Thunderful Group AB (THUNDR) Earnings Call Transcript

Good morning, and welcome to Thunderful live queue. Today, CEO, Martin Walfisz; and Mikael Falkner, CFO, will present the Q2 report. And shortly after, we will have some Q&A. So let's begin.

Thank you, Thomas, and good morning, everyone, and welcome to the Thunderful Group Q2 presentation. My name is Martin Walfisz, and with me today, I have Mikael Falkner, our CFO, and we will be presenting our Q2 highlights, financial results and also our upcoming product slate and then give some details on the ongoing restructuring and proposed investment from Atari and then we will end with a Q&A session moderated by Thomas. So before we dive into Q2, let me give you a brief introduction to Thunderful Group. 2024 and 2025 have been years of substantial change and transformation for Thunderful. We are today a very different company compared to the beginning of last year. And we are now a focused games publisher and service provider, and we publish PC and console games from our internal studios as well as from external third-party studios. And we also have a strong co-development capacity working on projects for external clients. The group is divided into two reporting segments. The Publishing segment focuses on all of our efforts to develop market and commercialize games and IPs and this includes the creative input from our internal studios as well as game projects by external studios. Our Co-Development & Services segment primarily focuses on offering development and publishing related expertise. Coatsink, 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 we have in our Publishing departments to provide custom services to third-party developers who seek help with their self-publishing efforts. Okay, that was a short introduction to Thunderful. Let's now move on to the highlights of Q2 and I will briefly summarize the financials for Q2 and then later, Mikael will go into a bit more detail. So our net revenue came in at SEK 59 million, which is in line with Q1 this year and a testament to our stable games catalog, but it is considerably lower than Q2 last year. Our adjusted EBITDA is minus SEK 23 million, and our EBIT came in at minus SEK 51 million. We invested SEK 21 million in capitalized ongoing game projects from both internal studios and third-party collaborations, and this is considerably lower than last year as an intended consequence of our various cost savings and restructurings. And cash flow from operations was minus SEK 27 million for the quarter and our available liquidity as of end of June was SEK 32 million. So moving to our operational highlights and starting with the Publishing segment. We launched two games in the quarter. First, Vampires Fall 2 at the end of May on mobile, and it's received great reviews and has sold well in its first few months. As it is a mobile game and a sequel, we expect it to grow and perform for a long while. Our expected biggest release in the quarter was Lost in Random: The Eternal Die. It has received solid reviews averaging above 80% on Metacritic, but unfortunately, it has not translated into commercial success. The timing was also unfortunate as The Eternal Die was released on the same day that HADES II got a major surprise update. And HADES II is the biggest competitor in the roguelite genre. On the positive side, sales of our existing catalog continues to be stable. And inside the organization, we have continued to improve our structures and processes and the publishing and development teams are working more focused than ever. However, as our revenue has not increased as we have projected, we determined after the end of the quarter that we needed to implement further cost reductions. And combined with a proposed investment of SEK 50 million, it will significantly help our liquidity going forward. Now let's move to our Co-Development & Services segment. The teams at Coatsink continue with their close collaborations with Meta and Sony Pictures VR. Some milestone phasing has caused lower revenue in Q2 compared to Q1, but this is quite natural as milestones are not evenly delivered each quarter. Coatsink are also focused on securing new contracts with new and existing clients for 2026 and beyond. Finally, a note on our services operations that is being affected after the end of the quarter. As we are decreasing the size of our Publishing organization, our ability to secure Robot Teddy clients is decreased. This will have a slightly negative impact on revenue in the segment going forward. Now let's share some more details about the restructuring that was announced on July 29. Although we are closing in on being cash flow neutral in our regular operations, our revenue this year has not grown as planned, and we have utilized a large portion of our credit facility. So to decrease the risk of lack of liquidity, we decided at the end of July to initiate another cost savings program. As part of that program, we are making redundancies in various teams. Our Stormteller studio has seen some redundancies as has our Publishing organization and our central operations, finance, IT and HR teams. And we are also evaluating doing cost savings in our To The Sky studio. The performance of their first title Godbreakers, which is launching later this year, will determine our ability to continue investing in that studio. All in all, we expect this restructuring to produce cost reductions of up to SEK 45 million on a full year basis. Now a few details on the Atari investment that was also announced on July 29. So the Board of Directors, together with two of the main shareholders of Thunderful, proposed to offer the classic gaming company, Atari, to invest SEK 50 million in the group. And this is subject to shareholder approval at an extraordinary general meeting that will be held tomorrow. And the investment will mean that Atari will own just about 80% of Thunderful. And in addition, as part of this financing, Danske Bank has also agreed to extend our existing credit facility. So the combination of the investment, the extended credit facility and our cost savings program will allow us to continue our operations and focus on reaching positive cash flow. As also announced a month ago, I will be leaving the role of CEO. With the major transformation that Thunderful has been through in the past two years and with a proposed -- now the proposed investment from Atari, the company is preparing to move into a new phase and I and the Board agree that this is the right time for a leadership change. So I will be staying until the end of the year to ensure a smooth transition for my replacement. And with that said, let's move on to Mikael and more financial details for the second quarter.

Thank you, Martin, and hello, everyone. Thank you for listening in. Let's have a look at this quarter's numbers. I will be starting with a highlight overview for the group, before giving some more context in our segment slide. Sales came in almost in line with Q1, but significantly below last year. We see sales decreases in both our segments. And besides underlying performance, the stronger Swedish krona, especially versus the weaker U.S. dollar, has had a negative impact on our revenue. Our overall cost decreased both due to the variable royalty costs that moves with our revenue and as a consequence of last year's restructuring programs. However, all in all, the cost savings has not been enough to mitigate the shortfall in revenue and both EBITDA and EBIT comes in negative. Moving on to our Publishing segment, so the segment that develops, markets and sells games. Net revenue decreased by over 35%. Back catalog performed stable. Currency had a negative impact, but the biggest effect comes from this year's main launch compared to Q2 last year launch. The game Lost in Random launched to great reviews but has not reached close to the same commercial success as last year's Q2 launch ASKA. Operating expenses decreased overall versus last year. We saw decreases in staff counts as planned, but also an increase in marketing cost as we did more launches this quarter. Our capitalization rate has decreased, impacting EBITDA and EBIT levels negatively. But so has our depreciation and write-downs, which has a positive effect on EBIT and is the main explanation for the EBIT improvement in the segment. In our Co-Development & Services segment, the part of our business is where we have some 100-plus FTEs that do work for higher game development, we flagged in Q1 that we had a positive revenue phasing, which we now see the downside of and as Martin already mentioned, the revenue in this segment is mainly connected to certain project milestone deliveries and the progression towards each milestone can be uneven, leading to some fluctuations in revenue, which we see this quarter, which in turn correlates to fluctuations in EBITDA margin as well. Briefly on our headcount development. At the end of Q2, the number of full-time equivalents counted to 208, so a reduction of almost 90 FTEs versus the start of the year and 120 FTEs comparing to Q2 last year, not counting discontinued business. The FTE reductions are connected to the restructuring programs announced last year. The newly announced program will have a gradual impact starting mid- to late Q3. Moving to my last slide is about the quarter's cash flow and net debt. The negative cash flow has compared to Q1 slowed down but it is still negative. Cash flow from operating activities amounted to negative SEK 27 million. Investments into future game launches were done with around SEK 20 million and an earn-out was paid with around SEK 5 million. And all in all, this has led to further increase in the company's net debt and decreased available liquidity. This was my last slide. Thank you very much, and over to you, Martin.

Thank you, Mikael. Now let's look at the parts of our publishing slate. So here is our main release slate for 2025 and the beginning of 2026. And so far this year, we have launched four titles: Rainbreaker, Vampire’s Fall 2, Lost in Random: The Eternal Die, and ISLANDERS: New Shores. And as mentioned, in aggregate, these titles have not performed as well as we had hoped. However, despite this and the turbulent times, both at Thunderful and in the industry as a whole, we are still very excited and focused on our upcoming releases. So Godbreakers was announced at the end of June, and it's coming out in the second half of the year. It's the debut title from our talented internal studio To The Sky and the demo is out in Steam right now with an 89% positive rating. So don't miss this if you're into frenetic [ pack and slash ] action. Next is ASKA. It is developed by the great team at Sand Sailor Studio and was released in early access last year. And the team continues to work and improve the game together with its early access community, and the full release is planned for later this year and the console launch during next year. And if you like survival games, you should absolutely join the early access on Steam already now. Replaced is a Sifi retro futuristic action platformer and it's the debut title from the very talented team at Sad Cat Studios and as I've said many times before, it looks absolutely amazing. Now the development of the project has had some delays and to ensure the best possible outcome, we are moving the launch from the planned late 2025 into the spring of 2026. Also coming in, in the first half of next year is the sequel to the beloved Planet of Lana from 2023, created by the highly talented and creative team at Wishfully Studios. Planet of Lana II continues the amazing cinematic puzzle adventure, but with a much longer story and tougher challenges than in the original game. And as you can see, it looks absolutely stunning. Okay, that was our 2025 and early 2026 slate. And now let's summarize our key takeaways. So as mentioned, to manage the shortfall in expected revenue, we have initiated another round of cost savings and this, combined with the proposed investment from Atari and the extended credit facility, will recapitalize the group and allow us to continue operating. And I have to say, personally, I'm very excited about the engagement from Atari. They are a classic gaming company. And of course, beyond the funds from the investment, I believe that they will be a great shareholder and collaboration partner. And furthermore, our existing catalog continues to perform through transactional sales. And despite all the turmoil, the great people of Thunderful are determined to turn this company around, not least with the amazing games we have coming out in the next 9 months. And of course, the immediate goal is still to reach positive cash flow and then to achieve sustainable success in the long term. Okay, thank you for listening. Let's now move into the Q&A session moderated by Thomas.

Yes. Thank you, Martin, and thank you for the presentation. Yes, I will actually not dive into the numbers that much. I -- actually, we were pretty accurate. It was in line with our expectations, the numbers and the results. So we dive into some game releases instead. I will start with Lost in Random: The Eternal Die, which I, for one, have played, and I played the hardest as well, and it's -- I'm very impressed by the game, but -- and also critics were very impressed. And you had some marketing in that game as well, some marketing spend, but it didn't perform commercially. And you named HADES, maybe the biggest competitor as one reason. Could you perhaps elaborate some more why this game doesn't sell that much? Hard question to answer.

Yes. Well, I mean, this is the games industry, so it's always very hard to predict how games will sell. But yes, the surprise update to the HADES 2 game came out on the same day as Lost in Random: The Eternal Die on June 17. So that definitely had some effect on the interest of buying Lost in Random versus buying HADES 2, unfortunately. And it is the biggest competitor in the genre. And the genre is also becoming quite saturated. There are many roguelite games out there. And it's unfortunately very clear that we were not able to properly communicate the USPs, unique selling points, on Lost in Random. So as you said yourself, I think it's a great game, but it is hard to get through the noise and unfortunately, we didn't manage that launch. Of course, we're still selling the game, and we're continuing to push it for years to come as it is still a great game and it will provide revenue for a long time still.

Maybe you can't answer this follow-up question, but can you say something about how it performed on console compared to PC because HADES 2 is only on PC at the moment?

Yes. So we're not sharing that split for specific games. We can say that in general, our portfolio is performing better on Steam than any of the consoles. But it's really dependent on different games. They perform differently well on the different platforms.

Yes. Sorry, one is historically, the Steam world titles in the beginning of the Switch 1 era performed very well. But is that -- has that changed? Since -- is it -- or is an Nintendo's platform still a big -- maybe yes, bigger than the PlayStation, for example? Or is it -- can you say something about that or...

We're not providing split between the platforms for specific games, but Steam World as a whole throughout its lifetime has performed well on Switch. You're correct there.

Yes. So let's move on to Vampire’s Fall 2, again, that performed -- exceeded your expectations commercially, is -- but that's free-to-play RPG only on mobile. How -- the first question is maybe, is this title also suitable for other platforms such as PC or...

No, I would say that it's most likely not something that would be ported to other platforms. Mobile games tend to have their own dynamic and gameplay design. So I don't think we should expect this coming out on any other platforms anytime soon.

And the other question, do you think your audience on this game is large enough to -- that you could have a meaningful revenue from this game in a long-term perspective? Or can you say something about that?

Well, absolutely. Well, in the short term, all revenue is important for us, of course.

Yes, but long-term, sorry.

Absolutely, no. Vampire’s Fall 2, it's a mobile game. Those games -- and the free to play, as you mentioned, those games tend to have a different dynamic in its sales curve. So we expect it to grow for actually many years to come. So it will absolutely have a meaningful revenue impact on Thunderful going forward.

And maybe your most -- one of your most interesting releases in the second half of this year, the full release of ASKA on PC and a follow-up by release on console next year. But can you -- games often experience a sales uplift during this hard or -- yes, this hard launch on PC. Do you have a strategy to maximize sales during this period? Can you give some -- maybe something to say about that? Is it a big uplift perhaps or a marketing effort or something?

Sure. Absolutely. Well, I mean, first of all, ASKA is in a genre that has very strong retention. So people -- players tend to play for hundreds or even thousands of hours. And it also has a very active influencer community. So part of the launch planning for the full release is to tap into the influencer community and have influencers help show the audience how great this game is. And then, of course, since it is -- it was released in early access last year, we also have a big existing fan base and community that we will also reach in to get help to -- with the full launch. Yes, I think that's the main part of the launch planning.

And you also talked about Godbreakers and that it has got good reviews on Steam, I think, you said from players. It looks like a multiplayer game, I would say. Could you please say some more about this game and what to expect for players?

Absolutely. So as mentioned, the demo has 89% positive reviews on Steam. So we're very happy with that. And it is a roguelite game, very action focused and it's a very popular genre. But Godbreakers is in 3D and also has a very strong co-op multiplayer component, which we believe makes it stand out from the competition. So we believe the sort of the style of the game combined with its unique selling points, definitely increases the chances of reaching commercial success when it launches later this year.

Could you say something about the budget? Is it like in comparison to Lost in Random: The Eternal Die? Is it like the same budget or bigger or smaller or can you say something?