the responsibility for technology, so we can focus on making and selling content. It is a logical consequence to the joint venture’s now independent status.
Q: How much will you reduce your cost base?
It has been an investment not a cost. Starbreeze will reduce its capitalised expenses related to StarVR by some SEK 15 million on an annual basis, with full effect starting in Q4 2018.
Q: Will Starbreeze keep the IP rights for the headset?
Starbreeze will keep its existing IP rights.
Q: Are you planning to sell your stake in StarVR?
A: No such decision has been taken. If there will be a material change in any our our holdings it will be communicated to the market according to requirements that we operate under.
Q: What is the value of your ownership in StarVR Corporation in your books?
A: As of 30 September 2018 the book value of Starbreeze share of StarVR Corporation is 27.3 MSEK.
StarVR cooperation is listed on the emerging market in Taipei and Starbreeze holding is valued at some SEK 311 million. However, the listing of StarVR Corporation’s share does not affect the value on our books since that currently is reported in accordance with the equity method.
Q: Does Starbreeze get any share of revenue that StarVR will generate?
Starbreeze owns 33% av StarVR Corporate and profit or loss from the joint venture is recognised as financial income or expense.
Finance
Q: The sales dropped dramatically in Q3, why?
Because the sale of the publishing rights to Dead by Daylight was closed on 30 June and therefor Dead by Daylight is not included in the Starbreeze portfolio as of Q3. During the quarter we’ve had only one game generating material revenues being PAYDAY 2. Q3 is between the phasing out Dead by Daylight and the release of OTWD and PAYDAY: Crime War. Hence, Q4 will look different.
Q: How come you have negative revenues in Publishing for Q3?
Because a contract between Starbreeze and StarVR for the VR title The Mummy was changed during the quarter resulting in the crediting of income of SEK 5.5 million from 2017.
Q: Will all pre-sales and sales in Q4 from the PC version of OTWD be recorded as revenue in Q4?
Yes, all pre-sales will be recorded at the release of the game. This is in accordance with IFRS.
Q: How much revenue are you expecting from OTWD in Q4? What are you expectations of the OTWD launch in terms of concurrent players first couple of days?
Naturally we make internal forecasts, but Starbreeze does not give any financial guidance or projections.
Q: When will you start depreciating OTWD?
According to IFRS; as soon as the project is finalised and in this case November 2018.
Q: When will the licence fee for the console version of OTWD of 10 MUSD from 505 Games be recognised as revenue?
As soon as Starbreeze has fulfilled its undertakings in the agreement with 505 Games which is assessed to be the case during Q4.
Q: Why did the depreciation and amortization increase so much in Q3?
We had depreciation and amortization of SEK 49.5 million this Q3 compared to 17.1 last year and the increase is mainly due to more game releases in 2018 and depreciation on VR parks.
Q: How come EBITDA improved for the nine-month period?
EBITDA improved by SEK 123 million during this year mainly due to the sale of the publishing rights to Dead by Daylight, which was a very good deal for Starbreeze in terms of profitability.
Q: Are you still happy with the Dead by Daylight deal?
In terms of profitability and cash flow it was a very good deal for us. The industry is also reacting to the deal and we are being approached more often by external studios with interesting game projects.
Q: Is the goal still to hit 2 billion SEK as a financial target for 2020, not including PD3?
Indeed, the majority is based on our own games but of course also including all our business areas. Starting today, we are launching 8 games of which several may become major revenues contributors. That is what we have been investing in in recent years.
Q: Sebastian, why are you leaving your postion as CFO at Starbreeze?
I have been here for several exciting years, when we have prepared Starbreeze to take on a much larger role in the industry. It has been a lot of fun and a lot of hard work, but we have taken Starbreeze into a completely new position. I feel it is time for me to move on another company, about to embark on a similar journey.
Financing/bond
Q: Why do you want to issue bonds?
No decisions have been taken, we have just announced that we are evaluating the possibility to issue senior secured bonds. The motive would be to diversify our funding sources and replace existing debt facilities to increase financial strength and flexibility.
Q: What will you use the money from the bond for (use of proceeds)?
No decision has been taken to issue a bond. But if we were to do so, the motive would be to replace the current credit facility as the bond is a more flexible solution. Also, we want to diversify our financing and secure enough financial headroom.
Q: How much do you intend to issue?
There is no amount specified, we have just announced that Starbreeze is evaluating the possibility to issue senior secured bonds. No decisions have been taken.
Q: How high will the interest rate be on the bond?
No conditions are determined in advance.
Q: Do you have liquidity problems?
In the Q3 report, the board of directors’ estimates that current and available financing is sufficient to operate the business for at least the next 12 months.
Q: How come you need capital again when you already completed two new share issues in 2018?
If we were to issue a bond the motive would be to diversify our funding sources and replace existing debt facilities to increase financial strength and flexibility.
Q: Will the bond be listed?
If the decision is to issue bonds, the bonds are likely to be listed.
Q: When will we find out more about the bond?
According to practice, a press release will be published as soon as the board has decided to issue a bond loan including the terms or when the decision is not to issue a bond.
