Annual Report 2019 - Funcom SE Page 2
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Contents Letter from the CEO 3 About Funcom 4 Active game portfolio 7 The Dreamworld Technology® 12 Report of the Management Board 12 Corporate Governance 20 Responsibility Statement 27 Corporate Governance Declaration 28 Report of the Supervisory Board of Directors 29 Consolidated Financial Statements: Consolidated Statement of Comprehensive Income 33 Consolidated Statement of Financial Position 35 Consolidated Statement of Cash Flows 37 Consolidated Statement of Changes in Equity 38 Notes to the Consolidated Financial Statements 40 Company Financial Statements: Statement of Financial Position 99 Statement of Comprehensive Income 100 Notes to the Company Financial Statements 101 Other information: Other information 111 Auditor’s report 112 Annexes: Annex I: Remuneration Committee report for 2019 121 Annex II: Investor Relations Policy 124 Annex III: Financial Calendar for Funcom 2020 127 Annex IV: Contact Details 128 Annual Report 2019 - Funcom SE Page 2 Letter from the CEO “2019 is the year with most releases in Funcom’s history, with a total of 10 game and DLC releases spread around four hardware platforms, 23 online stores and global retail distribution. It’s also been a year where the games industry has been showing signs of shifts in business models and trends, with the Epic Game Store growing in popularity, several game subscriptions services changing the dynamics around game sales and in-game monetization models such as loot boxes being under pressure from legislators. Combined with the very large number of games being released into the market, this makes for a competitive situation that leads to games requiring more than ever unique competitive advantages, larger budgets or a dose of luck in order to become visible and succeed. This has been felt in our publishing initiatives overall, with some of them like Conan Unconquered not generating as much attention as we originally hoped for. The multi-platform approach we take on other games such as Mutant Year Zero: Road to Eden, Moons of Madness and Conan Chop Chop helps to alleviate some of this risk by making the games available on as many platforms as possible at launch, but it also carries a technical and process cost, which impact the time needed to get the games to market. In the middle of these many publishing activities, Conan Exiles has been our bedrock. We’ve continued actively developing it and released five DLCs in the year, released it to millions of players as part of the Sony PS+ service, and have seen a very positive trend in the player numbers and activity of the game. Conan Exiles proves that the core of Funcom in creating and operating persistent online worlds is what we’re best at, and it’s something we’re taking to heart both for the game and for the future internal projects. The biggest, most exciting and most ambitious of our projects is without a doubt the DUNE open world survival game we’re working on, after having secured the exclusive rights for PC and Console games with this fantastic IP. It’s a game that is still a few years away and will be a more ambitious and robust version of Conan Exiles set in the DUNE universe, designed to be a game as a service from the outset. Finally, towards the end of the year we saw Tencent come in and become our largest shareholder by purchasing the shares from the previous largest shareholder, and later at the beginning of 2020 put in an offer to purchase all shares in the Company. Tencent shows strong interest for our plans and wants to support us in making the next generation of survival and other persistent online games and has been a great partner and shareholder. They have placed a fair offer to all shareholders to sell their shares while committing to supporting the execution of the company’s plans with both funding and industry expertise. It’s exciting to see everything that is happening and it’s my firm belief that this path will lead to great games with great successes!” Rui Casais Chief Executive Officer Annual Report 2019 - Funcom SE Page 3 About Funcom Funcom® is an independent developer and publisher of computer and console games. Funcom SE (the Company or Funcom) was founded in 1993 and listed on the Oslo Stock Exchange in 2005. The Company has developed and published around 30 game titles across several genres and gaming platforms. The Company holds a broad portfolio of released games and controls some great IPs well suited for games Annual Report 2019 - Funcom SE Page 4 Conan® Exiles launched into Early Access on PC in 2017, recouping its development costs after just a week. This was followed by the full release of Conan Exiles in May 2018 on PC, Xbox One and PlayStation 4 to great success, with the game selling over 1.4 million units between Early Access launch and two weeks after full release. Conan Exiles continues the strong ‘games as a service’ performance with the longevity of the game highlighted by the number of users growing year on year, December ‘19 being the third best average number PC player month since the January 2017 launch and revenues in Q4 2019 being higher than in Q4 2018. In 2018 Funcom also published Mutant Year Zero®: Road to Eden made by Swedish developer The Bearded Ladies, solidifying its reputation as a publisher of externally developed games. In 2019 the Company increased its published games portfolio with the launch of Conan Unconquered in May 2019 developed by US based Petroglyph and Moons of Madness® launch at Halloween 2019 by Norwegian developer Rock Pocket Games. Previous notable and still active games include the online MMOs Secret World Legends® (relaunched in 2017), Age of Conan® and Anarchy Online®. Today, around 190 talented individuals are employed at the Company’s studios in Oslo, North Carolina and Portugal at the time of release of the annual report. The launch of Conan Exiles in 2017 marked the successful execution of the strategic turnaround initiated in 2015. Key objectives were securing short development time bringing all games fast to the market, working on multiple games and revenue generating activities in parallel and doubling the addressable markets by launching games on console in addition to PC. In 2017 further strategic initiatives were made by adding publishing of externally developed games and acquiring intellectual property rights. This created more revenue streams at a lower risk, leading to more predictable cash flows and financials and a more stable base from which to grow. In early 2018 the Company secured control over its main Intellectual Property, Conan the Barbarian®, through the creation of Heroic Signatures, a joint operation together with Cabinet Entertainment containing the rights for interactive entertainment products utilizing Conan and a number of other IPs. In 2019 a six-year exclusive partnership to make games based on the DUNE IP, one of the world’s best-known science fiction universes, was announced. Legendary Entertainment and Warner Brothers are working to release a DUNE Hollywood blockbuster in December 2020. Funcom will invest heavily into a DUNE open world game, that will build on the success and learnings from Conan Exiles. The four main revenue streams are as follows • Games in operation & back catalogue: the portfolio of games in operation includes Conan Exiles, Secret World Legends, Age of Conan, Anarchy Online and Moons of Madness. These games are actively developed, new content is added, and events are held to support engagement. The back catalogue includes Mutant Year Zero, Conan Unconquered and other smaller games that are monetized without any ongoing development work or cost. With frequent new releases we aim to increase the portfolio of operational games, increasing the stable base cash flow. • New internally developed games: with a minimum of two games in development internally at all times. The Company's IPs and competence in Online games and RPGs are leveraged for this purpose. • New publishing games: the Company is building a network of trusted developers to partner up to co-develop and/or publish games and bring them to market utilizing its internal resources that the external developers do not typically have themselves, such as Marketing, Sales, Community management, Online operations, Motion Capture, Localization, Quality Annual Report 2019 - Funcom SE Page 5 Assurance and Customer Service and Technology and porting to console expertise. The goal is to have two to three such externally developed products launched annually. • Intellectual property licenses: Generation of activity, games and revenue from IP. This includes the interactive IP licenses held through Heroic Signatures DA acquired in February 2018, including Conan the Barbarian, Mutant Year Zero, Solomon Kane and other IPs, as well as our own IP portfolio comprising The Longest Journey, Anarchy Online and The Secret World. The Company carefully considers what niches to compete in and seeks niches that are too small for the largest industry players to focus on and too difficult for small indie companies to compete in. The company’s main niche, open-world multiplayer games requires a highly technically skilled organization to deliver on challenging multi-player elements which represents a significant entry barrier. Funcom has developed these skills over several years working on MMO games. Combining game development plans and niches the Company aims to get a quick recoup of its investments while maintaining a good chance of breakthrough success for each game. The Company will focus on the PC and Console digital markets. Physical retail distribution of the Company's games will be done when relevant and executed in conjunction with distribution partners. Geographically, the Company secures global distribution, handling digital distribution in North America and Europe directly, and selectively working with partners for other important markets.