ADMINISTRATION REPORT Risk factors

Risk factors

Specified below are some of the business- and industry-related risk factors that could have consequences for NetEnt’s future development. The risk factors are not arranged in order of importance or potential financial impact on the company’s revenues, profit or financial position. For financial risk factors that affect the company’s business, see Note 26.

that meet certain basic criteria. tions for gaming operators and Political decisions Due to ongoing legal game developers like NetEnt. Operational Risks developments in the different NetEnt is legally based in the disruptions NetEnt’s business is highly member states, in combina- EU, which gives the company dependent on the legal land- tion with an emerging set of constitutional protection for Risks scape for online casino games, precedents in the EU Court, business activities that follow NetEnt is responsible for primarily in the EU since most NetEnt operates in a relatively from national law, EU law and operating customer systems of the company’s customers unpredictable legal environ- the overarching WTO system. through its operation centers are based in Europe. In recent ment, at least with regards As NetEnt expands geograph- in Malta, Gibraltar, Alderney, years, a number of countries to the EU market. This means ically, the revenue base is Costa Rica and Denmark. Like have deregulated or reregu- that it is difficult to quantify becoming more diversified and other online services, the lated online gaming. Through the risk that NetEnt’s business dependency on political de- systems can sometimes suffer the EU Court’s latest legal could be negatively affected by cisions in individual countries from operational disturbanc- precedents, the member future political decisions. becomes smaller. In Sweden, es. The reasons for these can states have been give greater NetEnt is a member of the be both within and beyond opportunities to secure tax Management industry association for online NetEnt’s control. If opera- revenues provided that the li- It is difficult to predict how the gaming, BOS, which represents tional disturbances occur, the censing systems create sound legal landscape in the EU will gaming companies and suppli- company’s product could be competitive conditions and are develop in the future, and thus ers. In the next few years, the entirely or partially unavail- formally open to all operators affect the commercial condi- most important task for BOS able to the end users, which is to promote new, sustainable affects the gaming opera- gaming legislation in Sweden. tor’s revenues and therefore also NetEnt’s revenues. Any operational disturbance or technical problem in the com- pany’s servers could therefore result in lost revenues, loss of Regulated operations confidence in the company and and compliance (sustainability) possible claims for damages.

Risks Man. It is of vital importance regulated markets. NetEnt Management NetEnt holds licenses in the for NetEnt’s business that the undergoes audits and inspec- NetEnt invests continuously in following jurisdictions: Malta, above licenses and certifi- tions as licenses are obtained IT infrastructure and staff to Alderney, Gibraltar, the UK, cations are maintained and and extended. The license ensure high technical security Belgium, Romania and Spain. extended. on Malta was obtained for a in its systems and to mini- The company also has a tem- period of five years and was mize the risks for operational porary permit for operations in Management extended in 2015. In Alderney disturbances. New Jersey that will eventu- An important part of NetEnt’s and Gibraltar, the licenses are ally be replaced by a complete strategy is to grow in regulat- extended annually. The UK license. Furthermore, NetEnt’s ed markets. In recent years, licenses are continuous and products are certified in Den- the company has invested inspections are carried out mark, Italy, Estonia, Latvia, in technology and expertise regularly by the regulator. Bulgaria, Portugal and Isle of to adapt the organization to

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Responsible gaming (sustainability) Risks claims appear to be unfound- Management This means that the games are Although NetEnt does not offer ed, and would most likely be NetEnt works actively and in designed with functions that gaming services directly to rejected by a court of law, they close collaboration with other enable the operators to offer players, people suffering from could involve considerable entities in the market to pre- players good control over their gambling addiction could sue expenses and loss of confi- vent gambling-related prob- gaming. companies in the NetEnt Group dence for NetEnt, which could lems. NetEnt’s product design in their capacity as games and ultimately lead to reduced strives to help the operators systems supplier. Even if such revenues. promote responsible gaming.

ences and expertise in game by developing the corpo- Dependency development and technology. rate culture and by offering on skills and The business is also depend- competitive remuneration. In expertise ent on key personnel at the addition, the company offers management level. Due to opportunities for professional (sustainability) the high pace of change in the development, advancement in gaming industry, the loss of the organization as well as a experienced personnel in busi- healthy lifestyle through activ- Risks ness-critical areas could have ities and wellness benefits. NetEnt’s success depends on a temporary negative impact the ability to recruit and retain on the company’s profits and skilled employees in all func- financial performance. tions in the locations where NetEnt conducts operations. Management This includes commercial NetEnt actively works to be experience, understanding of an attractive employer with operator and player prefer- dedicated and loyal employees

Competition Management The barriers to entry in the Risks market for game development NetEnt competes with a few, are relatively high and are well-established companies. rising further as the share of But the market is highly at- regulated markets increases. tractive and new competitors NetEnt’s ambition is to main- are constantly attempting to tain and advance its position enter. If NetEnt is not success- as a world-leading provider of ful in fending off competition, digitally distributed gaming this could have a negative im- systems and to be a respect- pact on the company’s profits ed participant in the market. and financial position. Through a continued focus on development of high quality games with high entertainment value, in combination with a powerful administrative tools and related services, NetEnt hopes to defend and strength- en its market position.

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Dependency on Product faults and safety major customers Risks Risks certifications. The existence cesses so as to maintain high The loss of any of the compa- There is no guarantee that of technical faults could also IT security. The company con- ny’s major customers could NetEnt’s games cannot eventually damage confidence tinuously monitors the gaming have a negative impact on contain technical faults that in the company’s products. transactions in its systems to NetEnt’s revenues and profits. could be exploited by players Moreover, it cannot be ruled detect any irregularities and and lead to poorer game out that NetEnt’s customers or take swift action if needed. IT Management outcomes and consequently the company could be targeted security and operations are As NetEnt grows and the lower revenues for NetEnt’s by hacking or similar types of an important area where the number of customers increas- games, or give rise to legal cybercrime. company continuously invests es, this is gradually reducing expenses linked to the com- resources to enhance and dependency on individual major pany’s liability for product Management adapt its protection to the customers. functionality according to NetEnt applies industry stand- latest technological develop- the product descriptions and ards in its systems and pro- ments.

Intellectual property rights Risks be breached or contested by for conducting business. In products accrues to NetEnt. NetEnt’s most important intel- competitors. Furthermore, it addition, NetEnt is depend- Furthermore, the company lectual property rights consist cannot be ruled out that legal ent on specific knowhow and continuously protects its of the copyrights for the action could be taken against it cannot be ruled out that intellectual property rights for software and the games that NetEnt by competitors for competitors could develop example by registering pattern the company has developed alleged infringement on com- equivalent knowhow or that protection and trademarks. In and continuously develops. It petitors’ rights, both in Europe NetEnt could fail to effectively certain cases, NetEnt can also is therefore crucial that the and in North America. If this protect its knowhow. enter agreements to ensure assets developed in the Group happened, there would be a that the company’s products remain NetEnt’s property. risk of the company suffering Management do not risk infringing on any There is no guarantee that from substantial legal expens- Through contracts with other company’s patent rights. NetEnt’s rights will not in- es and damage claims, which employees and subcontrac- fringe on those of competitors would have a negative impact tors, NetEnt ensures that or that NetEnt’s rights will not on the company’s conditions the copyright for developed

Exchange rate fluctuations Risks ny’s profit. The attainment of Group’s consolidated financial is well equipped to handle The Group’s profits and NetEnt’s financial targets may reporting. exchange rate fluctuations. financial position are affected be affected by future exchange As the company expands its by exchange rate fluctua- rate fluctuations. Consolidat- Management operations outside Sweden, tions, since the main part of ed profit, equity, assets and NetEnt’s current policy is the cost base is also becoming revenues are invoiced in EUR liabilities are likewise affected not to hedge revenues and more diversified. while the costs largely arise in by exchange rate fluctuations expenses. NetEnt has a strong SEK. Appreciation of the SEK when the profits and net balance sheet and its opera- in relation to the EUR has a assets of foreign subsidiaries tions generate healthy cash negative impact on the compa- are translated to SEK for the flows. In general, the company

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Tax status Risks will not correspond to the amounts that NetEnt and Company and the Malta-based NetEnt’s tax expense is interpretations made by the its advisors deem correct. operation were not justified. affected by the countries tax authorities. After a tax audit of NetEnt AB However, NetEnt contested where its operations generate (publ) for the financial years the Swedish Tax Agency’s profits and the tax laws in Management 2007–2010, the Swedish Tax ruling and in March 2016 the these countries. New laws, Together with external ex- Agency decided to impose ad- Swedish Court of Appeal ruled taxes or rules could give rise perts, NetEnt has assessed ditional taxes on the company in favor of NetEnt and reversed to limitations in operations or how different tax rules affect for a total of approximately the Administrative Court’s place new and higher require- its operations, to ensure an SEK 92.1 million. In its decision, earlier ruling and the Swedish ments. There is also a risk accurate tax status. This the Swedish Tax Agency Tax Agency’s review decision in that NetEnt’s interpretation also applies to indirect taxes. found that the transfer pricing this case. of the applicable tax laws, tax NetEnt reports and pays tax used by the Group between agreements and regulations to the tax authorities in the the Sweden-based Parent

Anti-corruption and anti-money The business cycle laundering (sustainability) Risks Management Risks online casino games. It cannot Corruption and money laun- NetEnt has zero tolerance Historically, NetEnt’s reve- be ruled out that NetEnt’s dering are major problems and clear guidelines when it nues have not been negatively revenues and profits could be worldwide and are unfor- comes to money laundering affected by a weaker business negatively impacted in the tunately also found in the (AML policy) and corruption cycle. However, the online event of a future economic gaming industry. The existence (anti-bribery policy), and has a gaming industry is affected downturn. of these in NetEnt’s operations handbook to deal with money by the business cycle to a could seriously damage the laundering and financing of certain extent. A downturn in Management company’s ability to conduct terrorism (handbook for AML/ the economy could lead to a NetEnt’s products are dis- its business. Not only would CFT). All employees are given decrease in consumers’ dis- tributed in a large number of the company’s reputation training in anti-corruption posable income and therefore markets that do not follow the be negatively affected, but and anti-money laundering. also lower demand for digital same business cycle, which the company would also risk NetEnt’s compliance function entertainment, including reduces cyclical risk. losing gaming licenses and supports the organization in certifications that are essen- matters related to business tial for its operations. risks, laws, regulations, direc- tives and compliance with the company’s policies.

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