COMPANY ANALYSIS 29 June 2017
Summary
THQ Nordic (THQNO.ST)
List: Moving up to the next level Market Cap: 3,728 MSEK Redeye initiates coverage of the diversified gaming company Industry: Gaming THQ Nordic. The company, led and founded by long-time CEO: Lars Wingefors Chairman: Kicki Wallje-Lund entrepreneur Lars Wingefors, is gaining significant ground. THQ Nordic owns a vast and diversified portfolio of IPs, including
among others; Darksiders, MX vs. ATV, Red Faction, Titan OMXS 30 THQ Nordic Quest, SpellForce and 70+ more. 70 THQ Nordic focuses on acquiring well-known IPs at bargain 60 prices and then implementing a number of measures to enhance 50 the value of the asset. In the coming three years, the company 40 will not only release their first in-house developed and wholly 30 owned sequels but also release an entirely new IP. We, therefore, 20 find that the company is now moving up to the next level, which 10 0 will bring income levels to new heights. 22-Nov 20-Feb 21-May
We believe the market has yet to understand where THQ Nordic is positioned on their journey of growth. We also believe the highly competent and committed management team warrants a premium valuation. Our Estimated fair value in the Base-case scenario amounts to 69 SEK per share. Our Bear- and Bull scenarios render fair values of 28 SEK and 116 SEK per share.
Redeye Rating (0 – 10 points) Management Ownership Profit outlook Profitability Financial strength
8.0 points 9.0 points 7.0 points 6.0 points 8.0 points
Key Financials
2015 2016 2017E 2018E 2019E Share information Revenue, MSEK 213 302 608 841 1,015 Share price (SEK) 51.8
Growth 0% 42% 101% 38% 21% Number of shares (m) 72.0 EBITDA 105 132 283 394 480 Market Cap (MSEK) 3,728 EBITDA margin 49% 44% 47% 47% 47% Net cash (MSEK) 163
EBIT 67 95 196 280 340 Free float (%) 40 % EBIT margin 31% 31% 32% 33% 34% Daily turnover (’000) 20 Pre-tax earnings 66 93 194 280 340 Net earnings 51 72 150 218 265 Net margin 24% 24% 25% 26% 26%
Analysts: Kristoffer Lindstrom 2015 2016 2017E 2018E 2019E
Dividend/Share 0.00 0.00 0.00 0.00 0.00 [email protected]
2015 2016 2017E 2018E 2019E EPS adj. 0.00 1.00 2.09 3.03 3.68 P/E adj. 0.0 33.0 24.8 17.1 14.1 Tomas Otterbeck EV/S -0.1 7.4 5.9 4.2 3.4 [email protected] EV/EBITDA -0.1 16.9 12.6 8.9 7.2
Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.
Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: [email protected] THQ Nordic
Redeye Rating: Background and 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.
Company analysis 2 THQ Nordic
Index: Investment case ...... 4 Untapped portfolio potential ...... 4 Focus on long-term value and buying cheap ...... 5 Company profile ...... 7 Background ...... 7 Product and services ...... 10 Description of the company’s biggest IPs ...... 10 Pipeline ...... 13 Diversification ...... 16 Business model and strategy ...... 17 Strategy for future growth ...... 19 Team ...... 24 Market and opportunity ...... 27 The market ...... 27 Segments ...... 28 Revenue models ...... 29 Value chain ...... 30 Competition in a consolidating industry ...... 31 Financial forecast...... 32 Group forecast ...... 32 Revenue breakdown and explanation of income streams ...... 33 Modeling game sales ...... 35 Forecasting the cost levels ...... 46 Valuation ...... 49 Peer valuation ...... 50 Scenario analysis ...... 51
Company analysis 3 THQ Nordic
Investment case
We find that THQ Nordic is an attractive growth case where the market has An attractive growth case yet to understand the inherent value of the assets and what the future will bring for the company. We believe that the short history of the company as a publically traded entity and an overall low understanding of the Gaming industry has created an opportunity to acquire shares in the company at a fair/low price compared to future fundamentals. The following bullet points summarize our investment thesis;
Despite producing SEK 302m in income during 2016, the major part of the portfolio potential is still untapped
Significant development projects will be released in the years 2017, 2018 and 2019. This will take revenues to completely new levels
THQ Nordic’s core strategy is to acquire IPs at depressed prices and then enhancing their value. This focus will continue to keep risks at low levels and create significant investment returns for shareholders going onwards
The management team owns 60%+ of capital, has extensive experience from the industry and is highly committed to building “something big”. We believe there should be a premium on the valuation because of the strong shareholder focus
THQ Nordics extensive games portfolio with 75 game franchises and over 200 games create a great opportunity for stable cash flows in the years to come. We believe one of the most important ways to monetize on the company’s games portfolio will be through the subscription-based model currently offered by the biggest players in the industry
Untapped portfolio potential A large part of the IP portfolio is currently being developed and do not A large part of the IP generate any income today. This will change over the coming years when portfolio is currently being developed the company releases their first internally developed IPs and sequels to their strongest game franchises. We believe that the company will now move up to the next level, which could also boost business opportunities and proposals from players in the industry. The post on the balance sheet for projects under development, games still to be released, increased by roughly 240% from 2015 to 2016. A large part of these assets will start generating income during late 2017 and 2018.
Company analysis 4 THQ Nordic
We know that THQ Nordic is developing Darksiders 3, a sequel within their most prominent franchise. One major development project remains undisclosed but the title have the same type of development budget like Darksiders 3, so the potential should be similar. We see great value in doing sequels to MX vs. ATV, Red Faction, Delta Force and more.
Focus on long-term value and buying cheap THQ Nordic is what we like to call an owner-operator company where the founders, in total controlling more than 60% of capital, are focused on creating long-term value for the fellow shareholders. The team of the company and the business mind of Lars Wingefors, largest owner (50% of the shares) and founder should not be underestimated.
THQ Nordic’s core business strategy is to buy IPs, companies and game Management has franchises at depressed prices and then enhancing their value. In those patiently waited for the right opportunities cases management has patiently waited for the right opportunities. The approach creates low investment needs in relation to potential financial success and less risk. We can take the THQ IP portfolio acquisition, described thoroughly further down in the analysis, as an example. The asset was acquired for about SEK 40m, we approximate that between 2013 and 2016 the IPs has generated roughly SEK 400m in revenues, that’s about 10 times the initial investment (development and marketing excluded).
Sales return on THQ asset
450 400 400 350 300 250 10x mSEK 200 150 100 40 50 0 Acquisition of THQ's Accumulated sales IP portfolio of the IP asset acquired (2013- 2016) Source: Redeye Research
Our forecast, and therefore also our DCF valuation, does not factor in possible future value-adding acquisitions of IPs or companies, but it is a fact that THQ Nordic will continue to acquire, and will do so with bravura.
Company analysis 5 THQ Nordic
Counterarguments (Bear-points) It is always sensible to develop some counterarguments to an investment thesis. Below, we present some bear-points that an investor should consider and have in mind if the future development is not favorable.
Title risks of larger releases – Despite THQ’s extensive portfolio there is always some title risk when releasing larger projects. Disappointing releases and/or reviews could dampen investors’ enthusiasm and hurt the company’s financials. Rising competition in bidding for acquisitions – As THQ Nordic is entering a new level as a company, so will the future acquisitions in terms of size and target reputation. Going from an unknown player to a more established company might make it harder to find cheap deals. Management is paramount – Just as much we love a strong and committed management team, it is also a fact that relying on a few key individuals also poses a risk.
Valuation range
Our Estimated fair value, in the Base-case scenario, amounts to 69 SEK per share. Our Bear- and Bull-case scenarios render fair values of 28 SEK and 116 SEK per share respectively.
THQ Nordic: Fair value range
Base-case valuation of 69 0 20 40 60 80 100 120 140 SEK per share Last price 52.0
0 20 40 60 80 100 120 140 Bear-case: 28 Base-case: 69 Bull-case: 116
We believe that THQ Nordic is entering a new phase. In the coming three The income levels will reach new heights in the years, the company will not only release their first in-house developed and years to come fully owned sequels but also release at least one entirely new IP. The releases will bring income levels to new heights and create new business opportunities.
We conclude that the market has yet to understand where THQ Nordic is positioned on their journey of growth. We also believe the highly competent and committed management team warrants a premium valuation. Our Fair value range shows a share with good risk/reward characteristics, with significant upside and limited risk on the downside.
Company analysis 6 THQ Nordic
Company profile
Background THQ Nordic has since Lars Wingefors founded the company in 2011, established a strong platform and product portfolio under high growth and profitability. The company has approximately 100 employees and 270 full- time developers.
Net sales (mSEK) and key events
2017 First release of sequels and new IP
608 2016 Changes
2014-2015 name to THQ Internal studios Grimlore Nordic and public listning Games & Rainbow Studios opened and 2013 Acquisition of 13 game Acquisition of titles and IPs 302 the IP portfolio from THQ 213 178
102
2013 2014 2015 2016 2017E
Source: THQ Nordic & Redeye Research
The most important events in the company’s history are the acquisition of Acquisition of Austrian listed company JoWooD Austrian listed company JoWooD in 2011 and the US listed THQ’s main in 2011 and the US listed intellectual property in 2013. Both of these businesses had incurred THQ’s main asset in 2013 financial insolvency, which in this case means that THQ Nordic (at the time named Nordic Games) made these acquisitions out of their bankruptcy estate. This is also the simplest core of Lars Wingefors’s entrepreneurial business, when he sees an opportunity in buying something cheaper than he can sell it, he most certainly is interested.
Since the company was founded in 2011, the main focus has been to actively grow the portfolio of products. Today the collection is comprised of 79 different game franchises, which in the gaming industry is called intellectual property (IP). Out of these 79 IPs, over 200 games have been developed. This game portfolio generates the lion share of the company’s
Company analysis 7 THQ Nordic
revenue; in 2016 71 percent of income and 81 percent of gross profits. The remaining part of sales and profit comes from global physical distribution. Since 2011, the company has distributed over 60 games.
Until August 2016, the company’s name was Nordic Games, but a decision Name change to THQ Nordic in 2016 was made to change it to THQ Nordic to get more global attention amongst gamers and the industry as a whole. The US listed THQ was before its bankruptcy one of the ten biggest publishers in the world with a market cap of SEK 18 billion. However in 2012 the company filed for bankruptcy as a consequence of an unhealthy high debt.
In November 2016, THQ Nordic was listed on Nasdaq First North. During 2017 the company will release their first sequel and new internally developed IP. THQ Nordic also announced an upcoming sequel for the Darksiders fanschise.
Company analysis 8 THQ Nordic
The business mind of Lars Wingefors Lars Wingefors controls THQ Nordic through his holding of 50 percent of shares and 62 percent of votes. At the age of 15, Lars was Sweden’s leading mail order reseller of comic books. Several years later, Lars used this At the age of 15, Lars was Sweden’s leading mail experience to expand into new product segments and started to sell video order reseller of comic games (new and used) by mail order under the company name Nordic books Games. The business was a success, and the service was very popular in the gaming community in Sweden. Buying games by mail order were both comfortable and relatively cheap for consumers. Lars had a very small stockpile minimizing risk for Nordic Games and the price to consumers. In the middle of the IT-boom in 2000, Nordic Games was acquired by a British dotcom company. After the smoke had cleared after the stock market crash, Lars bought back the company. After this journey, Lars, his partner Erik Stenberg and their team gained valuable knowledge and experience of the many pitfalls and opportunities in the business. Most importantly, Lars and Erik has definitely understood the importance of holding a strong cash position to be able to take advantage of attractive business opportunities when they arise. Below we provide an overview of the structure of the THQ Nordic Group.
Group structure of THQ Nordic
- Karlstad, Sweden - 4 personnel Group HQ - Group CEO/CFO
- Vienna, Austria - 31 personnel Foxglove Studios Mirage Game Studios - COO - Stockholm, Sweden - Karlstad, Sweden - 15 personnel - 4 personnel
Game studio Game studio Distb. office
- München, Germany - Phoenix, USA - Bohemia, USA - 29 personnel - 21 personnel - 1 personnel
External studios 9 announced external studios 10 not announced external studios
Piranha Bytes Wired Productions
Airship Syndicate Weappy Studio Golem Labs KING Arts
Digital Arrow Kaiko Gunfire Games
Source: THQ Nordic
Company analysis 9 THQ Nordic
Product and services
Game portfolio THQ Nordic’s game portfolio can be divided into own brands and publishing titles. Own brands include those where the company owns all the rights and thereby has full control over development, marketing, and pricing strategies. Publishing titles are those where THQ Nordic owns the sales rights.
Own IPs Publishing deals
80+ brands and 200+ games 60+ games
71% 82% 29% 18% of 2016 net sales of 2016 gross profit of 2016 net sales of 2016 gross profit
Digital distribution Physical distribution
49% 51% of 2016 net sales of 2016 net sales
Description of the company’s biggest IPs Darksiders This game is THQ Nordics most critically acclaimed IP. Virgil Games developed the original game. The franchise was added in the company’s game portfolio in 2013 when THQ was acquired. The game is an Action Role-Playing Game (RPG). Darksiders is a so-called “hack and slash” game which is a subgenre of third person action games. Hack and slash is a
weapon based, melee action genre with a strong influence to so-called beat them up games. The game also has elements of puzzles and exploration.
Darksiders Game description Platform PC/Console Genre Action RPG Released games: Metascore Darksiders, released 2010 Critics: 83 Users: 78 Darksiders 2, released 2012 Critics: 83 Users: 81 Pipeline: Darksiders 3 Annonced release in 2018
Lifetime sales from gameseries 5 million copies Total net sales SEK 1.3 billion Source: THQ Nordic, Redeye Research
The player is taking the role as “War,” one of the four horsemen of the “Apocalypse.” The story is very well written and has graphics that are
Company analysis 10 THQ Nordic
inspired by comic books. The games creative director is Joe Madureira, a comic book writer, and artist most famous for his work on the X-Men. Darksiders 3 is developed by Gunfire Games. The studio is in many ways a reincarnation of the former Vigil Games the developer of the first two Darksiders-games. Vigil games dissolved after the bankruptcy of THQ, the previous owner of the studio. The team that is Gunfire Games has since the Darksiders 3 is developed by Gunfire Games a release of Darksiders 2 been dreaming of making a new game in the series. reincarnation of the former Vigil Games Remasters has been done on both games of Darksiders. In 2015, “Darksiders 2: Deathinitive Edition” was released followed by a remaster of the original game released in 2016 called “Darksiders: Warmastered Edition”. Both games were well received by both critics and users around the world with an average Metascore of around 80. Sales comparison to similar game series are; eg God of War: 22 million copies, Devil May Cry: 13 million copies, Bayonetta: 2.5 million copies.
MX vs. ATV THQ Nordics current top grossing IP focuses on off-road racing and is developed by Rainbow Studios, which is fully owned by THQ Nordic. This franchise was also acquired from THQ’s portfolio in 2013. The game series
has a long history, and the first game was released in 2005.
MX vs. ATV Game description Platform PC/Console Genre Racing Latest released games: Metascore Supercross Encore, released 2015 Critics: 42 Users: 47 Supercross, released 2014 Critics: 48 Users: 48 Alive, relesed 2011 Critics: 63 Users: 71 Pipeline: New game in the series Estimated release in 2018
Lifetime sales from game series 8 million copies Total net sales SEK 1.87 billion Source: THQ Nordic
Players race with motorcycles and all-terrain vehicles such as dune buggies and sport trucks. In some games, players can also fly airplanes and helicopters. The game has in later years been a financial success due to sales of downloadable content (DLC), which in this case means new tracks and motorcycles.
In December 2016, THQ Nordic released a DLC containing all 16 official tracks from the 2017 Supercross season. Releases of this kind generate long time revenue streams for the company.
Company analysis 11 THQ Nordic
Titan Quest Is an Action RPG hack and slash video game developed by Iron Lore Entertainment and published by THQ in 2006. This franchise was also acquired from THQ’s portfolio in 2013. The game is set in Ancient Greece, Egypt, and China. The main quest is to defeat Titans, and the gameplay is similar to the highly popular Diablo franchise.
Titan Quest Game description Platform PC/IOS Genre Action RPG Released games: Metascore Anniversary Edition, released 2016 Critics: N/A Users: 81 Titan Quest (IOS), released 2016 Critics: 80 Users: 64 Immortal Throne , released 2007 Critics: 80 Users: 85 Titan Quest Critics: 77 Users: 81 Pipeline: New game in the series Estimated release in 2018-2019
Lifetime sales from gameseries Around 3 million copies Total net sales SEK 0.4 billion Source: THQ Nordic, Redeye Research
The player’s movements and actions are being handled through a mouse driven interface. However, Diablo has been ported to consoles so this IP should also have “porting potential”. The game has been ported to iPhone/IOS in 2016 with 120 000 downloads and revenues at SEK 6.6 million (according to Thinkgaming.com). The game is sold as a full game on mobile for SEK 85.
Red Faction The original version of this First Person Shooter game (FPS) was released in 2001 and had excellent reviews. The original game was developed by Volition Inc. As with the rest of the top grossing IPs, the franchise was acquired in 2013 by THQ.
Red Faction
Game description Platform PC/Console Genre FPS/Action Released games: Metascore Armageddon, released 2011 Critics: 75 Users: 67 Guerilla, released 2009 Critics: 82 Users: 76 Red Faction 2 , released 2002 Critics: 84 Users: 83 Red Faction, released 2001 Critics: 88 Users: 81 Pipeline: New game in the series Estimated release in 2018
Lifetime sales from gameseries 6 million copies Estimated total net sales SEK 1.5 billion Source: THQ Nordic, Redeye Research
Company analysis 12 THQ Nordic
The first two games had a revolutionary undertone with socialism and monarchy as main themes. The last two games are set on planet Mars. The game series has over the years changed its gameplay. The first and second game was traditional FPS-games. The third installment in the series called Red Faction: Guerrilla, was a third person open world action game. The last release, called Red Faction: Armageddon, was a more traditional third person “corridor shooter” game.
The original game sold 1.92 million copies on PS2 worldwide while the sequel sold 1.5 million copies on PS2. (According to VG Chartz, game sales on PC is excluded). The third installment sold approximately 1.6 million copies, and the fourth sold below 1 million.
Pipeline THQ Nordic has a strong and well-financed pipeline with entirely new wholly-owned IPs, including sequels and remasters from the current games portfolio. In total, the company has approximately 30 games in the pipeline where the majority of the titles are still unannounced.
The pipeline includes three titles with the biggest budgets in the history of THQ Nordic has a strong and well-financed pipeline the company where the budgets range between SEK 65 – 125 million. As shown in the picture below, investments in game development have increased by over 150 percent in the last year and are now 121 percent of EBITDA for 2016. If the investments are successful, the company has real potential in reaching double-digit revenue growth in the next coming two years.
Investments in game development & % of EBITDA
200 200% 180 180% 160 160% 140 121% 140% 120 120% 100 100% 80 160 80%
60% %of EBITDA 60 60% Investments (mSEK) 31% 37% 40 40% 63 20 20% 15 35 0 0% 2013 2014 2015 2016
Investments (mSEK) Investments % of EBITDA
Source: THQ Nordic
Two of the games under development in the pipeline with the biggest budget is likely the wholly-owned new IP called “ELEX” and the recently announced sequel, “Darksiders 3”. They are described further below.
Company analysis 13 THQ Nordic
ELEX This new game is a post-apocalyptic open world action RPG played in a third person perspective. The game is developed by the studio Piranha Bytes. The game will be a mix of futuristic and medieval locations in which players can use swords, guns and later in the game even magic against enemies. For an exploration of the environment, the player can use a jetpack.
Early comments from game critics at Polygon are telling us that the mash- up between fantasy and science fiction could be a problem. The game demo has been very uneven and is lacking focus, and often it feels like playing at least two different games. Lots of bugs, bad physics, and voice acting made the critic fear that the small developer Piranha Bytes will have difficulties in managing such a large game.
However, at the biggest yearly gaming event E3 the game has received more positive attention. The reviewers are excited about the fully open world experience without load screens, the beautifully designed areas, the about 80 hours long main campaign of gameplay. All these elements mean the game has a potential to deliver a deep action RPG experience. As we can see the early reviews from critics has been somewhat mixed, as such we will only make conservative assumption for the titles success.
Battle Chasers - Nightwar The game is created by the former game veterans and co-founders from Vigil Games, which is the studio behind the first two Darksiders games. The veteran’s new studio is called Airship Syndicate, and the game is, like Darksiders, based on a comic book series. Battle Chasers is a turn based
RPG with a focus on dungeon exploration made with an appealing design for comic book fanatics and nostalgic gamers.
The game has raised USD 0.86 million with over 14 000 backers through Kickstarter.com. THQ Nordic has the publishing rights but does not fully own the IP. The game will be released on all leading platforms on console and PC/MAC.
The comic book series is made by Joe Madureira which is the author and creative designer behind Darksiders. It is one of the most popular comic series in the late 1990s. We think the combination of the comic books popularity combined with the elements from old favorite games like Baldur’s Gate: Dark Alliance and Final Fantasy 7 will be successful.
Company analysis 14 THQ Nordic
Aquanox – Deep Descent The IP was earlier a part of JoWood’s games portfolio. Aquanox is a submarine-based shooter/simulator set in a distant dystopian future. The story in the first game is set in the year 2661 where humanity lives in large cities underwater. Two games have been released in 2001 and 2003. Massive Development developed both games. Average critic scores are 63, and user scores are 77.
The sequel, Aquanox- Deep Descent, is also a Kickstarter project with USD 0.1 million funded from 2000 backers. The new game is developed by Digital Arrow which is a company with approximately 20 game developers. Aquanox features four player co-op and a variety of tactical elements and has pretty impressive graphics for an indie title.
Spellforce 3 Spellforce is a combination of real-time strategy and RPG. Two games have been released in the series 2004 and 2007 with good user and critics scores between 75 and 80. The new game has an announced release date of December 7 and is developed by Grimlore Games. Spellforce 3 will include a 30-hours campaign, a multiplayer mode for up to six players and a two- player campaign cooperative mode. Early impressions of the game are positive. The game has been delayed at least two times and was first planned to be released in 2016. We believe this will be a high-quality title that combines many of the best elements of real-time strategy and RPG in a perfect hybrid which makes it unique.
The Guild 3 The game is a mix of economic simulation, strategy, RPG and historical life simulation that takes place in medieval Europe. The game is developed by the Canadian studio GolemLabs and makes use of the Darksiders-engine. Previous games in the series have mixed reviews, the first one released in 2002 called “Europa 1400: The Guild” has a high average score of 84 from critics and users. The Guild 2, however, has an average rating of 64.
In “The Guild 3” you play as a single character or create a family dynasty which can last for centuries. You have to prove your skills in handcrafts, trading, social occasions, politics and intrigues.
Company analysis 15 THQ Nordic
Diversification In 2015, 50 percent of portfolio revenue came from two IPs. The largest contributor is MX vs. ATV representing 30 percent of the portfolio income in 2015. We believe this franchise generated around 30 percent of portfolio revenue in 2016 as well.
The second largest contributor to the portfolio income in 2016 is likely Darksiders. The remaster of the original game was released this year. We believe the Darksiders- franchise generated around 15 percent of portfolio revenue. Titan Quest was likely the third largest revenue driver in 2016. The game should have constituted around 5- 10 percent of portfolio income.
On Steam, every digital download of the remastered versions of Darksiders and Titan Quest generates around 5-10 Euro of revenue for THQ Nordic. Often old games are sold in high volumes during sales offerings with around 50-80 percent price drops for a limited time. These three IPs therefore represents approximately 60-70 percent of the We find that THQ Nordic has good diversification total portfolio income in 2016. An important thing to remember is that the between different sources portfolio income is 70 percent of total revenue in the company while 30 of income percent comes from publishing deals.
The diversified potfolio of THQ Nordic With this in consideration, we think THQ Nordic has good diversification 30% between different 40% sources of income. If you look at the pipeline with around 30 new games, the portfolio will be even more diversified in 30% the future which reduces total Action RPG Sports Others company risk. Source: THQ Nordic Source: Redeye Research
Company analysis 16 THQ Nordic
Business model and strategy THQ Nordics core business consists of acquiring established brands and then raising the value of these in the following three steps:
1) Distribution expansion 2) Asset Care 3) Sequels
THQ Nordic's business model
Distribution expansion "Asset care" Sequel
Add digital channels Porting to new platforms Release sequel
First game > Sequel 1 > Sequel 2 > Sequel 3 etc.. Remasters, new versions, patches and Add and re-active physcial channels
DLC's IP value after Swords, helmets, tracks.... THQ Nordics actions
IP aquired at a attractive price
Step 1: Step 2: Result: Acquisition of IP Refines the IP Value of IP is enhanced
Source: THQ Nordic
Distribution expansion The first step in refining the value of an acquired franchise is to expand the THQ Nordic adds multiple distribution channels, distribution. To do this, THQ Nordic adds multiple distribution channels, both digital and physical both digital and physical. The company has developed a broad distribution network which we consider one of the company’s strong competitive advantages. Broadening the distribution can sometimes be time-consuming and the time it takes varies from a couple of months to several years. THQ Nordics core business lies in acquiring IPs relative cheap and sometimes the game is no longer available for consumers on the market at the time of the acquisition. Depending on the sales potential in the IP the company has approximately 50 digital channels to add and partnerships with many of the dominating physical distribution companies. Making the game available to consumers in new ways have the potential to boost sales revenue relatively fast.
Company analysis 17 THQ Nordic
Asset care The second step in refining the value of the games is so called asset care. This can be explained as an ongoing process and can be divided into three business activities:
Porting - This consist of improving the game itself and add new platforms for the game, e.g., port the game from PC to console. The porting of a game often means that the code architecture for the game has to be reworked.
Remasters - The launch of remasters involves graphic and/or technical polishing and upgrading of an existing game. A graphic remaster often means the games are re-released with a higher graphical resolution while the rest of the game is unchanged. A technical remaster often means the developer corrects mistakes in the game or adds a new feature to the game. However, the underlying code is still unchanged in the game. Remasters is often made in popular console games between past and present gaming platforms, for example between Playstation 3 and Playstation 4.
Downloadable Content (DLC) – Extra content is added to gamers that already own the game. Usually, this includes extended story lines, new areas to explore, new battle maps or new objects in the form of weapons or a new motorcycle for example. This extra content is digitally distributed and is the most profitable business area for many publishers in recent years.
Develop and release sequels The third step in the process of increasing the value of an acquired Developing a sequel means that the company franchise is to develop and launch new game titles in an already established takes an established game game series. Developing a sequel means that the company takes an concept and develops a established game concept and develops a whole new game. The launch of a whole new game brand new game is associated with some risk because it is difficult to predict exactly how the new game will be received by the end consumer. THQ Nordic estimates that they have managed to contain this risk because the company prefers to develop new games based on already proven game concepts and brands with an existing fan base.
In 2014, THQ Nordic began to develop a number of sequels to some of the previously acquired IPs. The company has not yet released any of these sequels but will during 2017, 2018 and 2019. This final step requires the largest investments for the company but also have the greatest potential in generating most value in terms of increased sales.
Other creative ways in adding value As a complement to the core business, the company can selectively develop own games in new self-created game franchises and also publish game titles for different strategic partners. Today, 29 percent of total revenues and 19 percent of the gross profit comes from publishing deals with strategic partners. In 2017, THQ Nordic will release the company’s first self-created franchise called ELEX.
Company analysis 18 THQ Nordic
THQ Nordic can in the future also do others types of investments and acquisitions in the gaming industry where management considers that the company can add value by utilizing its existing skills and organizational power. For example, this may involve acquisitions of more game studios, acquire small publishers and explore IP out licensing and mobile games.
Strategy for future growth For future growth, THQ Nordic will focus on asset care, and investments in sequels to the company’s already well-established brands to further increase the value of the existing game portfolio. This means the company will have a clear focus on step 2 and 3 in the business model.
THQ Nordic will also be active in their search for new acquisitions, primary companies in financial difficulties. Typical sellers are firms that don't have the financial muscle to develop a game IP further or a seller who does not have the intention to develop the franchise further because it has made a strategic decision to focus on other IPs in their game portfolio.
Growth model of THQ Nordic
The future IP licensing and mobile Acquire smaller Possible IP publishers The core of business model licensing to Add more other geo. studios Acquisitions regions More of smaller acquisitions publishers Taking IPs to of IPs Add more mobile Increased internal and Asset Care & external sequels Sellers include studios both financial organic and Sequels on Present distressed throught established asset or non- acquisitions IPs core IPs
Present Future
Source: THQ Nordic
The company sees growth opportunities in adding further development More development capacity as a growth studios to the company to increase the overall development capacity. These opportunity additions can either be made organically or through the acquisition of existing external development studios.
The company can also achieve growth in out licensing the company's franchisees for the development of new games to new geographic markets through partners, for example on the Asian market.
THQ Nordic sees growth opportunities in acquiring all or part of smaller publisher product catalogs to integrate these into the company's current business and game portfolio.
Company analysis 19 THQ Nordic
The business model - a case study In the acquisition of THQ in 2013 the company paid SEK 40 million for the company’s entire games portfolio. Around SEK 5-6 million was spent to acquire MX vs. ATV.
After the acquisition, the company’s work begins in refining the product. A In total THQ Nordic has invested SEK 42 million in total of SEK 36 million has been invested between 2013 and 2016. The first MX vs. ATV and it has thing that is being done is distribution expansion adding distribution generated SEK 220 channels both physical and digital. Most value to date has been added million with a gross profit of SEK 150 million through “Asset care” in this IP. The game has been ported five times and two remasters has been done. And perhaps most importantly DLCs with additional content like new bikes, helmets, and tracks has contributed in maximizing revenues and the lifetime value of this game series. Of course, a prerequisite for the success of this case is a robust and loyal player base. MX vs. ATV is a strong brand amongst motocross fans in the US, and official tracks are certainly the franchise’s biggest sales argument.
In total THQ Nordic has invested SEK 42 million in MX vs. ATV and it has generated SEK 220 million with a gross profit of SEK 150 million.
However, at this time, no sequels have been developed. So the final step in the company’s business model has not yet been done in adding value.
Example of value creation: MX vs. ATV
12 Subscription based model Asset care Distrb. Expansion 5 portings Since + Digital 2 remasters 10 acquisiton + Physcial + DLC's (aug 2013- aug 2016)
8 Sales: EUR 22m 6 Gross profit: EUR 15M
4 Investment: MX vs. ATV EUR 4.2M acuired for 2 EUR 0.6m in 2013
0
Sales MX vs. ATV R12m (mEUR) Cum. Investments (mEUR)
Source: THQ Nordic
Company analysis 20 THQ Nordic
THQ Nordic: a market trend misfit Two of the current most prominent market trends are the transformation of digital distribution and the fast-growing mobile games industry.
Mobile vs Digital vs Physical sales, Market shares
A majority of the global game's sales are still physical on console
Source: Redeye Research
A majority of the global game's sales are still physical on console. By the end of 2017, the industry leader EA predicts that console game sales will be 40% digital downloads, in comparison to 33% in 2016.
THQ Nordic has a strong focus on the console and PC-segment with an estimated CAGR of 3-4% instead of the mobile segment with an estimated CAGR of 15-17% the next coming three years while 51% of its revenue comes from physical distribution.
From an investor’s point of view, this could be perceived as an unfortunate strategic choice. However, the company grew 42% year on year with an EBITDA-margin of 44% in 2016. In Q1 2017 the growth was approximately 90%. How is this possible? As Lars Wingefors stated himself; THQ Nordic is still a small company in a massive industry worth over USD 60 billion in 2016. The future growth will therefore mostly come from obtained market shares.
The best peer to THQ Nordic amongst the big companies in the industry is perhaps EA. While EA has a strong focus on big budget IPs (so called AAA- titles) on console THQ Nordic has a focus on mid-budget IP. This is a strategy for the company to reduce risk in single projects. In many cases, this could mean lower production values for the players and therefore sometimes also less sales potential. This has however been a lucrative niche for THQ Nordic. As long as the games are profitable, the strategy in developing mid-budget IPs can be seen as a god position in the competitive landscape. The release of Darksiders 3 in 2018 is the most important release for the company yet and is the first game that has the potential to
Company analysis 21 THQ Nordic
reach sales of an AAA-title. The obtained star power from this title can also help the company reaching a new attention level amongst gamers.
The power of the portfolio Building up a robust and significant games portfolio is crucial in the business strategy for THQ Nordic. The company often has publisher deals and bundles were the customer can purchase games at a discounted price. This sale is digitally distributed and most often made on games that are already profitable. Therefore this sale can be extremely profitable in comparison to for example sales in retail stores. At the same time, this is good marketing for the company to gain attention to THQ Nordic and its portfolio.
In the picture below you find how THQ Nordic markets their games portfolio on the dominating digital platform for PC. In the middle, you can find three games, a mix of newcomers and smaller titles, from left ELEX, Spellforce, and Titan Quest. In the corners, you see the biggest stars in the portfolio, in the left corner Red Faction, and in the right corner Darksiders.
The last game in the Red Faction series was released in 2011 and the last If the sequels to THQ Nordics franchises become successful, then the power of its portfolio will be greater than the sum of the two game in the Darksiders series was released in 2012 (remasters excluded). As
As we clarified earlier, a new sequel for Darksiders is already announced. We belive that the company will initate their asset care program on Red Faction in the years to come, but we do not know if the “undiscloused” title is within the franichise.
If the sequels to THQ Nordics franchises become successful, then the power of its portfolio will be greater than the sum of the two. In this case, the customer’s perception of THQ Nordic as a brand will be increase as well. If these releases receive mediocre attention, the portfolio will likely not reach the next level.
Subscription based model One obvious market trend if you look at software companies revenue models is subscription based services. Amongst gaming publishers this trend is stronger than ever. Sony is perhaps the company that has monetized on this revenue model most effectively the last years with the subscription service “Playstation Plus” which stands for a considerable amount of the company’s total profits. Sony also recently launched its new
Company analysis 22 THQ Nordic
subscription service “Playstation Now” where customers can play hundreds of games streamed on a PlayStation 4 or a PC instantly.
Microsoft launched a similar service on June 1 called “Xbox Game Pass” THQ Nordic currently has nine games on priced at USD 9.99 a month. Both theses companies have a high incentive PlayStation Now and one to have strong content offers to boost hardware sales. But the ability to play on Microsoft Game pass on multiple devices shows the companies have a greater perspective than that.
Currently THQ Nordic has nine games on Playstation Now were 8 of them comes from the company´s biggest game series Darksiders, MX vs. ATV and Red Faction. Xbox Game Pass is a newly launched service and has therefore at the current state a pretty limited games library of approximately 100 games. At this time only one game from THQ Nordic from the MX vs. ATV series. However, Microsoft has announced the games library will be extended, and old games from both the original Xbox and the Xbox 360 will be added. This means more games from THQ Nordics certainly will be added as well.
In August 11, 2014, EA launched its service EA Access a subscription based service exclusive for Xbox One. In 2016 this service stands for 12.5% (Ads included) of EA’s total digital revenue meaning approximately 5-7% of total revenue. However, Playstation 4 has sold twice as much as Xbox One. Offering a similar service for multiple platforms could, therefore, boost sales 1-2 times meaning approximately a potential of 10-20% of total revenue.
EA's Digital Net Revenues in 2016, 55% net sales (mSEK)
Source: Redeye Research
In the near future, we think THQ Nordic portfolio could be a part of a bigger publisher or platform owner’s collection. Gaining more attention and better perception amongst gamers with 2-3 appealing game franchises in the portfolio for a mass market THQ Nordic could have a strong portfolio on its own in 2-5 years.
Company analysis 23 THQ Nordic
Team The management team of THQ Nordic is by our measures highly competent with extensive experience from the Gaming industry. The company continuously put emphasis on a shareholder focus to generate long-term value creation by keeping to their core strategy; acquiring IPs at the cheap A highly experienced team and increase their value by asset care. The operational team with Klemenz Kreuzer and Reinhard Pollice at the helm has been within the Gaming industry whole their professional life and shows profound experience. Lars Wingefors is an entrepreneur by heart; he started his first business at the age of 13 and has been selling video games for more than 20 years. We find the management of THQ Nordic as trustworthy as they have never tried to misguide the market; instead, they always make conservative statements and educate the market about their business.
Management CEO - Lars Wingefors Lars Wingefors is the CEO, founder and a board member of THQ Nordic. Lars is an entrepreneur by heart. At the age of 15, Lars was Sweden’s leading mail order reseller of comic books. Several years later, Lars used this experience to expand into new product segments and started to sell video games (new and used) by mail order under the company name Nordic Games. The business was a success, and the service was very popular in the gaming community in Sweden. In the middle of the IT-boom in 2000, Nordic Games was acquired by a British dotcom company. After the smoke had cleared after the stock market crash, Lars bought back the company. After this journey, Lars and his team gained valuable knowledge and experience of the many pitfalls and opportunities in the business. Most importantly, Lars has understood the importance of holding a strong cash position to be able to take advantage of attractive business opportunities when they arise.
CFO - Erik Stenberg Erik Stenberg is a long-time business partner of Lars Wingefors. He is the co-founder, board member and Group CFO of THQ Nordic. Erik has extensive experience in business management.
Company analysis 24 THQ Nordic
COO - Klemes Kreuzer Klemens Kreuzer is the co-founder and managing director, or Chief Operating Officer (COO), of the Group’s operational company THQ Nordic GmbH. Klemens first professional contact with THQ Nordic, at the time named Nordic Games, was at JoWood Entertainment where he worked as controller and CFO, Klemens has been within the Gaming industry for over 20 years, all of his professional life. Key roles include among others; CFO at JoWooD, Managing Director Grimlore Games, President Rainbow Studios and the present position as the Chief Operating Officer at THQ Nordic GmbH.
B&PD Director/Executive Producer - Reinhard Pollice Reinhard Pollice is the co-founder and holds the title of Business and Product Development Director plus Executive Producer at THQ Nordic GmbH. Reinhard’s role at the company is rather broad with duties as handling game submissions and producing projects to game releases and more.
Board Chairman of the Board - Kicki Wallje Lund Kicki is the Chairman of the Board and has held the position that since 2016. She has extensive experience in business development from a number of international companies, mostly within the IT sector. Previous experience includes leading positions in companies such as NCR, Digital Equipment, AT & T, Philips, ICL, and Unisys. Currently, Kicki Wallje Lund is working as CEO of Wellnet AB.
Current assignments outside of THQ Nordic: Board member and CEO of Wellnet AB. Board member of C-Rad AB (publ), Betsson AB (publ) and Linkura AB.
Board member - Lars Wingefors See description in team.
Board member - Erik Stenberg See description in team.
Board member - Maria Segolsson Maria has been a member of the board since 2016. She has more than 15 years of experience in the music industry both as a marketing director and General Manager.
Company analysis 25 THQ Nordic
Current assignments outside of THQ Nordic: General Manager Polar Music International AB. Board member of Ma & Ma consulting AB and the ABBA foundation.
Board member - Pia Rosin Pia Rosin has been a member of the board since 2016. Pia has extensive experience in financial communication from public companies including among others; Kinnevikgruppen, Saab, Betsson AB.
Current assignments outside of THQ Nordic: IR director Betsson AB. Board member Rosinius Konsult AB.
Ownership The ownership structure of THQ Nordic is, in our view, one of the its key strengths. All the key personnel has substantial holdings in the company with the founder Lars Wingefors controlling more than 62% of the votes. The significant holdings create a focus on long-term value creation and not meeting short-term financial goals that a company led by “hired guns.”
Holdings of management and board Nr Value at share Name Shares price SEK 53 Lars Wingefors 36.0 1909 Erik Stenberg 7.8 413 Klemens Kreuzer 1.1 61 Reinhard Pollice 0.7 35 Kicki Wallje Lund 0.01 0.7 Maria Segolsson 0.02 0.8 Pia Rosin 0.01 0.3 Source: THQ Nordic
In addition to the substantial holdings of the management team, some of the most renowned institutional owners show up on the shareholder's list of THQ Nordic. Given the fact that the company is listed on Nasdaq First North this is quite the feat, as that listing reduces the possibility for institutional funds to own shares in the firm.
Ownership structure THQ Nordic Name THQN A THQN B Capital % Votes % Lars Wingefors 6.5 30.0 50% 62% Erik Stenberg 1.4 6.4 11% 13% Swedbank Robur Fonder 0.0 4.0 6% 3% Handelsbanken Fonder 0.0 3.4 5% 2% Cmb Holding 0.5 2.2 4% 5% Didner & Gerge Fonder 0.0 2.3 3% 1% Lumarisimo 0.3 1.3 2% 3% RAM Fonder 0.0 1.4 2% 1% Avanza Pension 0.0 1.3 2% 1% Rolf Lundström 0.0 1.3 2% 1%
Source: Holdings.se
Company analysis 26 THQ Nordic
Market and opportunity
The market The gaming industry is one of the largest digital entertainment markets globally. In 2016, total market size was USD 99.6 billion. Industry growth is projected to remain high at an average annual growth rate ("CAGR") of 7% in 2015-2019. As can be seen in the graph below, this will bring the total market to an estimated 119 billion USD in 2019.
Expected growth in the gaming industry
140 119 120 113 107 100 100 92
80
60
40
20
0 2015 2016 2017 2018 2019 Source: New zoo
North America and EMEA (Europe. Middle East and Africa) together account for around 49% of the global market. The total number of players during 2016 in North America and Europe was 535 million, of which 198 million are in North America and 337 million are in Europe. Asia-Pacific represents the largest geographic market with about 47% of the global gaming market and over 1 billion total number of players.
Gaming revenue per capita in North America and Europe are the highest globally and is estimated to be around 70 dollars in North America and 43 dollars in Europe in 2016. Gaming revenue per capita in Asia and the Pacific in 2016 is estimated to amount to 12 USD.
PC and console games have a strong position in the Western world where Console games accounted for just over $ 11 billion or players increasingly are interested in so-called hardcore games. In the 48% of total revenue United States, PC and console games generated around $ 17 billion in revenues in 2015, representing over 71% of the total gaming industry revenues in the US. Console games accounted for just over $ 11 billion or 48% of total revenue. The market for mobile games is much stronger in Asia than in the West. Mobile games is expected to grow to around 47% in 2018 in Asia.
Company analysis 27 THQ Nordic
Segments The gaming market can be divided into three main segments; PC, game PC and Console segment console and mobile games (mobile phone and tablet). As can be seen in the together generated approximately USD 56 graph below, the traditional PC and Console segment, where THQ Nordic is billion in revenues in 2016 present, generated together approximately USD 56 billion in revenues in 2016, representing 56% of the total gaming market. The PC segment is expected to grow on average 4% per year between 2015 and 2019, while the console segment is projected to grow by an average of 3% per year during the same period. This brings the PC and console market to around 62 billion USD in 2019, representing 51% of the total market.
Expected CAGR by segment
552015 53 50
45
40
35 32 30 30 30 28 26 25
20 Mobile Console PC 2015 2019 2015 2019 2015 2019 Mobile MobileConsolePC Console PC
Source: New zoo
The mobile segment accounted for 37% of the total gaming market in 2016 which amounted to approximately USD 37 billion. Compared to the PC and console games, the mobile market is relatively young and growing strongly. Between 2015 and 2019, the mobile games segment is projected to grow by an average of 15% per year. This brings the segment to about USD 53 billion in 2019, equivalent to as much as 45% of the total gaming market.
Global game revenues
Mobile 37% Digital PC/Console 47%
Physical PC/Console 16% Source: New zoo
Company analysis 28 THQ Nordic
The mobile segment consists to a large extent of casual games. This type of games can be developed in a much shorter time and with considerably scarcer resources than hardcore games in PC and console segment.
The barriers to entry into this segment is, therefore, lower than in the PC and console segment. Mobile games are less advanced and not as engaging as PC and console games. In general the life cycles of mobile games are therefore often shorter and the number of mobile game developers who have managed to repeat their success is relatively limited in comparison.
Revenue models The following section describe the most common revenue models for the two respective segments; PC/console and mobile.
Full-priced games PC and console games are usually full-priced games which means that they are sold at a relatively high one-off price. High budget games are often priced at SEK 500-600 while low budget games can be priced as low as 150 SEK. The majority of the revenue from a new PC or console game is usually realized during the first 3-12 months after launch.
Add-ons/Extra content In addition to revenues from sales of the original game there are ways to generate revenue from extra content. The increasing degree of digital distribution allows for sales of downloadable content ("DLC") as well as technical and graphical upgrades of already launched games (a so-called "remaster"). The add-on sales contribute to longer life cycles of the revenue streams.
“The Spotify model” Subscription-based game sales and streaming of games is a model that has so far been relatively unexploited but is growing strongly. We think this will be the biggest trend in coming years. Playstation Now and Mictrosoft Game Pass are early examples.
Freemium In mobile games, the most common revenue model nowadays is "free-to- play" or "freemium" meaning that the game is free to download or can be downloaded to a very low payment. Revenues for mobile games is instead generated through advertisements within the game or "In-game purchases." This revenue model requires a recurring customer base of paying players to be successful. KPI’s such as MAUs (Monthly Active Users), DAU (Daily Active Users) and ARPU (Average Revenue Per User) is often used to measure how well the game is performing when it comes to revenues.
Company analysis 29 THQ Nordic
Value chain Developers Game developers create game content, design the game and write the software code. A game developer can be divided into four different categories: independent (“indie”), first-, second- or third-party developers. First and second party developers were more common a couple of years ago when the gaming industry was more focused on high budget games on PC and console.
A first-party developer is part of a platform owner, such as Sony and Microsoft, and develops games exclusively for this platform. Second-party developers are game developers that are connected to a platform owner in making exclusive content. Unlike a first party developer, they can be an independently owned studio.
Third-party developers are platform independent and are either a games publisher as well, or develop the games for one or several games publishers. EA and Ubisoft are two examples of third-party developers.
Indie game developers can both develop games for a large game publisher or publish their games themselves. When collaborating with a game publisher, the publisher often assumes the intellectual property (IP) to the game while compensating the independent game developer with a contracting fee during game development and royalties on each sold copy of the game. Both the risk and the upside when it comes to revenue potential for the independent game developer are reduced when collaborating with a publisher.
Publishers A game publisher publishes video games that they have either developed internally or have developed through a video game developer. Usually, the publisher provides financing for the development of the game while also being responsible for the market research, pricing of the game and all aspects of marketing and advertising. In addition, the publisher supervises the development process, tests and adjusts the game as it is being developed and manufactures the product in case of physical distribution. Since the publisher often provides the financing and thus bears the financial risk of the project, it also retains a significant part of the IP ownership in case of outsourced development.
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 their digital platforms.
Company analysis 30 THQ Nordic
Competition in a consolidating industry The global games market is becoming more consolidated. According to market research firm NPD Group, 10 companies account for nearly 90% of the physical game sales in the USA. The top 4 Western publishers (Activision Blizzard, Electronic Arts, Take-Two, and Ubisoft), account for over half of total sales. THQ Nordic has a focus on PC and consoles and produces games more focus on the hardcore player.
The competetive landscape of Gaming
PC/CONSOLE
Casual Hardcore Games Games
WEB/MOBILE
Source: THQ Nordic
High development budgets and high expectations from fans among PC and console games make the barriers to entry in the PC and console segment higher than that of mobile games.
A few global distributors dominate the gaming market. In Asia publishers such as Nintendo, Square Enix, Bandai Namco, Konami, Capcom and Koei Tecmo dominate. In USA and Europe, the four distributors Activision- Blizzard, Electronic Arts, Take-Two, and Ubisoft generate the majority of the revenues from games sales.
In the mobile segment, there are a few major players such as Swedish King, Finnish Supercell and Chinese Tencent. Because of the low entry barriers and low development costs, there is a large number of smaller developers with only one or a few games. However, King nowadays is owned by Activision-Blizzard and Tencent has a majority stake in Supercell. And Mojang, the creator of Minecraft, is owned by Microsoft.
Company analysis 31 THQ Nordic
Financial forecast
The financial forecast for a gaming company like THQ Nordic is no easy In the coming years THQ task. The projection of sales levels relies heavily on future game releases will release significant titles which in turn is an effect of investment cycles. In the coming years THQ will release significant titles, which has been under development for the past 2-3 years. This will lead to a significant boost in revenue and put the company on a whole different level.
Group forecast Our sales forecast do not take into account coming acquisitions THQ Nordic Our sales forecast do not will conduct, and are solely based on the current IP portfolio of today. We take into account coming acquisitions THQ Nordic project the net sales levels based on assumptions regarding new release will conduct revenue and catalog churn. We will get into more detail about our projections further down in the analysis.
The future growth of THQ Nordic will be highly dependent on the strengthening of the overall portfolio and the upcoming larger releases. In the near-term, the three largest releases; ELEX, Darksiders 3 and the undisclosed project will be major drivers of sales growth.
We find it likely that we will see lower revenue levels in the next two- quarters as most of the profound releases during the year will be during Q4, before the holiday sales. Due to scalability, the margin level will also vary.
THQ Nordic estimates 2017- 2017E- 2017E- 2017E- mSEK 2015 2016 2017E 2018E 2019E 2020E Q1 Q2 Q3 Q4 Net sales 213 302 82 62 55 408 608 841 1015 1253 Of which NR 62 30 13 11 359 413 506 637 796
Of which Catalog 205 52 49 44 50 334 378 457 457 Total OPEX -146 -207 -50 -47 -41 -274 -412 -561 -675 -815 EBIT 67 95 32 16 14 134 196 280 340 439
CAPEX 143 157 67 50 61 61 239 294 355 439
Net sales growth 20% 42% 90% 19% -29% 218% 101% 38% 21% 23% EBIT margin 31% 31% 39% 25% 26% 33% 32% 33% 33% 35% CAPEX % sales 67% 52% 82% 80% 110% 15% 39% 35% 35% 35% Source: Redeye Research As the growth is largely an effect of money invested into game development, we believe the CAPEX levels will continue to be at high levels but drop in relation to sales due to scalability and as the more long-tail catalog revenue increases.
In the more long-term, we expect that THQ continues to focus on their asset care of the IP portfolio and thus releasing more sequels, Remasters, DLC’s and expansions for their game. The company also initiated a mobile venture during 2016, but as of today, we will not make any greater assumption regarding a future success of mobile titles. Profitability wise we expect to see margin in the region of 32-35% on the EBIT level. Our assumed margins are in line with companies like than for example Activision Blizzard and EA.
Company analysis 32 THQ Nordic
Revenue breakdown and explanation of income streams The sales of THQ consist of income from newly releases and revenue generated from the extensive catalog of older games. During 2016 SEK 123m of the total net sales of SEK 302m came from releases during the year, and SEK 179m was from the catalog, i.e., more long-tail income from older games.
Revenue development THQ Nordic (msek) The sales of THQ consist 350 of income from newly releases and revenue 300 generated from the extensive catalog of older 250 44% growth games 123 200 89 150 39% growth
100 179 124 50
0 2015 2016
Catalog New releases
Source: THQ Nordic
Catalog income is an effect of earlier releases, and there is a direct link between earlier reported revenue levels in the previous periods. Group sales during 2015 are by the end of2016 reported as “Catalog sales”. As the main part of the lifetime, revenue is generated during the first month after the release, there is a natural churn in revenue, this is the reason why new content is necessary for growth for a company like THQ.
Churn rate of the catalog (msek)
220 213 210
200 0.84 churn 190
179 180
170
160 Net sales 2015 Catalog net sales 2016
Source: THQ Nordic
Company analysis 33 THQ Nordic
As new content is crucial for growth so are the investments into Growth is largely a factor development. Growth is largely a factor on how much the company is on how much the company is willing to willing to invest. The development cycle for content differs and is invest dependent on the project. A porting to a new console can take a couple of month or weeks while a game project like Darksiders 3 or ELEX takes years. Thus some of the investments conducted under a fiscal year till lead to an uptake in sales during the same period while other CAPEX will boost the sales levels in the coming years.
Revenue and CAPEX (msek)
350 350 302 300 300
250 250 213 200 178 200
157 Sales 150 150 CAPEX
100 100 69 50 36 50
0 0 2014 2015 2016
Net sales New releases CAPEX
Source: THQ Nordic
The income of THQ is generated from their extensive IP portfolio of assets. Allot of the true value is not found in the “books” as the IPs are depreciated while in truth the perception of the brand will most often increase instead. The correlation between reported balance sheet value of the intangible asset and the revenue levels are quite high. During 2014 and 2015 the return factor based on sales and average intangible asset was 2.4-2.5x. During 2016 the factor was lower as the company has invested heavily in larger releases that will come to the market in H2 2017 and by 2018.
Net sales (msek) and intag. Asset with return factor
350 3.0 2.5 2.4 300 2.5 302 250 1.8 2.0 200 213 1.5 150 178 167
1.0 Retrunfactor
Net(msek) sales 100 90 0.5 50 70 0 0.0 2014 2015 2016
Net sales Avg. Intag. Asset Revenue to intag. Asset -1Y
Source: THQ Nordic & Redeye Research
Company analysis 34 THQ Nordic
Modeling game sales Before we take a deeper dive into our projections we believe it is worth explaining the modeling of video game sales. First off we want to elaborate further on the life-cycle of video games. The pattern varies due to platform and game type. A F2P mobile game revenue pattern is very different from a console game. As THQ mostly develops and releases games on consoles and PC this will be our focus.
The game life-cycle
Game sales cycle example
First month 2 3 4 5 6+
Game sales Expansion sales DLC's sales
Source: Redeye Research
About 60-80% of the games total revenue is generated the first month’s after the releases and most often has peak income during the release month. Many games lifetime sales can be extended with DLC’s and expansions, which of course will boost lifetime sales further. THQ has a strong focus on delivering additional content; this new content is most often developed with relatively small investment needs.
Darksiders 2 interest during 2012 About 60-80% of the games total revenue is generated the first month’s after the releases
Source: Redeye Research & Google
The interests of titles are most often the largest during the release months and like stated before this is the time where a game has its highest grossing income. In the diagram above we show the Google interest for Darksiders 2 when it was released in august 2012. The pattern in the diagram is representative for both interest and sales for video games.
Company analysis 35 THQ Nordic
Seasonality in video game sales The sales of video games are also widely affected by a seasonality pattern with peak income around Christmas, which leads to higher relative revenue levels during Q4. In the diagram below we exemplify this by looking at search volume for the phrase Playstation 4. The seasonality pattern is clearly visible.
Google interest search Playstation 4
Interest search PS4
Source: Redeye Research
The quarterly sales figures for THQ Nordic make no exception to the seasonality pattern. Q4 has, historically, been the quarter with the highest level of income throughout the year.
THQ Nordic: Net sales (msek) & EBIT margin
450140 50%45%0.5 0.5 400 40%45% 120 350 40%0.4 35% 35%0.4 300100 30%0.3 250 80 25%0.3 200
20%0.2
EBIT EBIT margin
EBITEBIT marginmargin
15060 20% EBIT margin
Net(msek) sales
NetNet(msek)(msek) sales sales Net(msek) sales 150
15%0.2 EBIT margin Net(msek) sales 100 15%0.1 40 10% 50 5%10%0.1 200 0.0
0 5%0%
0 0 0 0 0 0 0 0
0 0%
2015-Q2 2015-Q3 2015-Q4 2016-Q1 2016-Q2 2016-Q3 2016-Q4 2017-Q1
2015-Q32015-Q1 2016-Q1 2016-Q3 2017-Q1
2017E-Q3 2017E-Q4 2017E-Q2
Net sales (msek) EBIT margin
Source: THQ Nordic & Redeye Research
Company analysis 36 THQ Nordic
Copies sold and sales estimate To make assumptions regarding revenue generating from new titles we, of Small deviations in the copies sold forecast will course, will have to look at each larger title separately. We do however want yield significant swings in to say that modeling and assuming how much a game will sell is no easy forecasted income task, and small deviations in the copies sold forecast will yield significant swings in forecasted income.
Sales model video game sales Case: Base Release price: 200 Game: Example III Price long-tail 100
Sold copies (m): 1.0 Release date: Q4'17 Base 1.00 Platforms: Cross Bear 0.50 Formats: On-& offline Bull 1.50 Digital share: 55%
Release period Catalog period Weight 80% 20% Retail revenue (msek) 160 36 VAT 15% 15% Gross revenue (msek) 136 31 Platform/wholesaler cut 35% 35% THQ Nordic IP share 100% 100% Net sales THQ Nordic (msek) 89 20
Source: Redeye Research
Redeye uses a scenario-based approach, and we will model the assumed game sales in the same way. In the example above we use a retail price of 200 SEK that the game will sell 1 million copies during its lifetime and that 80% of the lifetime sales occur in the first months after the release. The sales will then be subjected to VAT of 15% and a platformer or wholesaler cut of 30-40%. If THQ Nordic, like in this example, owns the whole IP they would receive about SEK 110m in sales during the games life.
“Guesstimation” of game revenue To “guesstimate” future copies sold is inherently a none precise matter. However, we can base on a number of factors, make scenario assumptions regarding future success. Our primary medicine for this uncertainty is to be conservative and use our sound judgment.
Data points to use as a base for the forecast What data can be used to forecast potential game sales? Our primary sources of information are: If a sequel, previous titles game sales Interest on the web for YouTube clips, Google search and more Sales number for competitive titles Critics reception and Metascore Our judgment of game quality, and inherently what the receptions will be
Company analysis 37 THQ Nordic
We have a detailed forecast for each of the larger upcoming releases, i.e., ELEX, Battle Chasers, SpellForce 3, The Guild, Aquanox and the undisclosed AAA title. However we find it to be a better approach to show our aggregated sales estimate than disclosing the titles separately, we will briefly show our scenario range of possible game copies sold for each title. But to educate a reader in the assumption, we will take Darksiders 3 as an example and show in more detail what we have based our projection on.
Darksiders 3 estimates The upcoming Darksiders 3 are based on THQ Nordics most critical acclaimed IP. Virgil Games developed the original game and the reincarnation of the studio, Gunfire Games develops the new title. The franchise was added in the company’s game portfolio in 2013 when THQ was acquired. The game is an Action role-playing game (RPG). Darksiders is a so-called “hack and slash” game which is a subgenre of third person action games.
Darksiders Game description Platform PC/Console Genre Action RPG Released games: Metascore Darksiders, released 2010 Critics: 83 Users: 78 Darksiders 2, released 2012 Critics: 83 Users: 81 Pipeline: Darksiders 3 Annonced release in 2018
Lifetime sales from gameseries 5 million copies Total net sales SEK 1.3 billion Source: THQ Nordic, Redeye Research
Remasters has been done on both Darksiders 1 and 2; the IP has sold more than 5 million copies and generated more than SEK 1.3bn. In general, a sequel will sell a bit more copies than its processors as the IP then is well known, and most that have played the previous titles want to try the new addition to the series. Darksiders 2 sold 1.4 million copies during the first months post the release in August 2012. However, we want to highlight at that time the “old” THQ was a very large company with an extensive marketing machine. THQ Nordic will most likely use a more cautious approach regarding promotions and likely have a lower “goal” on sales as the development cost of Darksiders 3 has been significantly lower than the predecessors. The number two in the series had a development team of about 200 people; Gunfire Games has roughly 40 employees.
Company analysis 38 THQ Nordic
Darksiders 2, search volume at release and copies sold
2.0 1.8 1.6 1.40 1.4 1.2 For Darksiders 2 the 1.0 Google search volume reached approximately 0.8 1.9 million during August 0.6 2012 0.4 0.2 0.0
Search volume for D2 (m) Cum. copies sold byt Sept.'12 (m)
Source: Google, THQ, Redeye Research
As we have shown earlier; the interest for game titles are the largest during the release month. For Darksiders 2 the Google search volume reached approximately 1.9 million during August 2012. The volume averaged about 140k during the six months prior the release.
Darksiders 3, search volume (m)
0.45 0.40 0.35 0.39 0.30 0.25 0.20 0.15 0.10 0.09 0.05 0.08 0.08 0.06 0.06 0.00 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17
Search volume for D3 (m)
Source: Google, THQ, Redeye Research
Interest for Darksiders 3 is already relatively high, and the search volume amounted to almost 400k during May’17, as the game was announced and released game teaser trailer and Gameplay the numbers are boosted.
Company analysis 39 THQ Nordic
Darksiders 3 Youtube data
Darksiders 3 Official Reveal Trailer - IGN First
Views: 2.1 mn, 1 month ago
Darksiders 3 Gameplay Reveal - IGN First
Views: 1.6 mn, 1 month ago
Source: Youtube
YouTube is another good source of data to indicate how popular a title will be. During the first month the reveal trailer and gameplay teaser, from IGN, was viewed 2.1 and 1.6 million times respectively. Over all, we can say that our data sources indicate a large interest for Darksiders 3, likely on par with its precursors.
RPG titles and how much they sell In addition to data sources about overall interest for the games and previous sales numbers within the series, we also look at the average number of copies sold within the game genre for titles with the comparable We have a dataset of about 17k titles with their quality rating, i.e., high Metascore. We have a dataset of about 17k titles number of physical copies with their number of physical copies sold and Metacritic score. The dataset sold and Metacritic score stretches from 1998 to 2016 and is based on vgchartz.com numbers. As we know the approximated relation between physical game shipping and digital sold units, we can approximate the titles lifetime number of copies sold.
Average sales, new releases 2010-2016, Role-Playing Genre Role-Playing Titles in sample 32
Estimated sold copies (millons) Best 25 High range 12 Average 3 Low range 0.2 Lowest 0.2
Metascore High range 91 Average 80 Low range 71
Source: Redeye Research, Google, Metacritic, Vgchartz
As seen in the table above the copies sold varies to a great extent. The best titles can sell in the tens of millions of units while the more mediocre ones sell at about 200k copies. The average title in our 32 large samples sold roughly 3 million copies. Some extreme outliers of the biggest names shift the average upwards to some degree.
Company analysis 40 THQ Nordic
Sales model: Darksiders 3 Case: Base Release price: 600 Game: Darksiders 3 Price long-tail 240
Sold copies (m): 1.8 Release date 2018 Base 1.80 Platforms: Cross Bear 1.00 Formats: On-& offline Bull 3.20 Digital share 55%
Source: Redeye Research
Based on overall search and YouTube interest, previous sales of Darksiders 1 and 2 and the overall average unit sold for RPG titles we make the conservative assumption that Darksiders 3 will sell in the region of 1.8 million copies during its lifetime. We have a Bull scenario of 3.2 and Bear of 1 million units. The game is set to be released during 2018, likely in November or December.
The larger releases during 2017 Darksiders 3 will be released during 2018. Still, there are plenty of upcoming launches that will drive the revenue levels to new heights during 2017. We have a rather good visibility of current projects and there will not be any more major released during Q2 and Q3. The company continuously launches some new title platform porting’s, DLC’s and other asset care releases which increase the income level. The larger titles, which will be released during Q4 are; ELEX, Battle Chasers, SpellForce 3, The Guild 3 and Aquanox. We believe these new launches will create an income during the quarter of roughly SEK 342.
Sales projections THQ Nordic
450 45% Forecast period 400 40%
350 35%
300 30%
250 25% 342
sales sales (m) 200 20% Margin%
150 15%
100 10%
50 5%
0 0% 2016-Q4 2017-Q1 2017E-Q2 2017E-Q3 2017E-Q4
Catalog sales New releases sales, small New releases sales, large EBIT-margin
Source: Redeye Research
Company analysis 41 THQ Nordic
ELEX This new game is a post-apocalyptic open world action RPG played in a third person perspective. The game is developed by the studio Piranha Bytes. And is the first internally developed IP from THQ Nordic.
The receptions for the game has been relatively mixed which makes us approach our forecast with caution. The game will be released in October 2017. Piranha Bytes previous three latest games has sold in a range of 0.4 to 1.5 million copies. The interest for the title on Google is rather high with 140k in volume during May.
ELEX: Search volume model and release month sales (m) 3.00 Forecast period
2.50 2.39
2.00
1.50 1.35
1.00
0.50 0.32 0.14 0.14 0.19 0.05 0.06 0.06 0.09 0.07 0.07 0.09 0.12 0.00
Search volume (m) Release month copies sold forecast (m)
Source: Google and Redeye Research
The receptions for the Following the usual pattern for game titles this should indicate search game has been relatively volumes in the region of 2.4 million during release. If we assume a 50% mixed which makes us approach our forecast buy/search ratio then the title will sell about 1 million copies during its first with caution couple of months. As the IP is new and in some way a mix of two different genres we will keep our estimates conservative and model a Base-case of 1 million copies sold during its lifetime.
Sales model video game sales Case: Base Release price: 500 Game: ELEX Price long-tail 350
Sold copies (m): 1.00 Release date Q4'17 Base 1.00 Platforms: Cross Bear 0.30 Formats: On-& offline Bull 1.50 Digital share 55%
Source: Redeye Research
Battle Chasers The game is created by former game veterans and co-founders from Vigil Games the development studio behind the first two Darksiders games. The veteran’s new studio is called Airship Syndicate, and the game is like Darksiders based on a comic book series. Battle Chasers is a turn based
Company analysis 42 THQ Nordic
RPG with a focus on dungeon exploration made with an appealing design for comic book fanatics and nostalgic gamers. We think the combination of the comic books popularity combined with the elements from old popular games like Baldur’s Gate: Dark Alliance and Final Fantasy 7 will be successful. However, the interest on Google and YouTube is rather low. One boost will be the fact that the title will be available to Nintendo Switch.
Battle Chasers YouTube data
Battle Chasers: Nightwar - Nintendo Switch Reveal Trailer
Views: 335 ks, 2 month ago
Battle Chasers: Nightwar - Gameplay Trailer
Views: 132 ks, 1 year ago
Source: Youtube
In our Base-case, we assume that the title will sell for about 300k copies. As THQ is not the IP owner, the net sales to the company will be significantly lower than for example the ELEX IP.
Sales model video game sales Case: Base Release price: 300 Game: Battle Chasers Price long-tail 210
Sold copies (m): 0.3 Release date Q4'17 Base 0.30 Platforms: Cross Bear 0.10 Formats: On-& offline Bull 0.80 Digital share 55%
Source: Redeye Research
SpellForce 3 Spellforce is a combination of real-time strategy and RPG. Two games have been released in the series 2004 and 2007 with good user and critics scores between 75 and 80. The new game has an announced release date of December 7 and is developed by Grimlore Games.
We believe this will be a high-quality title that combines many of the best The interest on the internet is already quite elements of real-time strategy and RPG in a perfect hybrid which makes it significant with search unique. The interest on the internet is already quite significant with search volume of 50k during May volume of 50k during May. The title already has roughly 30k owners on its beta version on Steam. The title will retail for 50 dollars, which we believe is a bit pricey and will dampen the initial sales levels. Long-tail wise, we think SpellForce 3 holds great promise.
Company analysis 43 THQ Nordic
Steam data on SpellForce 3
Source: Steamspy (2017-06-14)
We believe SpellForce 3 will sell about 0.5 million copies, with smaller initial release sales and more in the long-tail at a lower price. The game will be released only on PC, which dampens the potential to some degree. We believe that the game will be ported to consoles, if the sales numbers proves to be satisfying.
Sales model video game sales Case: Base Release price: 500 Game: SpellForce 3 Price long-tail 350
Sold copies (m): 0.5 Release date Q4'17 Base 0.50 Platforms: PC Bear 0.30 Formats: On-& offline Bull 0.90 Digital share 55%
Source: Redeye Research
The Guild 3 The game is a mixture of economic simulation, strategy, RPG and historical life simulation that takes place in medieval Europe. Previous games in the series have mixed reviews, the first one released in 2002 called “Europa 1400: The Guild” has an average score of 84 from critics and users. The Guild 2, however, has an average score of 64.
In “The Guild 3” you play as a single character or create a family dynasty which can last for centuries. You have to prove your skills in handicrafts, trading, social occasions, politics, and intrigues. Like SpellForce 3 the game will only be avaible on PC. Estimated sales: 0.2-0.8 million copies, with a Base-case of 0.4 million.
Company analysis 44 THQ Nordic
Aquanox The sequel Aquanox - Deep Descent is also a Kickstarter project with USD 0.1 million funded from 2000 backers. The new game is developed by Digital Arrow, a company of approximately 20 game developers. Aquanox features four player co-op and a variety of tactical elements and has pretty impressive graphics for an indie title. The game should attract a smaller hardcore audience. Estimated sales: 0.1-0.4 million copies, with a Base-case of 0.2 million.
Company analysis 45 THQ Nordic
Forecasting the cost levels The gross profit margin varies The major factor behind the variation of the Cost of Sales (CoS) levels is the amount of revenue generated through publishing deals. The actual terms of the contracts with the developers vary widely, and no exact formula can be used to estimate the future cost levels. In the diagram below we illustrate publishing sales as % of total revenue and CoS as share of net sales. The relationship between a large part of publishing income and higher CoS is rather apparent.
THQ Nordic: Publishing % sales & CoS % sales
150% 50%0.5 The major factor behind 45%0 45%0.5 the variation of the Cost of 40%0 40%0.4 Sales (CoS) levels is the 0 35%0.4 amount of revenue 35% 35% 0 30%0.3 generated through 30% 30% publishing deals 0 25%0.3
25% 25%
CoSCoSCoS%%% sales sales sales 0 20%0.2 CoS% sales
20% 20% sales CoS%
Publishing Publishing Publishing Publishing %%%sales sales sales Publishing Publishing %sales 0 15%0.2
Publishing Publishing %sales 15%0 15%10%0.1 10%0 10%5%0.1 05% 5%0%0.0 0% 0% 2015-Q3 2016-Q1 2016-Q3 2017-Q1
Publishing % sales CoS % sales
Source: THQ Nordic & Redeye Research
As the CoS level is hard to predict we will mostly base our assumptions on historical numbers. More long-term we know that THQ will have a focus on internally developed and owned IPs and less on publishing deals and that the digital distribution will increase, this could lead to increasing margins.
THQ Nordic: Net sales (msek) & CoS % sales
450 50%
400 45%
40% 350 35% 300 30% 250 25% 200 20% CoS sales % Net sales Netsales (msek) 150 15% 100 10%
50 5%
0 0%
Net sales (msek) CoS % sales
Source: THQ Nordic & Redeye Research
Company analysis 46 THQ Nordic
The cost levels for other expenses, like offices e.tc. is expected to rise modestly, due to increased size of the company. However these cost are more “fixed” and do not vary greatly. In relation to sales, the scalability will kick-in during the release period of Q4’17. On the other hand the profitability levels will be dampened during Q2 and Q3, as the sales levels will be lower.
THQ Nordic: Net sales (msek) & Other OPEX % sales The scalability will kick-in 450 25% during the release period of Q4’17 400
350 20%
300 15% 250
200
10% Net(msek) sales
150 OtherOPEX % sales
100 5% 50
0 0%
Net sales (msek) Other OPEX % sales
Source: THQ Nordic & Redeye Research
Staff costs are not directly as scalable as “other expenses” as it takes people to create the games. However, a success in game sales is not related to an increased staff count so we count these as “semi-fixed” costs. Long-term we believe the company will continue to add more staff, but at the same time use external developers for operational leverage.
THQ Nordic: Net sales (msek) & Staff cost % sales
450 35%
400 30% 350 25% 300
250 20%
200 15% Staff Staff %costsales Net(msek) sales 150 10% 100 5% 50
0 0%
Net sales (msek) Staff cost % sales
Source: THQ Nordic & Redeye Research
Company analysis 47 THQ Nordic
EBIT margin projections The scalability on the cost side will indeed kick in during Q4, as the D&A will increase significantly during Q4 as company releases a lot of different titles. On the same time, the D&A will the company make major increase significantly during the quarter as roughly 30% development releases CAPEX is depreciated during the first three months after a game is released. We want to highlight that the exact D&A levels are almost impossible to predict so a rough approximation is the best we can do. During Q2 and Q3 we expected to see a modest margin decline as the sales levels will be lower due to a smaller pipeline of projects.
THQ Nordic: Net sales (msek) & EBIT margin
450 45%
400 40%
350 35%
300 30%
250 25%
200 20% EBIT EBIT margin
Net(msek) sales 150 15%
100 10%
50 5%
0 0%
Net sales (msek) EBIT margin
Source: THQ Nordic & Redeye Research
Forecast summary Our assumptions boil down to the following estimates seen in the table below. The large release during 2018 will be Darksiders 3 and by 2019 we believe the undisclosed title will come to the market, a game with development budget on the same level of Darksiders 3. The revenue levels the coming two quarters will most likely be lower as the pipeline of new releases is smaller. The sales levels during Q4 will be massive as the company will release ELEX, Spellforce 3, Battle Chasers, The Guild 3, Aquanox and also likely some other releases, DLC’s and the like.
THQ Nordic estimates 2017- 2017E- 2017E- 2017E- mSEK 2015 2016 2017E 2018E 2019E 2020E Q1 Q2 Q3 Q4 Net sales 213 302 82 62 55 408 608 841 1015 1253 Of which NR 62 30 13 11 359 413 506 637 796 Of which Catalog 205 52 49 44 50 334 378 457 457 Total OPEX -146 -207 -50 -47 -41 -274 -412 -561 -675 -815 EBIT 67 95 32 16 14 134 196 280 340 439 CAPEX 143 157 67 50 61 61 239 294 355 439 Net sales growth 20% 42% 90% 19% -29% 218% 101% 38% 21% 23% EBIT margin 31% 31% 39% 25% 26% 33% 32% 33% 33% 35% CAPEX % sales 67% 52% 82% 80% 110% 15% 39% 35% 35% 35% Source: Redeye Research
Company analysis 48 THQ Nordic
Valuation
The required rate of return used in the DCF-valuation is set to 7.5% which is WACC of 7.5% is used and derived using Redeye’s rating model. THQ Nordic has a long history of based on Redeye Rating profitable growth, significant experience and ownership of the management team and a healthy financial position. The combination of these elements lead to a high Redeye Rating, and thus a low assumed WACC.
In our Base-case scenario, we believe that the investment in new releases continues at a high phase, which boosts the growth rates. We want to highlight that our Base-case assumes moderate success for THQ Nordic’s In our Base-case scenario, larger projects; this is to keep a “margin of safety” in our favor. Despite our we believe that the relatively conservative estimates, we anticipate a CAGR of sales of 23% investment in new releases continues at a during the next ten years. We will see a significant boost in sales levels high phase, which boosts during the coming two years was the company enters the “next” level from the growth rates the upcoming releases of major sequels and new IPs. Profitability wise we believe it is possible that the gross margins will expand as the revenue streams from the own IPs will grow faster than the publishing revenue. We also see that the significant scalability inherit by THQ Nordic’s business model, and lower other expenses in relation to sales in the coming years. We model an average EBIT margin of 38% during our forecast period.
In the terminal year we use the conservative assumption of an FCF growth of 2% and an EBIT margin of 34%, this indicated an “exit” EV/EBIT multiple of 8x, considerably lower than what other diversified Gaming companies trade at today. We believe these assumptions warrant a large degree of safety. Our estimate does not take into account any future value- creating acquisitions of IPs or game studios.
THQ Nordic: Base-case Assumptions 2016-26 DCF-value CAGR Sales 23% WACC 7.5% EBIT margin (avg) 34% Net presenst value FCF 1 259 Base-case valuation of 69 ROIC (avg) 30% Net present value of Terminal 3 556 SEK per share Terminal EV 4 815 Terminal growth FCF 2.0% Net cash 139 Terminal EBIT margin 35% Value minorities 0 Exit EV/EBIT multiple 8x DCF-value 4 953 Estimated Fair value 69 Todays share price 52.0 Potential/Risk 32%
Source: Redeye Research
Our assumption generates a Fair value estimate, in Base-case of 69 SEK per share. We believe the market is yet to grasp the fact that THQ Nordic is entering the next phase with the upcoming releases of sequels an entirely new IPs. We also find that the valuation of today puts too little premium on
Company analysis 49 THQ Nordic
the competent management team and the possibility of future value enhancing acquisitions and deals.
Peer valuation In the same manner, as how we treat our other Gaming companies, we have divided our peer-valuation into peer groups of Swedish and International Gaming to display valuation differences between sub-segments in the gaming industry better. Our prime valuation metric is EV/EBIT as it, at least in some way, take into account the investment needs of gaming companies.
Swedish Gaming: At Redeye we also have coverage of Stillfront and G5, analyst research on the Starbreeze and Paradox Interactive are quite low, no projections are even available for Paradox. Overall, the companies within this peer group are expected to deliver healthy profit growth in the coming years. Our projections indicate that THQ Nordic will both outgrow this peer group and deliver higher profitability.
International Gaming: The companies in this peer -group are the “whales” of the gaming industry. Most of these enterprises act both as publisher, developers and platform owners. Most of them are also active in all sub-segments of the industry (cross platform in all genres). THQ Nordic is similar to these companies as they have an extensive cross-selling IP portfolio. Still the size of these firms makes a comparison not directly applicable. If our estimates become a reality, THQ Nordic will outperform this group of companies.
Peer valuation SALES EV/Sales EV/EBIT EBIT margin CAGR EV Company (MSEK) 2017E 2018E 2017E 2018E 2019E 16-19E 2017E 2018E 2019E Swedish Gaming Paradox Interactive 7 104 n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. Starbreeze 3 743 8.3x 3.5x n.m. 15.5x 58.2x 47% n.m. n.m. n.m. G5 Entertainment 2 168 2.1x 1.9x 21.5x 15.6x n.m. 36% 10% 12% 14% Stillfront 464 2.9x 1.6x 14.6x 5.5x 5.7x 34% 20% 30% 29%
Median 2 955 2.9x 1.9x 18x 16x 32x 36% 15% 21% 21% International Gaming Tencent 2 968 759 10.5x 8.0x 32.8x 25.6x 20.9x 32% 32% 31% 31% Activision Blizzard 409 651 7.2x 6.6x 22.3x 17.7x 15.0x 5% 32% 37% 41% Nintendo 340 539 4.9x 3.7x 35.8x 19.5x 14.8x 40% 14% 19% 24% EA 274 361 6.0x 5.6x 18.7x 16.0x 14.5x 11% 32% 35% 37% Ubisoft 56 751 3.4x 2.8x 22.7x 15.0x 12.1x 18% 15% 19% 22% Take-Two 56 063 4.0x 2.5x 27.4x 11.0x 14.0x 26% 15% 23% 17% Bandai Namco 52 116 1.1x 1.0x 9.9x 9.1x 9.2x 9% 11% 11% 11% CD projekt 16 842 19.6x 8.8x 45.9x 25.5x 7.7x 39% 43% 35% 64% Median 165 556 5.5x 4.7x 25x 17x 14x 22% 23% 27% 28%
Peer Group median 84 256 4.2x 3.3x 22x 16x 23x 29% 19% 24% 24%
THQ Nordic 3 582 5.9x 4.3x 18x 13x 11x 50% 32% 33% 33% at Base-case 4 815 7.9x 5.7x 25x 17x 14x
Source: Bloomberg & Redeye Research
Today THQ Nordic trades EV/EBIT2018E of 13x. This is a discount compared to our peer group and to low according to us as we believe the company will both outgrow and outperform the competition in the coming
Company analysis 50 THQ Nordic
years. We also find that the owner-operator team and possible future value- adding acquisition should warrant a premium. Our Base-case would imply 17x 2018E EBIT; more in-line with the group’s valuation levels.
Scenario analysis At Redeye we emphasize on the use of scenario-based analysis, as such, we always present a Base, Bear and Bull-case valuation. Our different cases create a Valuation range, which can be used to gauge implied future fundamental development at various share prices.
Bear-case In our Bear-case we have used much more conservative assumptions regarding the success of the larger upcoming releases and that ELEX will be a disappointment. We also model a much slower growth long-term growth of new release revenue, as in this scenario the earlier disappointments makes the company more cautious of new larger projects. However, the catalog revenue continues to develop at a healthy phase. The lower assumed growth leads to less operational leverage, and we model a less aggressive margin uptake. In our Bear-case, we expect a CAGR of 12% the coming ten years with an average EBIT margin of about 30%.
THQ Nordic: Bear-case Assumptions 2016-26 DCF-value CAGR Sales 12% WACC 7.5% EBIT margin (avg) 30% Net presenst value FCF 602 Bear-case valuation of 28 ROIC (avg) 21% Net present value of Terminal 1 250 SEK per share Terminal EV 1 852 Terminal growth FCF 2.0% Net cash 139 Terminal EBIT margin 30% Value minorities 0 Exit EV/EBIT multiple 9x DCF-value 1 990 Estimated Fair value 28 Todays share price 52.0 Potential/Risk -47%
Source: Redeye Research
Our Bear-case assumptions generate an estimated value of 28 SEK per share. Given our assumptions and that THQ Nordic is truly committed to making value-adding acquisition and investments, the scenario must be seen as clearly conservative.
Company analysis 51 THQ Nordic
Bull-case In our Bull-case we assume a larger success for the upcoming major releases during 2017, 2018 and 2019, the company then reinvest those cash flows into even greater projects, which also works out well. We also model some success for the mobile venture within the Group. In this scenario, we assume a more rapid growth rate and higher margins due to operational leverage. The estimated CAGR amounts to 29% the coming ten years with an EBIT margin of about 38%. Our assumptions in the Bull-case regarding commercial success for the larger upcoming releases should not be seen as any “Blue-sky” scenario with overly positive estimates. For example, we assume that ELEX would sell 1.5 million copies during its lifetime and Darksiders 3 sells 3.2 million units. These assumptions are within reasonable bounds, but of course on the positive side of the spectrum.
THQ Nordic: Bull-case Assumptions 2016-26 DCF-value CAGR Sales 29% WACC 7.5% EBIT margin (avg) 38% Net presenst value FCF 2 128 ROIC (avg) 35% Net present value of Terminal 6 099 Bull-case valuation of 116 SEK per share Terminal EV 8 228 Terminal growth FCF 2.0% Net cash 139 Terminal EBIT margin 37% Value minorities 0 Exit EV/EBIT multiple 9x DCF-value 8 366 Estimated Fair value 116 Todays share price 52.0 Potential/Risk 123%
Source: Redeye Research
Our Bull-case assumptions generate an estimated value of 116 SEK per share. Our scenario still does not take into account any future value enhancing acquisitions of IPs or game studios, which we will treat, act as a positive value adding option.
THQ Nordic: Fair value range
Our Fair value range 0 20 40 60 80 100 120 140 indicates a share with Last price 52.0 good risk/reward characteristics, with a significant upside and limited risk on the 0 20 40 60 80 100 120 140 downside Bear-case: 28 Base-case: 69 Bull-case: 116
We believe that THQ Nordic is entering its next phase as during 2017, 2018 and 2019 the company will release their first newly developed and fully owned sequels on the main franchises and an entirely new IP. The releases will bring the income levels to new heights and create new business opportunities.
We conclude that the market is yet to understand where THQ Nordic is on their growth journey fully. We also believe the highly competent and committed management team warrants a premium valuation. Our Fair value range indicates a share with good risk/reward characteristics, with a significant upside and limited risk on the downside.
Company analysis 52 THQ Nordic
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 8.0p The management team of THQ Nordic is by our measures highly competent with extensive experience from the Gaming industry. The company continuously put emphasis on a shareholder focus to generate long-term value creation by keeping to their core strategy; acquiring IPs at the cheap and increase their value by asset care. The operational team with Klemenz Kreuzer and Reinhard Pollice at the helm has been within the Gaming industry their entire professional life and shows profound experience. Lars Wingefors is an entrepreneur by heart; he started his first business at the age of 13 and has been selling video games for more than 20 years. We find the management of THQ Nordic as trustworthy as they have never tried to misguide the market; instead, they always make conservative statements and educate the market about their business.
Ownership 9.0p The ownership structure of THQ Nordic is, in our view, one of its key strengths. All the key personnel has substantial holdings in the company with the founder Lars Wingefors controlling more than 62% of the votes. The significant holdings create a focus on long-term value creation and not meeting short-term financial goals that a company led by “hired guns.” In addition to the substantial holdings of the management team, some of the most renowned institutional owners show up on the shareholder's list of THQ Nordic. Given the fact that the company is listed on Nasdaq First North this is quite the feat, as that listing reduces the possibility for institutional funds to own shares in the firm. Profit outlook 7.0p THQ Nordic has a large portfolio of game franchises with multiple streams of income and a massive player base. Some of the IPs, like Darksiders, Spellforce, Red Faction and MX vs. ATV has a large following and good reputation in the gamer community; this creates a pricing power and demand for new products. THQ Nordic is one of the larger game publishers/developers in Sweden. However, as the gaming industry is so massive, they are still a relatively small player.
Profitability 6.0p During the past years, THQ Nordic has been growing heavily and still producing more than satisfying margins and return on asset. The future profitability levels will vary due to game release schemes as the business model inherits a high degree of scalability. Long-term increasing margins as the company continues to grow and the revenue streams from their own IPs increase even further.
Financial strength 8.0p THQ Nordic is an unleveraged company with a strong cash position. One of the company’s core strategies is to acquire game IPs from companies in financial distress; this has led to a conservative approach regarding putting on debt. The income streams are diversified with a large portfolio of IPs and different games. Overall the video game industry is not sensitive to the business cycle which dampens the financial risk of downturns.
Company analysis 53 THQ Nordic
Income statement 2015 2016 2017E 2018E 2019E DCF valuation Cash flow, MSEK Net sales 213 302 608 841 1,015 WACC (%) 7.5 % NPV FCF (2017-2019) 122 Total operating costs -108 -170 -325 -447 -535 NPV FCF (2020-2026) 1135 EBITDA 105 132 283 394 480 NPV FCF (2027-) 3555 Non-operating assets 167 Depreciation 0 0 0 0 0 Interest-bearing debt -29 Amortization -38 -37 -87 -114 -140 Fair value estimate MSEK 4952 Impairment charges 0 0 0 0 0 Assumptions 2017-2023 (%) EBIT 67 95 196 280 340 Average sales growth 21.0 % Fair value e. per share, SEK 69 EBIT margin 33.9 % Share price, SEK 51.8 Share in profits 0 0 0 0 0 Net financial items -1 -2 -2 0 0 Exchange rate dif. 0 0 0 0 0 Profitability 2015 2016 2017E 2018E 2019E Pre-tax profit 66 93 194 280 340 ROE 0% 34% 36% 36% 31% ROCE 141% 41% 45% 46% 40% Tax -14 -21 -44 -62 -75 ROIC 0% 138% 95% 84% 68% Net earnings 51 72 150 218 265 EBITDA margin 49% 44% 47% 47% 47% EBIT margin 31% 31% 32% 33% 34% Balance 2015 2016 2017E 2018E 2019E Net margin 24% 24% 25% 26% 26% Assets Current assets Data per share 2015 2016 2017E 2018E 2019E Cash in banks 26 167 163 216 276 EPS 0.00 1.00 2.09 3.03 3.68 Receivables 31 47 91 126 152 EPS adj 0.00 1.00 2.09 3.03 3.68 Inventories 13 18 36 50 61 Dividend 0.00 0.00 0.00 0.00 0.00 Other current assets 0 0 0 0 0 Net debt 0.00 -1.93 -2.27 -2.99 -3.83 Current assets 69 232 291 392 489 Total shares 0.00 72.03 72.03 72.03 72.03 Fixed assets
Tangible assets 2 4 6 8 10 Valuation 2015 2016 2017E 2018E 2019E Associated comp. 0 0 0 0 0 EV -15.6 2,238.4 3,564.5 3,512.1 3,451.8 Investments 0 0 0 0 0 P/E 0.0 33.0 24.8 17.1 14.1 Goodwill 0 0 0 0 0 P/E diluted 0.0 33.0 24.8 17.1 14.1 Cap. exp. for dev. 0 0 0 0 0 P/Sales 0.0 7.9 6.1 4.4 3.7 O intangible rights 105 229 381 561 776 EV/Sales -0.1 7.4 5.9 4.2 3.4 O non-current assets 0 0 0 0 0 EV/EBITDA -0.1 16.9 12.6 8.9 7.2 Total fixed assets 106 232 386 568 785 EV/EBIT -0.2 23.6 18.2 12.6 10.1 Deferred tax assets 0 0 0 0 0 P/BV 0.0 6.9 7.5 5.2 3.8
Total (assets) 175 465 677 960 1,275 Share performance Growth/year 15/17e 1 month -8.4 % Net sales 69.0 % Liabilities 3 month 32.7 % Operating profit adj 71.6 % Current liabilities 12 month % EPS, just 0.0 % Short -term debt 10 29 0 0 0 Since start of the year 55.9 % Equity 142.6 % Accounts payable 72 80 170 235 284 O current liabilities 0 0 0 0 0 Current liabilities 82 108 170 235 284 Shareholder structure % Capital Votes Long-term debt 0 0 0 0 0 Lars Wingefors 50.0 % 61.8 % O long-term liabilities 1 0 0 0 0 Xagonus AB 10.8 % 13.4 % Convertibles 0 0 0 0 0 Swedbank Robur Fonder 5.5 % 2.6 % Total Liabilities 84 108 170 235 284 Handelsbanken Fonder 4.7 % 2.2 % Deferred tax liab 8 11 11 11 11 Cmb Holding AB 3.7 % 4.6 % Provisions 0 0 0 0 0 Didner & Gerge Fonder 3.1 % 1.5 % Shareholders' equity 84 345 496 714 979 Lumarisimo AB 2.2 % 2.8 % Minority interest (BS) 0 0 0 0 0 RAM Fonder 1.9 % 0.9 % Minority & equity 84 345 496 714 979 Avanza Pension 1.8 % 0.8 % Rolf Lundström 1.7 % 0.8 % Total liab & SE 175 465 677 960 1,275 Share information Free cash flow 2015 2016 2017E 2018E 2019E Reuters code THQNO.ST Net sales 213 302 608 841 1,015 List Total operating costs -108 -170 -325 -447 -535 Share price 51.8 Depreciations total -38 -37 -87 -114 -140 Total shares, million 72.0 EBIT 67 95 196 280 340 Market Cap, MSEK 3727.7 Taxes on EBIT 0 0 0 0 0 NOPLAT 67 95 196 280 340 Management & board Depreciation 38 37 87 114 140 CEO Lars Wingefors Gross cash flow 105 132 283 394 480 CFO Erik Stenberg Change in WC 29 -14 28 16 12 IR Gross CAPEX -145 -163 -241 -296 -357 Chairman Kicki Wallje-Lund
Free cash flow -11 -45 70 114 135 Financial information
Capital structure 2015 2016 2017E 2018E 2019E Equity ratio 48% 74% 73% 74% 77% Debt/equity ratio 12% 8% 0% 0% 0% Net debt -16 -139 -163 -216 -276 Analysts Redeye AB Capital employed 69 206 332 498 703 Kristoffer Lindstrom Mäster Samuelsgatan 42, 10tr Capital turnover rate 1.2 0.6 0.9 0.9 0.8 [email protected] 111 57 Stockholm
Growth 2015 2016 2017E 2018E 2019E Tomas Otterbeck Sales growth 0% 42% 101% 38% 21% [email protected] EPS growth (adj) 0% 0% 109% 45% 22%
Company analysis 54 THQ Nordic
Revenue & Growth (%) EBIT (adjusted) & Margin (%)
1200 120.0% 400 40.0% 350 35.0% 1000 100.0% 80.0% 300 30.0% 800 250 25.0% 60.0% 600 200 20.0% 40.0% 150 15.0% 400 20.0% 100 10.0% 200 0.0% 50 5.0% 0 -20.0% 0 0.0% 2014 2015 2016 2017E 2018E 2019E 2014 2015 2016 2017E 2018E 2019E
Net sales Net sales growth EBIT adj EBIT margin
Earnings per share Equity & debt-equity ratio (%)
4 4 0.9 14.0% 3.5 3.5 0.8 12.0% 3 3 0.7 10.0% 0.6 2.5 2.5 8.0% 0.5 2 2 6.0% 0.4 1.5 1.5 4.0% 0.3 1 1 0.2 2.0% 0.5 0.5 0.1 0.0% 0 0 0 -2.0% -0.5 2014 2015 2016 2017E 2018E 2019E -0.5 2014 2015 2016 2017E 2018E 2019E
EPS, unadjusted EPS, adjusted Equity ratio Debt-equity ratio
Sales division Geographical areas
Conflict of interests Company description Kristoffer. Lindström owns shares in the company THQ Nordic: Founded in 2011, THQ Nordic is a global video game publisher and Yes developer. Based in Vienna, Austria and Karlstad, Sweden with Tomas. Otterbeck owns shares in the company THQ Nordic: Yes subsidiaries in Germany and the USA, THQ Nordic brands include Darksiders, MX vs. ATV, Red Faction, Titan Quest and many more. THQ Redeye performs/have performed services for the Company and Nordic is meant to represent a core approach of doing much more than receives/have received compensation from the Company in connection “owning” a highly competitive portfolio of IPs. It revolves around with this. cherishing them, and aligning them with the very best development resources to expand upon them with the level of experience that communities and established fan bases expect and deserve. The company’s internal development studios are Grimlore Games based in Munich, Germany; Rainbow Studios based in Phoenix, Arizona; Mirage Game Studios AB based in Karlstad, Sweden and Foxglove Studios AB based in Stockholm, Sweden.
Company analysis 55 THQ Nordic
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Company analysis 56