Initiation of coverage
Equity Research 23 May 2019
Atari
Sector: Gaming
An old star in a new disguise FAIR VALUE RANGE
BEAR BASE BULL
The case for Atari hinges on management’s ability to capitalize on the Atari brand and its 2.2 4.3 6.6 extensive portfolio of games, including bringing retro classics into modern gaming VERSUS OMXS30FAIR VALUE RANGE mediums and explore other multimedia opportunities. With the current team having already completed a significant turnaround, we see considerable potential for it to now harvest new growth opportunities – including licensing and casino gaming. VERSUS OMXS30
OMXS 30 Atari Untapped IP potential 4,6
Atari’s massive portfolio of game franchises is still almost totally untapped. We find that 4,4 REDEYE4,2 RATING the market is yet to fully understand the scale of the opportunity for the company’s IPs - at 4 3,8 least 10 times the successfully relaunched Roller Coaster Tycoon’s revenue, we estimate. 3,6 3,4 Moreover, licensing can extend properties like Space Invaders and Missile Command in 3,2 new multi-media directions. 3 VERSUS OMXS30 Forgotten VCS
Furthermore, it seems like the market almost fully ignore the VCS release and its potential. REDEYE RATING The VCS can be viewed as a form of mini-PC at an attractive price. Our base case assumes 9 9 sales of about 250k units over the next four years, compared to current annual sales of 8
500k Atari Flashbacks, which retail at around USD 80. 6 6
Compelling pipeline
The current pipeline looks compelling. Besides new RCT games, Atari is also developing
new releases based on some of its largest brands: Asteroids and Pong. These will be key
Strength Strength Financial
Financial Ownership
drivers of revenue growth in the year ahead. Ownership Profitability
REDEYE RATING Profitability
Management Management
Profit Outlook Profit Outlook Profit
Valuation
KEY STATS Our Base Case values Atari at SEK 4.3 per share, with Bull and Bear Case values of SEK 6.6 Ticker ATA SDB and SEK 2.2, respectively. We expect the company to replicate its RCT success with two Market ENX/Nasdaq new titles within three years, while also achieving some commercial success with both the Share Price (SEK/EUR) 3.5 (0.34) VCS and the Casino vertical.
Market Cap (MEUR) 86 To be conservative we record Atari’s venture investments at cost and put no extra value on its the massive loss carry-forwards (LCFs), these ‘hidden’ assets limit the stock’s downside Net Debt 19E (MEUR) - 1 risk. Moreover, Atari is an attractive acquisition target thanks to its extensive IP portfolio Free Float 75 % (about 200 game franchises), strong balance sheet, profitability and LCFs. Avg. daily volume (‘000) 24000
KEY FINANCIALS (EURm) 16/17 17/18 18/19E 19/20E 20/21E 21/22E Net sales 15.4 18.0 20.2 39.5 47.2 50.2 ANALYSTS
EBITDA 11.1 4.4 5.2 7.8 11.0 13.7 Kristoffer Lindstrom
Rec. Oper. Income 1.9 2.3 3.2 3.7 5.4 6.9 [email protected] EBIT 8.5 2.5 2.9 4.7 6.4 7.9 EPS (adj.) 2016 2017 2018E 2019E 2020E 2021E Tomas Otterbeck EPS (adj.) 0.03 0.01 0.01 0.02 0.02 0.03 [email protected] EV/Sales 3.2 8.0 4.0 2.0 1.7 1.6 EV/EBITDA 4.4 32.4 15.4 10.2 7.3 5.8
EV/EBIT 5.8 56.7 27.1 17.2 12.5 10.2 P/E 44.0 70.4 34.1 21.2 15.0 12.2
An old star in a new disguise Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report The case for AtariRedeye, hinges Mäster on Samuelsgatan management’s 42, 10tr, ability Box 7141, to 103 capitalize 87 Stockholm. on Tel. the +46 Atari 8-545 brand 013 30, and E-post: its [email protected]
extensive portfolio of games, including bringing retro classics into modern gaming mediums and explore other multimedia opportunities. With the current team having already completed a significant turnaround, we see considerable potential for it to now harvest new REDEYE Equity Research Atari 23 May 2019
Index Investment Case ...... 3 Untapped IP portfolio ...... 3 Maximizing the brand ...... 4 VCS under the radar ...... 4 Media opportunity ...... 4 Skin in the game ...... 5 Company profile ...... 6 Business units ...... 8 Atari Games...... 8 Atari VCS ...... 10 Atari Casino ...... 11 Atari Partners ...... 12 Games market overview ...... 13 Management, the board, and ownership ...... 18 Management ...... 18 Board of Directors ...... 19 Ownership structure ...... 19 Financial projections ...... 20 Financials – Atari Games ...... 21 Financials – VCS ...... 23 Financials – Casino ...... 25 Financials – Casino ...... 26 Financials – Partners ...... 26 Valuation ...... 27 Peer valuation ...... 28 Catalysts ...... 29
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REDEYE Equity Research Atari 23 May 2019
Investment Case
Investment in Atari hinges on confidence that management can capitalize on the Atari brand and the extensive portfolio of games. We find that the market to some degree underestimate the significant value that will be tapped when Atari brings its retro classics into modern gaming mediums and other multimedia opportunities, in our view. Our positive stance towards Atari is founded on the successful turnaround that management has conducted over the past five years and the new growth opportunities it is preparing to harvest.
Our case can be summarized in the following bullets:
• Untapped IP portfolio – The bulk of Atari’s IP portfolio has not yet been brought into modern gaming mediums. We view the success of its Roller Coaster Tycoon (RCT) IP as a proof of concept and estimate that the untapped potential of its other slumbering brands is at least 10 times RCT’s revenue level. • Maximizing the brand – Atari is a well-known brand, though mainly among the older demographic. It is capitalizing on its brand awareness by expanding into new verticals, like casino gaming, and through smart licensing partnerships. • VCS under the radar – We find that the market has forgotten about the VCS a bit, likely due to some delays of the launch. While the sales outlook is uncertain, we view the potential for a Atari-branded mini-PC as significant. • Media opportunity - Atari is a gaming brand at its core, but the company’s multi- media approach open the way to future brand extensions (probably through licensing deals) like a Space Invaders cartoon or Missile Command comic. • Skin in the game – management (the CEO, chairman and major shareholder Frederic Chesnais in particular) is key to Atari’s continued success.
Untapped IP portfolio
The IP portfolio opportunity of Atari
2500
330 2000
1500 The 10x Proof of opportunity concept
1000 2000 Income (mEUR) Income
500 33 200 0 Atari 10 largest brands RTC
Lifetime income (before "new" Atari) IP re-launch
Source: Redeye Research
Atari has a massive portfolio of game franchises which still lies almost totally untapped. We believe investors underestimate just how large the opportunity is for the Atari IP portfolio. The RollerCoaster Tycoon (RCT) was the first game series that was brought back to life under the new management that took over the company in 2013. Since then the new games have generated revenue of EUR 33m+, which has extended lifetime sales of the franchise to about EUR 230m - an extension of 16%+ in just a few years. This success is a true proof of concept that an older game can work very well in a newer medium, like the mobile, we judge.
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REDEYE Equity Research Atari 23 May 2019
Atari’s 10 top franchises have generated about EUR 2bn in lifetime revenue. If the RCT IP’s success can be replicated to some degree by one of the larger franchises, the potential is enormous.
Currently, we know of games in production for the Asteroids IP and the well known brand series Pong. We view it as likely that that at least one ‘new’ IP will reach a similar revenue level to the RCT franchise in the coming years. While the specifics are still uncertain, RCT’s success should mark only the beginning of a huge opportunity.
Maximizing the brand Atari is a well-known brand. In a study conducted by E-Pool in 2010, 63% of people aged between 25 and 54 knew of the brand. In the younger demographic awareness was about half as high. Atari is constantly working to create more modern games and increase its awareness among young gamers, but it will also capitalize on its older, highly brand-aware audience by launching products that fit this demographic:
• In the market: o License agreements for hardware products such as the Flashback or home arcades o Atari Vault for digital downloads • Soon to be launched: o Atari VCS, a modern console with a retro feeling o Atari Casino, an area where audiences are usually older and the brand is well known
Atari is also capitalizing on its brand power through its Partner Segment, where the company typically takes equity without committing any cash. While this type of bet may well be a long- shot, it offers major potential rewards while risk is extremely limited.
VCS under the radar Estimating sales for the VCS is uncertain ahead of the first customer reviews and tests. However, investors have almost forgotten the VCS’s potential as an mini-PC at an attractive price-point. If the product is high quality, the market could be substantial in an era of game streaming and digital distribution of games. The VCS can also be used as a streaming box for other digital entertainment like Netflix or Disney+, which broadens its customer appeal. Our base case assumes sales of about 250k units over the coming four years. This compares to annual sales of about 500k Atari Flashbacks, which retail at around USD 80.
Media opportunity Atari differs from traditional game developer/publishers as it has limited in-house development and does not focus on the gaming sector exclusively. It is a gaming brand at its core, but the company has a multi-media approach. Recently the Atari brand or its games have featured in hit movies like ‘Blade Runner 2049’ and ‘Ready Player One’. Atari could be compared to Marvel as both own brands and commercialize these through different mediums. Marvel’s portfolio is clearly one of the most lucrative, but it generates revenue from this through comics, movies, games, merchandise, etc. Probably through licensing deals, a Star Raiders cartoon or Missile Command comic are potential future extensions.
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REDEYE Equity Research Atari 23 May 2019
Skin in the game We view Atari’s ownership structure as highly favorable with the CEO and Chairman also being the largest shareholder. We are usually positive to owner-operator companies as management’s interest in increasing the company’s long-term value aligns with those of minority shareholders. Under Chesnais’s leadership, Atari has gone from net sales of EUR 1m in FY 12/13 to EUR 18m in FY 17/18 while paying off debt of EUR 31.4m and accruing net cash of EUR 8m+. Its much improved financial position provides management with significant resources to create further value.
Counter-thesis (Bear points) Our counter-thesis provides a series of bear points - not as likely events, but rather as factors that investors should consider closely and monitor.
• Brand dilution – Entering new verticals like casino gaming and different ventures offers scope to capitalize on Atari’s brand strength. However, it requires strategic caution as missteps could dilute the brand's value.
• Retro to modern is hard – Putting a retro classic into a modern medium or updated graphics is not a straightforward undertaking. While basic Pong or Asteroids games could have been created with at least be modest success because of their brand recognition, Atari is setting the bar high – not least as the retro audience is relatively picky, and the brand could suffer if a new game does not have the right feeling.
• Title risk – As always with gaming companies, new game launches involve significant title risk.
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REDEYE Equity Research Atari 23 May 2019
Company profile
Atari is probably one of the most well-known brand within gaming, as it has been active since the very start of the industry. Atari was founded in 1972 and was originally a maker of arcade games. The company launched the first true home video console, the massive success that was the Atari 2600, in 1977. Its top 10 franchises have historically had revenues of more than USD 2bn. Atari has in excess of 200 titles under its umbrella, including some of the most iconic games, such as Pong, Asteroids, Centipede, Tempest, and Missile Command.
Although Atari has a history rich in success, it has also run into problems. In 1984, the original Atari Inc. was split into Atari Games Inc. and Atari Consumer Electronics. The latter was subsequently sold and renamed Atari Corporation. In 1998, it was sold again to Hasbro Interactive and renamed Atari Interactive. The Atari brand proprietary ownership was acquired by Infogrames Entertainment (IESA). IESA renamed itself Atari, SA in 2009.
A well-known brand
Atari is a brand that is well known by many, and most within the older gamer demographic (45+) have some relationship with the brand from their youth. In a study conducted in the USA by E-Pool in 2010, 63% of the people asked aged between 25 and 54 knew of the brand. Awareness among the younger demographic (13-24) was about half of that. Atari is working on improving its brand awareness among the young while also trying to capitalize on its brand status among the older audience.
Atari Awareness Score in 2010
80% 67% 70% 63% 58% 60% 56% 50% 40% 34%
Score 30% 30% 23% 20% 10% 0%
Source: e-pool
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REDEYE Equity Research Atari 23 May 2019
Frédéric Chesnais makes an entrance Frédéric Chesnais is CEO, chairman and a major shareholder in Atari; he has played an essential role in the turnaround of the company.
Financial development of Atari since management shift
20 35
25 15 15
10 5
-5
5 Net (mEUR) Net cash -15
Net sales & adj. EBIT EBIT (mEUR) adj. Net & sales 0 -25
-5 -35
2013 2014 2015 2016 2017 Purchased by Game prod. First casino No debt TV Fred Chesnais relaunched game
Source: Atari
The US subsidiaries filed for bankruptcy protection in January 2013. That February, Frédéric Chesnais, with Alden Capital, took over. Frédéric is the current CEO of Atari and also the largest shareholder. Atari was almost EUR 30 million in debt at that time and had no material revenues. In 2014-2016 the company re-launched its game production, implemented a turnaround strategy, paid down debt, and entered into new partnerships. In 2017 and 2018, it launched new games, developed licensing activities, and further optimised its financial structure.
Atari’s turnaround has been impressive. About four years after Mr. Chesnais took over the company had reduced its debt to zero and simultaneously grown revenues by more than 400%.
The road ahead
The company is now set to launch more of its classic games in new formats, improve its licensing activities, move beyond gaming, re-enter the console business, and strengthen its profitability further. Atari has recently undertaken a secondary listing on Nasdaq First North to broaden its shareholder base and continue its growth journey.
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REDEYE Equity Research Atari 23 May 2019
Business units
Atari has four business units: Games, VCS, Casino, and Partners. Games currently accounts for roughly 85% of net sales, with RollerCoaster Tycoon IP and Atari Vault, along with different licensing agreements for hardware, representing most of the sales. VCS is yet to produce any substantial revenues but will do so when the Atari streaming box, also named VCS, hits the shelves in late 2019. Casino and Partners together accounted for about 15% of sales during fiscal year 2017/18; both are relatively new ventures. Below we dig into the different business units in more detail.
Atari Games Games is the core business for Atari. The unit accounted for roughly 84% of net sales during fiscal year 2017/18. 16%
Group FY 17/18 The business unit focuses on video games, multimedia, and EUR 17.97m licensing of Atari’s IPs. Of course, game production and sales are the most important parts, but the division also 84% operates multichannel operations by extension, multimedia production, and licensing activities. Its core strategy is to Games Other develop, operate, and build the best portfolio of more than 200 Atari games, with priority given to mobile games and digital distribution.
The game catalogue The true strength of Atari is its massive IP portfolio of strong brands and game titles. Atari itself is a well-known brand in the gaming industry, and the company owns in excess of 200 game IPs and 800+ URLs. Adapting and launching the retro games that Atari owns on modern platforms has not been easy, however, and remains an ongoing process. Since 2013, the company has relaunched two game franchises and a licensing programme. The main revenue contributor in recent years has been RollerCoaster Tycoon, which it has successfully launched on PC, mobile, Nintendo Switch, and PS4. In addition to this title, Atari also sells old games as part of a virtual product called Atari Vault.
RollerCoaster Tycoon – the first test and a successful one
RollerCoaster Tycoon (RCT) was the first example of a successful launch of an older Atari title on new formats. Over the past five years, more than nine new games in the franchise have been launched, RollerCoaster Tycoon income initially on PC but more 10.00 9.00 recently on other 9.00 8.01 platforms and mobile. 8.00 7.14 RollerCoaster Tycoon 7.00 Touch was released in 6.00 February 2017 on App 5.00 4.54 3.80 Store and Google Play 4.00 3.00 and has been very (mEUR) Netsales successful, with 19+ 2.00 1.00 0.43 million downloads. The 0.00 current number of daily active users (DAU) of the game is in the 170,000-200,000 range. Source: Atari
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REDEYE Equity Research Atari 23 May 2019
We estimate that the RCT IP generated roughly EUR 200m during 1999-2012. Since its relaunch, we believe the franchise has generated approximately EUR 33m in sales over the past five years, suggesting that lifetime revenues have been extended by roughly 17% since relaunch. And Atari is not finished yet.
Since the end of H1 on 30 September 2018, Atari has released three new games/formats of RCT. Reviews and critical ratings of these games have been mixed. The balance between releasing new content to drive sales and living up to the standard of a franchise is no easy task; however, we view the RCT IP as a proof of concept when it comes to Atari’s ability to bring an old franchise to new formats. Atari holds an exclusive licence for the RCT IP until 2022 thanks to an agreement with series creator Chris Sawyer.
Release date: Release date: Release date: March 19, 2019 Dec 13, 2018 Oct 23, 2018
Atari Vault, and other games
Atari Vault is another of the company’s larger gaming products; it consists of a bundle of Atari’s classic/retro games. The bundle sells for USD 9.99 on Steam. Atari also has more than ten other games launched on mobile platforms. One of the most notable is Citytopia, which was launched worldwide this January. The game has reached 380,000 downloads and achieved a decent ranking on the grossing charts.
Foodgod’s Food Truck Frenzy, Days of Doom, and Ninja Golf are all games in early launch phase. Atari continues to invest in new games to expand its portfolio.
Licensing within the Games business
Within Games, Atari also has an extensive licensing business, including royalty income from other companies using the Atari brand or IPs for gaming consoles, clothing, arcade games, and even TV shows.
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REDEYE Equity Research Atari 23 May 2019
Atari VCS Atari is re-entering the console space with VCS. Design-wise, the new console takes much of its inspiration from the iconic Atari 2600, which sold upwards of 30 million units. VCS will not need a new format for the games as it will use the PC format. VCS can be viewed as a type of streaming box allowing you to play PC games on the screen of your choice, with an updated version of the iconic Atari Joystick, Atari controller, or mouse and keyboard.
VCS will also have an online store of both third-party titles and Atari games and will allow you to watch Netflix, listen to Spotify, etc. The VCS, which was previously nicknamed the Atari Box, was funded by a successful Indiegogo campaign that raised roughly USD 3m. The console was supposed to be shipped during H1 2019, but recently the company announced a delay until the end of 2019, giving it time to upgrade the processor and graphics architecture to make the console more powerful. Reaction to the delay has been mixed, as some have been waiting quite a while for their new Atari console. We do believe that a more powerful machine will have a longer lifetime and improved user experience. Through the Indiegogo campaign, the console already has 10,000 pre-orders. The machine will retail for USD 249- 299.
Looking at the specs and comparing it to other types of consoles, we see VCS holding firm ground. If gamers can play regular PC games on the VCS, then it is also a definite alternative to buying a cheaper gaming PC, making its customer group more the mass market than hardcore gamers. It is hard for us to gauge the sales potential for the console. We go into more detail about this in the Financial projections section of this research report.
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REDEYE Equity Research Atari 23 May 2019
Atari Jaguar – a failed product
Since the glory days of Atari 2600, the company has made other attempts to launch different consoles under the Atari brand. The latest before the VCS was the Atari Jaguar. The console was released in November 1993, with a 64-bit machine that was in reality a 32-bit system. The retail price was set at USD 250.
Jaguar was not successful and sold fewer than 250,000 units. Sales were discontinued just three years after launch. Most critics have stated that the multi-chip architecture, bugs, and lack of developer support tools made game development difficult, leading to only 50 licensed titles for the console. If there is no content, the gamers will not come.
Atari Casino 10% Atari Casino is a newly established division within the group, producing about 10% of revenues during fiscal year 2017/18. This Group FY 17/18 division will have a presence within the regulated EUR 17.97m online casino market, social casino, and in any other real-money games including e-sports. 90% Atari’s strategy is to leverage its IPs’ brand power within the online casino space. Casino Other
• Social casino – This is a term for mobile games with traditional casino mechanics. The users play for “pretend” money, the main attributes being the social function in terms of chat and achievements.
• Real money casino – Real money gambling in casino games is a huge business. The market is highly regulated and the legal framework is complex. The outcome of the games is based on luck alone.
Atari will operate directly or via a licensing/partnership agreement, dependent on the country. In layman terms, this means that a slot developer can sign an agreement to use an Atari brand for its game, and Atari will receive royalties based on the sales that the game generates.
The market for online gambling and slots is huge, but so is the competition. Still, Atari IPs are most likely well-known by the consumers who play slot games, as they are typically a little more mature than the “gaming” audience. Atari will not undertake any direct development of its own but will instead act via licensing agreements and maybe as a publisher funding the development. This implies low risk and high potential for Atari.
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REDEYE Equity Research Atari 23 May 2019
Atari Partners Atari Partners is a type of a “venture box”, through which the company aims to take equity stakes in growth companies. Investments 6% might be via a cash injection, or in exchange for the target company using Atari’s brands in its Group FY 17/18 business. During fiscal year 2017/18, the EUR 17.97m Partners segment generated about EUR 1.1m in revenues or 6% of group sales. On the 94% balance sheet, Atari has EUR 4.9m in recorded value for different types of securities and Partners Other holdings in these businesses and also amortised costs for deposits and loans. The holdings include:
• Infinity Networks Limited: Atari owns 30% of the capital and voting rights in Infinity Network Limited (INL), is guaranteed income related to the use of INL’s blockchain platform, and will receive profits related to sales.
• (Game Tacoo) Bayside Games: Bayside develops casual e-sports games, and Atari holds a convertible promissory note of EUR 1m in the company, which corresponds to roughly 15% of the capital. The note was received in exchange for a licence agreement and shows how Atari can gain interesting holdings in growth companies without directly investing cash.
• LGBT Media: Atari owns 26% of LGBT Media (recorded value of EUR 0.4m) in shares received after selling the Pridefest game to LGBT Media in 2017 owing to Atari’s participation in LGBT Media’s latest raising of capital.
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REDEYE Equity Research Atari 23 May 2019
Games market overview
Atari operates in the entertainment market, primarily gaming. In this section, we briefly present an overview of the gaming market and provide a short description of online casino.
The market for gaming The gaming industry consists of several different game genres aimed at all kinds of players. The main genres are: shooter/first person shooter (FPS), action/adventure/role-playing games (RPG), massively multiplayer online role-playing games (MMORPG), strategy/multiplayer online battle arena (MOBA), simulation, and puzzle.
In simplified terms, the value chain in the gaming industry consists of the following players: developers, publishers, distributors, retailers, and consumers.
• Developers – Developers can be split into three different categories. o A first-party developer is part of a platform owner, such as Sony and Microsoft, and develops games exclusively for this platform. o Second-party developers are those connected to a platform owner by creating exclusive content. Unlike a first-party developer, they can be an independently owned studio. o Third-party developers are platform-independent and are either a games publisher as well or develop games for one or several games publishers. EA and Ubisoft are examples of third-party developers.
• Distributors – Distributors are usually game vendors, supermarkets, and internet providers. Distribution via digital channels is becoming more common as gamers prefer digitally distributed games. All the console manufacturers have digital platforms. • Publishers – A games publisher publishes video games that they have either developed internally or by working with a video game developer. Usually, the publisher provides financing for the development of the game and is also responsible for the market research, pricing of the game, and all aspects of marketing and advertising. A value chain that is changing
There has been a dramatic change from physical distribution to digital distribution, with online distributors as the winners and retailers as the losers. Revenues are higher for publishers and in some cases developers. Distributors such as Apple and Google are minimising risk and maximising profits thanks to digital distribution.
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REDEYE Equity Research Atari 23 May 2019
The Atari way
What is interesting is that Atari does not follow the “classic” model, but instead outsources all development and has more focus on managing its IPs. Below is a simplification of how the company operates.
Revenue models
The following section describes the most common revenue models for the two respective segments: PC/console and mobile. • Full game – A traditional model where the customer pays for the whole game up- front. Most often about 70% of the lifetime value comes during the first months post-release. o Extra content – Often called “add- ons” and DLC (downloadable content). DLCs/expansion packs usually offer an extended storyline, new game areas, or objects that are distributed digitally by the game's official publisher.
• Freemium/F2P – F2P (free to play) has been dominating the mobile industry. In late 2016, Nintendo tried charging players when it launched Super Mario Run but its lack of success was a strong sign of how challenging the old revenue model is in mobile games nowadays. Freemium is starting to take its position in the console industry as well with strong titles such as League of Legends (LoL), PlayerUnknown’s Battlegrounds (PUBG), and Fortnite. • Subscription-based – This is the latest trend, with EA, Sony, and Microsoft having launched new subscription-based services. This could also be a more common revenue model for mobile games in the future, possibly for the whole industry, with dominating giants charging subscriptions for all their games cross-platform. In 2018, Microsoft’s two biggest exclusive titles were released on Xbox Game Pass on the very first day, which was a potential game-changer.
Market size and growth The gaming industry is the world’s largest entertainment business, trumping all others. According to Newzoo the global gaming market had a value of roughly USD 122bn during
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REDEYE Equity Research Atari 23 May 2019
2017 and is expected to grow annually by about 11% in the coming years. A key driver is mobile gaming, which is expected to rise by 19% on an annual basis.
Global Gaming Market in USD bn
180 $ 166bn $ 152bn 160 $ 138bn 140 $ 122bn $ 107bn 120 100 80 USDbn 60 40 20 0 2016 2017 2018E 2019E 2020E
Console Mobile PC
Global CAGR 11% 2017-2021, mobile CAGR of 19%
Source: New zoo
There are about 2.6 billion gamers worldwide who play at least once a month. The average gamer is 35 years old, and the gender split is relatively even, with a slight predominance of males.
#Gamers Avg age Gender
2.6Bn 35 M 54%, F 46% Mobile More than 500 new mobile games are introduced into the App Store every day. The overall mobile games market was worth USD 60 billion in 2017, and the top 10 games still account for 20% of total mobile games market revenues.
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REDEYE Equity Research Atari 23 May 2019
The hardware market for games
The market for gaming hardware is huge. During 2018, a total of 18 million PS4s, 17 million Nintendo Switches, and 7 million Xbox Ones were sold. The number of gaming-related PCs is not a readily available statistic, but a significant share of the more expensive computers are bought with the sole or partial purpose of playing games. Most consoles have a lifetime of around eight years, with peak sales in year two or three.
Sold units of gaming consoles 50 45 40 35 30 25 20 Millionunits 15 10 5 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Sony Playstation 4 Nintendo Switch XBox One Sony Playstation 3 Nintendo Wii U Xbox360 Nintendo Wii
Source: VGChartz
The online gambling industry The gambling industry consists of several different gambling verticals. Atari will primarily operate in the casino area. This includes several subcategories, such as slot machines, video slots, table games, live casino, etc. The largest online categories are slot and video slots. The value chain in the online gambling industry consists of the following participants: games suppliers, payment providers, platform providers, operators, white labels, affiliates, and the players.
Atari will primarily license its brands to game providers in Europe, and launch operation in small emerging markets like Kenya. Game studios focus on developing slot machines, video games, and virtual table games, where their skills in graphics, mathematics, and game creativity are essential to a game’s success. Return to player (RTP) is 90-98%. Casino suppliers take around 10% in commission, +/-5% depending on the size of the customer.
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REDEYE Equity Research Atari 23 May 2019
Size and growth of the market European online gambling segments (EUR bn) 2017
Gambling is a huge business in Europe. The 1.7 combined market of land-based and online gambling was estimated at a gross gaming 1.2 revenue (GGR) of EUR 91.8bn for 2017. In the 2.6 7.8 coming years, online gambling is likely to grow at a much faster pace than its older brother land-based. Within the online 6.7 gambling market, mobile gambling is expected (H2GC) to generate GGR of EUR 7.1bn and to grow at an annual rate of 15% in Sports betting Casino the coming years three years. Lotteries Poker Other games and bingo The market of suppliers Source: H2GC Suppliers of online gambling technology include many different players: games developers, technology platform providers, payment service providers, lead marketing affiliates, and more. Redeye estimates that the market for European online gambling suppliers was worth about EUR 6bn during 2017. Its growth is affected by vertical focus and niche, but overall the suppliers market is growing at the same rate as the larger main market for online gambling.
Suppliers (EUR +6bn) (Redeye estimates)
Game Platforms Affiliates developers (EUR +1.2bn) (EUR +1.5bn) (EUR +2bn)
Source: H2GC & Redeye Research
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REDEYE Equity Research Atari 23 May 2019
Management, the board, and ownership
We view management – and the CEO, chairman and major shareholder Frédéric Chesnais in particular – as paramount to the continued success of Atari. Given management’s significant holdings and the knowledgeable institutional investors, we view Atari’s ownership structure as solid. We almost always advocate for owner-operator companies, as management’s interest is the same as the minority shareholders’, namely increasing the long-term value of the company.
Management
CEO, Chairman of the Board and major shareholder – Frédéric Chesnais: As Mr Chesnais is such an important figure in the group, we will put extra emphasis on his background and history. He has been the key element behind the company’s turnaround and is also the largest shareholder.
During the past 20 years, Frédéric has been a core part of Atari. In 2001-2007, he was a member of the group’s management team, first as Deputy COO, then CFO of Atari Interactive (the entity that owned the Atari brand). In 2007, Frédéric decided to leave Atari and start his own video game company, Microprose, at which time he also founded KER Ventures, which is his personal holding company, and the direct shareholder in Atari, SA . In 2013, he bought BlueBay’s shares in Atari through KER Ventures and became the largest shareholder, CEO, and chairman. Under Frédéric’s leadership, Atari has gone from net sales of EUR 1m in FY 2012/13 to EUR 18m in FY 2017/18 and has paid off debt of EUR 31.4m – no mean feat to pull off.
• Shareholdings in Atari: o Shares: 47,065,781 o Warrants: 1,755,294 o Stock options: 13,427,500
CFO – Philippe Mularski has been CFO of Atari since 2014.
• Shareholdings in Atari: o Shares: none o Warrants: none o Stock options: 1,509,275
COO Atari Games – Jean-Marcel Nicolai joined Atari in 2018. He has previously worked as Head of Global Production at Disney Interactive Studios, CTO of Atari, and CPO at Centric Digital.
Shareholdings in Atari: Shares: none Warrants: none Stock options: 300,000
COO Atari VCS – Michael Arzt joined Atari as COO in 2017 and has been COO of Atari VCS since 2018.
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REDEYE Equity Research Atari 23 May 2019
• Shareholdings in Atari: o Shares: none o Warrants: none o Stock options: 1,002,000
Director of Strategy and Business Development – Manfred Mantschev joined the group in 2018, bringing with him vast experience from the investment banking world.
• Shareholdings in Atari: o Shares: none o Warrants: none o Stock options: 250,000
Board of Directors
Chairman - Frédéric Chesnais. See above.
Members of the board – The board consists of three independent directors: Isabelle Andrés, Erick Euvrard, and Alyssa Padia Walles. The board refreshment rate seems healthy, and these board members own a total of 346,605 shares. Alexandre Zyngier is the last member of the board and is counted as non-independent. Alexandre owns 9,519,540 shares and 1,043,823 warrants in Atari, making him the second-largest shareholder in the group.
Ownership structure
We regard Atari’s ownership structure of Atari as particularly robust, with significant holdings by management and a couple of capital-strong institutions. As discussed earlier, Frédéric Chesnais is the largest owner (about 19.5% of the capital), followed by board member Alexandre Zyngier. The third-largest owner, Arbevel, is an investment company with headquarters in Paris. The group also holds treasury shares and there are a couple of smaller institutional mutual funds, primarily from France, among the largest shareholders.
Ownership structure of Atari Owner Nr of shares % Ker Ventures LLC (Frédéric Chesnais) 47 065 781 18.4% Alexandre Zyngier 9 519 540 3.7% Financiere Arbevel SAS 6 485 933 2.5% ATARI (Treasury shares) 652 000 0.3% Other 192 386 006 75.1% Total 256 109 260 Source: Atari, Bloomberg & Redeye Research
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REDEYE Equity Research Atari 23 May 2019
Financial projections
The different business segments – Games, VCS, Casino, and Partners – all have varied business characteristics and cost structures. Despite the limited historical data, we thus choose to create sales and cost of sales projections for each unit. First, we present the group projections, and then we move onto each business unit in more detail.
Atari Group: Estimates Period 15/16 16/17 17/18 18/19E 19/20E 20/21E 21/22E 22/23E Net sales 11.9 15.4 18.0 20.2 39.5 47.2 50.2 55.2 CoS -1.8 -3.9 -2.2 -5.0 -16.8 -20.8 -19.3 -19.1 Gross profit 10.1 11.5 15.8 15.2 22.7 26.4 31.0 36.1 R&D -3.3 -3.8 -4.9 -5.9 -8.2 -8.5 -9.5 -12.1 Sales & Marketing -1.3 -2.0 -4.5 -3.2 -8.6 -9.0 -9.0 -9.9 G&A -4.0 -4.1 -3.8 -3.1 -3.2 -3.3 -4.5 -5.0 Other opr. Income & exp. -0.2 0.3 -0.3 0.3 -0.8 -0.2 -1.0 -1.1 Rec. Oper. Income 1.3 1.9 2.3 3.2 3.7 5.4 6.9 7.9 Extra items. -1.3 6.6 0.2 -0.3 1.0 1.0 1.0 1.0 EBIT 0.0 8.5 2.5 2.9 4.7 6.4 7.9 8.9 Margins and growth Net sales growth 57% 29% 17% 12% 96% 179% 122% 40% Gross profit margin 85% 75% 88% 75% 58% 56% 62% 65% Rec. Op. Inc. margin 11% 12% 13% 16% 9% 11% 14% 14% EBIT margin 0% 55% 14% 15% 12% 14% 16% 16%
Source: Redeye Research
Estimates in summary: • We expect that Atari manages to launch two more game brands successfully in the coming years three years period, and that those games achieve similar commercial success to RCT. • The surge in revenues we forecast for 2019/20 can mainly be attributed to the launch of the VCS console. VCS sales have a different cost mix to licensing revenue and IAP (In-App-Purchases) game sales, which leads to lower gross profit margins than in the past. • We expect a gradual ramp-up of the casino segment, with roughly 10% of revenues from this business unit by 2022/23.
Significant tax loss carry-forwards to be utilised
Due to its long history, Atari still has significant tax loss carry-forwards. In France, these amount to EUR 735m, and in the US they are USD 600m. The likely utilisation of these tax loss carry-forwards should be significantly less than the nominal value, but still Atari will only pay a small amount of taxes for the foreseeable future. The legal framework regarding such carry-forwards is complex, but they create value for Atari shareholders regardless.
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REDEYE Equity Research Atari 23 May 2019
Financials – Atari Games Today, the revenues from Games stem from the RollerCoaster Tycoon IP, other gaming products, and the licensing deals such as the Atari Flashback. During H1 2018/19, RollerCoaster Tycoon (RCT) sales held up well, mainly thanks to the continued strong performance of RollerCoaster Tycoon Touch. “Other” income also performed well, owing to strong licensing activity and Atari Flashback sales. During H1, Atari also received a settlement of EUR 1.2m from a t-shirt manufacturer. In seasonality terms, H2 is usually a stronger period for Atari.
Atari Games sales development
12
10
8 5 5 6 6 4 4
4 Net sales (mEUR) Netsales 2 5 4 5 5 3 0 16/17-H1 16/17-H2 17/18-H1 17/18-H2 18/19-H1
RollerCoaster Tycoon Other
Source: Redeye Research
Releases during H2 2018/19
RollerCoaster IP During H2, releases of games in the RCT franchise included RollerCoaster Tycoon: Adventures on PC and Switch, as well as VR title Joyride. The RCT: Touch title has also seen some major content updates that will likely continue to drive both monetisation and new user intake to some degree. Gross rankings appear to have been quite stable (lower is better), so the income level will likely be comparable to H1. Uptake in RCT sales during H2 will come from the new game releases mentioned above.
RCT: Touch iPhone Gross Rankings USA
430 410 390 370 350 330
310 Gross RankingGross 290 270 250
Source: Appannie, Redeye Research
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REDEYE Equity Research Atari 23 May 2019
Other game products During H2, Atari has released a total of four new mobile games: • Citytopia (global launch in December 2018 with gradual rollout) • Food Truck Frenzy (soft launch on 31 January 2019) • Days of Doom (soft launch on 19 February 2019) • Ninja Golf (soft launch on 25 March 2019)
Overall, it is too early to judge the success of these games. Citytopia is the only one to have briefly hit the US grossing charts. We expect a limited contribution from these titles during the half-year period. During H2, Atari Games will also see a positive impact from yet another settlement agreement, this time with a US-based company, adding a USD 1.1m in earnings contribution.
The pipeline
The current pipeline that we are aware of looks compelling. Some new RCT games are progressing, but Atari is also in the process of developing and releasing new games based on some of its largest brands: Asteroids and Pong. These game releases will be key drivers for revenue growth during fiscal 2019/20.
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REDEYE Equity Research Atari 23 May 2019
Atari Games sales development
40 Forecast 35
30 14 9 25 5 6 20 12 15 11 13 13 14 7 6 Net Net (mEUR) sales 10 5 5 7 8 9 9 9 9 9 8 0 15/16 16/17 17/18 18/19E 19/20E 20/21E 21/22E 22/23E
RollerCoaster Tycoon Other New products
Source: Redeye Research
When looking at the pipeline, it is clear that Atari is starting to toy with moving its massive IP portfolio to a modern context. The Asteroids and Pong franchises seem to be initial steps in this, but they are likely just the start. We believe the company will be able to mimic the success of the RollerCoaster Tycoon IP, and we expect increased sales thanks to new releases during the coming years. However, we take a cautious approach and model quite conservative success for the relaunched IPs, even though Asteroids, Pong, Space Commander, etc are more well-known and stronger franchises than RollerCoaster Tycoon.
Financials – VCS Today, the VCS business brings in almost no revenues, except some minor accounting- related fees. The launch of the Atari VCS in late 2019 will mark the start for this business segment. It is hard to speculate with projections for a product we have not been able to test or read the first customer reviews for. What we do know, however, through the 10,000 pre- orders on Indiegogo is that there is demand and that people are excited to see the VCS come to life. We also believe there is a market for this type of mini-PC, as the mass market does not typically want to buy a true gaming rig/laptop. The VCS will also have streaming service compatibility versus functionality that is large and extends beyond just games.
The VCS will include Atari games, but we also expect some type of affiliation programme with PC stores such as Steam or Epic Games Store, so the company can earn revenues from users buying PC games through the VCS. Such platform sales are even harder to project, as they are a derivative of the VCS sales and user count. Still, these revenues will be highly profitable with very low associated costs.
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REDEYE Equity Research Atari 23 May 2019
Atari VCS unit sales and ASP
80000 230 250 200 70000 190 185 200 60000
50000 150 40000 75 000
30000 63 750 100 ASP (EUR) ASP
Unit Unit sold (ks) 50 000 54 188 20000 50 10000 0 0 19/20E 20/21E 21/22E 22/23E
UNITS (ks) ASP (eur)
Source: Redeye Research
We expect that the VCS will sell around 50,000 units, including the 10,000 pre-orders, during its first year at an ASP of EUR 230. Furthermore, we expect the units sold patterns to be typical for gaming consoles and to reach a peak in year two, or possibly year three. Overall, we expect a rise in units sold during year two thanks to word-of-mouth, marketing, and a lower ASP through discounts and promotions.
Atari VCS sales and gross profit development
18 25 16 2 20 14 3 12 4 2 15 10 8 15 10 6 12
10 10 Net Net (mEUR) sales 4 5 profit Gross (mEUR) 2 0 0 19/20E 20/21E 21/22E 22/23E
VCS Platform sales Gross profit
Source: Redeye Research
We expect to see a strong development for the VCS segment driven by the sale of the console. In the diagram above we include our gross profit assumption for the business unit. Margins on the streaming box will be low in comparison with the overall group. We expect that cost of sales will amount to around 90% of the selling price, but we model negative margins during the first year to be conservative. At the same time, sales of games via the VCS platform would be highly profitable, and so we model increasing gross profit over the years despite total net sales dropping as unit sales of the VCS and its ASP decline. We expect that the platform sales of games will continue to increase as the churn of users is likely to be low, and so the number of users will grow steadily, allowing platform sales to do the same.
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REDEYE Equity Research Atari 23 May 2019
Financials – Casino We consider Atari’s opportunity in the casino space to be huge. This is a massive market driven by digitalisation. The regulatory framework in each country is something of a hindrance, but we can say that, in general, the whole market is opening up for online gambling. There is no shortage of game developers, and the competitive environment is becoming increasingly challenging, which is why we believe that Atari has a true shoot at this. Firstly, the average gambler is usually a bit older than the general gamer audience and is more likely to have some kind of previous relationship with the Atari brand. We believe that most of Atari’s IPs could fit well into a casino slot or real money type of game. What operators and developers want most is unique content and a way to stand out, and this is where Atari Casino comes in. The online casino experience itself is mostly similar, with casinos offering similar experiences bundled in different packages, ie casino operator brands.
Exemplified launch of a casino slot game
120
100
80
60
40 Indexed Indexed revenue 20
0
Hit game Ordinary game
Source: Redeye Research
Atari’s model in casino will mostly be based on partnership agreements, which means that a slot developer can sign an agreement to use an Atari brand for its game. Atari will then receive a royalty based on the revenues the game generates. This model offers low risk for Atari, as it will rarely invest in the development, but the outcome could be substantial. Typical slot games see their peak sales during the first weeks after release, thanks to lobby promotion of the games on the operator sites. After this, revenues decline and create a long tail that might amount to 3-10% of the “peak” level. Some games, however, are true successes, and start to gain traction again after a while. These games can become incredibly valuable and generate substantial revenues for many years.
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REDEYE Equity Research Atari 23 May 2019
Financials – Casino The Atari Casino venture will be about building a portfolio of games, which takes time. Currently, Atari has a partnership with Pariplay, and an Atari Pong slot was released in 2018. We expect more collaborations to be announced. Predicting sales levels is hard, of course, and should be seen as highly speculative. A medium-sized casino slot developer can often achieve EUR 5-10m in annual revenues after 3-5 years of high profitability. There are, of course, many examples of studios that have been much more successful though. We make the cautious assumption that Atari can reach roughly EUR 5m in annual sales after about four years
Atari Casino: Estimates mEUR 17/18 19/20E 20/21E 21/22E 22/23E 23/24E Net sales 1.8 0.3 1.5 2.3 3.4 4.9 Growth -83% 400% 50% 50% 45%
Source: Redeye Research
Financials – Partners Partners’ sales will fluctuate over the years as this business will be impacted by the venture investments and partnership agreements signed. We model annual revenues in a range of EUR 0.5-1.0m. The minority investments that increase in value will not show up in the income statement but will instead be recorded on the balance sheet for the Group.
Atari Partners: Estimates mEUR 17/18 19/20E 20/21E 21/22E 22/23E 23/24E Net sales 1.1 0.3 0.4 0.4 0.8 0.5 Growth -72% 45% -10% 100% -30%
Source: Redeye Research
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REDEYE Equity Research Atari 23 May 2019
Valuation
Base Case: SEK 4.3 per share Key model assumptions: • CAGR sales (2018-26): 16% • Average EBIT margin: 16% • Terminal FCF growth: 2% • Terminal EBIT margin: 17% • WACC: 10%
Our Base Case assumes that Atari replicates its RCT success with two new titles from its extensive IP portfolio. The VCS achieves decent commercial success but no real break-through, selling roughly 250k units in the coming years. The Casino vertical continues to progress and represents approximately 10% of Group sales by 2022/23. A long- term margin in the region of 17% reflects Atari’s licensing focus and cost-effectiveness. We value financial investments like Network Limited, Bayside Games and LGBT Media at cost and treat these as possible value-enhancing options. The significant LCFs, which should be attractive for an acquirer, are treated separately in our DCF model and add to the margin of safety in our valuation.
Bull Case: SEK 6.6 per share Key model assumptions: • CAGR sales (2018-26): 21% • Average EBIT margin: 16% • Terminal FCF growth: 2% • Terminal EBIT margin: 18% • WACC: 10%
Our Bull Case factors in the VCS achieving commercial success, leading to higher platform sales and driving the company’s growth for many years to come. As in our Base Case, this scenario assumes that Atari brings two further game franchises to life - but here their income exceeds RCT’s annual revenue. Again, the Casino vertical progresses towards approximately 10% of Group sales by 2022/23. Overall, the scenario features higher growth than the Base Case, but at approximately the same margins.
Bear Case: SEK 2.2 per share Key model assumptions: • CAGR sales (2018-26): 7% • EBIT margin average: 12% • Terminal FCF growth: 2% • Terminal EBIT margin: 12% • WACC: 10%
Our Bear Case assumes that the RCT license agreement is extended beyond 2022, hurting the company’s long-term growth. It also factors in fewer VCS units shipped, which reduces platform sales and lowers the profit margin. Nonetheless, the downside is limited by Atari’s massive LCFs and its investment holdings.
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REDEYE Equity Research Atari 23 May 2019
Peer valuation
Atari differs from traditional game publishers/developers as it is more of a media company with a portfolio of franchise assets that it is monetizing in various ways. Accordingly, insights from a comparison with peers are relatively limited, but indicate the range of sales and earnings multiples in the broad sector.
Peer valuation EV/Sales EV/EBIT SALES CAGR EBIT margin Company EV (MSEK) 2019E 2020E 2019E 2020E 2021E 18-21E 2019E 2020E 2021E Nordic Gaming THQ Nordic 23 256 4.0x 3.7x 33x 25x 25x 14% 29% 32% 33% Paradox Interactive 15 132 8.6x 7.4x 26x 20x 17x 37% 48% 53% 45% Stillfront 6 055 3.4x 3.0x 12x 11x 10x 19% 39% 38% 38% Funcom 1 301 3.1x 2.3x 13x 8x 8x 32% 24% 27% 26% Remedy 838 2.3x 2.1x 10x 10x 10x 21% 23% 20% 15% G5 Entertainment 719 0.6x 0.5x 5x 5x 5x 1% 20% 19% 21% Median 3 678 3.3x 2.7x 12x 11x 10x 20% 26% 29% 30% Mobile/casual Zynga 53 048 3.8x 3.4x 20x 16x 15x 30% 19% 21% 21% GLU 11 522 2.7x 2.3x 23x 13x n.m. 24% 12% 17% n.m. Rovio 4 936 1.5x 1.4x 11x 8x 7x 10% 14% 17% 17% Com2us 4 742 1.1x 1.0x 4x 3x 3x 8% 31% 31% 32% G5 Entertainment 719 0.6x 0.5x 5x 5x 4x 1% 11% 11% 13% Median 4 936 1.5x 1.4x 11x 8x 6x 10% 14% 17% 19% International Gaming Tencent 4 426 567 7.9x 6.2x 22x 17x 12x 17% 35% 36% 41% Nintendo 343 988 2.9x 2.9x 11x 11x 12x 13% 26% 26% 25% Activision 313 601 5.1x 4.6x 16x 13x 12x 4% 33% 35% 35% EA 231 551 4.6x 4.4x 15x 13x 14x 9% 31% 32% 31% Ubisoft 100 438 4.4x 4.0x 22x 18x 16x 16% 20% 22% 24% Take-Two 97 650 3.8x 3.5x 19x 16x 18x 34% 20% 22% 15% Bandai Namco 88 388 1.4x 1.3x 11x 11x n.m. 12% 12% 12% n.m. CD projekt 48 753 38.9x 7.2x 89x 11x 15x 79% 44% 67% 64% Median 165 994 4.5x 4.2x 17x 13x 14x 14% 28% 29% 31% Peer Group median 4 936 3.3x 2.7x 12x 11x 10x 14% 26% 29% 30% Atari (mEUR) 82 4.1x 2.1x 28x 18x 13x 38% 15% 12% 14% Source: Bloomberg & Redeye Research
While Atari’s valuation multiples appear relatively high compared to peers, they are reasonable and fair in view of its ‘hidden’ assets - the extensive IP portfolio, investment holdings and LCFs, in our view. These factors, as well as its strong balance sheet and profitability, also make it an attractive acquisition target.
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REDEYE Equity Research Atari 23 May 2019
Catalysts
VCS release above expectations
It seems like the market has almost fully ignored the VCS and the potential it holds. The VCS can be viewed as a form of mini-PC at an attractive price. Our base case assumes sales of about 250k units over the next four years, compared to current annual sales of 500k Atari Flashbacks, which retail at around USD 80.
Going beyond RCT
Besides new RCT games, Atari is also developing new releases based on some of its largest brands: Asteroids and Pong. These will be key drivers of revenue growth in the year ahead.
An acquisition target
We view Atari as an attractive acquisitions target thanks to the extensive IP portfolio, strong balance sheet, profitability, and the loss-carry forwards.
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REDEYE Equity Research Atari 23 May 2019
Summary Redeye Rating
The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points.
Rating changes in the report
Management: 9.0
We almost always advocate for owner-operator companies as the management interest is literally the same as the minority shareholders, namely increasing the long-term value of the company. Under Frédéric’s leadership, Atari has gone from a net sales of EUR 1m in FY 12/13 to EUR 18m in FY 17/18 and paid off the debt of EUR 31.4m and now having net cash of EUR 8m+ on their balance sheet. It will be interesting to see what value enchanting endeavors Frédéric and the rest of the management can pull off now when they actually have the resources to do that.
Ownership: 9.0
With significant holdings from managed and also with knowledgeable institutional investors, we view the ownership structure of Atari as strong. We almost always advocate for owner-operator companies as the management interest is literally the same as the minority shareholders, namely increasing the long-term value of the company.
Profit Outlook: 6.0
We view the profit outlook for Atari as favorable. Their core strength is their brands, which sets them apart from many other industry players. Launching new games and products is and is associated with major uncertainties but basing a game on a known brand helps a lot and should reduce the risks of failure. Atari is pursuing new growth endeavors like reviving some of the more classic retro titles, taking a console to market and working on the casino vertical. All in all, we believe the outlook for profitable growth he coming years are significant.
Profitability: 8.0
Atari has shown excellent growth and profitability in the last few years. The company is somewhat different from other gaming studios and publisher as a significant part of the income comes from licensing agreements at low cost for Atari, which leads to strong and stable margins. Due to its long history, Atari still has significant tax loss carry-forwards. In France, it amounts to EUR 735m and in the USA it’s USD 600m. The likely utilization of these tax loss carry-forwards will most likely be significantly less than the nominal value, but still Atari will only pay a small amount of taxes for the foreseeable future. During the past five years, the financials for Atari has improved significantly. In FY 12/13 the company had a net sales of EUR 1m, and in FY 17/18 it had expanded to EUR 18m, during the same time the Atari have and paid off a debt of EUR 31.4m and turned profitable with above industry margins and return on capital.
Financial Strength: 6.0
Atari has a light balance sheet and a strong cash position. Atari differs somewhat from other industry players when it comes to their operating model. A significant part of the income is generated through different kinds of licensing agreements and royalties, which creates strong margins and a low CAPEX need.
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REDEYE Equity Research Atari 23 May 2019
INCOMEPlease STATEMENT comment 16on/17 the changes17/18 18 in/19 Rating19/20 factors……20/21 DCF VALUATION CASH FLOW, MEUR Net sales 15 18 20E 40E 47E WACC (%) 10.0 % NPV FCF (2018-2020) 5 Total operating costs -4 -14 -15 -32 -36 NPV FCF (2021-2027) 33 EBITDA 11 4 5 8 11 NPV FCF (2028-) 57 Depreciation 0 0 0 0 0 Non-operating assets 8 Amortization -3 -2 -2 -3 -5 Interest-bearing debt -1 Impairment charges 0 0 0 0 0 Fair value estimate MEUR 103 EBIT 9 3 3 5 6 Assumptions 2017-2023 (%) Share in profits 0 0 0 0 0 Average sales growth 21.9 % Fair value e. per share, EUR 0.4 Net financial items -1 0 0 0 0 EBIT margin 15.4 % Share price, EUR 0.3 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 8 2 3 4 6 PROFITABILITY 16/17 17/18 18/19E 19/20E 20/21E Tax 0 0 0 0 -1 ROE 0% 22% 17% 22% 25% Net earnings 8 2 3 4 6 ROCE 181% 21% 19% 25% 27% ROIC 0% 31% 26% 31% 40% BALANCE SHEET 16/17 17/18 18/19 19/20 20/21 EBITDA margin 72% 25% 26% 20% 23% Assets E E E EBIT margin 55% 14% 15% 12% 14%
Current assets Net margin 50% 13% 12% 10% 12% Cash in banks 1 3 2 4 8 Receivables 8 4 5 10 12 DATA PER SHARE 16/17 17/18 18/19E 19/20E 20/21E Inventories 0 0 0 0 0 EPS 0.03 0.01 0.01 0.02 0.02 Other current assets 0 0 0 0 0 EPS adj 0.00 0.01 0.01 0.02 0.02 Current assets 10 8 7 14 20 Dividend 0.00 0.00 0.00 0.00 0.00 Fixed assets Net debt 0.00 -0.01 -0.01 -0.02 -0.03 Tangible assets 0 0 0 0 0 Total shares 230.41 228.94 253.44 253.44 253.44 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 VALUATION 16/17 17/18 18/19E 19/20E 20/21E Goodwill 0 0 0 0 0 EV 49.3 144.0 80.0 80.0 80.0 Cap. exp. for dev. 0 0 0 0 0 P/E 44.0 70.4 34.1 21.3 15.0 O intangible rights 7 9 13 17 19 P/E diluted 44.0 70.4 34.1 21.3 15.0 O non-current assets 3 5 5 5 5 P/Sales 3.1 8.1 4.0 2.0 1.7 Total fixed assets 10 14 18 21 24 EV/Sales 3.2 8.0 4.0 2.0 1.7 Deferred tax assets 1 1 1 1 1 EV/EBITDA 4.4 32.4 15.4 10.2 7.3 Total (assets) 20 22 25 36 45 EV/EBIT 5.8 56.7 27.1 17.2 12.5 Liabilities P/BV 6.5 10.6 5.3 5.3 5.3 Current liabilities SHARE PERFORMANCE GROWTH/YEAR 16/18E Short -term debt 0 0 0 0 0 1 month - Net sales 14.5 % Accounts payable 10 8 8 16 19 3 month 99,999,999,900.-8.8 % Operating profit adj -41.1 % O current liabilities 0 0 0 0 0 12 month -48.30 % EPS, just 44.4 % Current liabilities 10 8 8 16 19 Since start of the year -8.8 % Equity 48.5 % Long-term debt 2 1 1 0 0 SHAREHOLDER STRUCTURE % CAPITAL VOTES O long-term liabilities 0 0 0 0 0 Ker Ventures LLC (Frédéric Chesnais) 19.5 % 39.0 % Convertibles 0 0 0 0 0 Alexandre Zyngier 3.7 % 7.4 % Total Liabilities 12 8 9 16 19 Financiere Arbevel SAS 2.5 % 5.0 % Deferred tax liab 0 0 0 0 0
Provisions 0 0 0 0 0
Shareholders' equity 7 14 16 20 26
Minority interest (BS) 0 0 0 0 0
Minority & equity 7 14 16 20 26
Total liab & SE 20 22 25 36 45
FREE CASH FLOW 16/17 17/18 18/19 19/20 20/21 SHARE INFORMATION Net sales 15 18 20E 40E 47E Total operating costs -4 -14 -15 -32 -36 Reuters code ATA SDB Depreciations total -3 -2 -2 -3 -5 List ENX/Nasdaq EBIT 9 3 3 5 6 Share price 0.3 Taxes on EBIT 0 0 0 0 0 Total shares, million 253.4 NOPLAT 9 3 3 5 6 Market Cap, MEUR 86 Depreciation 3 2 2 3 5 Gross cash flow 11 4 5 8 11 MANAGEMENT & BOARD Change in WC 2 1 0 3 1 CEO Frédéric Chesnais Gross CAPEX -13 -6 -6 -7 -8 CFO Philippe Mularski Free cash flow 1 0 -1 4 5 IR Chairman Frédéric Chesnais CAPITAL STRUCTURE 16/17 17/18 18/19 19/20 20/21 Equity ratio 37% 62% 65%E 56%E 58%E FINANCIAL INFORMATION
Debt/equity ratio 27% 4% 4% 0% 0%
Net debt 1 -3 -1 -4 -8
Capital employed 8 11 15 16 18
Capital turnover rate 0.8 0.8 0.8 1.1 1.0
ANALYSTS GROWTH 16/17 17/18 18/19 19/20 20/21 Redeye AB Kristoffer Lindstrom Mäster Samuelsgatan 42, 10tr Sales growth 0% 17% 12%E 96%E 19%E [email protected] 111 57 Stockholm EPS growth (adj) 0% 90% 10% 60% 42%
Tomas Otterbeck [email protected]
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REDEYE Equity Research Atari 23 May 2019
Redeye Rating and Background Definitions
The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.
Company Qualities
The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth. We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 – Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength. Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points. The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys.
Management
Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 – Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.
Ownership
Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.
Profit Outlook
Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 – Competitiveness.
Profitability
Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit margin or EBIT.
Financial Strength
Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term. The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 – Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary events.
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REDEYE Equity Research Atari 23 May 2019
Redeye Equity Research team
Editorial Management Jim Andersson Björn Fahlén [email protected] [email protected] Eddie Palmgren Håkan Östling [email protected] [email protected] Mark Sjöstedt Technology Team [email protected]
Jonas Amnesten Johan Kårestedt (Trainee) [email protected] [email protected]
Henrik Alveskog [email protected] Life Science Team Anders Hedlund Dennis Berggren [email protected] [email protected] Arvid Necander Havan Hanna [email protected] [email protected] Erik Nordström Kristoffer Lindström [email protected] [email protected] Klas Palin Fredrik Nilsson [email protected] [email protected] Jakob Svensson Tomas Otterbeck [email protected] [email protected] Ludvig Svensson Eddie Palmgren [email protected] [email protected] Oscar Bergman (Trainee) Oskar Vilhelmsson [email protected] [email protected] Alexander Ribrant (Trainee) Viktor Westman [email protected] [email protected]
Linus Sigurdsson (Trainee) [email protected]
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REDEYE Equity Research Atari 23 May 2019
Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization).
Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis.
Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies: • For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, effective from 30 days before its covered company comes with financial reports, such as quarterly reports, year-end reports, or the like, to the date Redeye publishes its analysis plus two trading days after this date. • An analyst may not engage in corporate finance transactions without the express approval of management, and may not receive any remuneration directly linked to such transactions. • Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.
Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument.
Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making.
Redeye Rating (2019-05-23) Rating Management Ownership Profit outlook Profitability Financial Strength 7,5p - 10,0p 53 52 21 12 22
3,5p - 7,0p 94 88 126 44 60
0,0p - 3,0p 14 21 14 105 79
Company N 161 161 161 161 161
Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB.
CONFLICT OF INTERESTS
Kristoffer. Lindström. owns shares in the company Atari: No Tomas Otterbeck owns shares in the company Atari : No Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this.
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