Commissioned research 6 March 2018

Starbreeze Information Technology | Sweden

KEY DATA Three quarters to payday Country Sweden Bloomberg STARB SS Reuters STZEb.ST The game is on Share price 10.04 Once a niche form of entertainment, gaming has evolved into a rapidly Free float 80% Market cap (m) SEK 3,050 growing industry that pulls in more revenue than the film and music Website www.starbreeze.com industry. The global gaming market generates over USD 100bn in Next report date 09 May 2018 revenue a year, with a burgeoning player base of over two billion in 2017,

many of whom are spending more on games than ever before. Video ABSOLUTE & RELATIVE PERFORMANCE game developer and publisher Starbreeze stands poised to profit from 20 this booming market thanks to the popular titles it has under its belt and its diversified business offering.

15 The chance to make a killing We have confidence in Starbreeze’s record and upcoming game releases 10 and see the company cashing in peak sales of SEK 2.6bn over our forecast period to 2021E. It will likely make a killing from the launch of the 5 much-anticipated OVERKILL’s The Walking Dead, slated for autumn Mar 17 Jun 17 Sep 17 Dec 17 Mar 18 2018, and here we expect it to shift nearly 8 million copies over the course Starbreeze OMX Stockholm PI of three years. We base our estimates on the performance of comparable -1M -6M -12M YTD game titles, franchise interest, previous sales record and market trends. Absolute 16% -10% -39% 20% Relative 17% -10% -41% 22% Source: FactSet and Bloomberg Raising its game To combat the potential swings in earnings between major game VALUATION APPROACH releases, Starbreeze has broadened its operations, adding a publishing arm and investing in emerging technologies. Its games as a service approach and releases of bolster its games’ lifetime and generate substantial revenue even years after the initial SEK SEK DCF 13.8 15.9 game launch. This predictable revenue stream helps to de-risk the business model and will likely improve Starbreeze’s earnings stability.

Valuation 12 14 16 18 Based on our fundamental DCF approach and assuming a WACC of

Source: FactSet and Nordea Markets between 7.9-9.1%, we derive an equity value per share between SEK 13.8 and SEK 15.9. This implies a 2020E EV/EBIT between 5.‐6.4x and 2020E P/E of 9.0x-10.3x. Nordea Markets - Analysts Dan Johansson SUMMARY TABLE - KEY FIGURES Analyst SEKm 2013/14 2014/15 2015 2016 2017 2018E 2019E 2020E Predrag Savinovic Net sales 214 197 99 345 361 929 1,260 1,913 Analyst - growth 477.8% -7.7% -49.9% 249.6% 4.6% 157.0% 35.7% 51.8% EBIT 142 46 21 56 -151 -11 123 596 Alexander Fält - margin 66.5% 23.5% 21.3% 16.3% -41.9% -1.2% 9.7% 31.2% Analyst EPS 0.83 0.15 0.09 0.22 -0.55 -0.18 0.26 1.54 Jörgen Wetterberg - growth -82% -39% 140% n.m. n.m. n.m. 495% Senior Analyst DPS n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. P/E 8.2 78.1 170.0 87.0 n.m. n.m. 38.9 6.5 Henrik Nilsson EV/EBIT 5.9 55.8 170.9 96.9 n.m. n.m. 24.0 4.0 Senior Analyst EV/Sales 3.9 13.1 36.4 15.8 7.7 3.3 2.3 1.3 RoE 16.5% 6.6% 6.5% -11.7% -3.9% 5.3% 26.5% 33.7% Div. yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FCF yield 12.6% -1.2% -1.0% -4.7% -25.0% 1.4% 2.5% 17.8% ND/EBITDA -0.9x -1.2x -3.6x -5.0x n.m. -0.2x -0.3x -0.7x

Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze Starbreeze 6 March 2018

Table of contents Factors to consider when investing in Starbreeze ...... 3 Valuation ...... 9 Company overview ...... 18 The global games market ...... 29 Business area: Starbreeze Games ...... 36 Business area: Publishing ...... 46 Business area – VR Tech & Operations ...... 52 Historical financials ...... 60 OVERKILL’s The Walking Dead ...... 67 VR estimates ...... 73 Estimates ...... 75 Detailed estimates ...... 83 Risk factors ...... 84 Reported numbers and forecasts ...... 86

Marketing material commissioned by Starbreeze 2 Starbreeze 6 March 2018

Factors to consider when investing in Starbreeze Starbreeze is an established and respected name in the gaming industry, winning coveted partnerships with the likes of IMAX, Acer and SEGA. Its PAYDAY franchise is wildly popular and has become one of the most popular games of all time, boasting the largest player community on the platform . Players of Starbreeze’s games are active, engaged and loyal, spending money on downloadable content years after initial launch. This fan base offers Starbreeze a solid platform from which it can market its future releases. We expect a windfall as early as autumn 2018 when it adds another sought-after game title to its name. In addition, Starbreeze has expanded its business in an effort to stabilise its earnings flows. Executed properly, Starbreeze can reach a sales CAGR of over 70% up to 2020E while de-risking the business model, warranting a rerating of the share. We calculate a valuation range of SEK 13.8-15.9 per share. We consider the following factors to be key when evaluating an investment in Starbreeze: We identify a number of key  Transformation from a studio-for-hire to a global provider of world-class factors in Starbreeze’s entertainment experiences investment case  Positioned to benefit from sizeable investments in its games pipeline, publishing projects and emerging technologies such as VR

 New business lines such as Publishing and VR add cash flows in periods between major game releases, potentially mitigating future earnings volatility

 Successfully applies its “games as a service” concept, with a frequent mix of paid and free updates for its games to prolong their lifetimes and earnings potential

Key risk factors

 Its focus on AAA titles, which are released less frequently and require more time and resources than a typical game, makes it vulnerable to disappointments should its games garner a weak reception from players

 Starbreeze is dependent on its ability to attract and retain key employees, as the business is highly knowledge intensive

 The nature of the games industry, with a majority of revenues centred around the release of the game, could put pressure on finances if projects are delayed

 Competition in the industry is intense, which could put pressure on price and the number of sold copies. Competition does not only include other games developer, but also entertainment companies

Attractively positioned in the value chain Aided by the success of its popular PAYDAY games, Starbreeze has transformed from Attractively positioned to a studio-for-hire into a global provider of entertainment experiences, penetrating take part in a USD ~100bn market opportunity multiple parts of the value chain in the games industry. We believe that Starbreeze is attractively positioned to take a share of the flourishing USD ~100bn market for games, which could grow at a 2017-20 CAGR of ~6%, according to market forecasts by Newzoo.

Marketing material commissioned by Starbreeze 3 Starbreeze 6 March 2018

Source: Company data and Nordea Markets

GLOBAL GAMES MARKET REVENUE GAMES REVENUE GROWTH Y/Y

140 12%

120 10% 100 8% 80 6% 60 USDbn 40 4%

20 2%

0 0% 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2013 2014 2015 2016 2017 2018E 2019E 2020E Global games market revenue y/y Source: Newzoo and Nordea Markets Source: Newszoo and Nordea Markets When the dead comes knocking The eagerly awaited OVERKILL’s The Walking Dead (OTWD) is Starbreeze’s first OVERKILL’s The Walking major internally developed project and is slated for release this autumn. Starbreeze Dead a likely hit has poured its PAYDAY 2 earnings into the development of OTWD and the first trailer, unveiled in December 2017, garnered considerable interest from players, receiving more than 15 million views on YouTube and Facebook in the first week alone. The popularity of The Walking Dead universe does not seem to be waning. In fact, it seems to be more alive than ever. We believe the game could be Starbreeze’s next big franchise as it appeals to fans of The Walking Dead as well as the zombie genre. We are keenly aware that the gaming developer and publisher Telltale has been able to capitalise on the same franchise with an episode-based adventure game. In addition, The Walking Dead TV series still attracts an audience of millions each week and has recently been renewed for season nine, a testament of its popular appeal.

A timely fill to a void in the genre On the gaming front, we note that other comparable co-op survival games, such as 2, are among the top-selling games of all time. We believe Starbreeze’s OTWD compares well with the Left 4 Dead franchise and will fill a void in the genre, which has not had a major release for several years. On top of this, Starbreeze’s decision to use the renowned for OTWD will boost the game’s chances of success as it would give it a familiar look and feel, albeit modernised.

Potential to mirror the success of PAYDAY 2 We estimate a similar sales We believe OTWD’s sales trend will be similar to PAYDAY 2, Starbreeze’s most uptake as for PAYDAY 2, successful game to date, and be determined by dynamic pricing. As with other titles, implying a player base of PAYDAY 2 generated most of its revenue from copies sold when it was launched, but nearly 8 million over time the game still brings in a lot of revenue from downloadable content (DLC). We estimate that OTWD’s owner base could approach 8 million over time, compared with the ~3 million at the release of the first DLC.

Marketing material commissioned by Starbreeze 4 Starbreeze 6 March 2018

COPIES SOLD, ACCUMULATED COPIES AND PRICING 4.0 8

3.5 7

3.0 6

2.5 5

2.0 4

1.5 3

1.0 2

0.5 1 Copies sold per quarter, in in millions quarter, per sold Copies Accumulated copies, in millionsin copies,Accumulated

Q418E Q119E Q219E Q319E Q419E Q120E Q220E Q320E Q420E Acc. copies Sold per quarter Price

Source: Nordea Markets Project Crossfire – not all is quiet on the Western front Following OTWD, Project Crossfire will be Starbreeze’s next major game release. Project Crossfire, expected in Crossfire is currently the third-highest grossing PC game in the world, with 2017 2020, is the next major game release following OTWD revenues of USD 1.4bn. In 2016, Starbreeze and Crossfire’s developer signed an agreement for the company to develop a Western version of the game, which currently generates a vast majority of its sales in Asia. We take a cautious view on Project Crossfire as the franchise, while huge in Asia with 650 million players, has not seen the same success in the Western world. A successful release of Starbreeze’s version, however, could pose serious competition for CS:GO and Overwatch, each of which had sales of over USD 300m in 2017.

What to expect from PAYDAY 3 After the releases of OTWD and Project Crossfire, focus will shift to the next sequel in PAYDAY 3 has a superior the PAYDAY series. As the game is still in the early design phase, it is difficult to make platform from the start compared to its predecessor any predictions about its potential. Nonetheless, we believe it could be as profitable as PAYDAY 2. We note that the player base and Steam community is larger today than when PAYDAY 2 was released, and we believe that PAYDAY 3 will have a wider geographic scope and enjoy a full release across all platforms simultaneously. The development budget is likely to be considerably higher, meaning that the game is probably going to be more impressive than its predecessor. Plus, Starbreeze owns the full IP rights and revenue-sharing will be lower.

PAYDAY 2'S OWNERS PAYDAY 2'S SALES

18 80 70 15 60 12 50 9 40

SEKm 30

In millions In 6 20 3 10 0 0 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Jun-15 Jun-16 Jun-17 Feb-16 Feb-17 Feb-18 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec-17 Owners PAYDAY 2 sales *Note that OVERKILL gave away five million copies of the game in June 2017 Source: Company data and Nordea Markets Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze 5 Starbreeze 6 March 2018

Better risk and earnings profile… Starbreeze has made strategic investments to diversify its business, adding virtual New business lines to reality (VR) technology and a publishing platform. We welcome these initiatives as improve Starbreeze’s we believe that they lower the company’s risk and its reliance on game releases to earnings profile generate revenue, which had created severe income peaks and troughs. The cash flows of these new businesses are typically steadier, alleviating some of the pressure

on Starbreeze’s finances and making the game releases less vulnerable to delays caused by cash-strapped budgets. …thanks to publishing arm… First publishing project, Dead To leverage on its expertise, Starbreeze mainly collaborates with developers of similar by Daylight, has sold more games to those in its own portfolio. The first publishing project, , was than three million copies released on 14 June 2016 for PC and the console release followed in June 2017. It has so far sold more than three million copies on Steam. We see potential to further leverage the publishing platform by adding and releasing more titles. Currently, its pipeline includes popular franchises such as 3 and .

SALES COMPOSITION

140 123 120 104 103 103 99 100 78 80 72 57 SEKm 60 51 48 48 50 49 41 40 32 30

20

0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 Payday Dead by Daylight RAID: World War 2 Other

Source: Company data …and VR technology is an emerging technology that is likely to experience considerable VR is seen by market growth. Although there is lingering uncertainty regarding the pace of development forecaster as an emerging and adoption of the technology, PwC forecasts that the VR market will grow at an technology that will grow 80% five-year CAGR through 2021 and will then constitute a USD 15bn market. rapidly Beyond 2021, we expect growth rates to be maintained. In another report, Goldman Sachs forecasts that the combined market for VR and augmented reality (AR) will reach USD 80bn in 2025. SuperData, a market intelligence provider covering the global gaming markets, further estimates that software will account for USD 16.2bn of the total USD 28.3bn of VR revenues that it expects in 2020. This bodes well for Starbreeze’s VR strategy of focusing on premium content.

Marketing material commissioned by Starbreeze 6 Starbreeze 6 March 2018

WORLDWIDE VR REVENUE BY SEGMENT

30 28.3

25

20 16.2 17.1

15 7.2 USDbn

10 9.0 3.0 3.7 12.1 5 1.8 9.9 1.0 6.0 0.3 2.7 0 1.5 2016 2017E 2018E 2019E 2020E Hardware Consumer software/services

Source: SuperData

Starbreeze is pursuing a VR Starbreeze’s VR activities are now close to break-even point after several years of strategy with the ultimate heavy investments. The company has pursued a strategy of developing the goal of becoming a premium technology and the concept for location-based VR centres. It has deemed this content provider to its necessary to delivering the last phase of its strategy – premium content. Starbreeze consumers has made considerable strides in this strategy, partnering with Acer to develop its high-end StarVR headset, which will be featured at more than ten SEGA arcade locations across Japan by the end of the year. As Starbreeze’s expertise lies in delivering premium content, where margins are highest in the value chain, its intention is to leverage its strong IPs, such as PAYDAY, on all entertainment channels and to expand its publishing portfolio by adding VR titles.

VR STRATEGY – TO ENABLE PREMIUM CONTENT

Source: Company data and Nordea Markets A formula to extend game-life and maximise monetisation Games as a service approach Starbreeze stands out from other games companies thanks to its “games as services” aims to prolong the games’ concept, a model it applies to all of its titles. The company’s aim is to prolong the life lifetime of the game by offering free and paid updates, as well as tailored community events. This concept works particularly well with strong IPs, where PAYDAY 2 is the prime More than four years after example of the strength of the concept. launch, PAYDAY 2 is still generating sales PAYDAY 2 was released in August 2013 and has sold more than 16 million copies and generated more than SEK 700m to date for Starbreeze. Historically, the typical game Successful execution with earns the majority of its revenue around the release window. With PAYDAY 2, PAYDAY has created the however, Starbreeze works actively with its player community, keeping them largest player community on engaged long after initial release with more than 170 free and paid updates, Steam successfully extending the game’s lifetime. As an example of Starbreeze’s accomplishments, PAYDAY 2’s Steam community has amassed 5.5 million members

Marketing material commissioned by Starbreeze 7 Starbreeze 6 March 2018

making it the platform’s largest community. Starbreeze’s use of dynamic pricing also gives it more flexibility and a competitive edge. It means that it can attract more players to its games by quickly adjusting prices, offering the games at a lower retail price but monetising on the larger player base by selling DLCs.

PAYDAY 2 STEAM COMMUNITY

6

5

4

3 In millions In 2

1

0 sep-14 nov-14mar-15 jun-15 sep-15dec-15mar-16 jun-16 sep-16dec-16mar-17 jun-17 sep-17 Today PAYDAY 2 Steam community

Source: Company data, Steam and Nordea Markets Risk factors Starbreeze’s main risk is related to its own game development, as it is expected to A full description of the risk derive a majority of its future revenue from these games. The risk is related to the factors we find most relevant for Starbreeze is provided on commercial success of its games and the timing of the games’ launches. Starbreeze pages 84-85 develops AAA games, which have the highest development budgets. If the games are not well-received by the market, this could result in capitalised development costs being impaired.

Games revenue is also unevenly distributed over time, with the majority made in conjunction with the release. Delays in ongoing projects could also hurt profitability and there is a risk that completion of a project requires more resources than estimated. It could put pressure on finances and induce a need of additional capital infusions.

As Starbreeze is a development company, it is highly knowledge intensive and a lot of the value in the company lies within its employees. This includes senior developers and executive management, among those CEO and major shareholder Bo Andersson Klint. Losing key employees could lead to disruptions and affect operations and future success of the company.

The market for games is highly competitive and Starbreeze competes with major global players such and Blizzard for players’ attention. There are also examples of smaller studios developing successful games, such as PlayerUnknown’s Battlegrounds (PUBG), developed by PUBG Corporation (a subsidiary of Korean publisher Bluehole). Competition could also stem from alternative entertainment services such as films, TV, sports and other experiences that compete for consumers’ time.

Marketing material commissioned by Starbreeze 8 Starbreeze 6 March 2018

Valuation Primarily using a fundamental DCF valuation and assuming a WACC of 7.9-9.1%, we derive an equity value range of SEK 13.8 to SEK 15.9 per share. This implies a 2020E EV/EBIT valuation of 5.4x-6.4x and 2020E P/E of 9.0x-10.3x. In our analysis, we also complement our DCF framework with a multiples-based relative valuation approach, including peers with similar value drivers and characteristics. We also provide a framework with which to assess how the sector valuation has developed over time. Based on the current share price and our estimates, Starbreeze trades at 2020E EV/EBIT of 4.0x and 2020E P/E of 6.5x.

Our valuation approach is One of the most common ways of determining the attractiveness of an investment primarily based on a DCF opportunity is the discounted cash flow (DCF) method. A DCF model discounts all framework available cash flows for equity, bond and non-equity holders at the weighted average cost of capital (WACC). In other words, WACC represents a blended cost of capital for all invested capital in the company. In fundamental terms, a DCF framework is built on three parts:

 Discounting the company’s free cash flow at WACC.

 Identifying the value of debt and other non-equity claims on the enterprise value.

 Deducting all claims to determine the value of the common equity. The fair value per share is then simply calculated by dividing the equity value by the number of outstanding shares.

A DCF valuation is commonly considered among academics and those in the industry to be the best way to capture the underlying fundamental drivers of a company, such

as cost of capital, growth rates and reinvestment rates. If applied correctly, it represents the best way to approximate the true intrinsic value of a company. The

main appeal of a DCF framework compared with other valuation methodologies is that it also focuses on streams of cash rather than accounting earnings. Its main

disadvantage is its relative sensitivity to changes in input values.

We also complement our DCF approach with a multiples-based relative valuation but note that a direct peer comparison is difficult due to the different games release We complement our analysis cycles, accounting principles and risks related to IP and games portfolios. Starbreeze with a peer group valuation is also among the smallest companies in our peer valuation, with a market cap 8% of the peer median. We therefore prefer to use an over-the-cycle valuation approach such as a DCF framework.

Fundamental valuation In the table below, we set out the general assumptions that we use to calculate our Based on our assumptions, DCF value. Based on the assumption that Starbreeze can deliver broadly in line with we derive an equity value of SEK 13.8 to SEK 15.9 per share our forecasts, with variations in sales growth, EBIT margin and WACC assumptions, for Starbreeze we arrive at a fair equity value range of SEK 13.8 to SEK 15.9 per share. In the terminal period, we model WACC equal to ROIC and 2.5% growth.

DCF VALUATION DCF value Value Per share NPV FCFF 4,382-5,020 14.3-16.4 (Net debt) -233 -0.8 Time value 83-83 0.3-0.3 DCF Value 4,232-4,870 13.8-15.9

Source: Nordea Markets

Marketing material commissioned by Starbreeze 9 Starbreeze 6 March 2018

AVERAGES AND ASSUMPTIONS Averages and assumptions 2018-23 2024-28 2029-38 2039-43 2044-48 Sust. Sales growth, CAGR 12.2% 5.0% 3.0% 2.5% 2.5% EBIT-margin, ex. associaties 24.3% 23.0% 23.0% 20.0% 3.5% Capex/depreciation, x 0.9 1.0 1.0 1.0 1.0 Capex/sales 17.7% 5.0% 5.0% 5.0% 5.0% NWC/sales -11.0% 1.0% 1.0% 1.0% 1.0% FCFF, CAGR 47.6% 31.5% 3.6% -0.2% -30.9% 2.5%

Source: Nordea Markets

We apply a WACC range of WACC 7.9-9.1% We apply a range for the cost of capital (WACC) of 7.9-9.1% as the input for our DCF valuation. The assumptions behind our WACC are outlined in the table below.

WACC ASSUMPTIONS WACC components Risk-free interest rate 1.5% Market risk premium 5.5% Forward looking equity beta 1.6-1.9 Cost of equity 10.3%-12.0% Cost of debt 3.0% Tax-rate used in WACC 21.0% Equity weight 70.0% WACC 7.9%-9.1%

Source: Nordea Markets DCF sensitivity To highlight the sensitivity of the DCF valuation, we also provide sensitivity matrices modelling variations in revenue growth, margin assumptions and cost of capital.

In the table below, we provide a sensitivity analysis of the DCF valuation, with varying EBIT margins and sales growth rates.

Our DCF value with varying SALES GROWTH VS EBIT MARGIN EBIT margins and sales Sales growth change growth rates -1.0pp -0.5pp 0.5pp 1.0pp +1.0pp 14.514.915.315.816.3 EBIT margin +0.5pp 14.314.615.115.516.0 change 14.014.414.815.215.7 -+0.5pp 13.814.114.514.915.3 -+1.0pp 13.513.914.214.615.0

Source: Nordea Markets

Below, we also illustrate how the equity value varies with changes in WACC and sales growth.

Our DCF value with different WACC VS SALES GROWTH WACC and sales growth WACC assumptions 7.9% 8.2% 8.5% 8.8% 9.1% +1.0pp 16.916.315.715.114.5 Sales growth +0.5pp 16.415.815.214.714.2 change 15.915.314.814.313.8 -+0.5pp 15.514.914.413.913.4 -+1.0pp 15.014.514.013.613.1

Source: Nordea Markets

In addition, we provide a sensitivity table illustrating how the equity value varies with changes in EBIT margin assumptions and WACC.

Marketing material commissioned by Starbreeze 10 Starbreeze 6 March 2018

Our DCF value with different WACC VS EBIT MARGIN WACC and EBIT margin WACC assumptions 7.9% 8.2% 8.5% 8.8% 9.1% +1.0pp 16.615.915.314.814.3 EBIT margin +0.5pp 16.215.615.114.514.0 change 15.915.314.814.313.8 -+0.5pp 15.615.014.514.013.6 -+1.0pp 15.314.814.213.813.3

Source: Nordea Markets

Relative valuation In our peer group valuation, we use listed peers from all over the world. We include a Our DCF approach is wide range of gaming companies, from console and PC developers to publishers, as complemented with a peer well as mobile developers. From a wider perspective, they are all present in the same group valuation as a sanity sector, but there are differences in revenue models, cost structures, product lifetimes check and end customers.

In terms of benchmarking, we regard enterprise value (EV)-based multiples, such as EV/EBITDA (or EV/EBITA) and EV/sales, as the most relevant multiples for the The peer group is derived gaming sector. The advantage of the former is that it is not affected by the large from a global universe accounting differences with regard to amortisation and depreciation across the companies. The latter is interesting due to its stability – from time to time, other multiples can be inflated due to timing effects in revenue recognition and game releases, while EV/sales, although also volatile, varies far less, whereas other We rely on EV/EBITDA and multiples can swing higher due to margin profiles when titles reach peak sales. EV EV/sales multiples for our multiples are also neutral to a company’s financial gearing. relative valuation P/E is often used to compare companies and to take account of the differences in tax rates and financing costs. However, it is biased towards lower multiples for companies with high financial gearing. We believe that certain adjustments should be applied when using P/E in order to value companies appropriately.

Key peers We regard CD Projekt and as the closest peers to Starbreeze.

Among our key peers, we see CD Projekt as the closest from Starbreeze’s perspective, We regard CD Projekt as our although we believe that CD Projekt has stronger, better established intellectual key peer property. Similar to Starbreeze, CD Projekt is known for a handful of titles. Its Witcher franchise accounts for a majority of sales, and the large sales forecasts by consensus for future years are based on the release of 2077, which will be a new IP for the company. A large chunk of Starbreeze’s revenue comes from the PAYDAY franchise, and it, like CD Projekt, has a large upcoming title with IP rights that have not been tested before.

Paradox Interactive is another company that we think shares many characteristics Paradox also shares some with Starbreeze. Paradox is often mentioned for its niche games and loyal player characteristics with base. We think this is similar to the PAYDAY franchise, which has by far the biggest Starbreeze Steam community and active player base loyal to the brand.

Peer group valuation Looking at the aggregate of our sector valuation, we conclude that multiples are quite Multiples vary a lot due rich but also that the range is wide; some companies can have very high multiples for lumpy sales and growth some years, only to drop ~80% sequentially owing to the revenue profiles. This is due expectations to expectations of sales growth greatly exceeding 100% in some periods given how large game releases are scheduled and how they impact financials. Some companies, such as CD Projekt and Starbreeze, are more reliant on a few titles, causing large swings in sales growth, while companies such as EA Games or Activision Blizzard An optimal peer should have have completely different degrees of earnings stability.

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a similar release schedule As such, to find an optimal comparison, we would need to find a peer with a similar schedule for the release of titles in the same year, meaning that looking at average or median multiples could be erroneous at any given time, in which case we would rather look at valuations over time.

Based on our estimates, Starbreeze trades at a discount of 35-42% on 2019E EV/EBITDA and EV/sales, despite having higher sales and profit growth than its peer group. It is worth highlighting, however, that the company is among the smallest in the group with a market of only 8% of the median company used in our peer comparisions. Estimate risk is likely also on the high side compared to some of its peers, due to Starbreeze’s dependence on a limited number of AAA games.

PEER GROUP VALUATION P/E EV/EBIT EV/EBITDA EV/Sales Name Country Mcap (EURm) 18E 19E 20E 18E 19E 20E 18E 19E 20E 18E 19E 20E Ubisoft Entertainment SA France 7,245 37.5 25.9 21.8 26.4 17.7 14.8 8.7 7.2 6.6 4.4 3.6 3.3 Electronic Arts Inc USA 31,151 29.3 25.0 22.2 20.8 17.7 15.6 19.1 16.4 15.0 6.7 6.1 5.8 Activision Blizzard Inc USA 45,585 28.3 24.6 23.1 21.0 18.3 17.0 19.7 17.1 15.7 7.4 6.9 6.4 Take-Two Interactive Software Inc USA 10,288 33.8 21.9 23.5 23.3 14.6 15.7 21.8 13.8 14.6 5.6 3.9 4.2 Zynga Inc USA 2,497 25.6 19.5 16.4 18.2 12.9 11.3 14.9 11.4 10.4 2.6 2.4 2.3 Glu Mobile Inc USA 423 n/a 17.7 9.3 n/a 14.5 7.3 n/a 13.2 6.9 1.4 1.2 1.0 Majesco Ltd USA 137 NaN 43.5 23.7 193.1 25.1 12.1 29.2 18.8 10.0 1.4 1.2 1.0 Konami Holdings Corp Japan 6,005 21.9 19.2 18.4 n/a n/a n/a 10.3 9.3 8.8 2.7 2.5 2.5 Nintendo Co Ltd Japan 50,172 43.0 25.4 18.7 n/a n/a n/a neg. 17.4 13.7 5.3 4.0 3.7 Holdings Co Ltd Japan 4,201 21.0 18.4 15.5 n/a n/a n/a 9.3 8.2 7.1 1.7 1.5 1.4 Capcom Co Ltd Japan 2,189 22.6 20.7 18.5 n/a n/a n/a 13.0 12.0 11.0 3.1 2.9 2.7 Sega Sammy Holdings Inc Japan 3,206 37.7 28.1 21.3 n/a n/a n/a 7.4 7.0 6.3 0.9 0.9 0.9 Perfect World Co Ltd China 5,516 23.0 18.9 NaN 21.0 17.2 0.0 18.6 15.7 0.0 4.3 3.6 0.0 NetEase Inc China 30,965 20.2 17.5 14.6 16.1 13.7 12.5 14.6 12.3 11.0 3.0 2.4 2.0 THQ Nordic AB Sweden 979 25.5 21.9 15.9 25.1 21.3 18.6 21.1 18.2 9.5 4.6 4.0 3.7 Stillfront Group AB (publ) Sweden 351 22.3 13.9 13.2 17.3 11.2 7.9 8.8 6.3 5.9 2.5 2.1 2.0 Paradox Interactive AB (publ) Sweden 1,306 35.1 28.8 24.0 26.7 21.9 24.5 19.3 15.4 12.9 11.4 9.4 7.9 CD Projekt SA Poland 2,433 43.8 14.0 13.8 35.1 9.6 12.6 33.2 8.4 13.7 17.6 5.9 8.3

Starbreeze (NRD est.) Sweden 300 n/a 38.9 6.5 n/a 24.0 4.0 15.7 7.4 2.4 3.3 2.3 1.3

Simple average 11,369 29.4 22.5 18.5 37.0 16.6 13.1 16.8 12.7 9.9 4.8 3.6 3.3 Simple median 3,703 27.0 21.3 18.5 22.2 17.2 12.6 16.8 12.8 10.2 3.7 3.3 2.6

Source: Thomson Reuters and Nordea Markets

PEER GROUP VALUATION Sales growth EBITDA growth EBITDA margin Name Country Mcap (EURm) 18E 19E 20E 18E 19E 20E 18E 19E 20E Ubisoft Entertainment SA France 7,245 14% 22% 8% 38% 20% 10% 50% 49% 51% Electronic Arts Inc USA 31,151 5% 9% 6% 29% 16% 10% 35% 37% 39% Activision Blizzard Inc USA 45,585 7% 8% 7% 21% 15% 9% 38% 40% 41% Take-Two Interactive Software Inc USA 10,288 10% 44% -8% 109% 58% -6% 26% 28% 29% Zynga Inc USA 2,497 9% 9% 6% 176% 31% 10% 18% 21% 22% Glu Mobile Inc USA 423 6% 14% 18% -146% 61% 92% 6% 9% 15% Majesco Ltd USA 137 -9% 17% 17% n/a 55% 88% 5% 6% 10% Konami Holdings Corp Japan 6,005 9% 7% 2% n/a n/a n/a 26% 28% 28% Nintendo Co Ltd Japan 50,172 120% 34% 8% n/a n/a n/a 16% 23% 27% Square Enix Holdings Co Ltd Japan 4,201 2% 8% 9% n/a n/a n/a 18% 19% 20% Capcom Co Ltd Japan 2,189 3% 6% 7% n/a n/a n/a 24% 25% 25% Sega Sammy Holdings Inc Japan 3,206 -10% 3% 3% n/a n/a n/a n/a n/a n/a Perfect World Co Ltd China 5,516 24% 20% n/a 54% 18% n/a 23% 23% n/a NetEase Inc China 30,965 31% 25% 20% 12% 19% 13% 20% 19% 18% THQ Nordic AB Sweden 979 284% 15% 8% 256% 16% 91% 22% 22% 39% Stillfront Group AB (publ) Sweden 351 754% 17% 5% 1905% 40% 6% 28% 34% 34% Paradox Interactive AB (publ) Sweden 1,306 36% 21% 19% n/a 25% 20% 59% 61% 61% CD Projekt SA Poland 2,433 13% 198% -29% -8% 295% -39% 53% 70% 60%

Starbreeze (NRD est.) Sweden 300 157% 36% 52% n/a 108% 148% 21% 32% 52%

Simple average 11,369 73% 27% 6% 222% 51% 25% 27% 30% 32% Simple median 3,703 9% 16% 7% 38% 25% 10% 24% 25% 29%

Source: Thomson Reuters and Nordea Markets

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Sector valuation over time As previously mentioned, we regard EV/EBITDA and EV/sales as the most relevant We take a closer look at multiples for the gaming sector. We also choose to look at P/E multiples, as there are sector valuation over time comprehensive consensus estimates available. For some multiples, we exclude the financial crisis years because they distort the comparisons. Our charts show a range for the multiples as well as the means.

EV/sales Based on LTM EV/sales multiples, companies were trading in a narrower interval Based on EV/sales, mean between 2009 and 2011, following the financial crisis. From 2012 on, the interval valuation and dispersion have increased for the sector becomes broader due to the varying performances of the companies. However, the mean increased from 0.7x in 2009 to 5.0x by year-end 2017.

SECTOR VALUATION LTM EV/SALES SECTOR VALUATION NTM EV/SALES 6.0 4.0 3.5 5.0 3.0

TM 4.0 2.5

es - L 3.0 2.0 l a 1.5 2.0 EV/S EV/Sales - NTM 1.0 1.0 0.5 0.0 0.0

1st to 3r quartile: 3.1 - 7.6 Midmean: 5.3 1st to 3r quartile: 1.9 - 4.1 Midmean: 3.0 Source: Thomson Reuters and Nordea Markets Source: Thomson Reuters and Nordea Markets EV/EBITDA Other forward-looking EV/EBITDA is neutral to a company’s financial gearing and is not affected by multiples paint a similar amortisation and depreciation, which can vary a lot between companies. EV/EBITDA picture based on reported numbers has been sluggish over time, while the forward-looking multiple bottomed during 2012-13 and was followed by a sharp increase. After being range-bound for a few years, forward valuation started to increase again at the beginning of 2017.

SECTOR VALUATION LTM EV/EBITDA SECTOR VALUATION NTM EV/EBITDA 25 50 20 40 LTM

- 15 30

20 10 EV/EBITDA 10 -EV/EBITDA NTM 5

0 0

1st to 3r quartile: 11.7 - 43.3 Midmean: 27.5 1st to 3r quartile: 9.8 - 18.8 Midmean: 14.3 Source: Thomson Reuters and Nordea Markets Source: Thomson Reuters and Nordea Markets EV/EBIT Mean NTM EV/EBIT now EV/EBIT is neutral to a company’s financial gearing. It captures the operations’ exceeds 20x for the space capital intensity to the extent that depreciation levels approximately correspond to sustainable capex. Mean NTM EV/EBIT has increased sharply over the past year and recently exceeded 20x for the sector as a whole.

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SECTOR VALUATION LTM EV/EBIT SECTOR VALUATION NTM EV/EBIT 70 30

60 25

50 20

LTM 40 15

30 10 EV/EBIT - NTM

EV/EBIT 20 5 10 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1st to 3r quartile: 15.3 - 46.7 Midmean: 31.0 1st to 3r quartile: 16.5 - 25.1 Midmean: 20.8

Source: Thomson Reuters and Nordea Markets Source: Thomson Reuters and Nordea Markets

P/E

Sector valuation at a distinct P/E is often used to compare companies and to take account of the differences in tax premium to MSCI World rates and financing costs. However, it is biased towards lower multiples for companies with high financial gearing. P/E ratios for the peer group follow the same pattern as seen in earlier graphs, with both the lower and upper ends of the valuation range being pushed upwards. The average NTM P/E of 24.7x for the group is well above the 17.3x forward-looking earnings multiple for a broad global index such as MSCI World.

SECTOR VALUATION LTM P/E SECTOR VALUATION NTM P/E 35 100 30

80 25 20

LTM 60 - 15 P/E - NTM P/E 40 10

20 5 0 0 2011 2012 2013 2014 2015 2016 2017 2018 1st to 3r quartile: 26.8 - 67.3 Midmean: 47.0 1st to 3r quartile: 21.8 - 30.3 Midmean: 26.1

Source: Thomson Reuters and Nordea Markets Source: Thomson Reuters and Nordea Markets Price Major divergence in The chart below shows the price performance for a broader peer group within performance within the gaming. The development since 2007 has been muted for the whole sector, although games sector this is due to some companies showing extremely good performances, while others have failed considerably, as is evident in the broad range. This is yet another similarity that the gaming industry shares with pharmaceutical companies.

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SECTOR PRICE PERFORMANCE

400

350

300

250

200 Price Price 150

100

50

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1st to 3r quartile: 28.2 - 328.3 Midmean: 178.3 Source: Thomson Reuters and Nordea Markets A closer look at sales forecasts The messy chart below is a good representation of how expectations on a stock- Pending game releases yield specific may look in the gaming sector. Unlike, for example, the industrial or real extreme differences in growth estate sectors, there is a great divergence in gaming stocks – companies can have rich valuations in spite of expectations of negative growth for specific years due to pending game releases. As shown in the chart below, CD Projekt is expected to have negative growth in sales for 2017 and 2019, after which it will increase substantially. In the case of Nintendo, sales growth is negative in 2017, only to reach ~120% growth in 2018.

SECTOR GROWTH EXPECTATIONS

175%

125%

75%

25%

17E 18E 19E -25% Ubisoft Entertainment SA Electronic Arts Inc Activision Blizzard Inc Take-Two Interactive Software Inc Nintendo Co Ltd Sega Sammy Holdings Inc THQ Nordic AB Paradox Interactive AB (publ) Source: Thomson Reuters and Nordea Markets

SECTOR GROWTH EXPECTATIONS

200%

150%

100%

50%

0%

-50% 17E 18E 19E Source: Thomson Reuters and Nordea Markets

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Description of peer companies

Ubisoft Ubisoft Entertainment is a France-based company engaged in the development, We provide a short publishing and distribution of video games. Founded in 1986, it is one of the best- description of the 18 known game companies with titles such as Assassin’s Creed, Far Cry, Splinter Cell and companies used in our peer Ghost Recon. The company launched its service Uplay in 2012 as a means to better group valuation control its distribution, which is a games platform that contains all of Ubisoft’s titles, and is required for playing any of its games. Its games are still present on Steam, however. Ubisoft has a strong IP portfolio and titles across all gaming platforms.

Activision Blizzard As one of the giants in the gaming industry, Activision Blizzard is clearly one of the dominant forces in the sector. The company was founded in 2008 through the merger of Games, which held the rights of the Warcraft and franchises, and Activision. Activision Blizzard is a holding company which owns and operates several independent studios, including Treyarch and Infinity Ward. Activision Blizzard is known for, other than the names listed above, Hearthstone, and Destiny, amongst others, all of which have been major successes. The company was one of the first to introduce gaming as a service through the subscription-based World of Warcraft, which has been leading in its genre since its inception in 2004. Through Battle.net, the company distributes games from Blizzard (and some Activision titles), while Activision is distributed on all major platforms.

Electronic Arts Also known as EA Games, Electronic Arts is one of the giants in the gaming industry, mostly known for its sport franchises, where it is the dominant player, but it is also behind titles such as Battlefield, , and Battlefront. Founded in 1982, EA was one of the pioneers in gaming. It develops and publishes games under the EA brand but also through wholly-owned subsidiaries such as DICE, BioWare and Visceral, all of which are leaders in their respective genres. Like Ubisoft and Activision Blizzard, EA has its own digital distribution through the platform and is thus a competitor to Steam. Origin, however, only publishes titles from EA and excludes third-party titles.

Take-Two Take-Two is the third-largest gaming company and is based in the US and Europe. Behind titles such as Grand Theft Auto (GTA), BioShock, Borderlands, Read Dead and Civilization, Take-Two is one of the most influential companies in the industry. It wholly owns publishers , Games and Private Division and boasts accolades such as having the best-selling single title and the fastest entertainment property to gross USD 1bn with GTA 5. Take-Two is active in both development and publishing.

Paradox Interactive Paradox is a Sweden-based games company, mostly known for its and Cities: Skylines franchise. The company specialises in strategy games in a certain niche and has a vibrant community and loyal player base. Over 90% of its sales come from digital channels. Paradox was founded in 1998 and was listed on the Swedish exchange in 2016.

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THQ Nordic THQ was originally founded in 1989 but filed for bankruptcy in 2012 after having had severe financial struggles. After liquidation of its assets began at the end of the year, the THQ trademark was acquired by Nordic Games, which had also acquired large parts of the company’s portfolio. In 2016, the company changed its name to THQ Nordic, and was listed in Sweden the same year. THQ acquires, develops and publishes PC and console games globally, but its niche is to acquire established but underperforming brands and then develop them.

Stillfront Stillfront is a Sweden-based independent developer and publisher of games primarily for browsers and mobile, but it also has a few titles for PCs and consoles. Its aim is to be among the leaders in indie gaming. It distributes its games globally but primarily targets Sweden, France, the UK, Germany and the US.

CD PROJEKT RED Founded in 1994, CD PROJEKT RED began its gaming journey by translating major Western games into Polish. The company did the translation for one of the blockbuster RPGs of its time, the Baldur’s Gate series. Work began on a sequel in a new setting, but the collaborating studio, Interplay Entertainment, found itself in financial distress and cancelled the game. The game instead became The Witcher which turned out to be a real blockbuster series. The Witcher 3: Wild Hunt, released in 2015, is one of the most renowned games ever to be released. CD PROJEKT RED has become the most appreciated developer among players due to its approach of releasing free downloadable content, offering games free of DRM and not including microtransactions in its games.

Japanese publishers We include five Japanese developers and publishers in our peer group. These differ largely from other companies in our peer group. The Japanese stock exchange is peculiar in an international sense due to wealthy families owning a lot of stock, which has led to less optimal capital structures than other countries. Furthermore, the central bank, Bank of Japan, has run quantitative easing for a number of years also on equities, vacuuming any assets it can get hold of. For many years, Japan has suffered from deflation trends, which have caused asset prices to appreciate. All of these factors have had impacts on valuation multiples, to some extent inflating them.

We include Konami, Nintendo, Square Enix, Capcom and SEGA Sammy in our peer group valuation. Japanese developers and producers have had a vital presence in the gaming market since the sector’s inception. They are behind consoles such as the PlayStation and , as well as world-renowned titles such as Super Mario, Pokémon, Metal Gear Solid and Final Fantasy.

Mobile gaming We also separate mobile gaming into its own category, including companies such as Zynga, Rovio and Glu Mobile. Although mobile gaming shares many similarities to console and PC gaming, it differs on cost structure and revenue. Development of mobile games is usually associated with lower costs and is a simpler form of gaming. Revenue generation also differs, with many developers making a living from advertisements in games, while others use in-app purchases. There are many PC games which have similar free-to-play models, but the vast majority of these types of games are on mobiles.

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Company overview Starbreeze develops and publishes games and creates virtual reality experiences via its business areas Games, Publishing and VR Tech & Operations. The main business, Starbreeze Games, is built on PAYDAY 2, one of the world’s most popular online games, and the pipeline includes titles such as OVERKILL’s The Walking Dead, Project CrossFire and PAYDAY 3. Since 2016, it is also publishing third-party developed games, including Dead by Daylight and RAID: World War II. The company is also focusing on emerging technologies, such as VR, and has pursued a VR strategy that enables the delivery of premium content by developing the StarVR headset, which will be delivered to location-based VR centres.

Introduction Starbreeze is a creator, publisher and distributor of games and virtual reality Starbreeze is active within entertainment products. The operations are divided into three business segments: game development, publishing and VR Starbreeze Games, which develop in-house games, Publishing, which focuses on experiences publishing of in-house and externally developed games and VR Tech & Operations, which includes technology and software development in VR as well as operations of VR centres. The company is headquartered in Stockholm and has studios in Paris, Los Angeles, Studios in Paris, Los Angeles, Barcelona, Brussels, Luxembourg and India. It was listed on Aktietorget in 2000 and Barcelona, Brussels, since 2 October 2017 it is traded on the Nasdaq OMX Stockholm. After closing the Luxembourg and India acquisition of Dhruva at the end of 2017, the company now has approximately 650 employees.

In the past two to three years, Starbreeze has been on a major transformation It has refined its business journey. Starting as a game developer working with external publishers, it has model to become a global expanded its business to include publishing of externally developed games, entertainment provider diversifying its operations and potentially adding revenues in periods between its major game releases. The business has also been expanded further by investments in VR, supporting its ambition of becoming a global provider of world-class entertainment experiences.

This journey to and the foundation of Starbreeze today have mainly been built on the The company’s foundation is successful PAYDAY franchise. PAYDAY 2 is still among the most popular games mainly built on the PAYDAY online, despite being launched four years ago. The company has considerable franchise expertise in developing co-op first-person shooter games and looking ahead, we suggest that it will keep its focus on developing its own games. Its next AAA game, namely games with the highest development budget and level of promotion, will be the survival co-op game OVERKILL’s The Walking Dead, which we expect to be launched this autumn.

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Source: Company data and Nordea Markets Company history Starbreeze was founded in 1998 as one of the first game developers in Europe. In Founded in 1998 as one of the 2000, it merged with O3 Games and was listed on Aktietorget. During that time, it first European game developers operated as a studio for hire. Three years after listing, the company experienced a major crisis as Swing Entertainment, one of its largest customers, declared bankruptcy and Starbreeze was forced to lay off 35% of its workforce. In 2012 Starbreeze acquired the game development studio OVERKILL. OVERKILL was In 2012 Starbreeze acquired the developer of PAYDAY: The Heist and reported sales and EBIT in 2011 of SEK the game development studio 15.4m and SEK 4.3m, respectively. Starbreeze paid SEK 200m in newly issued shares OVERKILL and pledged to initiate an option programme aimed at senior management in SLG Everscreen, the owner of OVERKILL.

The following year, the commercially successful game PAYDAY 2 and critically Relationship with acclaimed Brothers: A Tale of Two Sons, based on a storyline by the movie director started with the title , were released. This also marked the start of a long-term relationship with “Brothers: A tale of Two Sons 505 Games, which acted as the publisher of Brothers: A Tale of Two Sons. In 2014, Starbreeze signed an agreement with Skybound Interactive to develop and publish the game OVERKILL’s The Walking Dead.

2015-16 were busy times with The next few years were eventful times in Starbreeze’s history, as several projects the introduction of new were launched and the company made a number of acquisitions. It created its business lines and selective publishing segment in 2015 and the first third-party project, Dead by Daylight, was M&A published the following year. In 2015, it initiated its VR venture with the acquisition of InfinitEye. A year later, it announced that it had entered into a partnership with Acer Initiated a joint venture with on its StarVR project, with Acer supporting the production and development of Acer on the StarVR project in Starbreeze’s VR headset. Among other VR-related announcements in 2017, 2016 partnerships with IMAX and SEGA Entertainment were rolled out, with Starbreeze acting as a content provider to the VR centres operated by its partners.

In the beginning of 2016, Starbreeze and Smilegate, the creator of the popular game CrossFire, entered a long-term partnership to develop a new CrossFire game for the Western markets. Starbreeze also received distribution rights for its games, including PAYDAY 2 and OVERKILL’s The Walking Dead, for the Asian PC and mobile markets

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KEY EVENTS FOR STARBREEZE Key years 1998 was founded 2000 Merger with O3 Games Listed on Aktietorget 2007 Release of 2012 Acquisition of 2013 PAYDAY 2 and Brothers: A Tale of Two Sons are released Acquisition of Germinose Inc. 2014 Listed of First North 2015 Acquisition of Paris-based InfiniEye Acquisition of Valhalla 2016 Partnership with Smilegate to develop new crossfire game and later a VR platform Dead by Daylight was released Acquisition of ePawn, a French VR/AR company Acquired the outstanding rights to PAYDAY 2017 Partners with IMAX on VR Acquired Enterspace, a Swedish location-based VR company Partners with SEGA on VR Source: Company data and Nordea Markets 2018 directed issue and rights issue On 24 January 2018, Starbreeze announced a directed share issue that brought in SEK 238m in gross proceeds. It also announced that it intends to offer existing shareholders the opportunity to participate in a rights issue of SEK 150M during H1 2018. The reason for the share issues was a need to secure financing for the existing business plan following the poor reception of Raid: World War II and the delay in the release of OVERKILL’s The Walking Dead, which have negatively impacted cash flows.

SEK 75m of the proceeds will go towards securing financing of the existing business plan while the remainder will go towards new business opportunities that the company has identified to accelerate growth and broaden the revenue base within the core business. The remaining net proceeds from the directed share issue and the planned rights issue will thus be used for the following:

 New publishing titles not included in the aforementioned business plan

 Expansion of the existing game portfolio to new platforms and geographies, as well as extension of the development plan for PAYDAY 2 to 2019

 Accelerated production plan for PAYDAY 3

Detailed terms and conditions for the upcoming rights issue, which is conditional on approval by an extraordinary general meeting of shareholders on 20 March 2018, is expected to be announced by 15 March 2018, at the latest.

Business areas As of Q2 2017, the operations are divided into three business areas; Starbreeze Segment reporting introduced Games, Publishing and VR Tech & Operations. in Q2 2017

Starbreeze Games The Starbreeze Games segment consists of its in-house developed games. The Starbreeze Games consists of company develops games for PC, console, mobile and location-based VR, which are in-house developed game titles published on digital platforms (mainly Steam) or sold via physical stores through agreements with external publishers.

Its most successful game to The game portfolio include titles such as PAYDAY and PAYDAY 2, which is the date is PAYDAY 2 company’s most popular game, with more than 16 million copies sold. The pipeline includes OVERKILL’s The Walking Dead, Project CrossFire, Geminose and Storm to be developed and released over the coming years.

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The company wants to develop AAA games with high replayability and a storyline that has potential to extend the game’s lifetime through the release of additional Focus on AAA games with content (so-called downloadable content, or DLCs). Since the release of PAYDAY 2 in large budgets and expected 2013, Starbreeze has released more than 170 updates, both paid and free, which have sales prolonged the game’s lifetime.

Games as a Service concept Starbreeze applies the “games as a service” concept on all of its titles. Games as a increases the lifetime of the service is a way of keeping the game alive after the initial launch, by offering free and game paid updates as well as community events. Even in the design phase, the company already has plans on how the product will be updated, up to four years after its release.

Starbreeze designs its games based on four fundamental pillars:

 Gameplay first. Gameplay is the most important part of game development

as it is about the interaction between the player and the game. It defines how the game feels, the challenges and how to overcome them.

 Have fun with friends. Starbreeze develops co-operative gameplay as it Starbreeze has a specific believes that games are most fun when played with others. business model, based on four pillars, to attract players  Replayability. Part of its strategy is to make the game enjoyable enough to play again and again, which is closely linked to the games as a service concept offering continuous updates and community events.

 Community care. Starbreeze has a strong presence on Steam and other communication channels. By marketing its games on these communication channels, it ensures that the players have the latest information about its games. These communities also function as a two-way communication stream, where Starbreeze and players can interact and Starbreeze can use players’ feedback when it later updates its games.

Publishing The publishing segment offers publishing services for external developers. To The first publishing title, Dead leverage on its expertise, Starbreeze mainly collaborates with developers of similar by Daylight, sold 270,000 copies during its first week games to those in its own portfolio. Currently, revenues primarily stem from the royalties it receives for the publishing project Dead by Daylight.

Dead by Daylight was Starbreeze’s first publishing project. It is an asymmetrical horror game developed by the Canadian studio Behaviour Digital. It was released for PC on 14 June 2016 and sold 270,000 units during its first week. The game was released for console in June 2017 and last year the company announced that DBD had sold over 3 million copies.

RAID: World War II, Starbreeze, Lion Game Lion and 505 Games together released Raid: World War II for developed by Lion Game Lion, PC on 26 September 2017. The title was released for PlayStation 4 and One in was released in September, October. 2017 Starbreeze launched the IndieLabs brand in 2016 and is focusing on smaller game projects with the ambition of finding upcoming games studios to use for larger IndieLabs is a project projects. Antisphere, the first IndieLabs title, was released on Steam in July 2017. launched to find up and However, sales for the PC version were lower than the company had expected and it coming smaller studios decided not to invest further in the release on console format.

VR Tech & Operations The VR Tech & Operations business area comprises the VR technology and software VR Tech & Operations is an development, including the VR headset StarVR and the VR movie format PresenZ. emerging business line with VR technology and software The company believes that VR will be a key component of the industry due to its development potential for immersive experiences and is pursuing a strategy to enable the delivery of premium content, leveraging on Starbreeze’s strong IP portfolio.

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VR STRATEGY – TO ENABLE PREMIUM CONTENT

Starbreeze has a clear VR strategy that aims to enable the delivery of premium content

Source: Company data and Nordea Markets StarVR Headset A key aspect of developing its VR experience is to combine the software and The StarVR headset is hardware in its StarVR headset. The headset is developed in a joint venture with Acer, developed in collaboration with Acer through a JV called StarVR Corporation. Starbreeze owns and control IP rights, while Acer manufactures the product. Sales and marketing of the StarVR head-mounted display (HMD) headset is managed by the JV’s sales organisation. The headset differentiates from competitors through its revolutionary 210 degree field of vision, 5K low persistent screen and perfect tracking via its Phase Space tracking.

Starbreeze holds 33% of the StarVR JV and owns the IP rights

Source: Company data and Nordea Markets ePawn and Nozon were The French company ePawn, now Starbreeze Paris, was acquired in June 2016 and in acquired in order to further October 2016, Starbreeze acquired the Belgian companies Nozon S.p.r.l. and develop the VR business Parallaxter S.p.r.l., which are developing the PresenZ Technology together. The technology allows interactive illusory position shift in 360-degree videos, VR content in post-production and 3D animation. The acquisitions were important steps in the company’s VR strategy.

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Location-based VR centres Starbreeze VR’s strategy is based on the concept of location-based VR through the Enterspace to open its first VR establishment of VR centres. In June 2017, Starbreeze finalised the acquisition of centre in 2018 which will showcase the LBE concept Enterspace, a location-based VR company. In August 2017, the company announced that it had entered into an agreement with Emaar Entertainment to develop a 7,000 2 m VR centre in Dubai. Enterspace will be the lead partner of the VR centre providing content, installation and operational experience. The VR Park, as it is called, opened on 1 March 2018 in the prominent Dubai Mall and had eight of Starbreeze’s experiences available at the opening. Enterspace will also open a VR centre in Stockholm following the Dubai opening. The Collaborations with IMAX, Enterspace centres in Dubai and Stockholm will function as showcases for the LBE SEGA and others where concept, which Starbreeze aims to develop through collaborations with partners. Starbreeze acts as content There is already an agreement with IMAX to offer VR experiences and in Q4 2017 provider is the preferred path Starbreeze announced an ambition to roll out its concept in SEGA Entertainment’s game arcades throughout Japan.

Premium content As the VR segment grows, the company aims to develop premium content, both in- After the roll-out of location- house and as a publisher, for its StarVR headset and location-based VR centres. based entertainment, the aim is to capitalise on its expertise Starbreeze has a number of projects with external developers of VR game titles and in content has eg released Chronicles: Arcade Edition in VR. The long-term target is to make more of the company’s existing titles available in all formats, including VR.

Major titles

PAYDAY 2 PAYDAY 2 is a four-player co-op shooter game developed by OVERKILL Software and PAYDAY 2 was released in published by 505 Games. PAYDAY 2 was released in August 2013 for PC, PlayStation 2013 and has since sold more 2 and for digital distribution and retail channels. It is the sequel to PAYDAY: than 16 million copies and The Heist, which was released in 2011. PAYDAY 2 has sold more than 16 million units generated more than SEK worldwide and generated revenues above SEK 700m between 2013 and 2017. Since 700m in revenues its launch in 2013, more than 170 updates have been released. In February 2018, it will be launched on the .

Multiplayer game where The game takes place in Washington DC, where the players, in the roles of the players cooperate to carry out PAYDAY crew: Dallas, Hoxton, Wolf and Chains, go on a crime spree. In each heist, the heists players have to complete a series of tasks while the police attempt to take out the players. The new CrimeNet network offers the players a wide range of contracts, from kidnapping to emptying out bank vaults. As the offences become more elaborate and rewarding, the players also get the opportunity to customise the characters, guns and gear.

OVERKILL’s The Walking Dead OVERKILL’s The Walking Dead is based on the book series by Robert Kirkman. The The Walking Dead will be game was announced in 2014 and was then slated to be released in 2016. It has released during H2 2018 suffered from delays and the company now expects to release it during H2 2018, for PC, and PlayStation 4. The game is a four-player co-op first person shooter (FPS) game developed by OVERKILL, a Starbreeze Studio.

FPS zombie game where In The Walking Dead, the gamer fights to stay alive in a post-apocalyptic world. The players cooperate to stay players have to cooperate on a range of missions and raids to secure their base camp alive in a post-apocalyptic against the dead and the living. world

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Dead by Daylight Dead by Daylight was the first game to be released by the Starbreeze Publishing Dead by Daylight is a business area and was developed by the Canadian studio . The publishing title that sold about two million copies in its game was released on 14 June 2016 for PC and by August 2017, it had sold more than first year two million units on the digital distribution platform Steam. Following the release, seven paid updates have been made and in June 2017, the game was also released for console. Dead by Daylight is an asymmetrical multiplayer (four versus one) horror game for It is a horror game version of five players. It is a version of hide and seek, where one player takes the role of the hide and seek developed by killer and hunts the other four players, who try to avoid being caught and killed. The Behaviour Interactive killer plays in first person while the survivors play in third person.

STARBREEZE STUDIOS AND STARBREEZE PUBLISHING TITLE RELEASE SCHEDULE IP DEVELOPMENT STARBREEZE GAMES & OVERKILL OWNERSHIP GENRE PLATFORM PHASE TIMING PAYDAY: The Heist 100% Co-op, FPS, Action PSN & PC Released 2011 PAYDAY 2 100% Co-op, FPS, Action PC Released 2013 PAYDAY 2: Crimewave Edition 100% Co-op, FPS, Action PS4 & XBONE Released 2015 PAYDAY 2: The Big Score 100% Co-op, FPS, Action PS4 & XBONE Released 2016 PAYDAY 2 Switch 100% Co-op, FPS, Action Nintendo Switch In Production Feb 23/27, 2018 OVERKILL’s The Walking Dead 0% Co-op, FPS, Action PC, PS4 & XBONE In Production Fall, 2018 PAYDAY Crime War 100% PvP, FPS, Action Mobile In Production 2018 Geminose 100% Children, Music Nintendo Switch In Production TBC Project Crossfire 0% Co-op, FPS, Action PC In Pre-Production TBC Storm 100% Co-op, FPS, Action PC In Pre-Production TBC PAYDAY 3 100% Co-op, FPS, Action PC Design Phase TBC PUBLISHING Dead by Daylight 0% Horror, Asymmetric, 4v1 PC Released 2016 John Wick Chronicles 0% VR, FPS, Action VR PC & LBE Released Feb 9, 2017 Dead by Daylight 0% Horror, Asymmetric, 4v1 PS4 & XBONE Released June 20/23, 2017 Antisphere 50% Arena shooter, 2v2 PC Released July 14, 2017 RAID: World War II 50% Co-op, FPS, Action PC Released Sep 26, 2017 RAID: World War II 50% Co-op, FPS, Action PS4 & XBONE Released Oct 10/13, 2017 Psychonauts 2 0% Adventure, platform Multiformat In Production TBC System Shock 3 0% Not announced/defined Multiformat In Production TBC Deliver Us The Moon 0% Not announced/defined PC In Production TBC 10 Crowns n.a. Turn-based strategy PC Design Phase TBC Elementerra 50% VR, Puzzle VR PC In Production TBC The Raft 50% VR, Multiple. LBE VR LBE In Production TBC Hero 0% VR, Drama, Puzzle, LBE VR LBE In Production TBC APE-X 0% VR, Action, LBE VR LBE In Production TBC Project Golem 50% VR, Action, LBE VR LBE In Production TBC Source: Company data and Nordea Markets Financial targets In conjunction with the change of listing in 2017, the company presented ambitious

new financial targets. Most notable is the bold revenue target, where a majority of the expected growth is anticipated to come from the company’s in-house developed games.

Starbreeze aims for net sales  Net sales: At least SEK 2bn by 2020, excluding PAYDAY 3. of SEK 2bn by 2020 and positive EBITDA from Q4 2018  Profitability: To generate positive EBITDA in Q4 2018 and on an annual basis and onwards subsequently.  Dividend policy: No dividend in the next few years, as the cash flows generated will be used to finance further growth and development of the business. Long-term policy to distribute 50% of net profit after tax.

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Executive management and board of directors Starbreeze has an extensive management team led by CEO Bo Andersson Klint. He CEO Bo Andersson Klint was formerly CEO of OVERKILL and became a member of the Starbreeze team when joined Starbreeze in conjunction with the OVERKILL was acquired in 2012. Bo Andersson Klint is one of the largest acquisition of OVERKILL shareholders; his shares represent almost 8% of the capital and 24% of the votes in the company.

Source: Company data and Nordea Markets

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Source: Company data and Nordea Markets

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Source: Company data and Nordea Markets

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Shareholders The company’s CEO, Bo Andersson Klint, is the largest owner in terms of voting CEO Andersson Klint is the power, with shares representing nearly 8% of the capital and 24% of the votes. largest shareholder in terms of votes, while Notable investors include Swedbank Robur, a large Swedish asset manager, which is Robur holds the top spot in the largest owner in terms of capital through three of its mutual funds. Första AP- terms of capital fonden, one of the buffer funds in the Swedish national income pension system, is another prominent institutional investor with close to 11% of the capital. Korean partner Smilegate holds 3% of the capital and 5% of the votes.

SHAREHOLDER STRUCTURE AS OF JANUARY 31, 2018 Shareholder Capital Votes Bo Andersson Klint1 7.9% 24.1% Försäkringsaktiebolaget Avanza Pension 8.1% 6.5% Swedbank Robur2 14.8% 6.2% Smilegate Holdings Inc 3.2% 5.0% Första AP-fonden 10.9% 4.2% CBLDN-BFCM Fulltx Third Party Asset 1.2% 2.0% Michael Hjort3 0.8% 1.9% Nordnet Pensionsförsäkring AB 1.5% 1.3% Viktor Vallin 0.3% 1.3% CBNY-National Financial Services LL 1.1% 1.1% Others 50.3% 46.4% Total 100.0% 100.0% 1Directly and indirectly through Varvtre AB 2Swedbank Robur consists of three funds; Ny Teknik BTI, Småbolagsfond Sverige and Småbolagsfond Norden

3Michael Hjorth owns shares via Indian Nation Aktiebolag.

Source: Company data

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The global games market After rapid growth in recent years, the global gaming market reached a landmark in 2016 when aggregated sales reached USD 100bn for the first time. Looking at market estimates from Newzoo, the global gaming is expected to continue to grow at a 6% CAGR until 2020. Consoles and PCs are still the core platforms for gaming, comprising about 54% of total revenue in 2016. However, market growth is mainly attributable to other platforms, such as mobile, while growth rates for PCs and consoles are slowing.

Understanding the revenue streams Players in the games industry Before jumping into the market structure, sizes and forecasts, we would like to touch can be divided into a number on the revenue streams of a games developer, which we think is crucial to understand of categories the space. Starbreeze is present in the categories below with asterisks.

Studios* Studios are responsible for Studios develop games, from idea to execution, meaning they are responsible for the developing games content, artwork, design, programming and testing of games. The types of studio also vary, from first-party developers (such as Rare or Sony, which create exclusive titles for certain platforms), to second-party developers who take on contracts from platform owners, third-party developers and fully independent ones. To succeed with Include both work-for-hire a launch, a studio needs to have financial and marketing support from a publisher. A and independent studios common process is that a studio pitches an idea to a publisher, which in turn invests a sum in the development of the game. Upon launch, the publisher is able to recoup its initial investment first, after which there is typically a revenue-sharing model on the copies sold. Notable developers include Activision, Avalanche, BioWare, Bethesda,

Blizzard, DICE and Ubisoft. Due to the industry dynamics and revenue sharing with many stakeholders, studios typically get to keep between 10% and 40% of the

revenue generated from a game.

Publishers* Publishers are responsible for Similar to book and movie publishers, publishers are responsible for funding and marketing the advertising, market research and financial investment. Publishers fund a studio or a products developer beforehand. A large publisher often handles the distribution of games itself as well. Publishers face numerous risks that are worth highlighting: the reliance on

the Christmas selling season, which accounts for a significant portion of industry sales; product slippage; piracy; and cost inflation for game production. Sony, ,

Microsoft and Nintendo are the biggest publishers.

Intellectual property owners* IP owners include content This category includes players such as Disney, Marvel, DC Comics and bigger game providers such as Disney, companies including Blizzard, which owns a lot of game franchises, such as Diablo Marvel, DC Comics and and Warcraft. When IP owners license their property, they take a portion of the sales, Blizzard typically between 10% and 20%. Licensing their intellectual property is pretty much all they do.

Digital distributors Digital distribution is a highly Distribution in the games market is highly consolidated. There are many players, concentrated market with a although the smaller ones have negligible market shares. Steam, the major gaming few large players platform for PCs, is very dominant in this area. There are multiple sources citing its market share, which appears to range from 51% to 65%, followed by at 11%

and Gamestop at ~9% in 2016. Larger companies such as Electronic Arts and Activision Blizzard have their own platforms and only distribute their own titles and therefore bypass the fee to distribute games through Steam, which charges 15-30% of the sales value to distribute a game on its platform.

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Retailers This category includes classical retailers such as WalMart and Home Depot, as well as games retailers such as Gamestop and GAME. These retailers sell game codes but predominantly focus on physical copies. Although they are declining in importance for Retailers include physical PC gaming, they are still important, especially for console gaming. The vast majority stores such as Walmart and of PC games sold in retail today still need to be registered on platforms such as Steam Home Depot, as well as or Origin (Electronic Arts). Physical copies usually receive a mark-up on price versus specialised games stores digital versions.

Game engine owners All software is built on a graphics or game engine, which dictates the look or feel of the gameplay. The engine includes a renderer for graphics, a physics engine, collision detection and response, sound, animation, AI, memory management, and threading, ie All games are built on specific it serves as the backbone of the software itself and is a crucial choice for developers. game engines Most engines have some kind of specialisation, such as Creation, which is focused on role-playing games, and iD and CRYENGINE, which are very focused on FPS (first- person shooter) games. Other popular engines include Unreal (The Walking Dead, the upcoming game from Starbreeze is based on this engine) and , which has been able to run games from different genres. Engine providers take 3-5% of the sales price of a game.

Source: Company data and Nordea Markets

The global games market Gaming is a USD 100bn The gaming market has witnessed ample growth in the past years, with revenue market exceeding the USD 100bn mark for the first time in 2016. Since 2012, the gaming market has grown by 54% and posted a CAGR of 9% for 2012-17. Forecasts point to further growth, albeit somewhat decelerating. Looking at market forecasts up to 2020, the gaming market is expected to grow at a CAGR of ~6% from 2017, while the The market is expected to figure lies at ~8% when using 2012 as a base. It is safe to say that the market is grow at a 6% CAGR up to massive, but it is also quite crowded with titles. Today, gaming caters for a wide 2020 variety of interests, from hard-core competitive gamers, to casual ones, viewers only or spontaneous phone players who spend only a few minutes a day playing. Gaming companies have truly become the leaders in interactive entertainment.

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GLOBAL GAMES MARKET REVENUE GAMES REVENUE GROWTH Y/Y

140 12%

120 10% 100 8% 80 6% 60 USDbn 40 4%

20 2%

0 0% 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2013 2014 2015 2016 2017 2018E 2019E 2020E Global games market revenue y/y Source: Newzoo and Nordea Markets Source: Newzoo and Nordea Markets

GAMES REVENUE

140 4 120 4 5 24 4 25 100 5 24 25 80 25 47 51 41 60 35 28

12 13 40 10 11 12

20 32 34 35 36 36

0 2016 2017 2018E 2019E 2020E Console Tablet Phone PC Browser PC Source: Newzoo and Nordea Markets

Phone gaming crowned as no. 1 in 2017 Smartphones recently Gaming on smartphones recently surpassed consoles as the biggest platform in terms surpassed consoles as the of gaming revenue, posting more than USD 35bn in turnover in 2017. Currently leading platform for games accounting for 35% of the total market, smartphones are expected by Newzoo to grow their share to 40% by 2020. Titles such as Candy Crush, Clash of Clans and Contest of Champions are widely played and reach a broad base of people.

REVENUE SPLIT BY DEVICE 2017 REVENUE SPLIT BY DEVICE 2020

Console Phone Console 28% 32% 31% Phone 40%

Browser PC Browser PC 3% 4% Tablet Tablet 10% PC 10% PC 23% 19% Source: Newzoo and Nordea Markets Source: Newzoo and Nordea Markets

Consoles and PCs – not the growth one might expect Consoles and PCs are still a Console and PC gaming has traditionally been the core of the gaming sector. These core part of the gaming alternatives have been around for a long time and although they are growing market, but market growth is somewhat, the market has become quite mature. Given the nature of the industry coming from other platforms dynamics, there are always opportunities for successfully marketed titles to earn a considerable amount of money and the variations in growth between companies can

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be quite pronounced from year to year. Accounting for a ~54% share, or USD 60bn, the market is quite massive. The level of fragmentation varies between the platforms – consoles in particular are Console and PC gaming is dominated by the big companies, especially on Nintendo’s platforms, while Sony expected to grow by 0.5-2% PlayStation has come the furthest in integrating indie and low-budget franchises. annually Console and PC gaming combined is expected to show growth of 0.5-2% per year up to 2020, implying that the market is becoming quite mature. Note that the figures only include consumer revenue from software, subscriptions and live services, ie no hardware revenue.

SALES SPLIT GROWTH Y/Y 40 5% 35 4% 30 3% 2% 25 1% 20 0% USDbn 15 -1% 10 -2% 5 -3% 0 -4% 2016 2017 2018E 2019E 2020E 2017 2018E 2019E 2020E Console PC Console PC Source: Newzoo and Nordea Markets Source: Newzoo and Nordea Markets

APAC are the biggest consumers Asia is the largest consumer APAC accounts for 47% of gaming revenue, with China at the forefront, offering a of games, comprising almost lucrative opportunity for Western games companies. and EMEA are half of the global market roughly the same size. While Latin America has a large player base, it still lags significantly in terms of revenue.

REVENUE SPLIT BY GEOGRAPHY 2017

NAM EMEA 25% 24%

LATAM 4%

APAC 47% Source: Newzoo and Nordea Markets Massive market of players but figures somewhat misleading According to Newzoo, there According to Newzoo data, there are a total of 2.2bn gamers or gaming enthusiasts are a total of 2.2bn games globally and 1.1bn excluding APAC. Crunching the numbers, we find that the definition of a gamer, according to Newzoo, is pretty much anyone who has installed However, numbers could be a game on their smartphone. This means that the figures are somewhat inflated and a slightly inflated large number of players likely account for a minor share of wallet. Nonetheless, Newzoo’s data shows there is considerable interest in the market and that the number of players is vast.

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GAMERS BY MARKET - EXCLUDING APAC GAMERS BY MARKET - INCLUDING APAC 400 1,400

350 1,200 300 1,000 250 800 200 600 150 400 100 50 200 0 0 E-EU NAM W-EU LATAM MEA E-EU NAM W-EU LATAM MEA APAC Gamers by market (m) Gamers by market (m) Source: Newzoo and Nordea Markets Source: Newzoo and Nordea Markets

Have barriers to entry been lowered? Looking at the 5,000 highest There are more than 80,000 studios and developers on the market, according to data grossing titles in 2017, about from Game Development. Using data from Steam as a proxy for the market, we note 50% of all revenue is that around 7,600 titles were released in 2017 but that the top games make up the generated from the top 100 lion’s share of all sales. Our analysis reveals that the top 100 titles account for almost games 50% of all sales. However, as our data lacks information regarding in-game purchases, we reason that the actual figure is likely much higher, especially considering that it does not include any data from major games such as DOTA2.

Services such as Steam, Services such as Steam, AppStore and Google Play let independent developers and AppStore and Google Play small studios reach an audience of millions. The usual suspects, however, take the have created lower barriers to majority of the market share. There are always a few titles from small studios that entry, but the vast majority of earn great bucks, but the vast majority of revenues are taken by the big names, revenues are taken by the showing the importance of being a high-profile publisher or IP owner. The average larger studios game on Steam sells only 32,000 copies. We lack data for the console industry, but believe it to have an even greater tilt towards large publishers as the independent market is still underdeveloped when it comes to consoles.

TOP GAMES PERCENTAGE OF MARKET REVENUES NO OF GAMES ACCOUNTING FOR MARKET REVENUES

90% 80% 70% 60% 50% Sales 40% 30% 20% 10% 0% Top 10 Top 25 Top 50 Top 100 Top 1,000 +1,000

Source: Steamspy and Nordea Markets Source: Steamspy and Nordea Markets Most popular genres FPS games are the most First-person shooters (FPS) are the most popular games, grabbing close to a third of popular category of games in the market, followed by action games at 22%, and role playing games (RPG) at no. 3. the US As this data is only for the US, there are likely considerable differences in the split when looking at other regions. Due to the popularity of football in Europe and the popularity of the FIFA franchise, we reason that sports games likely make up a larger share in Europe, while RPGs and fighting games are especially popular in Asia.

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REVENUE SPLIT BY GEOGRAPHY 2017

Racing Other Strategy3% 4% 4% FPS Fighting 28% 6%

Adventure 8%

Sport 12%

Action RPG 22% 13% Source: Newzoo and Nordea Markets Steam – a dominant force on the market Steam is a dominant force, Steam is a digital distribution platform developed by Valve Corporation, offering recording 18m concurrent gaming, video streaming and social networking services for its community. The Steam players in January 2018, up platform is available for PC, Mac, box, mobile devices and television, and is almost 30% y/y accessible in 237 countries and 21 languages. There are 287 million total active users on Steam. On 6 January 2018, Steam Database reported that Steam had reached a peak of 18 million concurrent players for the first time, compared with 14 million players in January 2017.

In 2013, Steam had a 75% According to a Bloomberg article, Steam had a 75% market share in game digital market share in digital games distribution in 2013. We cannot find more recent data on this and although it is distribution unclear what today’s actual market share is, we believe a range between 50% and 75% would be fair given that Steam is still the dominant digital distributor. Electronic Arts and ActivisionBlizzard have their own distribution platforms for their own games called Origin and Battle. Apart from that, the vast majority of games are digitally distributed on Steam. Note that third-party vendors also offer Steam keys (licences for use of the games on Steam).

STEAM'S PEAK CONCURRENT USERS

20

16

12

8 In millions

4

0 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 May-13 May-14 May-15 May-16 May-17 Peak concurrent users Source: Statista and Nordea Markets Revenue model There are multiple revenue The main revenue models in the games markets are described below. models in the games market Full-price games are games sold at a relatively high one-time price. Generally, most Full-price games are of these games generate the majority of revenue in their first year. The most increasingly followed up with successful games can continue to generate revenue by releasing DLCs DLC sales, extending the (downloadable content) after their initial release. lifetime and revenue

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generation of a game DLC sales are becoming more common as games are sold via digital distribution Subscription and streaming platforms such as Steam. On these platforms, the developer can release updates and games as well as free-to-play extend the lifetime and revenue of a game. games offer alternative Subscription and streaming games are based on a model where the player revenue models subscribes to a platform and gains access to a number of titles. This revenue model, similar to DLC sales, is increasing with digital distribution channels. Free-to-play games are available to the player free of charge. Revenue stems from in-game ads or paid updates/features. This revenue model is most common for mobile phone games but has also been popular for PC games in Asia.

Trends in the games market

Trends in the games market Games with a context. Digital distribution platforms and game communities are of include games with a context increasing importance for game developers as they can communicate with gamers and microtransactions through these channels and better understand what their customers prefer. Watching other people play and being part of a context is important for the player today, according to Starbreeze. Microtransactions. Additional revenue streams for many popular games are microtransactions where the player can buy weapons or accessories for their characters.

Console and PC differ in their Technical progress. The technical framework for games is based on how advanced technical progress, with PC the gaming device is. For console, the lifecycle is normally seven years and when a seeing a more continuous new platform is released, game developers need to improve game quality. For PC, the technical development gamer decides when to upgrade his/her device and hence the technical development is more continuous. VR is a technology that VR. Based on the technical progress, more game developers are focusing on VR. Starbreeze sees as a key Starbreeze believes that revenue from VR will grow for all devices. The company sees growth area the short- to medium-term potential for the VR technology in location-based entertainment (LBE), due to the costs associated with high-quality delivery of the The games industry is technology. becoming ever more Consolidation. The games industry is undergoing a consolidation phase. According to consolidated: top ten account Starbreeze, the ten largest game companies represented 54% of the revenue in for 54% of sales global games market in 2016, corresponding to USD 54bn. Other gaming facts you might not know Average gamer is 35 years and The average age of gamers has been steady for a number of years, which is an about 41% of gamers are indication that there are young newcomers joining, while older gamers are continuing female to play. Although there is a common misperception that the vast majority of gamers are young men, the age of the average gamer is 35 and only 59% are men.

Gaming facts Avg. age 35 Avg. age of purchasers 38 Households that own a gaming device 65% - exclusively for gaming 48% Avg. number of years gamers have been playing 13

Playing with others 54% Feel they connect with friends 53% Hours per week online with others 6.50 Hours per week in person with others 4.5

With friends 40% With family members 21% With parent(s) 17% With partner 15%

Male gamers 59% Female gamers 41%

Male purchasers 60% Female purchasers 40% Source: Bigfishgames and Nordea Markets

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Business area: Starbreeze Games Starbreeze’s games business area consists of the company’s in-house developed games portfolio. Its most popular title is PAYDAY 2, which has sold more than 16 million copies to date. It also includes games under development such as OVERKILL’s The Walking Dead and Project Crossfire. The games are primarily sold through digital platforms, the largest platform being Steam. Starbreeze’s key differentiator compared with other development studios is that it uses a “Game as Service” concept, which refers to a predefined development plan for how the product will be updated for up to three years after launch.

Starbreeze successful Starbreeze is on a path to evolve from studio-for-hire to an entertainment company management of the PAYDAY providing a broad spectrum of experiences. A key component that has enabled this franchise has enabled the transformation journey has been the successful management of the PAYDAY company to broaden its franchise through its “Game as Service” model. The concept refers to a predefined operations development plan during the design phase for how the game will be updated, up to three years after its release. Essentially, the company aims to enhance sales spikes through continuous updates, thus prolonging the lifetime of the game. As a testament to the successful execution of the concept, Starbreeze has one of biggest players’ PAYDAY 2 still makes a communities on Steam, where players interact with each other and with the company. meaningful earnings contribution, four years after In 2017, Starbreeze reported revenues of SEK 122m for the games business area. it was first released PAYDAY 2 still comprises the vast majority of these sales, despite the game being released more than four years ago.

STARBREEZE GAMES' REVENUE STARBREEZE GAMES' OPERATING COSTS

70 100 60 80 50 40 60 30 SEKm SEKm 40 20 20 10 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 2016 2016 2016 2016 2017 2017 2017 2017 Net sales Capitalised development costs Operating costs

Source: Company data and Nordea Markets Source: Company data and Nordea Markets Business model

Starbreeze game development strives to provide world-class entertainment based on Games business model is built four fundamental pillars: on four fundamental pillars  Gameplay first

 Have fun with friends

 Replayability

 Community care

Quality assurance team A key parameter to ensure that a game is entertaining and has a long useful life is ensures solid gameplay based on the interaction between the player and the game, which is commonly referred to as gameplay. The concept can be a bit ambiguous, but is essentially defined by the pattern created by the rules and scope of the game, the challenges met by the player, what happens if you win or lose, etc. To certify solid gameplay, Starbreeze utilises its quality and games assurance team, which helps design and test the game to ensure that it is fun for the end user.

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Creating loyalty through care Community care also has a central role in the business model and the company works of the game community proactively by implementing changes and listening to opinions from its players. In addition, it specialises in games with co-operative gameplay, where users can have fun together with their friends. Altogether, this fosters player loyalty and ensures that players return to play the game over and over again.

Current portfolio Pipeline includes major titles Starbreeze’s current portfolio includes its main franchise PAYDAY plus a pipeline to be developed and launched including OVERKILL’s The Walking Dead, Project Crossfire and Storm, which will be in the coming years developed and launched over the coming years.

STARBREEZE GAMES' CURRENT PORTFOLIO AND GAMES IN DEVELOPMENT IP DEVELOPMENT STARBREEZE GAMES & OVERKILL OWNERSHIP GENRE PLATFORM PHASE TIMING PAYDAY: The Heist 100% Co-op, FPS, Action PSN & PC Released 2011 PAYDAY 2 100% Co-op, FPS, Action PC Released 2013 PAYDAY 2: Crimewave Edition 100% Co-op, FPS, Action PS4 & XBONE Released 2015 PAYDAY 2: The Big Score 100% Co-op, FPS, Action PS4 & XBONE Released 2016 PAYDAY 2 Switch 100% Co-op, FPS, Action Nintendo Switch In Production Feb 23/27, 2018 OVERKILL’s The Walking Dead 0% Co-op, FPS, Action PC, PS4 & XBONE In Production Fall, 2018 PAYDAY Crime War 100% PvP, FPS, Action Mobile In Production 2018 Geminose 100% Children, Music Nintendo Switch In Production TBC Project Crossfire 0% Co-op, FPS, Action PC In Pre-Production TBC Storm 100% Co-op, FPS, Action PC In Pre-Production TBC PAYDAY 3 100% Co-op, FPS, Action PC Design Phase TBC Source: Company data and Nordea Markets PAYDAY 2 PAYDAY 2 is co-op FPS game PAYDAY 2 is a four-player co-operative shooter game developed by OVERKILL developed by OVERKILL Software. It was released in August 2013 for PC, PlayStation 2 and Xbox 360 via Software digital distribution and retail channels and is a sequel to PAYDAY: The Heist, which launched in 2011. It is expected to be launched for Nintendo Switch in February 2018.

The game takes place in Washington DC where the players, in the roles of the PAYDAY crew (Dallas, Hoxton, Wolf and Chains), go on a crime spree. In each heist, the players have to complete a series of tasks while the police attempt to stop them. The CrimeNet network offers the players a wide range of contracts; it is possible to choose anything from kidnapping to emptying bank vaults. As the crimes become bigger and more rewarding, the players are given the opportunity to customise the character as well as add new guns and other gear.

Starbreeze has acquired the The development of PAYDAY 2 was partially financed by 505 Games, which in return full rights for the PAYDAY was granted exclusive publishing rights. In May 2016, all parties agreed that the franchise publishing rights to PC and mobile platforms for PAYDAY 2, plus the rights to future games, would revert to Starbreeze. Before, it was a 50/50 split between the parties. Starbreeze paid a consideration amounting to 10.9 million B-shares in Starbreeze, corresponding to USD 30m at the time. 505 Games also maintained the publishing rights on the console platform.

505 Games could receive a 505 Games will also have the rights to an initial share of future revenues from revenue share capped at USD PAYDAY 3, which is currently in design phase. In total, 505 Games will receive a 33% 40m for PAYDAY 3 revenue share, capped at USD 40m, provided that Starbreeze does not release a sequel within three years of the launch of PAYDAY 3. Starbreeze has also entered into numerous licensing agreements with third parties for the use of IP in DLCs.

OVERKILL’s The Walking Dead A game based on the famous OVERKILL’s The Walking Dead is based on the popular comic book series by Robert “The Walking Dead” franchise Kirkman and its subsequent television series. We expect it to be released in H2 2018 is expected to be released H2 on PC, Xbox and PlayStation. 2018

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The game is said to be a four-player co-op FPS developed by OVERKILL, a Starbreeze Studio. The gamer will fight to stay alive in a post-apocalyptic world. Each character has its own abilities and players need to co-operate on a variety of missions and raids to secure their base camp, against the dead and the living.

Revenue will be shared with Starbreeze entered into a licensing and development agreement with the author and the author and Skybound, Skybound in 2014. The revenue-sharing agreement has not been communicated by who own The Walking Dead the company, but is said to be standardised royalty agreement. In 2015, it also entered IP into a publishing agreement with 505 Games for the console version of the game. Starbreeze has the right to receive royalties on 505 Games’ net sales and will receive a licensing fee of USD 10m that will commence upon launch.

Project Crossfire Starbreeze is to release a In January 2016, Starbreeze signed a ten-year agreement with Korea’s Smilegate to Western version of the develop and publish a Western version of the Crossfire franchise, which has been successful Crossfire game, hugely successful in Asia. According to Smilegate, Crossfire is among the world’s developed by Smilegate bestselling online FPS games with more than eight million concurrent users and 650 million registered players. It generated more than USD 1.4bn in gross sales in 2017, the In 2017 the game generated majority of which derived from China. As the game applies a free-to-play model, the more than USD 1.4bn in gross revenue is generated through microtransactions. sales Starbreeze was granted an investment of USD 40m from Smilegate, through a USD 15m equity issue and a USD 25m convertible bond. As part of the agreement,

Smilegate will also be a distribution partner for PAYDAY and OVERKILL’s The Walking Dead in Asia.

PAYDAY Crime War PAYDAY Crime War will be The upcoming mobile game PAYDAY Crime War will be the first product where the Starbreeze’s first step into PAYDAY series expands outside the PC and console segments. The co-op FPS game mobile gaming will also be Starbreeze’s first step into mobile gaming. This is a market generally characterised by lower barriers of entry as games are simpler and less costly to develop.

Other projects Other games include sci-fi Storm is expected to have a PAYDAY meets science fiction theme. It is an in-house game Storm and song and developed FPS game for PC and VR where Starbreeze owns the full IP. The project is dance game Geminose said to be in early stages. On 1 September 2014, Starbreeze acquired Geminose for a consideration of USD 7m in

newly issued shares. The seller also has rights to receive a maximum earnout of USD 10m, paid out over a five-year period. Starbreeze is developing a game based on the Geminose characters that focuses on music and dance. In an initial phase, it is expected to be released exclusively on Nintendo Switch.

Case study: Game as a service model used for PAYDAY 2

PAYDAY 2 has sold more than The business model based on game as a service seems particularly effective with 16 million copies strong IP, as evidenced by the successful execution with PAYDAY2. It was released in August 2013 and has sold more than 16 million copies and has generated more than SEK 700m in revenues for Starbreeze since its launch.

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PAYDAY 2'S OWNERS PAYDAY 2'S SALES

18 80 70 15 60 12 50 9 40

SEKm 30

In millions In 6 20 3 10 0 0 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Jun-15 Jun-16 Jun-17 Feb-16 Feb-17 Feb-18 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec-17 Owners PAYDAY 2 sales * Note that OVERKILL gave away five million copies of the game in June 2017. Source: Company data and Nordea Markets Source: Company data and Nordea Markets

Life cycle of the game has Typically, the life cycle of a game used to be front-end loaded, with the majority of been prolonged through a sales generated around the release date. This has changed to some extent and continuous release of paid Starbreeze is working actively to build and maintain its players community, primarily and free updates by releasing new DLCs, ie new missions, characters or weapons. Since 2013, the company has released more than 170 free and paid updates. In 2016 alone, it released nine paid DLCS, 11 free DLC bundles and a total of 72 updates. The price of paid updates is typically about USD 3-7.

Game as a service model This payment model offers more flexibility as the company could charge a lower price offers more flexibility in terms for the game and monetise the release of new DLCs, which could extend the life of pricing expectancy of the game by several years and also increase the player base due to lower barriers to entry.

*PAYDAY 2 was released in August 2013. The generic comparison game was released in October 2014. The chart above shows the sales trend from September 2015 (thus, one year after PAYDAY 2 was released).

Source: Company data

Usually, the number of players diminishes over time but this commitment to player PAYDAY 2 is still among the experience has enabled PAYDAY 2 to retain a large number of players. It is still one of most popular games on Steam, with 5.5 million the most popular games on Steam, with more than 5.5 million community members. members in its community Another testament to the business model is the large spikes compared with the typical game when new updates to enhance the user experience are released.

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PAYDAY 2'S AVERAGE DAILY PLAYERS PAYDAY 2'S PEAK CONCURRENT PLAYERS 100,000 300,000

80,000 250,000 200,000 60,000 150,000 40,000 100,000

20,000 50,000

0 0 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Aug-13 Nov-13 Aug-14 Nov-14 Aug-15 Nov-15 Aug-16 Nov-16 Aug-17 Nov-17 Aug-13 Nov-13 Aug-14 Nov-14 Aug-15 Nov-15 Aug-16 Nov-16 Aug-17 Nov-17 May-14 May-15 May-16 May-17 May-14 May-15 May-16 May-17 Avg. Players Linear (Avg. Players) Peak Concurrent Players Linear (Peak Concurrent Players) Source: Company data and Nordea Markets Source: Company data and Nordea Markets PAYDAY 3: Can the success be replicated? The next focal point after the launches of OVERKILL’s The Walking Dead and Project

Crossfire will likely be PAYDAY 3. The game is still in the design phase, so it is difficult to make any firm predictions about its sales potential. Nonetheless, we find a number of compelling reasons why it could be at least as successful as its predecessor:  Player base and Steam community is larger today We see a number of factors why PAYDAY 3 could be at  Development budget is likely to be more sizeable least as successful as its  Less revenue sharing predecessor  Wider geographical scope.

PAYDAY 2 sold about 1.6m PAYDAY 2 sold about 1.6 million copies in its first month, compared with about 0.4 copies in the first month million copies sold of PAYDAY: The Heist in its first six months. In Q1 2014, the company announced that PAYDAY 2 and PAYDAY: The Heist had collectively sold nine million copies plus eight million DLCs over the previous 12 months. Almost 80% of sales were digital.

PAYDAY: THE HEIST'S OWNERS PAYDAY 2'S OWNERS 5 18

4 15 12 3 9 2

In millions In millions 6 1 3 0 0 Oct-17 Oct-17 Oct-16 Apr-17 Oct-16 Apr-17 Oct-15 Apr-16 Oct-15 Apr-16 Apr-15 Apr-15 Jun-17 Jun-17 Jun-16 Jun-16 Jun-15 Jun-15 Feb-18 Feb-18 Feb-17 Feb-17 Feb-16 Feb-16 Dec-17 Dec-17 Dec-16 Dec-16 Dec-15 Dec-15 Aug-17 Aug-17 Aug-16 Aug-16 Aug-15 Aug-15 Owners Owners

* Note that OVERKILL gave away five million copies of PAYDAY 2 in June 2017.

Source: Steamspy and Nordea Markets Source: Steamspy and Nordea Markets

The PAYDAY 2’s Steam Since PAYDAY 2 was first released, the player base and community has grown community is large and still significantly, enabling a better platform and starting point for PAYDAY 3. This is also growing true for the Steam platform as whole, as the number of players has more than doubled since 2013.

Furthermore, as Starbreeze has secured the rights to the franchise, the company will Starbreeze will receive a gain a larger share of revenue if the game is successful. The deal struck with 505 larger share of future Games entitles it to a revenue share capped at a maximum of USD 40m. It is also PAYDAY revenues likely that the game will entail a much larger development budget, as the PAYDAY franchise is viewed as a cornerstone of the business.

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Collaboration with Smilegate Finally, the collaboration with Smilegate enables wider geographic scope for the enables distribution in Asia game with simultaneous release on the Asian markets.

PAYDAY 2'S STEAM COMMUNITY

6

5

4

3 In millions 2

1

0 sep-14 nov-14 mar-15 jun-15 sep-15 dec-15 mar-16 jun-16 sep-16 dec-16 mar-17 jun-17 sep-17 Today PAYDAY 2 Steam community

Source: Company data and Nordea Markets

OVERKILL’s The Walking Dead OVERKILL’s The Walking In 2014, Starbreeze announced a partnership for the rights to develop and release Dead to be released during H2 OVERKILL’s The Walking Dead (OTWD). It was first expected to launch in 2016 but, 2018 due to delays, the game has been postponed and is expected during H2 2018. In the past, almost every blockbuster film was accompanied by a video game. After Many games based on other numerous failures, demand has more or less dried up and the internet is flooded with media formats has failed “top ten worst video games based on movies” lists. Anyone remember successful tie- in games such as II (1990), Street Fighter: The Movie (1995), Robocop

(2003) and Fight Club (2004)?

This phenomenon is not isolated to the games industry; movie spin-offs of renowned games such as Angry Birds and Assassin’s Creed have not reached the same heights as the original games in terms of reception from critics and attendance in cinemas.

The main reason has been Naturally, this questions whether different entertainment formats based on the same small budgets and rushed franchise can coexist. We would argue, yes and no. In general, tie-in games have been deadlines rushed for release in connection with the film and have had relatively small development budgets. We believe different parts of the entertainment industry have their own unique strengths and by playing to those strengths it should be possible to utilise a strong franchise. If anything, history at least indicates that it is a really bad idea to just copy the original format.

The Walking Dead is still The comic book based Walking Dead franchise is undoubtedly huge, with season among the most watched eight of the popular TV show currently airing. Viewings are somewhat below the shows on TV; season eight is peak and ratings are sliding, but it still attracts an audience of millions each week. currently airing Season eight was one of the most viewed shows in 2017, only surpassed by Game of Thrones. On 15 January, AMC announced that The Walking Dead is being renewed for a ninth season, to premiere in late 2018. Usually, the show starts airing in October each year.

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THE WALKING DEAD'S VIEWERS 20 18 16 14 12 10

In millions 8 6 4 2 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100 103 106 Season 1 Season 2 Season 3 Season 4 Season 5 Season 6 Season 7 Season 8

Source: Nielsen ratings

Further proof of the strong OTWD is based on the critically acclaimed comic book series with the blessing of its franchise is the popular comic original author, Robert Kirkman. The comic series has also had success, which could books be seen as further testament to the strength of the franchise. It was the top grossing comic book series in 2012 and 2013, according to Comichron.

Independent storyline makes In our view, it is an advantage that OTWD will be an independent game with its own OTWD less vulnerable if the storyline rather than just a rerun of the TV series or comic book. It both mitigates the show is cancelled risk of being another failed remake and also makes demand less vulnerable if the TV show is eventually cancelled. The time and money invested, the experience of the team, the platform and the independent storyline set it apart from other productions. Because of these reasons, we believe there is little read-through from the less successful examples mentioned above.

Is there an appetite for another zombie game? First trailer introducing one of In its first attempt to hype the launch of the much-awaited game, Starbreeze released the main characters received a trailer introducing Aidan, one of the four playable characters. The short two-minute major interest worldwide trailer received more than 15 million viewers on YouTube and Facebook in the first week. In addition, the game has had almost 1.9m views on a single third-party account. Initial feedback also seems to be encouraging, with 98% positive reviews.

Source: YouTube

Telltale has released a story- OTWD is also not the first game based on the franchise. Telltale Games launched its based Walking Dead game, first episodic adventure game based on the comics back in 2012. According to a which has been a commercial statement by the company in July 2017, it had sold a total of more than 50 million success episodes worldwide since launch. Although the game is quite different and based on episodes, which are cheaper, it is further demonstration of the large fan base. The fourth and final season of the game is in development (The Walking Dead: The Final season) and is set to arrive sometime during 2018.

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Estimating sales potential of a new game franchise is difficult due to the limited Other similar zombie games public information available until the final marketing push, just before the game is such as Left 4 Dead 2 are launched. Looking at other successful FPS co-operative games with survival elements among the ATH selling games, such as Valve’s Left 4 Dead could provide a ballpark comparison. implying a clear interest in the genre The sequel, Left 4 Dead 2, was released in November 2009 and sold more than two million copies in retail alone (excluding Steam sales) in its first two weeks. In 2012, the Left 4 Dead franchise had sold more than 12 million copies and, according to Steamspy, the total number of digital owners is 19.6 million today. Other co-op zombie games such as Dead Island and Dying Light have also received positive feedback and records above four million owners each on Steam.

LEFT 4 DEAD'S 2 OWNERS 25

20

15

10

5

0 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Owners

Source: Steamspy and Nordea Markets

LEFT 4 DEAD'S AVERAGE DAILY PLAYERS LEFT 4 DEAD'S PEAK CONCURRENT PLAYERS 25,000 200,000

20,000 160,000

15,000 120,000

10,000 80,000

5,000 40,000

0 0 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Avg. Players Linear (Avg. Players) Peak Concurrent Players Linear (Peak Concurrent Players) Source: Steamspy and Nordea Markets Source: Steamspy and Nordea Markets

LEFT 4 DEAD'S AVERAGE DAILY PLAYERS (ADJ.) LEFT 4 DEAD'S PEAK CONCURRENT PLAYERS (ADJ.) 18,000 60,000

15,000 45,000 12,000

9,000 30,000

6,000 15,000 3,000

0 0 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Avg. Players Linear (Avg. Players) Peak Concurrent Players Linear (Peak Concurrent Players) Source: Steamspy and Nordea Markets Source: Steamspy and Nordea Markets

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Project Crossfire

Starbreeze signed an When Starbreeze signed an agreement with Korean game company Smilegate to agreement in 2016 with develop and publish a Western version of the Crossfire game in 2016, it got its hands Smilegate, to develop a on IP from a franchise with more than eight million concurrent users and 650 million Western version of its best- registered players. It has generated more than USD 8bn in sales worldwide since its selling Crossfire FPS 2007 release, making it one of the world’s bestselling online FPS games. The original Smilegate version of Crossfire is currently available in 80 countries Crossfire has seen massive including China, Vietnam, and in North America, South America and Europe, but it has success in Asia but has not not proven as successful in the West as it has in Asia. In the West, Counter-Strike: been the same hit in the West Global Offensive (CS:GO) has dominated the FPS PC game scene for a number of years.

The free-to-play model and Crossfire’s disappointing reception in the West can likely be explained by some of the the game’s simple graphics same factors that made it such a hit in Asia. It is technologically quite a dated game, are factors that both explain with simple graphics that allow the game to run on a wide range of computers. the game’s success in Asia as Combined with a free-to-play (F2P) sales model, which means that lower-income well as its lack of appeal in players do not need to pay upfront and that those without a gaming PC can play in the West internet cafes, this makes for quite low barriers of entry for new players. While this model works well in Asia, where microtransactions in the game have racked up accumulated sales of more than USD 8bn since its release in 2007, Western gamers usually value more advanced graphics and have instead shown a preference for more premium games like CS:GO. However, due to the more fragmented market in Europe as well as the size of the Asian market, CS:GO only achieved sales of USD 341m in 2017 compared to Crossfire’s sales of USD 1.4bn in the same period.

Partnering with Tencent as Another key factor behinds Crossfire’s success in Asia was Smilegate’s partnering publisher in China was with Chinese giant Tencent as its publisher there. With Tencent’s distribution another crucial factor in the network, China quickly became the largest market for the game and it has accounted Crossfire’s success for a large majority of Crossfire’s revenues to date.

Crossfire’s lack of appeal in the West has prompted Smilegate to partner up with Starbreeze, which has a strong record in developing co-op games with its PAYDAY franchise. In conjunction with the partnership agreement, Smilegate invested USD 40m, of which USD 15m was through an equity issue and USD 25m via a convertible bond in Starbreeze. This meant that Smilegate took a 3.4% stake in Starbreeze. As part of the 2016 agreement, Smilegate will also be a distribution partner for PAYDAY and OTWD in Asia.

Crossfire is still one of the Crossfire was first released in 2007 and is still one of the highest grossing games highest grossing games; ten today. According to SuperData, it was third on the list of the world’s top grossing titles years after its 2007 release, it ranked by December 2017 earnings. For 2017, Crossfire raked in USD 1.4bn in ranked third in 2017’s rank of revenues, placing it third for the full year as well. The longevity of Crossfire is similar PC games by worldwide to that of other successful F2P MMO (massive multiplayer online) games. The long revenues lifespan of such games can partly be explained by players sticking with these games after investing time and money in them. In developing markets, another factor is also that players also tend to stick with older titles because their PCs are not capable of running the latest games.

CROSSFIRE'S ANNUAL SALES AND RANK AMONG TOP PC GAMES BY REVENUE 2013 2014 2015 2016 2017 Sales (USD bn) 1.0 1.3 1.1 1.2 1.4 Rank among top PC games by revenue11233

Source: SuperData and Nordea Markets We expect a 2020 release of While there has been no announcement regarding a release date for Project Crossfire, Project Crossfire we estimate that the game will not be released until 2020 as it is still in pre- production phase.

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Difficult to estimate potential Estimating the sales potential of a title based on Crossfire is difficult since there is as the franchise has not seen always considerable uncertainty about the commercial potential of a new game the same success in the West franchise. While Smilegate’s version of the game is highly popular in Asian markets, as it has in Asia but… we still believe the success of a remake aimed at European and North American gamers is far from certain. The pricing model will also likely differ, as Starbreeze does not intend to launch Project Crossfire with a free-to-play model.

As a reference point for Project Crossfire’s potential, we can look at Valve’s CS:GO. …CS:GO and Overwatch offer interesting reference points as This is likely one of the most similar FPS games to Project Crossfire and consequently they are both FPS games and will likely be one of the main competitors for the upcoming Starbreeze title. CS:GO will likely be key competitors has built an owner base of close to 40 million players and the number of average for Project Crossfire daily players has held above 300,000 since mid-2015. In 2017, CS:GO earned USD 341m in revenues. Another reference point and likely competitor is Activision Blizzard’s Overwatch, which was first released in 2016 and had sales of USD 382m in 2017.

COUNTER-STRIKE: GLOBAL OFFENSIVE'S OWNERS 45

40

35

30

25

20 In millions 15

10

5

0 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Owners

Source: Steamspy and Nordea Markets

CS:GO'S AVERAGE DAILY PLAYERS CS:GO'S PEAK CONCURRENT PLAYERS 500,000 1,000,000

400,000 800,000

300,000 600,000

200,000 400,000

100,000 200,000

0 0

Avg. Players Linear (Avg. Players) Peak Concurrent Players Linear (Peak Concurrent Players) Source: Steamspy and Nordea Markets

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Business area: Publishing Starbreeze’s Publishing segment offers publishing services to external developers. The operations started in 2016 and reported sales of SEK 219.9m in 2017. The first, and most successful, title released was Dead by Daylight, developed by Behavioural Interactive. More than two million units of the game have been sold and it accounted for SEK 202m of sales in 2017. The Publishing pipeline includes several upcoming VR titles as well as 10 Crowns, Starbreeze’s first foray into the strategy genre.

Publishing The Publishing segment has been offering publishing services to third-party First successful publishing developers since 2016. The company mainly collaborates with developers of similar title, Dead by Daylight, was released in 2016 games to those in Starbreeze’s portfolio to maximise the use of its expertise. The first title released was Dead by Daylight, developed by Behaviour Interactive. Currently, the company’s revenue mainly stems from royalties for the rights to Dead by Daylight. However, Starbreeze’s aim is to grow the business area in order to diversify its games portfolio and generate cash flows also in periods between releases of its in-house developed games.

PUBLISHING'S REVENUE PUBLISHING'S OPERATING COSTS

100 120

80 100 80 60 60

SEKm 40 SEKm 40

20 20

0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 2016 2016 2016 2016 2017 2017 2017 2017 Net sales Capitalised development costs Operating costs

Source: Company data and Nordea Markets Source: Company data and Nordea Markets Publishing reported revenue The Publishing business area reported net sales of SEK 219.9m in 2017 (SEK 176.1m), of SEK 219.9m in 2017 of which Dead by Daylight accounted for SEK 201.5m (SEK 143.7m), RAID: World War II for SEK 4.6m (SEK 32.5m, representing a minimum guarantee in royalties for the physical console version) and John Wick Chronicles for SEK 8.3m (SEK 0m). Capitalised development costs were SEK 26.1m (SEK 32.4m), relating to production costs.

The majority of revenue stems from digital distribution channels such as Steam. The Majority of revenue stems from digital distribution payment streams go from the customer via the distributor, which charges a standard channels such as Steam fee, and then to Starbreeze. When Starbreeze acts as publisher, it pays royalties to the game developer, which in most cases holds the IP rights. Starbreeze reports the IP rights as revenue and deducts them as costs to external developers; hence the reported revenue is gross revenue.

Business model The Publishing business model is built on five pillars, which differentiates Starbreeze

from its competitors.

Development knowhow Starbreeze focuses on As Starbreeze is a game developer, it can provide knowledge and support to other publishing projects similar to developers to support them with games and projects. To be able to help in the best its own games possible way, the Publishing segment mainly works with developers of similar games.

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Global in-house production Global teams and marketing teams to Starbreeze Studios has global in-house production and marketing teams to help its support developers external developers during the process.

Tailored publishing deals The Publishing business area publishes games in accordance with agreements made Starbreeze is generally with each external developer. Starbreeze is generally granted an exclusive publishing granted exclusive publishing licence under which the company has the right to sell, publish and distribute the rights games in languages and via platforms specified under the agreements. In some cases, games have been developed under ‘work for hire’ agreements, under which all rights are transferred to Starbreeze.

IP ownership Starbreeze allows the Normally, the publisher owns the rights to the game, while the external developer is publisher to maintain all, or a responsible for production. Sometimes, the publisher only releases, markets and majority, of the rights to the IP distributes the game, while the game developer still own the rights. The latter gives the developer the creative freedom to design the games as it likes. This is also in line with Starbreeze’s strategy, and the game developer retains all, or a large share of, the IP rights for its games. According to the company, it is, and will continue to be, flexible regarding financing agreements and management of IP rights.

Games as a service Similar to the Starbreeze Games business area, the Publishing business area uses the - ‘games as a service’ concept. The concept involves extending the lifetime of the game through releases of new content in the form of paid and free game updates.

Starbreeze can offer By focusing on these pillars, Starbreeze can offer game developers an attractive deal, developers a flexible deal as the developer has a higher degree of creative freedom than when cooperating with a high degree of freedom with a larger studio. Starbreeze allows the developer to retain influence over the game while providing support when needed.

Games pipeline Since the release of Dead by Daylight, Starbreeze has signed projects with developers Pipeline includes renowned such as Tim Schafer’s Productions with Psychonauts 2, as well as Warren franchises such as Psychonauts 2 and System Spector’s OtherSide Entertainment and its game, System Shock 3. The company Shock 3 recently also announced a new publishing agreement with Mohawk Games for a turn-based strategy game under the working title 10 Crowns.

PUBLISHING'S CURRENT PORTFOLIO AND GAMES IN DEVELOPMENT IP DEVELOPMENT PUBLISHING OWNERSHIP GENRE PLATFORM PHASE TIMING Dead by Daylight 0% Horror, Asymmetric, 4v1 PC Released 2016 John Wick Chronicles 0% VR, FPS, Action VR PC & LBE Released Feb 9, 2017 Dead by Daylight 0% Horror, Asymmetric, 4v1 PS4 & XBONE Released June 20/23, 2017 Antisphere 50% Arena shooter, 2v2 PC Released July 14, 2017 RAID: World War II 50% Co-op, FPS, Action PC Released Sep 26, 2017 RAID: World War II 50% Co-op, FPS, Action PS4 & XBONE Released Oct 10/13, 2017 Psychonauts 2 0% Adventure, platform Multiformat In Production TBC System Shock 3 0% Not announced/defined Multiformat In Production TBC Deliver Us The Moon 0% Not announced/defined PC In Production TBC 10 Crowns n.a. Turn-based strategy PC Design Phase TBC Elementerra 50% VR, Puzzle VR PC In Production TBC The Raft 50% VR, Multiple. LBE VR LBE In Production TBC Hero 0% VR, Drama, Puzzle, LBE VR LBE In Production TBC APE-X 0% VR, Action, LBE VR LBE In Production TBC Project Golem 50% VR, Action, LBE VR LBE In Production TBC

* FPS – first person shooter, LBE – location-based entertainment Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze 47 Starbreeze 6 March 2018

Games portfolio Dead by Daylight

Dead by Daylight was the first game released in the Starbreeze Publishing business Dead by Daylight was the first area and was developed by the Canadian studio Behaviour Interactive. The game is game released by Starbreeze an asymmetrical multiplayer (four versus one) horror game for five players. It is a Publishing version of hide and seek, where one player takes the role of the killer and hunts the other four players, who try to avoid being caught and killed. The killer plays in first

person, while the survivors play in third-person.

The game has sold around 2.8 The game was released on 14 June 2016 for PC and the console release followed in million copies and the Steam June 2017. It have sold almost three million copies on the digital distribution platform community group has Steam. As for PAYDAY, Starbreeze applies the concept ‘games as a service’ to Dead surpassed 780,000 members by Daylight, and following the launch seven paid updates have been released. Today, the community has surpassed 780,000 members and up to 42,895 concurrent players have been noted by Starbreeze for the game. According to Steamspy, the game currently has about 2.8 million owners.

Starbreeze financed the game development by investing USD 2m and will receive 50% of the royalties for the lifetime of the game, while Behaviour Interactive retains 100% of the IP rights.

DEAD BY DAYLIGHT'S OWNERS - STEAM DEAD BY DAYLIGHT'S SALES - ALL PLATFORMS 3.5 80

3.0 70 60 2.5 50 2.0 40

1.5 SEKm 30 In millions In 1.0 20 0.5 10 0.0 0 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Q2 2016Q3 2016Q4 2016Q1 2017Q2 2017Q3 2017Q4 2017 Owners Dead by Daylight sales Source: Steamcharts and Nordea Markets Source: Company data and Nordea Markets

DEAD BY DAYLIGHT'S AVERAGE DAILY PLAYERS - STEAM DEAD BY DAYLIGHT'S PEAK PLAYERS - STEAM 18,000 50,000

15,000 40,000 12,000 30,000 9,000 20,000 6,000

3,000 10,000

0 0 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Avg. Players Linear (Avg. Players) Peak Players Linear (Peak Players)

Source: Steamcharts and Nordea Markets Source: Steamcharts and Nordea Markets Psychonauts 2 In February 2016, Starbreeze signed an agreement with Double Fine Productions to Almost 15 years after the publish the title Psychonauts 2. The game is a third-person action/adventure game original title, Starbreeze and where players control a newly graduated Psychonaut. The Psychonauts are an elite Double Fine Productions are group of international secret agents born with powerful psychic abilities. We expect releasing Psychonauts 2 Psychonauts 2 to be released in 2019 for PC, PS4 and Xbox One. The development of the game was previously funded by Double Fine Productions and through equity crowdfunding via the Fig service.

After a slow start, sales The predecessor, Psychonauts, was published in 2005 and was initially considered a picked up after Double Fine commercial failure with only around 100,000 retail copies sold. In 2011, Double Fine

Marketing material commissioned by Starbreeze 48 Starbreeze 6 March 2018

acquired the rights to the acquired the rights to the game and relaunched the title with support for digital game distribution. In December 2015, Double Fine reported that the game had sold 1.7 million copies, 1.2 million copies of which were sold after Double Fine had acquired Starbreeze will be able to the rights. According to Steamspy, the game currently has about 2.4 million owners. recoup 100% of its investment Starbreeze will be able to recoup 100% of its investment including marketing costs, before revenue-sharing with an initial revenue share of 85% after distribution and platform fees and the Fig crowdfunding revenue share. After the investment is fully recouped, Starbreeze’s share of revenue will be 60%. Double Fine will retain the full intellectual property rights.

PSYCHONAUT'S OWNERS 3.0

2.5

2.0

1.5 In millions In 1.0

0.5

0.0 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Owners

*Note that the bump in September 2017 refers to free versions of the game Source: Steamspy and Nordea Markets

System Shock 3 ’s OtherSide System Shock 3 is a publishing collaboration with OtherSide Entertainment. The man Entertainment game System behind the modern first-person role-playing game (RPG) genre, Warren Spector, who Shock 3 is under development produced the first System Shock game in 1994, is returning to release the third game in the series.

System Shock 2 was initially released in 1999 and received positive reviews but failed has won a to meet commercial sales expectations. Many critics have since praised the game for dozen awards and been having substantial influence on the FPS genre and the game is considered to have included on ‘greatest game of all times’ lists been well ahead of its time. It has won a dozen awards since, including seven ‘game of the year’ titles and has been included in several ‘greatest game of all time’ lists.

Night Dive Studios acquired the rights and released an updated version of System Shock 2 in 2011, and in 2015 it was announced that OtherSide Entertainment had been licensed the rights to produce a sequel, System Shock 3.

BioShock was released in A called BioShock was released in 2007, inspired by System Shock 2007 and is seen as a spiritual with a similar plot. The game has been successful and has been followed by two successor to System Shock 2 sequels, BioShock 2 and BioShock Infinite, with each game having 3.6-5 million owners on Steam, according to Steamspy. Starbreeze has invested USD Starbreeze has invested USD 12m in a publishing-only deal and will be able to recoup 12m in the project and is able 120% of its investment including marketing costs. After the investment is recouped, to recoup 120% before revenue will be split equally. revenue-sharing

Raid: World War II Starbreeze, Lion Game Lion and 505 Games jointly released the publishing title RAID: World War II for PC and console in autumn 2017. The game is a four-player co-op first-shooter game in a World War II setting. Starbreeze invested USD 8m in game development and will be able to recoup 120% of the investment with a 50/50 royalty split. Starbreeze and Lion Game Lion will each own 50% of the IP rights.

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RAID: WORLD WAR II'S OWNERS 0.040

0.035

0.030

0.025

0.020

In millions 0.015

0.010

0.005

0.000 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Owners

Source: Steamspy and Nordea Markets RAID: WORLD WAR II'S AVERAGE DAILY PLAYERS RAID: WORLD WAR II'S PEAK CONCURRENT PLAYERS 180 1,600 160 1,400 140 1,200 120 1,000 100 800 80 600 60 40 400 20 200 0 0 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Avg. Players Linear (Avg. Players) Peak Concurrent Players Linear (Peak Concurrent Players) Source: Steamcharts and Nordea Markets Source: Steamcharts and Nordea Markets 10 Crowns 10 Crowns will be On 5 February 2018, Starbreeze announced that it had signed a publishing agreement Starbreeze’s first foray into with Mohawk Games regarding a project currently under the working title 10 Crowns. the strategy genre The game, which is in the design phase of its development, is an epic-scale turn- based strategy game that lets players create the greatest dynasty in world history. The team behind Mohawk Games includes industry veterans from blockbuster titles such as Civilization IV and Civilization V.

John Wick Chronicles John Wick Chronicles is a VR game published in cooperation with Lionsgate. It was Publishing portfolio also released on Steam in February 2017 and is available in the IMAX VR centre in Los includes VR titles John Wick Angeles. Chronicles and ElemenTerra ElemenTerra ElemenTerra is the second publishing title in the VR segment. The player takes on a god-like role and rebuilds and designs planets in a cosmic disaster environment. Starbreeze is financing the development and will receive 50% of the royalties for the lifetime of the game. Starbreeze and Freeform Labs each own 50% of the intellectual property rights.

IndieLabs The IndieLabs brand was launched in 2016 under the Publishing business area and IndieLabs focuses on smaller focuses on smaller game projects with the ambition of finding upcoming game game projects to find new upcoming studios developers to use for larger projects. Antisphere was the first IndieLabs title and was released on Steam in July 2017. However, sales for the PC version were lower than expected and the company decided not to invest further in the console release.

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Second title to be published is The second IndieLabs project is to publish the title Deliver Us The Moon with the Deliver Us The Moon by the Dutch studio KeokeN Interactive. The game is set in the near future and the Earth’s Dutch studio KeokeN resources are nearly depleted. An astronaut travels to the moon in a do-or-die secret Interactive mission to save humanity. Starbreeze will be able to recoup 120% of its investment, and will subsequently retain 50% of the revenue after distribution fees. KeokeN will retain 100% of the IP rights.

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Business area – VR Tech & Operations Starbreeze’s VR Tech & Operations business area is responsible for the development of VR technology and software, as well as the new concept of VR centres. These are centres for location-based entertainment (LBE) that Starbreeze views as its preferred means of VR content delivery. The business area includes the StarVR venture, a JV with Acer to develop the StarVR head-mounted display (HMD) headset, and technologies such as the VR movie format PresenZ. VR Tech & Operations is focused on R&D and has seen multiple additions through acquisitions since Starbreeze started its VR initiative in 2015. The VR market is still in its infancy but PwC expects the size of the market to grow to USD 15bn by 2021. Starbreeze believes VR will be a key component of the industry and has a strategy that aims to enable the delivery of premium content, leveraging on its strong IP portfolio.

Starbreeze views location- The VR Tech & Operations business area comprises the Virtual Reality (VR) based VR as the preferred technology and software development, as well as the new concept of VR centres. channel to deliver VR content These centres are a form of location-based entertainment (LBE) that Starbreeze considers its preferred means of VR content delivery. The business area includes the StarVR venture, which sells and markets the premium StarVR HMD headset, and the VR movie format PresenZ.

The business area is focused on research and development and aims to support Starbreeze’s vision of providing first-class entertainment products. The company believes that VR will be a key component of the industry in the future and is implementing a strategy of enabling the delivery of premium content, leveraging on its strong IP portfolio.

The business line has been Starbreeze’s expansion into VR has been driven by a number of acquisitions, starting built on selective M&A in June 2015 with the acquisition of InfinitEye. This was followed by further deals, such as the establishment of a JV with Acer to develop the StarVR HMD and

collaboration agreements with IMAX and SEGA Entertainment for their VR centres.

VR strategy to establish the The VR Tech business area is in the heavy investment phase and has yet to generate tech and LBE concept any profit. However, Starbreeze has taken many of the steps required to enable the required to enable delivery of delivery of premium content, ie developing the required tech and establishing the premium content LBE concept through partnerships. The company expects that its VR strategy will ensure that the business area can contribute positively to the company’s bottom line in the future.

VR TECH'S REVENUE VR TECH'S OPERATING COSTS

25 30

20 25 20 15 15 SEKm SEKm 10 10

5 5

0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 2016 2016 2016 2016 2017 2017 2017 2017 Net sales Capitalised development costs Operating costs

Source: Company data and Nordea Markets The VR market In its “Global Entertainment and Media Outlook 2017–2021” report, PwC notes that VR is still in an emerging there is considerable uncertainty in virtual reality with regards to the pace of change phase and time to rollout and revenue potential is still and the effect it will have. VR is also an area where uncertainty also hangs as a cloud

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uncertain over the speed of monetisation and the viability of new business models that the new technology enables.

As a relatively novel technology that has yet to mature and prove its business potential, the size and growth of the VR market is subject to considerable uncertainty. Growth rates will be high, The very definition of the VR market also differs as some actors, such as Newzoo - a albeit from a low base leading provider of market intelligence covering the global games, e-sports and mobile markets - does not regard VR as a new segment in the market. Instead, it sees Shares many similarities with smartphone market, with it as a part of the established console, PC and mobile games markets as VR headsets game publisher leading the are available for all three segments. way A common thread in most market estimates is the strong expected growth in the coming years as consensus seems to believe in the ability of the technology to establish itself and post impressive CAGRs, albeit from a rather low base.

PWC expects the market to In its report, PwC notes that the VR market today is similar to that of the early days of grow 80% annually until 2021, the smartphone, ie a highly immature market with several underdeveloped business yielding a USD 15bn market models and lots of experimental or low-quality content. While game publishers are making some progress, VR video creators still struggle with distribution and monetisation and the razor thin margins that result from the technical constraints and high costs of headsets. PwC foresees hardware (device) platform leaders emerging, paving the way for the maturing of marketplaces for content.

In the report, PwC anticipates that the VR market will grow at an 80% five-year CAGR through 2021, at which point it will be a USD 15bn market, compared with USD 869m in 2016. PwC’s projections for the three largest markets – the US, China and Japan – can be seen in the chart below.

Source: Global entertainment and media outlook 2017−2021, PwC

Other reports point to a Other estimates of the size of the VR market are generally in line with PwC’s market opportunity of projections, although some divide the market into hardware and software between USD 13.1bn and USD components. For example, in a 2016 report, JP Morgan estimated that the HMD 13.5bn in 2020 market will grow by 52% annually in 2016-20, going from HMD sales of USD 2.5bn in 2016 to USD 13.5bn in 2020. SuperData, a market intelligence provider covering the global gaming markets, estimates that of the total VR revenues of USD 28.3bn it expects in 2020, software will account for USD 16.2bn.

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WORLDWIDE VR REVENUE BY SEGMENT

30 28.3

25

20 16.2 17.1

15 7.2 USDbn

10 9.0 3.0 3.7 12.1 5 1.8 9.9 1.0 6.0 0.3 2.7 0 1.5 2016 2017E 2018E 2019E 2020E Hardware Consumer software/services

Source: SuperData

Growth rates to remain high In another report from 2016, Goldman Sachs estimated that the software market for beyond 2020, VR games alone HMD will generate sales of USD 13.1bn in 2020, USD 6.9bn of which will be generated could reach USD 11.6bn in from the games market. Furthermore, it forecast sustained strong growth and sales estimated that hardware and software related to VR and AR (augmented reality) will generate sales of USD 80bn in 2025, USD 11.6bn of which from the games market.

Interest starting to shift from While most of the focus for the future of the VR market has been in its game home applications to applications in a console, PC or mobile setting, a further VR-related trend that location-based VR Starbreeze has observed is that location-based VR is on the rise and it expects to see a growing number of VR centres. This is a development that will demand content adapted to large-scale VR experiences and this observation and the belief that location-based entertainment (LBE) will be the best means of delivering VR content in the short to medium term, considering the cost of a premium VR headset, has been a key driver in Starbreeze’s bet on VR centres.

Apart from the games market, the progression of VR technology could also see In the future, the B2B segment additional applications for its use, both in B2C, eg changing how people attend a could offer additional upside property viewing or how they see their doctor, and B2B channels, eg architects taking developers on a virtual tour of their blueprints. Armed forces around the world have also been early adopters of VR technology, using it for applications such as combat training and safety enhancement. The value of these applications for the VR technology is harder to estimate as it is still in its infancy and even more immature than the VR game market.

Starbreeze’s VR strategy Starbreeze’s VR strategy is focused on enabling the delivery of premium content, thus Strategy to enable the leveraging on Starbreeze’s strong IP portfolio. The strategy can be divided into three delivery of premium content – leveraging on Starbreeze’s phases: the StarVR Headset, Location-based VR centres and Premium content. The strong IP portfolio first two phases have been necessary in order to develop the technology and infrastructure to deliver on the third, which is where Starbreeze’s strength as a company comes into play and where the profit potential is greatest. The relationship between time and profit in the strategy can be seen in the visualisation below. Starbreeze has to date made significant progress in this three-pronged strategy as Moving into the third phase of the StarVR headset has completed the R&D phase and location-based VR centres are its strategy – delivery of now being rolled out through the IMAX and SEGA partnerships. This means that the premium content heavy investment phase is transitioning into a new phase where focus shifts towards the end goal of delivering premium content.

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Source: Company data and Nordea Markets

StarVR Headset A key aspect of developing the VR experience is to integrate the company’s software The StarVR headset is key for and hardware in the StarVR HMD headset. The purpose of developing a VR headset is creating high-class to enable an end-to-end concept for LBE VR entertainment with full control of the entertainment experiences entertainment experience. It also presents a pioneering opportunity to unlock the B2B market where multiple segments can be targeted, including arcade centres, real estate, engineering, healthcare, theme parks and shopping malls.

Source: Company data and Nordea Markets

Starbreeze partnered with The headset was developed in a joint venture with Acer called StarVR Corporation, in Acer on the StarVR joint which Starbreeze holds a 33% ownership share. Starbreeze owns and controls the IP venture rights and provides content, while Acer manufactures the product. Sales and marketing of the StarVR HMD headset is managed by the JV’s sales organisation. The premium headset is differentiated from its competitors through its 210 degree field of vision, 5K low persistent screen and perfect tracking through Phase Space tracking. In February 2018, Acer and Starbreeze confirmed that they were looking into an IPO of the StarVR JV, but no decision has been taken yet.

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Source: StarVR Corporation

Important VR technology In addition to the StarVR JV, Starbreeze’s tech investments include the acquisitions of acquired in 2016 the French company ePawn, now Starbreeze Paris, in June 2016 and in October 2016, the Belgian companies Nozon S.p.r.l. and Parallaxter S.p.r.l., which together are developing the PresenZ Technology. The technology allows interactive illusory position shift in 360-degree videos, VR content and in post-production and 3D animation.

Location-based VR centres Location-based VR is a key step in the VR strategy and the company sees great Flagship centre for VR in potential in VR arcades. In June 2017, Starbreeze finalised the acquisition of Dubai and forthcoming centre Enterspace, a location-based VR company. In August 2017, the company announced in Stockholm to showcase the that it had entered an agreement for a 7,000m2 VR centre in Dubai. The Emaar technology Entertainment’s VR Park, as it is called, opened on 1 March 2018 in the prominent Dubai Mall and is slated to serve as a flagship for the VR LBE concept. Enterspace will

be the lead partner to the VR centre providing content, installation and operational experience. In 2018, Enterspace will also open a showcase VR centre in central Stockholm.

Partners with IMAX and SEGA In addition to the fully owned Enterspace, the company is betting on the LBE concept on location-based through partnerships. It has an agreement to supply IMAX with games and hardware entertainment for its VR centres in the US and a similar deal was announced in December with the Japanese entertainment company SEGA Entertainment. Starbreeze’s StarVR JV with Acer will supply VR technology to IMAX and SEGA Entertainment.

Premium content Content and IP ownership are the key in Starbreeze’s VR strategy. The company is Long-term ambition to pursuing a strategy of developing premium content, both in-house and as a publisher, monetise on content, where for its StarVR headset and location-based VR centres. Starbreeze also has a number the company has expertise of projects with external developers of VR game titles and has released John Wick and margins are high Chronicles: Arcade Edition in VR. The long-term target is to make more of the company’s existing titles available in VR.

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VR game portfolio and pipeline Starbreeze has so far released two VR games, John Wick Chronicles and The Mummy Starbreeze has a number of Prodigium Strike, but has several titles in development – Starbreeze Games titles as VR titles in its pipeline well as titles where it acts as a publisher. Several of the games in the pipeline are being developed for LBE use and will become available at the VR centres being rolled out globally.

Selected titles:

John Wick Chronicles Starbreeze’s first VR-dedicated production publication in cooperation with Lionsgate. John Wick was the first The game was released on Steam in February 2017 and is also available in an arcade released VR title version at the IMAX VR centre that opened in January 2017 in Los Angeles, where players can play using the StarVR HMD headset.

ElemenTerra

The second published product in the VR segment. The game is a social VR world- ElemenTerra is a social VR building puzzle game set in the midst of a cosmic disaster where the player takes on a puzzle game god-like role to assist the population of the universe by rebuilding and designing entire planets.

STORM

STORM is said to be a A project in the early stages of development with a PAYDAY meets a science fiction PAYDAY meets sci-fi game theme. STORM is a co-op shooter game being developed for PC and VR. Starbreeze has full ownership of its IP.

STARBREEZE VR GAME PORTFOLIO AND GAMES IN DEVELOPMENT Title Status Genre IP ownership STARBREEZE GAMES PAYDAY 2 (VR version) Release March 2018 Co-op, FPS, Action 100% STORM In development Co-op, FPS, Action 100% Publishing John Wick Chronicles Released Feb 2017 FPS, Action 0% The Mummy Prodigium Strike Released Jun 2017 FPS, Action, LBE 0% ElemenTerra In development Puzzle 50% The Raft In development Multiplayer, LBE 50% Hero In development Drama, Puzzle, LBE 0% APE-X In development Action, LBE 0% Project Golem In development Action, LBE 50% Source: Company data and Nordea Markets PresenZ

In 2016 Starbreeze acquired With the 2016 acquisitions of Nozon and Parallaxter, Starbreeze acquired the PresenZ the PresenZ technology that technology. PresenZ is a VR format that offers interactive parallax in 360-degree offers interactive parallax in computer graphics (CG) movies, VR content in post-production and 3D animation. It is 360-degree CG movies able to provide an immersive experience that avoids the cyber sickness often associated with the VR format. This means that the image quality of a blockbuster movie can be combined with the immersive feel of a real-time game engine.

PresenZ combines With the PresenZ technology, Starbreeze’s subsidiary Nozon can offer a complete blockbuster movie image computer hardware and content package to enable immersive 360-degree movie quality with the immersive experiences for applications ranging from marketing and promotional events to feel of a real-time game virtual rides for entertainment parks. engine

Starbreeze’s VR journey Starbreeze is a gaming company and since the launch of its VR initiative in June 2015, Starbreeze’s VR journey has it has often been questioned about the reasoning behind its move into VR, engaging been questioned by the market in hardware production and in doing so competing with tech giants such as Facebook with its Oculus Rift product.

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The company sees VR as an First, it believes that VR is one of the emerging technologies that will play an emerging technology that can increasingly important role and it wants to position itself for that development. later be expanded into the Second, it sees great potential in the B2B market and an opportunity to grab market B2B space share through its StarVR JV.

The VR journey began in June 2015 when Starbreeze announced the acquisition of InfinitEye, a French VR hardware developer that was developing a high-quality HMD prototype, which would later be developed into the StarVR HMD.

VR journey kick-started in This initial VR-related acquisition was followed by another four acquired companies 2015 and 2016 with a number during an M&A intense 2016. The first acquisition of that year was the French of selective acquisitions company ePawn in June. ePawn’s operations were primarily in positioning solutions with applications in VR and physical game pieces with their digital counterparts.

The second acquisition was that of Enterspace in July 2016, a company that develops software solutions for VR. The third and fourth acquisitions were of the Belgian companies Nozon and Parallaxter, both active in developing and commercialising the PresenZ Technology. This is a technology developed by Parallaxter that allows interactive parallax/illusory position shift in pre-rendered 360-degree videos or still pictures and VR content, as well as in post-production and 3D animation. Interactive parallax is a technique to enhance viewers’ perspective and view depth.

StarVR JV with Acer was The summer of 2016 also presented other developments as a joint venture with Acer initiated in the summer of was announced in June through the establishment of StarVR Corporation. The JV was 2016 set up with a 50-50 ownership split between Starbreeze and Acer and a capitalisation plan of up to USD 25m to be shared equally through capital injections on a set schedule. The JV was to develop, produce, market and sell the StarVR HMD that Starbreeze had acquired in June 2015 through its InfinitEye acquisition.

Acer increased its share in the The JV agreement was altered in 2017 when a new capitalisation plan for the StarVR JV as it enters a more Corporation was agreed. Under the new agreement, Acer will inject USD 5m into the resource intensive phase JV and increase its interest to 67%. Starbreeze was relieved from its remaining capital commitment of USD 7.5m and its interest decreased to 33%.

A further step in the VR journey was taken in June 2016 when a joint venture agreement was announced with IMAX with the purpose of creating a concept for location-based VR experiences under the IMAX brand. This would later be amended into a licensing agreement with Starbreeze delivering content to IMAX’s VR Centres through its StarVR corporation JV with Acer, and receiving a share of revenue in return.

Showcase VR centres in Dubai In 2017, Starbreeze made a further bet on LBE through its subsidiary Enterspace, and Stockholm in 2018 which is expected to open a VR centre in Stockholm in 2018 and already acts as the main partner for a new VR centre in one of the largest malls in Dubai. Enterspace is the main provider to the 7,000m2 VR centre for operations, installations and the main content provider through Starbreeze Studios. Starbreeze will receive 20-25% of the future net revenue. The Dubai centre will serve a flagship location for Starbreeze’s VR initiatives.

In December 2017 Starbreeze Furthermore, in December 2017, a collaboration agreement was announced with the announced a collaboration leading Japanese entertainment company SEGA Entertainment. Under the with SEGA to rollout VR in its agreement, Starbreeze’s JV StarVR will supply existing SEGA Game Centre locations game arcades throughout Japan with premium VR solutions and Starbreeze content. The collaboration will be rolled out at three locations by March 2018 and at more than ten locations by the end of the year.

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The path ahead

Starbreeze has made significant progress in its VR initiatives in recent years. Its JV Starbreeze has developed the with Acer has developed the hardware required for its location-based VR centres. In tech required for its content delivery through its StarVR JV February Starbreeze and Acer confirmed that they are looking into a potential IPO of their JV, but no decision has been taken yet.

VR centres are being rolled The VR centres have started rolling out through the partnerships with IMAX and out through the IMAX and SEGA. Partnerships such as these are where Starbreeze sees the growth in VR centres SEGA partnerships, with the being generated. The subsidiary Enterspace is lead partner for the recently opened two Enterspace centres flagship venue in Dubai and will open its first own centre in Stockholm later in the serving as showcases for the year. It will operate its centres as showcases for the LBE concept and does not LBE concept currently plan to open additional centres.

As commercial activities are As these activities are being ramped up, the business area is moving closer to a being ramped up, Starbreeze break-even point after several years of heavy investment. As the company has will be able to capitalise on successfully developed technology to enable premium VR content, this allows it to earlier investments launch and leverage its strong IPs, such as PAYDAY, on all entertainment platforms. It also gives it an opportunity to utilise its expertise and expand its publishing portfolio with new VR games.

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Historical financials Starbreeze increased its sales by more than 10x for the LTM period between Q1 2013 and Q4 2017. A vast majority of historical sales is derived from own game development and the successful PAYDAY franchise. In 2015, operations were expanded to include a publishing business line, which has boosted sales after the release of the multiplayer horror game Dead by Daylight in Q2 2016. Profitability has been more sluggish due to strategic investments in long-term growth initiatives and emerging technologies. In 2017, Starbreeze reported net sales of SEK 361m and EBITDA of SEK -54m.

Group financials Sales have increased by more Starbreeze has experienced a period of rapid sales growth in the past few years than 10x in four years driven by the PAYDAY franchise and a successful execution on the “games as a service” concept, which has kept sales at a high level even a few years after the launch of the games. Between 2012 and 2016, sales increased by more than 10x, with EBITDA improving from SEK -20m to SEK 81m. This translates into an EBITDA margin expansion from -63.7% to 23.5% in the same period.

Profits have been reinvested In 2017, Starbreeze reported net sales of SEK 361m and EBITDA of SEK -54m. in product development and Profitability has been hampered by strategic investments in game and product emerging technologies development, as well as building new business lines such as VR and a publishing platform.

NET SALES DEVELOPMENT (CALENDERISED) LTM SALES DEVELOPMENT

400 450 400 350 350 300 300 250 250 200 200 SEKm SEKm 150 150 100 100 50 50 0 0 CY12 CY13 CY14 CY15 CY16 CY17 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17

Source: Company data and Nordea Markets Source: Company data and Nordea Markets EBITDA EBITDA MARGIN

160 100% 80% 120 60% 80 40% 20% 40

SEKm 0% 0 -20% -40% -40 -60% -80 -80% CY12 CY13 CY14 CY15 CY16 CY17 CY12 CY13 CY14 CY15 CY16 CY17

Source: Company data and Nordea Markets Source: Company data and Nordea Markets

Number of employees has The number of employees has steadily increased and there has been an accelerating more than doubled in the past pace of new hires in the past year. The drastic increase in 2017 is largely explained by year the acquisition of Indian production company Dhruva but also by staff additions in Stockholm to support game development. At the end of Q4 2017, Starbreeze had 650 employees versus 212 employees in the same period last year.

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AVERAGE NUMBER OF EMPLOYEES SALES PER EMPLOYEE

300 6.0

250 5.0

200 4.0

150 3.0 SEKm 100 2.0

50 1.0

0 0.0

Source: Company data and Nordea Markets Source: Company data and Nordea Markets Group cost structure

Operational costs have been ramped up significantly in 2016 and have continued to Publishing sales are reported increase in 2017. However, one notable difference in the income statement compared on a gross basis, while royalties paid to external with previous years is linked to the establishment of the publishing business. All developers are included in revenues related to the game rights accrue to Starbreeze and are reported on a gross other external expenses basis, before profit share to external developers. These payment streams are instead recorded as “other external expenses,” which increases the cost base. In 2017, royalties amounted to SEK 98m compared with SEK 64m and zero in 2016 and 2015, respectively.

Another major cost driver is purchased services for game development, which reflects Purchased services for game the significant investments made in growth initiatives in recent years. All business development has surged lines are in an expansive phase, but the pace of increased investments has levelled off thanks to recent growth on a sequential basis. In 2017, purchased services for game development amounted to initiatives SEK 174m compared with SEK 98m in 2016. Office costs are also up by 83% in the same period, although it is a rather minor expense compared with other items.

Personnel costs are also up by 55%, which reflects the higher number of employees.

OPEX DEVELOPMENT OPEX BREAKDOWN

200 200

160 160

120 120 SEKm 80 SEKm 80

40 40

0 0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2015 2016 2016 2016 2016 2017 2017 2017 2017 2015 2016 2016 2016 2016 2017 2017 2017 2017 OPEX development Royalties Purchased services Offices Other Personnel costs Source: Company data and Nordea Markets Source: Company data and Nordea Markets< Cash flow items

Cash flow from operations is lumpy, which is a natural consequence of the Cash flow is lumpy due to dependence on major game releases with front-end loaded earnings contribution. front-end loaded earnings contribution in connection There is also some seasonality, with weaker cash flows during the summer when with major game releases typically fewer games are released. In Q4 2017, Starbreeze had an operational cash flow of SEK -44m.

Marketing material commissioned by Starbreeze 61 Starbreeze 6 March 2018

CASH FLOW FROM OPERATING ACTIVITIES

80

60

40

20

SEKm 0

-20

-40

-60 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Cash flow from (-used in) operating activities

Source: Company data and Nordea Markets

Cash flow from operations The majority of cash flow from operations has been reinvested in growth initiatives to has been reinvested in the build the pipeline and pave the way for its SEK 2bn revenue target in 2020. games platform Investments include own game development, the StarVR venture and funds used to build the publishing platform. It has also made a number of selective acquisitions. Increased growth initiatives Starbreeze has financed the step-up in growth investments through a combination of have been financed by a new equity and debt. The spikes in non-current liabilities refer to the convertible loans combination of equity and to Acer and Smilegate. In Q3 2017, the company received an operating loan from debt Nordea, which increased cash reserves by SEK 100m.

CASH FLOW FROM INVESTING ACTIVITIES CASH FLOW FROM FINANCING ACTIVITIES

0 500 -40 400 -80 300 -120 SEKm SEKm 200 -160

-200 100

-240 0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2015 2016 2016 2016 2016 2017 2017 2017 2017 2015 2016 2016 2016 2016 2017 2017 2017 2017 Cash flow from (-used in) investing activities Cash flow from financing activities New issue Investment in capitalized expenditure for games development Increase in non-current liabilities Source: Company data and Nordea Markets Source: Company data and Nordea Markets

CASH AND CASH EQUIVALENTS

800

700

600

500

400 SEKm 300

200

100

0 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Cash and cash equivalents Source: Company data and Nordea Markets Capex and working capital

Starbreeze continuously invests in game and product development, to ensure a Starbreeze has invested steady flow of high-quality games that could result in future cash flows attributable

Marketing material commissioned by Starbreeze 62 Starbreeze 6 March 2018

heavily in its games pipeline to its shareholders. The company is activating part of its costs related to its own development projects, including OVERKILL’s The Walking Dead and Geminose, as Costs are capitalised when well as the StarVR development project. This is stated as capitalised development the game is deemed “first work in the income statement. Costs are capitalised once the product has reached a playable” stage where it is possible to evaluate its commercial viability, referred to by Starbreeze as “first playable.”

Development of individual downloadable content (DLCs) does not fulfil the Games are normally deemed to have a useful life between requirement and are therefore fully expensed. Amortisation starts upon launch based 1.5-3 years on its “useful life,” which is usually between 18 to 60 months. One example is PAYDAY 2, which upon launch in 2013 was deemed to have a useful life of 1.5 years, although the game still has meaningful sales four years after launch. Investments in publishing projects are also recorded in the balance sheet, but it is not included as capitalised development work and only affects cash flow. Therefore, we argue that the cash flow statements provide the best proxy for total investments in

games.

Net working capital need is Tangible capex consists of computers that are depreciated on a straight line basis basically zero over three years, while other equipment is depreciated over five years. The net working capital need is limited, as the company does not hold any inventory and accounts payable and receivables are more or less matched.

CAPEX

180 200%

160 180%

140 160% 140% 120 120% 100 100%

SEKm 80 80% 60 60% 40 40% 20 20% 0 0% Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Tangible capex Intagible capex capex to sales Source: Company data and Nordea Markets

TOTAL INVESTMENT IN GAMES TOTAL INVESTMENT IN GAMES (QUARTERLY)

500 120% 140 120 400 100% 100 180.2 80% 49 300 54 80 42 60% 35 SEKm 200 SEKm 60 14 40.4 40% 40 23 0 100 231.9 3 67 17.1 154.5 20% 6 53 50 57 58 20 39 78.4 26 29 34 0 0% 0 2015 2016 2017 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Publishing projects Capitalised development costs 2015 2016 2016 2016 2016 2017 2017 2017 2017 Total investments to sales Capitalised development costs Publishing projects Source: Company data and Nordea Markets Source: Company data and Nordea Markets Balance sheet items Starbreeze’s balance sheet has grown significantly in the past two years with total Balance sheet has grown assets of SEK 2.5bn at the end of 2017, compared with SEK 568m at the end of significantly in the last two years calendar year 2015. The main driver is an increase in intangible assets as result of investments in future growth via acquisitions and capitalised expenditure for games Main driver is growth in and technology development. As of Q4 2017, goodwill, other non-current assets (IP

Marketing material commissioned by Starbreeze 63 Starbreeze 6 March 2018

intangible assets and Technology) and capitalised development costs comprised about a third each of the intangible asset base.

PPE consists of computer and other equipment, while financial assets include investments in StarVR joint venture, deferred tax assets and other financial assets.

ASSET COMPOSITION

3,000

2,500

2,000

1,500 SEKm

1,000

500

0 2012/13 2013/14 2014/15 2015 2016 2017 Intangible assets Financial assets Property, plant and equipment Current assets

Source: Company data and Nordea Markets Financing structure consists Starbreeze’s investments have been financed by a combination of equity and debt. of a combination of equity, Non-current liabilities amounted to SEK 984m at the end of Q4 2017 and consists of convertible bonds and loans deferred tax liabilities, acquisition related earnouts and loans. The largest component is tied to a ten-year earnout which is activated through licensing revenue from the use of the PresenZ technology.

Non-current liabilities mainly consist of loans, including convertible bonds from Acer Starbreeze has two and Smilegate. Acer issued a SEK 76m bond in September 2016 with 1% accrued outstanding convertible bonds with Acer and interest, a two-year maturity and conversion to class B shares at a price of 17.82. A Smilegate maximum of 4.2 million class B shares can be added through conversion. The convertible loan from Smilegate has a nominal value of SEK 215, 2% interest, conversion price of SEK 13.49 and matures in February 2020.

EQUITY AND LIABILITIES

3,000

2,500

2,000

1,500

1,000

500

0 2012/13 2013/14 2014/15 2015 2016 2017 Total equity Total non-current liabilities Total current liabilities Source: Company data and Nordea Markets Financials per business area Starbreeze has started a transformation journey from a pure game developer to a Starbreeze has diversified its provider of entertainment experiences in a broader sense. This is illustrated through operations by introducing the Publishing and VR segments the establishment of the new business lines, Publishing and VR. Dead by Daylight was the first successful game released through Starbreeze’s publishing platform and has contributed materially to net sales since Q2 2016. It has added stability and diversity to the revenue profile, which historically has been dominated by the PAYDAY franchise.

Marketing material commissioned by Starbreeze 64 Starbreeze 6 March 2018

Starbreeze Games Starbreeze has been successful in extending the lifetime through its “game as a PAYDAY 2 is still having a service concept” and the PAYDAY franchise generated SEK 22.2m in Q4 2017 major impact on net sales compared with SEK 37.9m in the same period last year.

Development costs have Development and operating costs have been ramped up in recent quarters, primarily ramped up as OTWD and driven by higher activity in OVERKILL’s The Walking Dead as well as a more intensive Crossfire are in intensive production phase for Crossfire. phases of production

STARBREEZE GAMES' REVENUE STARBREEZE GAMES' OPERATING COSTS

70 100 60 80 50 40 60 30 SEKm SEKm 40 20 20 10 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 2016 2016 2016 2016 2017 2017 2017 2017 Net sales Capitalised development costs Operating costs Source: Company data and Nordea Markets Source: Company data and Nordea Markets Publishing

Revenue in the publishing business area is mainly derived from royalties for the rights Revenue in Publishing mainly to Dead by Daylight. Net sales were SEK 74.6m in Q4 2017, SEK 67.6m of which was derives from the game Dead by Daylight from Dead by Daylight. In Q2 2017, Starbreeze received a royalty payment of SEK 22m for the physical console rights of the game.

The release of RAID: World War II (26 September 2017) has so far been a The release of RAID: World disappointment. It has earned sales of only SEK 1.7m in Q4 2017 and Starbreeze is War II has so far been a working closely with the studio to tweak and improve the game. Note that Starbreeze disappointment received a royalty of SEK 32.5m for the physical console version of the game in Q3 2016.

The increased costs compared with the previous year are mainly related to further development costs for Dead by Daylight, royalties to partners and negative FX effects.

PUBLISHING'S REVENUE PUBLISHING'S OPERATING COSTS

100 120

80 100 80 60 60

SEKm 40 SEKm 40

20 20

0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 2016 2016 2016 2016 2017 2017 2017 2017 Net sales Capitalised development costs Operating costs

Source: Company data and Nordea Markets Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze 65 Starbreeze 6 March 2018

ROYALTIES ROYALTIES TO SALES

40 60% 35 50% 30 25 40% 20 30% SEKm 15 20% 10 5 10% 0 0% Q2 2016Q3 2016Q4 2016Q1 2017Q2 2017Q3 2017Q4 2017 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Royalties Royalties to sales Source: Company data and Nordea Markets Source: Company data and Nordea Markets VR Tech and Operations

The business area consists of VR technology and software development, including the Technologies have not StarVR headset and VR movie format PresenZ. Revenue and costs for VR centres are reached the commercial phase yet also included as of Q3 2017, while the JV with Acer is recorded as financial income (expense) after the most recent transaction.

Costs have been high due to The first revenues for the business area were recorded in Q4 2017. These primarily the ramp-up of VR centres consisted of license revenues from various technologies and revenues generated by and development activities VR centres. Costs for the VR Tech segment have been high due to the construction of for the StarVR headset VR centres in Dubai and Stockholm, as well as higher development activity for the StarVR headset.

VR TECH'S REVENUE VR TECH'S OPERATING COSTS

25 30

25 20 20 15 15 SEKm SEKm 10 10

5 5

0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 2016 2016 2016 2016 2017 2017 2017 2017 Net sales Capitalised development costs Operating costs

Source: Company data and Nordea Markets Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze 66 Starbreeze 6 March 2018

OVERKILL’s The Walking Dead The release of OVERKILL’s The Walking Dead is estimated to be the main short-term driver of sales for Starbreeze. We expect the game to generate sales from copies sold of SEK 1.2bn over its first nine quarters, starting in Q4 2018. The addition of DLC sales will extend the lifetime of the game and enable games as a service. We assume that the DLC conversion and pricing of DLCs will decline gradually but DLC releases still have substantial revenue generation potential as we expect the player base to see continuous growth over time as a result of dynamic pricing. A successful release could pave the way for a PAYDAY dynamic with a potential sequel building on the success and established fan base of the first game.

Considerable upside in OTWD sales

In our base case, we assume that The Walking Dead (TWD) will net sales from copies More than 40% of revenue sold of around SEK 1.3bn over nine quarters, starting in Q4 2018. Most revenue from from copies sold comes in the first period after release titles sold is generated in the first quarter after release, amounting to just above 40%, according to our estimates, whereas the second period accounts for 20%. This exemplifies concentration of sales around the release of the game, and then the plunge thereafter. AAA games typically enjoy a full price for some time, after which point the price decreases by 20-50%. In Q2 2019, we factor in a discount of 33%, which leads to another hike in generated revenue.

THE WALKING DEAD'S SALES DISTRIBUTION FROM COPIES SOLD 50%

41.9% 40%

30%

19.8% 20%

12.0% 9.4% 10% 6.7% 4.1% 3.7% 1.7% 0.8% 0% Q418E Q119E Q219E Q319E Q419E Q120E Q220E Q320E Q420E TWD Sales (Copies) Source: Nordea Markets Declining price will sustain Given how prices fall after the release, thereby fuelling demand, we assume that demand, translating into OTWD will shift a considerable number of copies for a long time. As highlighted in the continuous growth in the chart below, the number of accumulated copies continues to grow at a high rate. Note accumulated owner base that this is not net sales.

By the end of the lifetime for the revenue generation from copies sold, we assume the price to be 5-17% of the original sales price. Given the large discount to the launch price, we still assume that the owner base will continue increasing.

Marketing material commissioned by Starbreeze 67 Starbreeze 6 March 2018

COPIES SOLD, ACCUMULATED COPIES AND PRICING 4.0 8

3.5 7

3.0 6

2.5 5

2.0 4

1.5 3

1.0 2

0.5 1 Copies sold per quarter, in in millions quarter, per sold Copies Accumulated copies, in millionsin copies,Accumulated

Q418E Q119E Q219E Q319E Q419E Q120E Q220E Q320E Q420E Acc. copies Sold per quarter Price

Source: Nordea Markets DLCs extend game lifetime and enable games as a service

Starbreeze’s biggest success to date is PAYDAY 2, released in 2013. As with other Games as a service concept titles, PAYDAY 2 generated most of its revenue from copies sold at the start, but the with DLC content will keep revenues coming years after game still generates a lot of revenue from downloadable content (DLC). At one point, initial game release Starbreeze even gave away five million copies for free to expand the owner base, to which it could later sell additional DLCs.

In contrast to a classic game release, we assume that the largest revenue generation We assume that the largest from DLCs comes later in the lifetime of the game. If DLCs are released too close to revenue generation from the initial launch while fully priced copies are still netting a lot of revenue, it might DLCs comes later in the restrain new sales from the game copy revenue channel. We believe that DLCs will lifetime of a game as the generate healthy revenue from the first rollout, but we argue that it actually has player base grows due to the greater revenue generation power towards the end of the game’s lifetime. This is dynamic pricing of the title possible thanks to the capitalisation on the large player base. As we have highlighted above, we believe that the number of owners will increase largely due to the dynamic pricing of the title. We estimate that the owner base could approach 8 million compared with the ~3 million at the release of the first DLC.

THE WALKING DEAD'S SALES DISTRIBUTION FROM DLC'S 20% 18.8% 17.1% 16.5% 15.5% 16% 14.8%

12% 9.4% 7.9% 8%

4%

0% Q219E Q319E Q419E Q120E Q220E Q320E Q420E TWD Sales (DLC) Source: Nordea Markets

Revenue streams appear Grouping these two, ie copies sold and DLCs, together, we get a completely different more spread out when split. Due to the nature of peak sales in gaming, the spike in revenue is still the including DLC sales, although greatest upon launch, but the revenue streams appear more spread out when the front-loaded nature of the including DLCs. We still believe that OTWD will be able to net decent revenue even distribution remains after 2020, but from there and beyond, we do not model it separately.

Marketing material commissioned by Starbreeze 68 Starbreeze 6 March 2018

THE WALKING DEAD'S SALES DISTRIBUTION FROM COPIES SOLD AND DLC'S 40% 35.2%

30%

20% 16.6% 13.1% 9.1% 10% 8.3% 5.8% 5.6% 4.0% 2.2%

0% Q418E Q119E Q219E Q319E Q419E Q120E Q220E Q320E Q420E TWD Sales (Copies & DLC) Source: Nordea Markets DLC conversion

The chart below outlines our view on what future DLC launches may look like. To We believe DLC conversion reach success in this revenue stream, a careful strategy on pricing, marketing and will reach a peak of 16% early on and subsequently decline, manipulation needs to be undertaken. In the first period after a DLC is launched, but success in this regard which we assume would be around six months after the release of the game, what we rests on a careful strategy on refer to as DLC conversion will be high at 16%, which is the share of the owner base pricing and marketing that decides to purchase the first DLC. We further assume that the DLC conversion will decline steeply over time, while the economics grow stronger given the increase in the player base. This means that a lower conversion rate later on in the game’s lifetime can still generate decent returns.

DLC CONVERSION RATE 10 50%

8 40%

6 30%

20% In millions In 4 16% 15% 12% 9% 8% 2 7% 6% 10%

0% Q418E Q119E Q219E Q319E Q419E Q120E Q220E Q320E Q420E Copies sold DLC Conversion Source: Nordea Markets

The pricing of DLC will be As with the dynamics of a game launch, we believe that the price of the first DLC will highest in the first quarters be the highest, after which the price point declines substantially. We also assume that and then gradually decline the first DLC will consume the most production costs due to our assumption that the first DLC will also be the most content rich– much like a new game in the same framework. After the first DLC, we assume that the content in the future releases will more likely include in-game skins, weapon packages and smaller updates. These tend to have a very low price point, but also limited development costs.

Marketing material commissioned by Starbreeze 69 Starbreeze 6 March 2018

DLC'S RELEASED PER QUARTER AND PRICE PER DLC 8

7

6

5

4

3 Amount and price and Amount 2

1

0 Q219E Q319E Q419E Q120E Q220E Q320E Q420E DLC'S DLC Price (USD) Source: Nordea Markets The chart below summarises our sales estimates for Starbreeze’s DLCs.

DLC'S SALES DISTRIBUTION IN ABSOLUTE FIGURES

50 45 40 35 30 25 SEKm 20 15 10 5

Q418E Q119E Q219E Q319E Q419E Q120E Q220E Q320E Q420E DLC Sales Source: Nordea Markets The impact big releases have on revenue Capitalised development The chart in this section shows what kind of impact a major game release can have on costs build up prior to a the financials. Capitalised development costs build up ahead of a release and then launch and then drop drop considerably. This is the same for net sales, which spike when the game hits the considerably with the release market and usually have a second, smaller spike when the game is discounted. Over of the game, at which point time, we believe that there will be more stability in Starbreeze’s financials when its IP sales spike portfolio and publishing deals grow, but there will always be a swing factor present.

NET SALES AND CAPITALISED DEVELOPMENT COSTS 700 140

600 120

500 100

400 80

SEKm 300 60 SEKm

200 40

100 20

Net sales Capitalised development costs Source: Nordea Markets

Marketing material commissioned by Starbreeze 70 Starbreeze 6 March 2018

The reasoning behind our estimates

There are several factors that lay the foundation for our assumptions on how much The popularity of The OTWD will net. In order to reach our estimates, we look at the popularity and viewers Walking Dead TV series, the Telltale Stories and the Left 4 of The Walking Dead TV series, the Telltale Stories, a game based on The Walking Dead series underpin our Dead (note, however, that the genre is completely different) and other video games. estimates of OTWD sales When benchmarking Starbreeze’s upcoming release to other titles, we regard Left 4 Dead and its sequel as the closest comparables, and both of these have an owner base of ~24 million. Based on what we know from OTWD, we believe this title is a newer, hotter and more story-driven version of the Left 4 Dead franchise.

There are other popular titles in the zombie FPS genre, including Dying Light, DayZ, Dead Island and the Resident Evil series.

For more details on our estimates, please see our section ‘Business area – Games’, where we outline the rationale behind our OTWD estimates more thoroughly.

Why a delay is negative, but not critical

The Electronic Entertainment Expo, usually abbreviated as , is the biggest annual Starbreeze will likely event in the gaming industry, with around 70,000 attendees last year. It has been announce the release of OTWD at E3, and expo usually running annually since the 1990s, and is a forum for new game releases and major held in the second week of announcements. We believe that Starbreeze will likely announce the release date for June OTWD at E3, which is usually held in the second week of June. Furthermore, we assume that the game will hit the shelves in Q4 2018. This would not be an unlikely scenario as many major game releases follow this pattern of Q4 releases. Q4 is a crucial period for AAA titles and major game releases, especially when the Q4 is a crucial period for holidays are closing in. Many large publishers want to create hype for their game and major game releases then want to release ahead of the holiday season, when consumer spending is at a very high level. On the other hand, the cost for marketing is also the highest here and

game titles face stiffer competition, as many titles hit the market at the same time. A studio with a low budget could profit more by releasing its game well before the “big

season” as it can attract more attention that way.

The success of any specific How big of a hit a game becomes can also depend on the market it enters and the game can depend on the other releases it has to compete with. Some years stand out with many games market it enters and the other garnering critical acclaim, such as in 1998 and 2007, while other years have had releases it has to compete several titles that flopped – as in 2014. Without knowing the quality of competing with games, having the luck to release a game during a quieter year would be beneficial. There is no right or wrong way as to when a game should be released as different times of the year have varying benefits and disadvantages and require different strategies.

We would regard it as negative if OTWD was delayed, not because it would net lower We see a delay in OTWD as a sales, but because of the additional cost it brings for development. In some cases, if negative due to the additional the delay is significant, the graphics could become outdated. Another factor could be development costs a delay that the hype fades – as of now, the battle royale genre is extremely popular. If a would entail battle royale game were to be released in 2020 as opposed to now, the game could net lower sales. Lastly, some gamers may simply choose to purchase another title during the wait.

Marketing material commissioned by Starbreeze 71 Starbreeze 6 March 2018

Success opens up for a sequel

Success for OTWD opens up Similar to the development of the PAYDAY franchise, a successful release of OTWD for a development similar to would pave the way for DLC releases that could keep the title generating revenue for that of PAYDAY, opening up years and also open up for a sequel. As a comparison, PAYDAY 2 has to date for a sequel with an generated sales of more than SEK 700m compared with the SEK 100m generated by established fan base to build its predecessor PAYDAY: The Heist. Starbreeze was able to build upon the success of upon the first PAYDAY game and its established fan base, and expand it to a wider audience, generating substantially higher sales in the process.

The establishment of a new strong franchise with a dedicated fan base, where OTWD has a good starting point considering the popularity of the TV show, would thus put Starbreeze in a good position to diversify its revenue streams and profit from the popularity of OTWD for years to come.

Marketing material commissioned by Starbreeze 72 Starbreeze 6 March 2018

VR estimates The novelty of VR technology, the as of yet unproven concept of location-based entertainment as a VR delivery path and the resulting lack of track record for Starbreeze’s VR business offer challenges when estimating the business potential. We expect the business area to continue to be a drag on short-term profitability, but given a successful validation of the LBE concept, revenue could quickly ramp up and, given the scalability of content sales, add meaningful margin-enhancing contributions to the company’s bottom line.

VR business potential

The potential revenue that can be generated from the VR Tech business area is Difficult to estimate the difficult to estimate as the technology is quite novel and the concept of location- business potential in VR as it is a novel technology and the based VR centres - Starbreeze’s chosen path of delivering VR - is still in its infancy. LBE concept is still not proven Both IMAX and SEGA are currently offering VR at only a small number of locations and are cautious in their communication about VR initiatives as they are still seen as pilot projects. StarVR JV has potential, but it We believe that the StarVR joint venture with Acer has solid potential and, given that is likely to have a limited the LBE concept for VR is validated, Starbreeze should start to see positive contribution during our contributions from the business area in a few years, even though these contributions forecast period will be limited during our forecast period.

We assume a 25% revenue In our estimates of the profit potential of the business area, we assume that a VR share for the IMAX and SEGA centre on average has an annual attendance of 75,000 visitors and that these pay an collaborations average price of SEK 80 for their VR experience. Our research indicates that a standard collaboration agreement implies an equal split between content provider, hardware provider and location owner. Using the lower range of the 20-40% interval that the standard split implies, we assume that the collaboration deals with IMAX and SEGA have a 25% revenue share for Starbreeze as content provider. As this revenue is content-related, it will be booked in the Publishing and Starbreeze Games business areas, with an assumed 70/30 split between these. We estimate that the Publishing revenue will see a 50% royalty share to the IP owners.

We assume a 75% revenue For the Enterspace VR centres, ie the just opened Dubai VR Park and the forthcoming share for the Enterspace VR Stockholm VR centre, we assume that Starbreeze captures 75% of revenue on centres and see its VR centres average. This is a result of our belief that Starbreeze’s focus is on content. Therefore as showrooms; IMAX and we do not expect to see further Enterspace VR centres and regard the Dubai and SEGA will drive VR centre Stockholm centres as showrooms for the LBE concept. We see the value driver in VR additions from a rollout of IMAX and SEGA VR locations, with potential upside from further similar deals.

We assume that StarVR JV For the StarVR JV, where the primary driver of income will be sales of the StarVR will gradually reach a long- HMD headset to the VR centres, we assume that a VR centre on average is open 350 term EBIT margin of 30% in days a year, 12 hours a day and that an experience lasts 10 minutes. With a utilisation 2022E rate of 50% for each headset this implies a capacity of 12,600 hours per headset. We assume that the joint venture will have an EBIT margin of 10% in 2018, which gradually rises to an assumed long-term margin of 30% in 2022. The earnings contribution from StarVR is reported in Starbreeze’s financial items.

We base our analysis on the The number of VR centres drives revenue for Starbreeze both directly through the rollout of new VR centres by IMAX and SEGA collaborations and the Enterspace subsidiary but also indirectly IMAX and SEGA through the StarVR joint venture and its sales of headsets to the VR locations.

Marketing material commissioned by Starbreeze 73 Starbreeze 6 March 2018

VR CENTRES ROLLOUT SCENARIO 2018E 2019E 2020E 2021E 2022E 2023E IMAX 41220283337 Sega 42035607590 Enterspace222222 Total 10 34 57 90 110 129 Source: Nordea Markets

Our base case implies a The economies of scale in content provisions mean that a successful rollout of VR revenue contribution of SEK centres could generate substantial margin-enhancing contributions to Starbreeze’s 190m in 2023 to Starbreeze top line. In our base case the revenue potential from content sales in 2023 could be Games and Publishing about SEK 190m.

With the VR Park in Dubai just opened and the Stockholm VR centre fortcoming, we VR centres to provide useful await additional news from these locations with great anticipation as they should data points during the year start generating valuable data points in a few months’ time. This data could increase visibility on the assumptions underlying our estimates.

VR REVENUES

200

160

120

SEKm 80

40

2018E 2019E 2020E 2021E 2022E 2023E Sales to Publishing Sales to Starbreeze Games

Source: Nordea Markets Upside potential for the VR In addition to the VR centres, which we expect to offer the greatest potential for sales technology to see contribution in the short term, there is upside from the potential of applying VR applications other than VR technology in other industries. As mentioned in the VR market overview (see section centres in the longer term Business area: VR Tech & Operations), there is potential in both B2B and B2C markets for VR to play a growing role and if Starbreeze is able to capitalise on such developments, there is upside potential to our estimates. Given the lack of visibility and the longer-term nature of these kinds of revenue streams, we do not account for this potential in our current estimates.

Marketing material commissioned by Starbreeze 74 Starbreeze 6 March 2018

Estimates After several years of investments, we believe Starbreeze is about to enter a harvesting period. For the period between 2017 and 2023, we estimate a revenue CAGR of 29%, aided by several major game releases. We expect EBITDA to improve from SEK -54m in 2017 to SEK 758m in 2023E , due to the scalable nature of the business. In 2021, we expect Starbreeze to reach peak sales of SEK 2.6bn, after the release of the much awaited PAYDAY 3 game, which is by far its most important game franchise to date.

Major game releases set to We believe that Starbreeze could deliver revenue CAGR of 29%, aided by major game drive growth releases during 2017-23E. The main contribution will derive from its own game development, including AAA titles such as The Walking Dead and PAYDAY 3. We also believe that recently signed publishing projects, such as System Shock 3, could have a meaningful earnings impact over the coming years. The lumpy sales pattern on a quarterly basis reflects the nature of the games industry, with the majority of sales made upon the initial release of a game.

ESTIMATED NET SALES ESTIMATED SALES PER QUARTER

3,000 1,200

2,500 1,000 800 2,000 600 1,500 SEKm

SEKm 400 1,000 200 500 0 0 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Net sales Quarterly net sales Source: Company data and Nordea Markets Source: Nordea Markets

Software sales are highly We estimate that the revenue CAGR of 29% could result in an EBITDA increase from scalable, implying improving SEK -54m in 2017 to SEK 758m in 2023E , which illustrates how well the business margins model scales. For 2021, we estimate peak EBITDA of SEK 1,378m, implying an EBITDA margin of 52.2%, versus an EBITDA margin of -14.8% in 2017 and 23.5% in 2016. The margin boost illustrates how the company gains from its earlier efforts to build a strong games pipeline.

ESTIMATED EBITDA ESTIMATED EBITDA MARGIN

1,500 60%

1,200 40% 900

600 20% SEKm

300 0%

0 -20% -300 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E EBITDA margin EBITDA Source: Company data and Nordea Markets Source: Company data and Nordea Markets Group costs Adjusted for royalties, we expect external costs in 2018 to remain high and peak upon Costs are highest in the final the launch of OVERKILL’s The Walking Dead. For the subsequent years, we expect phases of games development costs to gradually move up again thanks to the late-stage development activities of Project Crossfire and later PAYDAY 3, which we expect to be released during 2021. In

Marketing material commissioned by Starbreeze 75 Starbreeze 6 March 2018

absolute terms, external costs will peak in 2021E as Starbreeze reports include royalties paid to intellectual property holders.

OTHER EXTERNAL EXPENSES OTHER EXTERNAL EXPENSES TO SALES 1,200 140%

1,000 120% 100% 800 80% 600

SEKm 60% 400 40%

200 20%

0 0% 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Adj external costs Royalties External costs to sales Source: Company data and Nordea Markets Source: Company data and Nordea Markets

PERSONNEL COSTS PERSONNEL COSTS TO SALES

400 80%

300 60%

200 40% SEKm

100 20%

0 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 0% Personnel costs 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Personnel costs to sales Source: Company data and Nordea Markets Source: Company data and Nordea Markets Cash flow items

After several years of investments, we expect Starbreeze to capitalise on its earlier Cash flows to improve during efforts. In 2018, we estimate free cash flow before acquisitions and divestments of second half of 2018 SEK 42m compared to SEK -582m in 2017. The improvement is largely explained by the release of The Walking Dead during the second half of this year. In terms of Capex is mainly related to capex, we expect a normalisation, albeit at a continued high level. We estimate capex capitalised expenditure for to sales of about 12-34% throughout our forecast period. The vast majority of the games development expenditure (about 90%) relates to investments in games development, in order to ensure the steady flow of high-quality games.

FREE CASH FLOW CAPEX TO SALES

1,200 160%

800 120%

400 80%

SEKm 0 40% -400

0% -800 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Intagible capex to sales Tangible capex to sales FCF before A&D Source: Company data and Nordea Markets Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze 76 Starbreeze 6 March 2018

Financial forecasts per business area In our financial forecasts, our key assumptions for each game include its price and the Key assumptions in the units sold during each period. The prevalent sales model in the gaming industry financial forecasts for each makes modelling Starbreeze’s future revenue more challenging than for many other game relate to price and the companies. The standard is to use revenue share models where distributors, IP units sold during each period owners and possibly other stakeholders each receive a share of a game’s gross revenues, sometimes using complicated reimbursement formulas to recoup initial

investments. This causes the revenue shares to vary over the lifetime of a game.

Revenue share models can be In the table below, we demonstrate the revenue share model for OTWD for the digital complex and involve multiple PC channel that we apply for our estimates. We make further assumptions regarding stakeholders, each with a the distributor’s cut (Steam for the digital PC channel) and the IP’s cut (Skybound and claim on revenue game engine owner) to arrive at the share of revenue for each unit sold that is attributable to Starbreeze.

The retail channel, which only accounted for 10% of sales in Q4 2017, yields a lower revenue share owing to a higher cut for physical distributors than the digital ones. This is partly a function of the higher distribution costs associated with the retail sales channel. Revenues for Starbreeze’s own games are reported after Steam’s cut, while IP and engine royalties are recorded as other external expenses.

REVENUE SHARE MODEL - OVERKILL'S THE WALKING DEAD Distribution channel: PC Price (USD) 59.90 VAT 15.0% Revenue after VAT 50.92 Steam cut (Post VAT sales) 30.0% Revenue post Steam 35.64 IP Cut (Skybound & game engine) 30.0% Revenue post IP 24.95 Revenue attributable to Starbreeze (Pre VAT) 59.5% Revenue attributable to Starbreeze (Post VAT) 70.0% Source: Nordea Markets Starbreeze Games Our forecasts for the Starbreeze Games segment are built on its three major pipeline Our forecasts are based on projects: OVERKILL’s The Walking Dead, Project Crossfire and PAYDAY 3. We Starbreeze’s major pipeline games estimate that OTWD will be released during Q4 2018, while we expect Project Crossfire to be released in Q2 2020, followed by PAYDAY 3 in Q2 2021. Our estimates imply peak sales of SEK 1.87bn in 2021 upon the release of PAYDAY 3, which implies a We expect a meaningful sales CAGR of 98% (2017-21E). We expect costs to level out at the 2018E level improvement in sales based (adjusting for royalty payments). We note that 505 Games will retain a 33% revenue on three major games releases share of Starbreeze’s net revenues from PAYDAY 3, which are capped at USD 40m and will be paid after Starbreeze’s marketing and development costs have been fully recouped.

STARBREEZE GAMES' SALES STARBREEZE GAMES' OPERATING COSTS

2,000 1,200

1,600 900

1,200 600 SEKm 800 SEKm

300 400

0 0 2016 2017 2018E 2019E 2020E 2021E 2016 2017 2018E 2019E 2020E 2021E Net sales Capitalised development costs Operating costs Source: Company data and Nordea Markets Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze 77 Starbreeze 6 March 2018

ESTIMATED SALES FROM MAJOR PIPELINE PROJECTS SEKm 2018E 2019E 2020E 2021E 2022E 2023E The Walking Dead 529 745 229 0 0 0 Crossfire 0 0 661 46 2 0 PAYDAY 3 0 0 0 823 498 208 VR 11425404957 Source: Nordea Markets OVERKILL’s The Walking Dead We expect Starbreeze’s own games development to be the key growth driver in 2018, We expect Starbreeze to set a aided by the release of OVERKILL’s The Walking Dead during Q4. We expect it to sell premium price for OVERKILL’s The Walking at a premium price of USD 59.90, putting it head-to-head with other AAA games. At Dead that price point, we see potential to sell a total of 1.9 million copies across all platforms during the first three months. Starbreeze has not revealed the terms of the royalty agreement with Skybound besides that it is a standardised deal, which indicates about 20-30% royalties to the IP holder. We assume 25% in royalties, which is recorded as other external expenses in the income statement. During the full game life, we expect over 7.7 million copies to be sold and the first A thorough review of our DLCs to be released in Q2 2019. Below we include a sensitivity check illustrating the OTWD estimates is provided lifetime sales potential with +/- 10% changes in the price and number of copies sold. in the preceding section A more in-depth discussion about our underlying assumptions is provided in the “The Walking Dead” section of the report.

COPIES SOLD, ACCUMULATED COPIES AND PRICING 4.0 8

3.5 7

3.0 6

2.5 5

2.0 4

1.5 3

1.0 2

0.5 1 Copies sold per quarter, in millions in quarter, per sold Copies Accumulated copies, in millions in copies, Accumulated

Q418E Q119E Q219E Q319E Q419E Q120E Q220E Q320E Q420E Acc. copies Sold per quarter Price

Source: Nordea Markets OVERKILL'S THE WALKING DEAD'S SALES SENSITIVITY (SEKm) Number of copies -10% -5% +5% +10% +10% 1,434 1,509 1,584 1,659 1,734 +5% 1,397 1,470 1,543 1,616 1,689 Price 1,361 1,432 1,503 1,574 1,645 -5% 1,324 1,393 1,462 1,531 1,600 -10% 1,287 1,354 1,421 1,488 1,555 Source: Nordea Markets Project Crossfire There is considerable uncertainty in the commercial potential of new game Although the franchise is franchises. Smilegate’s version of the game is highly popular in the Asian markets, popular, we believe the success with a remake is with at most eight million concurrent players online, but we still believe the success of uncertain a remake aimed at European and North American gamers is far from certain. The pricing model will also likely differ, as Starbreeze does not intend to launch it with a free-to-play model. However, consider the recent success of a game like Player Unknown’s Battlegrounds (PUBG).

Marketing material commissioned by Starbreeze 78 Starbreeze 6 March 2018

Despite its March 2017 release, the game had revenue of USD 714m in 2017 and thus outsold titles like Overwatch and CS:GO, both of which were sold during the entire year. This shows that a successful Crossfire title release could imply substantial upside to our estimates.

We estimate lifetime revenue to Starbreeze of SEK 708m, based on sales of 5.9 million We set an initial price of USD copies, 1.4 million copies of which we expect to be sold upon launch in Q1 2020 (ie 39.90 and calculate 5.9 million three months of sales). We note that our sales estimate could be on the cautious side, sold copies over the game’s lifetime as we do not include any potential DLC sales. We set a price point of USD 39.90 upon launch and only calculate sales based on the game being released on PC.

COPIES SOLD, ACCUMULATED COPIES AND PRICING 4.0 8

3.5 7

3.0 6

2.5 5

2.0 4

1.5 3

1.0 2

0.5 1 Copies sold per quarter, in millions per sold quarter, Copies Accumulated copies, in millionsin copies,Accumulated

Q120E Q220E Q320E Q420E Q121E Q221E Q321E Q421E Q122E Acc. copies Sold per quarter Price Source: Nordea Markets

PROJECT CROSSFIRE'S SALES SENSITIVITY (SEKm) Number of copies -10% -5% +5% +10% +10% 701 740 779 818 857 +5% 669 706 744 781 818 Price 637 673 708 744 779 -5% 606 639 673 706 740 -10% 574 606 637 669 701 Source: Nordea Markets PAYDAY 3

PAYDAY is in the DNA of Starbreeze, and management has indicated that PAYDAY is still considered the development of a much anticipated sequel to PAYDAY 2 will take as much time as most important franchise needed. Our baseline assumption is that the game could be released in mid-2021, as it is not included in the company’s 2020 revenue guidance. Not much has been revealed about the game apart from that it is in the early design phase, but we find several factors indicating it could be at least as successful as its predecessor. We note that the player base and Steam community is larger today than when We believe there are several PAYDAY 2 was released, and we believe that PAYDAY 3 will have a wider reasons to be excited about geographical scope and enjoy a full release across all platforms simultaneously. The the commercial potential development budget is likely to be considerably higher, implying a more impressive product. Also, all revenue from the game will be attributed to Starbreeze, after Digital

Bros has recouped USD 40m (based on 33% revenue sharing).

Over time, we believe the We assume that the game will be launched priced at USD 59.90 and that it could sell owner base could reach 2.0 million copies in its first three months, across all platforms, translating into sales of above 9 million SEK 586m for Starbreeze. We expect the owner base to exceed 9 million over the game’s lifetime and that it could reach accumulated sales of SEK 1.2bn (including DLCs).

Marketing material commissioned by Starbreeze 79 Starbreeze 6 March 2018

COPIES SOLD, ACCUMULATED COPIES AND PRICING 4.0 12.0

3.5 10.5

3.0 9.0

2.5 7.5

2.0 6.0

1.5 4.5

1.0 3.0

0.5 1.5 Copies sold per quarter, in millions in per quarter, sold Copies Accumulated copies, in millions in copies, Accumulated

Q321E Q421E Q122E Q222E Q322E Q422E Q123E Q223E Q323E Acc. copies Sold per quarter Price

Source: Nordea Markets

PAYDAY 3'S SALES SENSITIVITY (SEKm) Number of copies -10% -5% +5% +10% +10% 1,538 1,619 1,700 1,781 1,861 +5% 1,488 1,566 1,644 1,723 1,801 Price 1,438 1,514 1,589 1,665 1,740 -5% 1,389 1,461 1,534 1,606 1,679 -10% 1,339 1,409 1,479 1,548 1,618 Source: Nordea Markets Publishing In Publishing, we focus our analysis on Psychonauts 2 and System Shock 3, which we Our publishing estimates rely argue will be major revenue drivers in the current publishing pipeline. We estimate a primarily on forecasts for Psychonauts 2 and System launch of Psychonauts during Q4 2019, which is in line with the developer’s guidance Shock 3 that the game will be released in 2019. With regards to System Shock 3, we expect it to be launched during the second half of 2020.

Our estimates imply peak sales for Publishing of above SEK 700m in 2020 and, for the Upside potential to period between 2017 and 2021, we expect a revenue CAGR of 35%. As operating costs Publishing sales if the include royalties paid to IP owners, we expect them to follow the sales pickup in company can sign new 2020E and 2021E. We believe the publishing platform is highly scalable, implying projects in the near term some upside optionality if Starbreeze can sign new publishing projects. However, due to financial restraints, we believe it is a delicate question for management where funds are optimally put to work.

PUBLISHING'S SALES PUBLISHING'S OPERATING COSTS

800 600

500 600 400

400 300 SEKm SEKm 200 200 100

0 0 2016 2017 2018E 2019E 2020E 2021E 2016 2017 2018E 2019E 2020E 2021E Net sales Capitalised development costs Operating costs Source: Company data and Nordea Markets Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze 80 Starbreeze 6 March 2018

ESTIMATED SALES FROM MAJOR PIPELINE PROJECTS SEKm 2018E 2019E 2020E 2021E 2022E 2023E Psychonauts 0 117 124 19 0 0 System Shock 3 0 0 368 152 4 0 VR 3305283102120 Source: Nordea Markets Psychonauts 2 Double Fine studios announced in December 2017 that it needs some additional time Psychonauts 2 has been with Psychonauts 2, and the game’s release date was postponed from 2018 until 2019, postponed until 2019 at the earliest. The original game was critically acclaimed and records 2.3m owners on Starbreeze can recoup USD Steam. Our estimates expect 3.3 million sold copies over the game’s lifetime, 850,000 8m before revenue sharing copies of which will likely be sold during its first three months. We assume 50/50 revenue sharing, after Starbreeze has recouped USD 8m in development costs. The game is expected to launch both on PC and console. In terms of pricing, we pencil in an initial price of USD 29.90 upon launch. We calculate lifetime revenue of SEK 260m and we do not include any sales of DLCs.

COPIES SOLD, ACCUMULATED COPIES AND PRICING 0.9 4.5

0.8 4.0

0.7 3.5

0.6 3.0

0.5 2.5

0.4 2.0

0.3 1.5

0.2 1.0

0.1 0.5 Copies sold per quarter, in millions in quarter, per sold Copies Accumulated copies, in millions in copies, Accumulated

Q419E Q120E Q220E Q320E Q420E Q121E Q221E Q321E Q421E Acc. copies Sold per quarter Price Source: Nordea Markets

PSYCHONAUTS 2'S SALES SENSITIVITY Number of copies -10% -5% +0% +5% +10% +10% 251 265 278 292 305 +5% 243 256 269 282 296 Price +0% 235 248 260 273 286 -5% 227 239 252 264 276 -10% 219 231 243 254 266 Source: Nordea Markets System Shock 3

The next big publishing title is System Shock 3, a long-awaited sequel to System Based on benchmarking with Shock 2 that was initially released in 1999. We estimate that Starbreeze could sell up similar titles, we believe System Shock 3 will receive a to 3.7 million copies across all platforms, based on benchmarking with similar games lot of interest among gamers such as Bioshock and Bioshock 2. Pricing is likely to be set in line with other premium titles and we use an initial price of USD 59.90 in our model. Based on these assumptions, we expect initial sales of 0.7 million copies during the first three months after release.

Lifetime revenue of the game is calculated at SEK 523m, including some (limited) Starbreeze is allowed to contribution from sales of DLCs. Also note that Starbreeze has invested USD 12m in a recoup 120% of its investment publishing-only deal and can recoup 120% of its investment including marketing of USD 12m before revenue costs. After the investment is recouped, revenue will be split equally. sharing

Marketing material commissioned by Starbreeze 81 Starbreeze 6 March 2018

COPIES SOLD, ACCUMULATED COPIES AND PRICING 1.6 4.0

1.4 3.5

1.2 3.0

1.0 2.5

0.8 2.0

0.6 1.5

0.4 1.0

0.2 0.5 Copies sold per quarter, in millions per sold quarter, Copies Accumulated copies, in millions in copies, Accumulated

Q320E Q420E Q121E Q221E Q321E Q421E Q122E Q222E Q322E Acc. copies Sold per quarter Price Source: Nordea Markets

SYSTEM SHOCK 3'S SALES SENSITIVITY (SEKm) Number of copies -10% -5% +5% +10% +10% 579 606 632 659 686 +5% 563 589 614 640 666 Price 547 572 596 621 646 -5% 530 554 578 602 626 -10% 514 537 560 584 607 Source: Nordea Markets VR Tech & Operations The business segment consists of software and technology development related to We expect costs to peak in VR, as well as expenses and revenue from its own-operated VR centres. We expect 2019 costs to remain high but remain flat as the technologies are close to reaching the commercial phase.

VR TECH'S SALES VR TECH'S OPERATING COSTS

80 100

80 60

60 40 SEKm SEKm 40

20 20

0 0 2016 2017 2018E 2019E 2020E 2021E 2016 2017 2018E 2019E 2020E 2021E Net sales Capitalised development costs Operating costs Source: Company data and Nordea Markets Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze 82 Starbreeze 6 March 2018

Detailed estimates

GROUP P&L SEKm Q1 17 Q2 17 Q3 17 Q4 17 Q1 18E Q2 18E Q3 18E Q4 18E 2016 2017 2018E 2019E 2020E 2021E Net sales 57 123 78 104 97 128 80 624 345 361 929 1,260 1,913 2,640 Growth 40.3% 19.6% -24.3% 4.4% 70.0% 4.2% 2.4% 501.6% 4.6% 157.0% 35.7% 51.8% 38.0% Capitalised dev. costs 50 57 58 67 71 73 78 65 154 232 288 283 348 242

Other external expenses -86 -121 -100 -109 -130 -155 -163 -225 -292 -416 -673 -773 -891 -1,134 Employee benefit expense -52 -58 -54 -65 -81 -84 -94 -92 -149 -230 -351 -370 -377 -369 Other -4-2-49-8-8-8-821-1-320 0 0

EBITDA -35 -3 -22 6 -51 -46 -107 364 80 -54 161 401 993 1378 Depreciation -2 -4 -5 -5 -5 -5 -6 -7 -4 -16 -23 -24 -23 -25 EBITA -38 -7 -27 2 -55 -52 -113 357 76 -69 137 377 970 1,353 Amortisation -13 -12 -12 -45 -29 -35 -39 -77 -21 -82 -180 -254 -374 -330

Operating profit -51 -19 -39 -43 -77 -78 -144 288 56 -151 -11 123 596 1,024

Net financials -5 2 6 -24 -6 -5 -7 -11 -1 -21 -30 -32 -21 -13

PTP -56 -17 -35 -68 -83 -84 -151 277 56 -176 -40 98 582 1,023 Tax 6 7 4 5 5 5 29 -53 1 21 -14 -19 -111 -205 Net profit -50 -10 -32 -63 -78 -78 -122 225 57 -155 -54 79 471 819

Margins EBITDA -61.8% -2.2% -28.1% 6.1% -52.0% -36.3% -133.8% 58.4% 23.3% -14.8% 17.3% 31.8% 51.9% 52.2% EBITA -65.8% -5.3% -34.2% 1.5% -57.0% -40.5% -141.8% 57.3% 22.1% -19.2% 14.8% 29.9% 50.7% 51.3% Operating profit -88.7% -15.2% -50.2% -41.5% -78.8% -61.2% -180.8% 46.1% 16.3% -41.9% -1.2% 9.7% 31.2% 38.8% Source: Company data and Nordea Markets

DIVISIONAL SPLIT SEKm Q1 17 Q2 17 Q3 17 Q4 17 Q1 18E Q2 18E Q3 18E Q4 18E 2016 2017 2018E 2019E 2020E 2021E Net sales Games 24 51 24 22 58 72 37 555 162 122 722 901 1,145 1,869 Publishing 28 67 50 75 40 54 41 68 176 220 203 341 742 735 Virtual reality 0 0 0 4 0 1 1 1 0 4 4 19 26 35 Other 553300 007150000

Royalties -11 -35 -20 -33 -29 -26 -29 -138 -64 -98 -222 -287 -370 -584 as % of sales 19% 28% 25% 32% 30% 20% 36% 22% 18% 27% 24% 23% 19% 22%

Capitalised dev. costs Games 28 26 34 60 56 57 62 48 82 148 222 225 295 192 Publishing 7 9 10 1 7 7 8 8 32 26 29 29 29 29 Virtual reality 1522146 9 9 9 9395836292321 Other 000000 00000000

Operating costs Games -52 -58 -67 -91 -108 -140 -173 -259 -171 -268 -680 -872 -1,047 -1,155 Publishing -37 -84 -62 -107 -93 -98 -91 -105 -152 -290 -388 -396 -465 -550 Virtual reality -13 -22 -23 -4 -13 -15 -15 -15 -77 -62 -59 -57 -57 -57 Other -56 -34 -23 -11 -31 -25 -23 -22 -66 -124 -101 -96 -95 -95

Y/Y Net sales Games -41% -18% 16% -42% 140% 41% 52% 2403% -25% 491% 25% 27% 63% Publishing 67% -38% 37% 40% -19% -18% -9% 25% -8% 68% 118% -1% Virtual reality -67% -2% 389% 37% 39% Total 40% 20% -24% 4% -6% 31% -38% 684% 5% 157% 36% 52% 38%

Capitalised dev. costs 69% 69% 52% 27% 44% 28% 34% -2% n/a 50% 24% -2% 23% -31%

Operating costs Games 50% 5% 101% 91% 109% 141% 156% 185% 57% 153% 28% 20% 10% Publishing 289% 181% 1% 108% 153% 17% 48% -2% 91% 34% 2% 18% 18% Virtual reality -13% 15% 50% -84% 2% -30% -34% 236% -19% -6% -3% -1% 0% Total 107% 64% 29% 60% 15% 14% 8% 33% n/a 60% 65% 16% 17% 12% Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze 83 Starbreeze 6 March 2018

Risk factors Below, we list the main risk factors we find relevant for Starbreeze. The purpose of this is not to provide a comprehensive picture of all of the risks that the company may be subject to, but instead to highlight those that we find most relevant. The main risks we see relate to games development, intellectual property rights and financing requirements.

Distributors

A large portion of sales is attributable to a small number of distribution channels; Dependent on a limited mainly the digital platform Steam. As such, if the current terms for using the platform numbers of distribution platforms; mainly Steam were to change, or if Steam were to lose market share to other platforms, it could have an adverse impact on Starbreeze’s revenue and profitability.

Development of games and project delays

Future revenue streams are dependent on the company’s ability to develop new Delays could impact games on a regular basis. Delays in ongoing projects could also hurt profitability and profitability and increase cost of completion of games there is a risk that completion of a project requires more resources than estimated.

Low revenue upon release of games or other products

There is a risk that new games will not be well-received by the market. This could Games might not be as result in revenue losses and lower margins than expected as well as capitalised commercially successful as predicted development costs having to be impaired. This relates both to games developed in- house and games where Starbreeze acts as a publisher and is accountable for part of the financing.

Dependency on key individuals

Starbreeze’s future success is dependent on its ability to attract and retain employees. Starbreeze depends on a few The business is knowledge-intensive and if Starbreeze cannot employ individuals key individuals, including senior management and when the need arises, this could affect the operations negatively. A loss of senior developers management, including the CEO and main owner Bo Andersson Klint, as well as senior developers, could also lead to disruptions in its operations.

Intellectual property rights

Intellectual property (IP) rights comprise a large part of the company’s assets. The IP Intellectual property is an rights are primarily in the form of copyright on its own games and software as well as integral part to the viability of Starbreeze’s business publishing licences for games where rights are owned by third-party developers. Starbreeze’s operations could be negatively impacted, if it was unable to protect the IP rights. There is also a risk that the company might infringe on third-party property rights.

Capital need

There is a risk that the company may need additional capital in the future due to Company may need revenue being unevenly distributed over a game’s lifetime. This could lead to delays additional funding in the future, due to its volatile cash in projects and a slowdown of operations. If a game is not as successful as predicted, flows the company could also require more capital, as the company is dependent on a limited number of important games, including OVERKILL’s The Walking Dead.

Market and competition

Starbreeze operates in a highly competitive market. Competitors are not only game Market for games is highly developers but also other entertainment companies. There is a risk that the competitive, with a number of current and future company’s product will be overshadowed by the competition and there could be competitors pressure on the pricing of its games. Competition includes major multinational games companies and smaller games studios.

Marketing material commissioned by Starbreeze 84 Starbreeze 6 March 2018

Acquisitions and integration

Starbreeze has acquired and will probably continue to acquire companies or assets. Starbreeze has historically There is a risk that the integration will be more costly and time-consuming than acquired companies and technologies and is therefore expected or that the company will lose key customers following acquisitions. One key exposed to certain risk is that Starbreeze might overpay for companies or technologies in relation to their acquisition-related risks future financial performances. This could impact operations and hurt profitability.

Marketing material commissioned by Starbreeze 85 Starbreeze 6 March 2018

Reported numbers and forecasts

INCOME STATEMENT SEKm 2013/14 2014/15 2015 2016 2017 2018E 2019E 2020E 2021E 2022E Net revenue 214 197 99 345 361 929 1,260 1,913 2,640 1,527 Revenue growth 477.8% -7.7% -49.9% 249.6% 4.6% 157.0% 35.7% 51.8% 38.0% -42.2% EBITDA 159 59 24 81 -54 193 401 993 1,378 632 Depreciation and impairments PPE -0 -1 -2 -4 -16 -23 -24 -23 -25 -29 EBITA 158 58 22 77 -69 169 377 970 1,353 603 Amortisation and impairments -16 -12 -1 -21 -82 -180 -254 -374 -330 -320 EBIT 142 46 21 56 -151 -11 123 596 1,024 282 of which associates 000000000 0 Associates excl. from EBIT 0 0 0 0 -4 1 7 7 13 10 Net financials 0 0 0 -1 -21 -30 -32 -21 -13 -4 Pre-Tax Profit 142 46 21 56 -176 -40 98 582 1,023 288 Reported taxes -24 -12 1 1 21 -14 -19 -111 -205 -58 Net profit from cont. operations 118 34 22 57 -155 -54 79 471 819 230 Discontinued operations 000000000 0 Minority interest 000000000 0 Net profit to equity 118 34 22 57 -155 -54 79 471 819 230 EPS 0.83 0.15 0.09 0.22 -0.55 -0.18 0.26 1.54 2.67 0.75 DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 of which ordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 of which extraordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Profit margin in percent EBITDA 74.2% 30.0% 23.9% 23.5% -14.8% 20.7% 31.8% 51.9% 52.2% 41.4% EBITA 74.0% 29.5% 22.0% 22.3% -19.1% 18.2% 29.9% 50.7% 51.3% 39.5% EBIT 66.5% 23.5% 21.3% 16.3% -41.9% -1.2% 9.7% 31.2% 38.8% 18.5%

Adjusted earnings EBITDA (adj.) 159 59 24 81 -54 193 401 993 1,378 632 EBITA (adj.) 158 58 22 77 -69 169 377 970 1,353 603 EBIT (adj.) 142 46 21 56 -151 -11 123 596 1,024 282 EPS (adj.) 0.83 0.15 0.09 0.22 -0.55 -0.18 0.26 1.54 2.67 0.75

Adjusted profit margins in percent EBITDA (adj.) 74.2% 30.0% 23.9% 23.5% -14.8% 20.7% 31.8% 51.9% 52.2% 41.4% EBITA (adj.) 74.0% 29.5% 22.0% 22.3% -19.1% 18.2% 29.9% 50.7% 51.3% 39.5% EBIT (adj.) 66.5% 23.5% 21.3% 16.3% -41.9% -1.2% 9.7% 31.2% 38.8% 18.5%

Performance metrics CAGR last 5 years Net revenue n.a. n.a. n.a. n.a. n.a. 34.1% 44.9% 80.9% 50.2% 33.4% EBITDA n.a. n.a. n.a. n.a. n.a. 4.0% 46.6% 111.2% 76.2% -263.9% EBIT n.a. n.a. n.a. n.a. n.a. -159.8% 21.4% 95.2% 78.5% -213.3% EPS n.a. n.a. n.a. n.a. n.a. -173.4% 11.4% 75.5% 64.5% -206.5% DPS n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Average EBIT margin 66.5% 45.9% 41.1% 31.1% 9.4% -2.0% 1.3% 12.7% 22.2% 24.4%

Average EBITDA margin 74.2% 53.0% 47.3% 37.7% 22.1% 15.7% 21.5% 33.6% 41.0% 43.5%

Source: Company data and Nordea Markets

VALUATION RATIOS - ADJUSTED EARNINGS SEKm 2013/14 2014/15 2015 2016 2017 2018E 2019E 2020E 2021E 2022E P/E (adj.) 8.2 78.1 170.0 87.0 n.m. n.m. 38.9 6.5 3.8 13.4 EV/EBITDA (adj.) 5.2 43.8 152.3 67.3 n.m. 15.7 7.4 2.4 1.1 2.0 EV/EBITA (adj.) 5.3 44.5 165.7 71.0 n.m. 17.9 7.8 2.5 1.1 2.0 EV/EBIT (adj.) 5.9 55.8 170.9 96.9 n.m. n.m. 24.0 4.0 1.4 4.4

Valuation ratios/reported earnings P/E 8.2 78.1 170.0 87.0 n.m. n.m. 38.9 6.5 3.8 13.4 EV/Sales 3.9 13.1 36.4 15.8 7.7 3.3 2.3 1.3 0.6 0.8 EV/EBITDA 5.2 43.8 152.3 67.3 n.m. 15.7 7.4 2.4 1.1 2.0 EV/EBITA 5.3 44.5 165.7 71.0 n.m. 17.9 7.8 2.5 1.1 2.0 EV/EBIT 5.9 55.8 170.9 96.9 n.m. n.m. 24.0 4.0 1.4 4.4 Dividend yield (ord.) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FCF yield 12.6% -1.2% -1.0% -4.7% -25.0% 1.4% 2.5% 17.8% 30.7% 7.3%

Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Source: Company data and Nordea Markets

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BALANCE SHEET SEKm 2013/14 2014/15 2015 2016 2017 2018E 2019E 2020E 2021E 2022E Intangible assets 25 184 389 1303 1785 1893 1922 1896 1808 1681 of which R&D 10 31 115 304 643 750 780 754 666 538 of which other intangibles 11 115 200 595 597 597 597 597 597 597 of which goodwill 4 39 74 405 545 545 545 545 545 545 Tangible assets 1 10 17 23 99 103 104 119 147 148 Shares associates 0 0 0 9 42 42 50 57 70 80 Interest bearing assets 000000000 0 Deferred tax assets 0 0 5 31 108 0 0 0 0 0 Other non-int. bearing assets 000000000 0 Other non-current assets 1 13 16 32 38 0 0 0 0 0 Total non-current assets 28 208 427 1398 2072 2038 2076 2073 2025 1909 Inventory 000000000 0 Accounts receivable 18 19 33 26 28 71 97 147 203 118 Other current assets 49 34 23 56 125 322 437 663 915 529 Cash and bank 137 111 85 669 234 514 592 1139 2085 2310 Total current assets 203 164 141 751 387 908 1126 1950 3203 2956 Assets held for sale 000000000 0 Total assets 230 371 568 2149 2459 2946 3202 4022 5229 4865

Shareholders equity 158 254 398 1370 1282 1466 1546 2017 2836 3066 of which preferred stock 000000000 0 of which Equity of hyb. debt 000000000 0 Minority interest 000000000 0 Total Equity 158 254 398 1370 1282 1466 1546 2017 2836 3066 Deferred tax 1 0 42 119 169 169 169 169 169 169 Long term int. bearing debt 000000000 0 Non-current liabilities 0 8 8 307 348 348 348 348 348 348 Pension provisions 000000000 0 Other long-term provisions 000000000 0 Other long-term liabilities 0 0 0000000 0 Convertible debt 0 40 0 266 467 467 467 467 467 467 Shareholder debt 000000000 0 Hybrid debt 000000000 0 Total non-curr. liabilities 1 48 51 692 984 984 984 984 984 984 Short-term provisions 000000000 0 Accounts payable 52 36 54 42 122 315 427 648 894 517 Other current liabilities 19 33 65 45 71 181 246 374 516 298 Short term interest bearing debt 000000000 0 Total current liabilities 71 70 119 87 193 496 673 1021 1409 815 Liab.for assets held for sale 000000000 0 Total liabilities and equity 230 371 568 2149 2459 2946 3202 4022 5229 4865

Balance sheet and debt metrics Net debt -137 -71 -85 -404 233 -48 -126 -673 -1619 -1843 Working capital -5 -17 -63 -5 -40 -103 -139 -211 -291 -169 Invested capital 23 191 364 1393 2032 1936 1937 1861 1734 1740 Capital employed 159 301 449 2062 2266 2450 2529 3001 3819 4050 ROE 16.5% 6.6% 6.5% -11.7% -3.9% 5.3% 26.5% 33.7% 7.8% 10.0% ROIC 476.1% 31.9% 7.8% 6.5% -7.9% -1.6% 5.0% 25.3% 45.4% 12.9%

Net debt/EBITDA -0.9 -1.2 -3.6 -5.0 n.m. -0.2 -0.3 -0.7 -1.2 -2.9 Interest coverage n.m. n.m. n.m. 4.1 -4.6 -0.2 3.6 25.5 67.6 49.4 Equity ratio 68.7% 68.3% 70.1% 63.8% 52.1% 49.8% 48.3% 50.1% 54.2% 63.0%

Net gearing -86.3% -28.0% -21.4% -29.5% 18.2% -3.2% -8.1% -33.4% -57.1% -60.1%

Source: Company data and Nordea Markets

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CASH FLOW STATEMENT SEKm 2013/14 2014/15 2015 2016 2017 2018E 2019E 2020E 2021E 2022E EBITDA (adj.) for associates 159 59 24 81 -54 193 401 993 1378 632 Paid taxes -3 -24 -4 4 -5 -14 -19 -111 -205 -58 Net financials 0 0 0 3 -5 -30 -32 -21 -13 -4 Change in Provisions 000000000 0 Change in other LT non-IB 0 -4 -7 257 -43 146 0 0 0 0 Cash flow to/from associates 000000000 0 Dividends paid to minorities 000000000 0 Other adj. to reconcile to cash flow -18 5 34 -329 85 0 0 0 0 0 Funds from operations (FFO) 137 37 47 15 -21 295 350 861 1160 571 Change in NWC 0 0 0 0 0 63 37 72 80 -123 Cash flow from op. (CFO) 137 37 47 15 -21 358 387 933 1240 448 Capital Expenditure -15 -49 -79 -229 -561 -316 -308 -386 -294 -223 Free Cash Flow before A&D 122 -13 -32 -214 -582 42 78 547 946 224 Proceeds from sale of assets 000000000 0 Acquisitions 0 -18 -4 -60 -59 0 0 0 0 0 Free cash flow 122 -31 -36 -274 -641 42 78 547 946 224

Dividends paid 000000000 0 Equity issues / buybacks 0 0 0 555 0 238 0 0 0 0 Net change in debt 0 40 -40 265 301 0 0 0 0 0 Other financing adjustments 1001400000 0 Other non-cash adjustments 1 -34 51 24 -95 0 0 0 0 0 Change in cash 123 -26 -25 584 -436 280 78 547 946 224

Cash flow metrics Capex/D&A 90% 291% 2982% 887% 510% 155% 111% 97% 83% 64% Capex/Sales 19% 78% 64% 138% 34% 24% 20% 11% 15%

Key information Share price year end (current) 6.8 11.8 15.7 19.3 8.4 10.0 10.0 10.0 10.0 10.0 Market cap 968 2,665 3,681 5,874 2,565 3,077 3,077 3,077 3,077 3,077 Enterprise value 832 2,594 3,596 5,470 2,798 3,029 2,951 2,404 1,458 1,234

Diluted no. of shares, year-end (m) 142.4 226.8 234.4 304.4 305.4 306.4 306.4 306.4 306.4 306.4

Source: Company data and Nordea Markets

Marketing material commissioned by Starbreeze 88

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Completion date Marketing Material 6 March 2018, 08:14 CET This research report should be considered marketing material, as it has been commissioned and paid for by the subject company, and has not been prepared in accordance with the regulations designed to promote the independence of investment research and it is not subject to any legal prohibition on dealing ahead of the dissemination of the report. However, Nordea Markets analysts are according to internal policies not allowed to hold shares in the companies/sectors that they cover..

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