Annual Report 2017 Contents Page Introduction About Starbreeze 4 The year in brief 6 CEO’s message 8 Market 10 History 18 Vision, targets and strategy 20 Operations Starbreeze Games 24 Publishing 26 VR Tech & Operations 28 Marketing 30 Game development process 32 Game portfolio and games in development 34 Employees and organization 43 The share and shareholders 46 Corporate governance Corporate governance statement 50 Board of directors and auditors 56 Senior management 58 Auditor’s opinion on the corporate governance statement 60 Financial review 61 Financial reports Contents 63 Board of directors’ report 64 Consolidated financial statements 69 Parent company financial statements 73 Auditor's report 106 Starbreeze Annual Report 2017 Contents 3 About Starbreeze WE CREATE WORLD-CLASS EXPERIENCES ●● One of the first independent game developers in northern Europe, founded in 1998. ●● Well-established developer and publisher of PC and console games and VR products aimed at the global market. ●● Develops high-quality entertainment products based on own and third-party rights, in-house and in partnership with external game developers. ●● Net sales of approximately SEK 361 million in 2017. ●● Listed on Nasdaq Stockholm. Starbreeze has three business areas San Francisco Los Angeles Starbreeze Games Own game development Publishing Publishing business VR Tech & Operations VR technology/software development and operation of VR parks Net sales in 2017 By business area By platform 4 % 7% 1% 40% 34% 61% 60% 93% Publishing Starbreeze Games Console PC Digital Retail VR Tech & Operations Other 4 About Starbreeze Starbreeze Annual Report 2017 Starbreeze offices 650employees in seven countries Stockholm (HQ) Brussels Paris Luxembourg Dehradun Barcelona Bangalore Game portfolio with strong IP rights System Shock 3 Starbreeze Annual Report 2017 About Starbreeze 5 THE YEAR IN BRIEF The year in figures ●● Net sales up 4.6 percent to SEK 361.4 million (345.5). Key data ●● PAYDAY generated SEK 120.3 million (162.4) and SEKk 2017 2016 Dead by Daylight SEK 201.5 million (143.7). Net sales 361,447 345,463 ●● EBITDA amounted to SEK –53.5 million (81.2). EBITDA –53,523 81,220 Profit (-loss) before tax –176,185 55,900 ●● The loss before tax amounted to SEK –176.2 million Earnings per share –0.55 0.22 (55.9). Cash flow from operations –21,086 15,291 ●● Basic and diluted earnings per share were SEK –0.55 Net sales per employee 1,300 2,288 (0.22). ●● Cash and cash equivalents at the end of the period amounted to SEK 233.8 million (669.4). Net sales in 2017, SEKk ●● The board of directors is proposing that no dividend be distributed for the 2017 financial year. 361,447 Net sales in 2016 SEK 345,463 thousand Significant events Acquisition of Swedish location-based VR company Enterspace. New publishing agreement with Double Fine Produc- License agreement with IMAX for tions for Psychonauts 2. content for IMAX centers. 2017 JAN FEB MAR APR MAY JUN New publishing agreement with Publishing title Dead by Daylight released for Play- Otherside Entertainment for System Shock 3. Station 4 and Xbox One in Europe and the US. 6 The year in brief Starbreeze Annual Report 2017 Largest shareholders as of 28 February 2018 Sales and profit 2013–2017 Owner Holding, % Voting rights, % MSEK 400 Bo Andersson Klint1) 7.93 24.30 345.5 361.5 Försäkringsaktiebolaget Avanza Pension 8.18 6.26 300 Swedbank Robur2) 14.81 6.24 214.3 Smilegate Holdings Inc. 3.17 5.05 200 141.6 161. Första AP-Fonden 10.92 4.18 100 63.5 49.2 55.9 CBLDN-BFCM FULLTX, third party asset 1.06 1.98 107.1 Michael Hjorth3) 0.75 1.96 0 Nordnet Pensionsförsäkring AB 1.49 1.30 CBNY-National Financial Services ll 1.03 1.13 –100 –176.2 Viktor Vallin 0.30 1.10 –200 Other 50.36 46.50 2013 2014 2015 2016 2017 Total 100.00 100.00 Net sales, SEKm Profit (-loss) before tax, SEKm 1) Directly and indirectly via Varvtre AB. 2) Swedbank Robur consists of three funds: Ny Teknik BTI, Småbolagsfond Sverige and Småbolagsfond Norden. 3) Directly and via Indian Nation Aktiebolag. Antisphere, the first Indielabs Release of the first trailer for title, was released on Steam. OVERKILL’s The Walking Dead, developed by Starbreeze. The publishing title RAID: World War II was released for PC, PlayStation 4 and Xbox One. Response to the game was poorer than expected. JUL AUG SEP OCT NOV DEC 2018 Lead partner for operation, Acquisition of Indian production installation and content for company Dhruva finalized. the new VR park in Dubai. Acer takes over the majority of financing of the joint venture StarVR Corporation. Listing on Nasdaq Stockholm in the Mid Cap segment. Starbreeze Annual Report 2017 The year in brief 7 CEO’s message A STRONG FINISH TO 2017 AND HIGH EXPECTATIONS FOR 2018 Looking in the rearview mirror, 2017 was a very eventful year with many important milestones completed. We continued building up our game portfolio and our VR venture took off. We are now looking forward to 2018 and several exciting releases. We have already launched PAYDAY 2 for the Switch and VR and the mobile version is coming soon. OVERKILL’s The Walking Dead will be our biggest release ever and our expectations for the game are huge. Continued growth Dead by Daylight VR venture we embarked upon in 2014 In the last quarter of 2017, we ended – an outstanding publishing case by building the technical platform in the the year with a record breaking SEK 100 We agreed in March 2018 to sell back StarVR headset. We continued investing million in sales, which boosted net sales the publishing rights to Dead by Daylight in location-based VR in 2017 in order for the full year by 5 percent to SEK 361 to the developer, Behaviour. The deal to reach the ultimate goal: to produce million. PAYDAY 2 continued performing accelerates our cash flows from the game and distribute games and experiences well and our publishing title Dead by and frees up capital for new projects. for location-based VR operators, such Daylight continued to grow. On the down Dead by Daylight has been a stellar deal as theme parks and shopping centers. side, RAID: World War II (RAID), released for Starbreeze. We initially invested USD We have invested time and resources in September, was a disappointment in 2 million in developing the game, which in building up the VR parks in Dubai and terms of revenue. has sold more than three million copies Stockholm as full-blown concept stores We made two acquisitions in 2017. to demonstrate how our content and Towards the end of the year, we closed the the StarVR headset can work together to acquisition of Indian production company create a superior concept. On the first of Dhruva. With its 320 employees, Dhruva March 2018, it was at last time to open will continue independently delivering ser - the gates to the VR park at the Dubai Mall. vices to the global games industry, and we We are thrilled to have more than 100 VR will continue buying their services. Earlier stations in the 7,000 square meter VR in the year in June, we bought Stockholm- We ended 2017 with park, probably the biggest high-quality based Enterspace, who signed a contract indoor VR park in the world. in August with EMAAR Entertainment to be sales over SEK 100 mil- We are convinced that location-based the lead partner to a brand-new VR park lion in the last quarter VR is the optimal business model for VR in the Dubai Mall, which has more than of the year for the first for the masses in the foreseeable future. 80 million visitors a year. In another big IMAX, SEGA and EMAAR are already event during the year, we switched our time ever. customers of both Starbreeze and StarVR market listing in October from First North Corporation, which shows we are on the to Nasdaq Stockholm Main Market. This right path. is a quality stamp not only for us as a com- since release, generating approximately pany, but for our entire industry. SEK 345 million in net sales. We are now Joint venture StarVR Corporation concluding the partnership with Behav- takes the VR headset to market One of the most-played games in the iour in a favourable manner and Dead by As of our latest agreement, Acer has world Daylight has become an even better deal taken on the majority of the financing of PAYDAY 2 is still a highly relevant product for Starbreeze. In addition to securing and StarVR Corporation and we are thus free and was one of the most frequently played accelerating our revenues from the game, to concentrate our resources on produc- games worldwide on the digital distribu- we will incur no costs related to further ing content. By the end of 2017, StarVR tion platform Steam in 2017. After the end development and marketing. We expect Corporation had begun serial production of the year, we released PAYDAY 2 for the the profits from the game through this of the current version of the headset to Nintendo Switch platform and released transaction to exceed our earlier forecast meet demand from customers like SEGA the game for VR in mid-March. PAYDAY 2 of the game’s remaining lifetime. and the VR park in Dubai. StarVR Corpo- for VR is arguably the biggest VR game in ration will present the next version of the world in terms of content. Based on Phase three in the VR venture the headset for a professional customer the undiminished interest in PAYDAY, we We successfully established Starbreeze base during the year.