Starbreeze. Three quarters to payday. Commissioned research 6 March Information Technology Sweden

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1 Commissioned research 6 March 218 Starbreeze Information Technology Sweden KEY DATA Country Sweden Bloomberg STARB SS Reuters STZEb.ST Share price 1.4 Free float 8% Market cap (m) SEK 3,5 Website Next report date 9 May 218 ABSOLUTE & RELATIVE PERFORMANCE Mar 17 Jun 17 Sep 17 Dec 17 Mar 18 Starbreeze -1M -6M -12M YTD Absolute 16% -1% -39% 2% Relative 17% -1% -41% 22% Source: FactSet and Bloomberg VALUATION APPROACH DCF SEK 13.8 Source: FactSet and Nordea Markets Nordea Markets - Analysts Dan Johansson Analyst Predrag Savinovic Analyst Alexander Fält Analyst Jörgen Wetterberg Senior Analyst Henrik Nilsson Senior Analyst OMX Stockholm PI SEK Three quarters to payday The game is on Once a niche form of entertainment, gaming has evolved into a rapidly growing industry that pulls in more revenue than the film and music industry. The global gaming market generates over USD 1bn in revenue a year, with a burgeoning player base of over two billion in 217, many of whom are spending more on games than ever before. Video game developer and publisher Starbreeze stands poised to profit from this booming market thanks to the popular titles it has under its belt and its diversified business offering. The chance to make a killing We have confidence in Starbreeze s record and upcoming game releases and see the company cashing in peak sales of SEK 2.6bn over our forecast period to 221E. It will likely make a killing from the launch of the much-anticipated OVERKILL s The Walking Dead, slated for autumn 218, and here we expect it to shift nearly 8 million copies over the course of three years. We base our estimates on the performance of comparable game titles, franchise interest, previous sales record and market trends. Raising its game To combat the potential swings in earnings between major game releases, Starbreeze has broadened its operations, adding a publishing arm and investing in emerging technologies. Its games as a service approach and releases of downloadable content bolster its games lifetime and generate substantial revenue even years after the initial game launch. This predictable revenue stream helps to de-risk the business model and will likely improve Starbreeze s earnings stability. Valuation Based on our fundamental DCF approach and assuming a WACC of between %, we derive an equity value per share between SEK 13.8 and SEK This implies a 22E EV/EBIT between 5.4x 6.4x and 22E P/E of 9.x-1.3x. SUMMARY TABLE - KEY FIGURES 213/14 214/ E 219E 22E Net sales ,26 1,913 - growth 477.8% -7.7% -49.9% 249.6% 4.6% 157.% 35.7% 51.8% EBIT margin 66.5% 23.5% 21.3% 16.3% -41.9% -1.2% 9.7% 31.2% EPS growth -82% -39% 14% n.m. n.m. n.m. 495% DPS n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. P/E n.m. n.m EV/EBIT n.m. n.m EV/Sales RoE 16.5% 6.6% 6.5% -11.7% -3.9% 5.3% 26.5% 33.7% Div. yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FCF yield 12.6% -1.2% -1.% -4.7% -25.% 1.4% 2.5% 17.8% ND/EBITDA -.9x -1.2x -3.6x -5.x n.m. -.2x -.3x -.7x Marketing material commissioned by Starbreeze

2 Table of contents Factors to consider when investing in Starbreeze... 3 Valuation... 9 Company overview The global games market Business area: Starbreeze Games Business area: Publishing Business area VR Tech & Operations Historical financials... 6 OVERKILL s The Walking Dead VR estimates Estimates Detailed estimates Risk factors Reported numbers and forecasts Marketing material commissioned by Starbreeze 2

3 Factors to consider when investing in Starbreeze Starbreeze is an established and respected name in the gaming industry, winning coveted partnerships with the likes of IMAX, Acer and SEGA. Its PAYDAY franchise is wildly popular and PAYDAY 2 has become one of the most popular games of all time, boasting the largest player community on the digital distribution platform Steam. Players of Starbreeze s games are active, engaged and loyal, spending money on downloadable content years after initial launch. This fan base offers Starbreeze a solid platform from which it can market its future releases. We expect a windfall as early as autumn 218 when it adds another sought-after game title to its name. In addition, Starbreeze has expanded its business in an effort to stabilise its earnings flows. Executed properly, Starbreeze can reach a sales CAGR of over 7% up to 22E while de-risking the business model, warranting a rerating of the share. We calculate a valuation range of SEK per share. We identify a number of key factors in Starbreeze s investment case We consider the following factors to be key when evaluating an investment in Starbreeze: Transformation from a studio-for-hire to a global provider of world-class entertainment experiences Positioned to benefit from sizeable investments in its games pipeline, publishing projects and emerging technologies such as VR New business lines such as Publishing and VR add cash flows in periods between major game releases, potentially mitigating future earnings volatility Successfully applies its games as a service concept, with a frequent mix of paid and free updates for its games to prolong their lifetimes and earnings potential Key risk factors Its focus on AAA titles, which are released less frequently and require more time and resources than a typical game, makes it vulnerable to disappointments should its games garner a weak reception from players Starbreeze is dependent on its ability to attract and retain key employees, as the business is highly knowledge intensive The nature of the games industry, with a majority of revenues centred around the release of the game, could put pressure on finances if projects are delayed Competition in the industry is intense, which could put pressure on price and the number of sold copies. Competition does not only include other games developer, but also entertainment companies Attractively positioned to take part in a USD ~1bn market opportunity Attractively positioned in the value chain Aided by the success of its popular PAYDAY games, Starbreeze has transformed from a studio-for-hire into a global provider of entertainment experiences, penetrating multiple parts of the value chain in the games industry. We believe that Starbreeze is attractively positioned to take a share of the flourishing USD ~1bn market for games, which could grow at a CAGR of ~6%, according to market forecasts by Newzoo. Marketing material commissioned by Starbreeze 3

4 GLOBAL GAMES MARKET REVENUE USDbn E 219E 22E Global games market revenue Source: Newzoo and Nordea Markets GAMES REVENUE GROWTH Y/Y 12% 1% 8% 6% 4% 2% % E 219E 22E y/y Source: Newszoo and Nordea Markets When the dead comes knocking OVERKILL s The Walking Dead a likely hit The eagerly awaited OVERKILL s The Walking Dead (OTWD) is Starbreeze s first major internally developed project and is slated for release this autumn. Starbreeze has poured its PAYDAY 2 earnings into the development of OTWD and the first trailer, unveiled in December 217, garnered considerable interest from players, receiving more than 15 million views on YouTube and Facebook in the first week alone. The popularity of The Walking Dead universe does not seem to be waning. In fact, it seems to be more alive than ever. We believe the game could be Starbreeze s next big franchise as it appeals to fans of The Walking Dead as well as the zombie genre. We are keenly aware that the gaming developer and publisher Telltale has been able to capitalise on the same franchise with an episode-based adventure game. In addition, The Walking Dead TV series still attracts an audience of millions each week and has recently been renewed for season nine, a testament of its popular appeal. A timely fill to a void in the genre On the gaming front, we note that other comparable co-op survival games, such as Left 4 Dead 2, are among the top-selling games of all time. We believe Starbreeze s OTWD compares well with the Left 4 Dead franchise and will fill a void in the genre, which has not had a major release for several years. On top of this, Starbreeze s decision to use the renowned Unreal Engine for OTWD will boost the game s chances of success as it would give it a familiar look and feel, albeit modernised. We estimate a similar sales uptake as for PAYDAY 2, implying a player base of nearly 8 million over time Potential to mirror the success of PAYDAY 2 We believe OTWD s sales trend will be similar to PAYDAY 2, Starbreeze s most successful game to date, and be determined by dynamic pricing. As with other titles, PAYDAY 2 generated most of its revenue from copies sold when it was launched, but the game still brings in a lot of revenue from downloadable content (DLC). We estimate that OTWD s owner base could approach 8 million over time, compared with the ~3 million at the release of the first DLC. Marketing material commissioned by Starbreeze 4

5 COPIES SOLD, ACCUMULATED COPIES AND PRICING Copies sold per quarter, in millions Accumulated copies, in millions Q418E Q119E Q219E Q319E Q419E Q12E Q22E Q32E Q42E Acc. copies Sold per quarter Price Source: Nordea Markets Project Crossfire not all is quiet on the Western front Project Crossfire, expected in 22, is the next major game release following OTWD Following OTWD, Project Crossfire will be Starbreeze s next major game release. Crossfire is currently the third-highest grossing PC game in the world, with 217 revenues of USD 1.4bn. In 216, Starbreeze and Crossfire s developer Smilegate signed an agreement for the company to develop a Western version of the game, which currently generates a vast majority of its sales in Asia. We take a cautious view on Project Crossfire as the franchise, while huge in Asia with 65 million players, has not seen the same success in the Western world. A successful release of Starbreeze s version, however, could pose serious competition for CS:GO and Overwatch, each of which had sales of over USD 3m in 217. What to expect from PAYDAY 3 PAYDAY 3 has a superior platform from the start compared to its predecessor PAYDAY 2'S OWNERS After the releases of OTWD and Project Crossfire, focus will shift to the next sequel in the PAYDAY series. As the game is still in the early design phase, it is difficult to make any predictions about its potential. Nonetheless, we believe it could be as profitable as PAYDAY 2. We note that the player base and Steam community is larger today than when PAYDAY 2 was released, and we believe that PAYDAY 3 will have a wider geographic scope and enjoy a full release across all platforms simultaneously. The development budget is likely to be considerably higher, meaning that the game is probably going to be more impressive than its predecessor. Plus, Starbreeze owns the full IP rights and revenue-sharing will be lower. PAYDAY 2'S SALES In millions Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Owners *Note that OVERKILL gave away five million copies of the game in June PAYDAY 2 sales Marketing material commissioned by Starbreeze 5

6 Better risk and earnings profile New business lines to improve Starbreeze s earnings profile First publishing project, Dead by Daylight, has sold more than three million copies Starbreeze has made strategic investments to diversify its business, adding virtual reality (VR) technology and a publishing platform. We welcome these initiatives as we believe that they lower the company s risk and its reliance on game releases to generate revenue, which had created severe income peaks and troughs. The cash flows of these new businesses are typically steadier, alleviating some of the pressure on Starbreeze s finances and making the game releases less vulnerable to delays caused by cash-strapped budgets. thanks to publishing arm To leverage on its expertise, Starbreeze mainly collaborates with developers of similar games to those in its own portfolio. The first publishing project, Dead by Daylight, was released on 14 June 216 for PC and the console release followed in June 217. It has so far sold more than three million copies on Steam. We see potential to further leverage the publishing platform by adding and releasing more titles. Currently, its pipeline includes popular franchises such as System Shock 3 and Psychonauts 2. SALES COMPOSITION Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Payday Dead by Daylight RAID: World War 2 Other Q4 217 VR is seen by market forecaster as an emerging technology that will grow rapidly Source: Company data and VR technology Virtual reality is an emerging technology that is likely to experience considerable growth. Although there is lingering uncertainty regarding the pace of development and adoption of the technology, PwC forecasts that the VR market will grow at an 8% five-year CAGR through 221 and will then constitute a USD 15bn market. Beyond 221, we expect growth rates to be maintained. In another report, Goldman Sachs forecasts that the combined market for VR and augmented reality (AR) will reach USD 8bn in 225. SuperData, a market intelligence provider covering the global gaming markets, further estimates that software will account for USD 16.2bn of the total USD 28.3bn of VR revenues that it expects in 22. This bodes well for Starbreeze s VR strategy of focusing on premium content. Marketing material commissioned by Starbreeze 6

7 WORLDWIDE VR REVENUE BY SEGMENT USDbn E 218E 219E 22E Hardware Consumer software/services Source: SuperData Starbreeze is pursuing a VR strategy with the ultimate goal of becoming a premium content provider to its consumers Starbreeze s VR activities are now close to break-even point after several years of heavy investments. The company has pursued a strategy of developing the technology and the concept for location-based VR centres. It has deemed this necessary to delivering the last phase of its strategy premium content. Starbreeze has made considerable strides in this strategy, partnering with Acer to develop its high-end StarVR headset, which will be featured at more than ten SEGA arcade locations across Japan by the end of the year. As Starbreeze s expertise lies in delivering premium content, where margins are highest in the value chain, its intention is to leverage its strong IPs, such as PAYDAY, on all entertainment channels and to expand its publishing portfolio by adding VR titles. VR STRATEGY TO ENABLE PREMIUM CONTENT Games as a service approach aims to prolong the games lifetime More than four years after launch, PAYDAY 2 is still generating sales Successful execution with PAYDAY has created the largest player community on Steam A formula to extend game-life and maximise monetisation Starbreeze stands out from other games companies thanks to its games as services concept, a model it applies to all of its titles. The company s aim is to prolong the life of the game by offering free and paid updates, as well as tailored community events. This concept works particularly well with strong IPs, where PAYDAY 2 is the prime example of the strength of the concept. PAYDAY 2 was released in August 213 and has sold more than 16 million copies and generated more than SEK 7m to date for Starbreeze. Historically, the typical game earns the majority of its revenue around the release window. With PAYDAY 2, however, Starbreeze works actively with its player community, keeping them engaged long after initial release with more than 17 free and paid updates, successfully extending the game s lifetime. As an example of Starbreeze s accomplishments, PAYDAY 2 s Steam community has amassed 5.5 million members Marketing material commissioned by Starbreeze 7

8 making it the platform s largest community. Starbreeze s use of dynamic pricing also gives it more flexibility and a competitive edge. It means that it can attract more players to its games by quickly adjusting prices, offering the games at a lower retail price but monetising on the larger player base by selling DLCs. PAYDAY 2 STEAM COMMUNITY In millions sep-14 nov-14mar-15 jun-15 sep-15dec-15mar-16 jun-16 sep-16dec-16mar-17 jun-17 sep-17 Today PAYDAY 2 Steam community Source: Company data, Steam and Nordea Markets Risk factors A full description of the risk factors we find most relevant for Starbreeze is provided on pages Starbreeze s main risk is related to its own game development, as it is expected to derive a majority of its future revenue from these games. The risk is related to the commercial success of its games and the timing of the games launches. Starbreeze develops AAA games, which have the highest development budgets. If the games are not well-received by the market, this could result in capitalised development costs being impaired. Games revenue is also unevenly distributed over time, with the majority made in conjunction with the release. Delays in ongoing projects could also hurt profitability and there is a risk that completion of a project requires more resources than estimated. It could put pressure on finances and induce a need of additional capital infusions. As Starbreeze is a development company, it is highly knowledge intensive and a lot of the value in the company lies within its employees. This includes senior developers and executive management, among those CEO and major shareholder Bo Andersson Klint. Losing key employees could lead to disruptions and affect operations and future success of the company. The market for games is highly competitive and Starbreeze competes with major global players such Electronic Arts and Activision Blizzard for players attention. There are also examples of smaller studios developing successful games, such as PlayerUnknown s Battlegrounds (PUBG), developed by PUBG Corporation (a subsidiary of Korean publisher Bluehole). Competition could also stem from alternative entertainment services such as films, TV, sports and other experiences that compete for consumers time. Marketing material commissioned by Starbreeze 8

9 Valuation Primarily using a fundamental DCF valuation and assuming a WACC of %, we derive an equity value range of SEK 13.8 to SEK 15.9 per share. This implies a 22E EV/EBIT valuation of 5.4x-6.4x and 22E P/E of 9.x-1.3x. In our analysis, we also complement our DCF framework with a multiples-based relative valuation approach, including peers with similar value drivers and characteristics. We also provide a framework with which to assess how the sector valuation has developed over time. Based on the current share price and our estimates, Starbreeze trades at 22E EV/EBIT of 4.x and 22E P/E of 6.5x. Our valuation approach is primarily based on a DCF framework One of the most common ways of determining the attractiveness of an investment opportunity is the discounted cash flow (DCF) method. A DCF model discounts all available cash flows for equity, bond and non-equity holders at the weighted average cost of capital (WACC). In other words, WACC represents a blended cost of capital for all invested capital in the company. In fundamental terms, a DCF framework is built on three parts: Discounting the company s free cash flow at WACC. Identifying the value of debt and other non-equity claims on the enterprise value. Deducting all claims to determine the value of the common equity. The fair value per share is then simply calculated by dividing the equity value by the number of outstanding shares. A DCF valuation is commonly considered among academics and those in the industry to be the best way to capture the underlying fundamental drivers of a company, such as cost of capital, growth rates and reinvestment rates. If applied correctly, it represents the best way to approximate the true intrinsic value of a company. The main appeal of a DCF framework compared with other valuation methodologies is that it also focuses on streams of cash rather than accounting earnings. Its main disadvantage is its relative sensitivity to changes in input values. We complement our analysis with a peer group valuation We also complement our DCF approach with a multiples-based relative valuation but note that a direct peer comparison is difficult due to the different games release cycles, accounting principles and risks related to IP and games portfolios. Starbreeze is also among the smallest companies in our peer valuation, with a market cap 8% of the peer median. We therefore prefer to use an over-the-cycle valuation approach such as a DCF framework. Fundamental valuation Based on our assumptions, we derive an equity value of SEK 13.8 to SEK 15.9 per share for Starbreeze In the table below, we set out the general assumptions that we use to calculate our DCF value. Based on the assumption that Starbreeze can deliver broadly in line with our forecasts, with variations in sales growth, EBIT margin and WACC assumptions, we arrive at a fair equity value range of SEK 13.8 to SEK 15.9 per share. In the terminal period, we model WACC equal to ROIC and 2.5% growth. DCF VALUATION DCF value Value Per share NPV FCFF 4,382-5, (Net debt) Time value DCF Value 4,232-4, Source: Nordea Markets Marketing material commissioned by Starbreeze 9

10 AVERAGES AND ASSUMPTIONS Averages and assumptions Sust. Sales growth, CAGR 12.2% 5.% 3.% 2.5% 2.5% EBIT-margin, ex. associaties 24.3% 23.% 23.% 2.% 3.5% Capex/depreciation, x Capex/sales 17.7% 5.% 5.% 5.% 5.% NWC/sales -11.% 1.% 1.% 1.% 1.% FCFF, CAGR 47.6% 31.5% 3.6% -.2% -3.9% 2.5% Source: Nordea Markets We apply a WACC range of % WACC We apply a range for the cost of capital (WACC) of % as the input for our DCF valuation. The assumptions behind our WACC are outlined in the table below. WACC ASSUMPTIONS WACC components Risk-free interest rate 1.5% Market risk premium 5.5% Forward looking equity beta Cost of equity 1.3%-12.% Cost of debt 3.% Tax-rate used in WACC 21.% Equity weight 7.% WACC 7.9%-9.1% Source: Nordea Markets DCF sensitivity To highlight the sensitivity of the DCF valuation, we also provide sensitivity matrices modelling variations in revenue growth, margin assumptions and cost of capital. In the table below, we provide a sensitivity analysis of the DCF valuation, with varying EBIT margins and sales growth rates. Our DCF value with varying EBIT margins and sales growth rates SALES GROWTH VS EBIT MARGIN Sales growth change -1.pp -.5pp.5pp 1.pp +1.pp EBIT margin +.5pp change pp pp Source: Nordea Markets Below, we also illustrate how the equity value varies with changes in WACC and sales growth. Our DCF value with different WACC and sales growth assumptions WACC VS SALES GROWTH WACC 7.9% 8.2% 8.5% 8.8% 9.1% +1.pp Sales growth +.5pp change pp pp Source: Nordea Markets In addition, we provide a sensitivity table illustrating how the equity value varies with changes in EBIT margin assumptions and WACC. Marketing material commissioned by Starbreeze 1

11 Our DCF value with different WACC and EBIT margin assumptions WACC VS EBIT MARGIN WACC 7.9% 8.2% 8.5% 8.8% 9.1% +1.pp EBIT margin +.5pp change pp pp Source: Nordea Markets Our DCF approach is complemented with a peer group valuation as a sanity check The peer group is derived from a global universe We rely on EV/EBITDA and EV/sales multiples for our relative valuation Relative valuation In our peer group valuation, we use listed peers from all over the world. We include a wide range of gaming companies, from console and PC developers to publishers, as well as mobile developers. From a wider perspective, they are all present in the same sector, but there are differences in revenue models, cost structures, product lifetimes and end customers. In terms of benchmarking, we regard enterprise value (EV)-based multiples, such as EV/EBITDA (or EV/EBITA) and EV/sales, as the most relevant multiples for the gaming sector. The advantage of the former is that it is not affected by the large accounting differences with regard to amortisation and depreciation across the companies. The latter is interesting due to its stability from time to time, other multiples can be inflated due to timing effects in revenue recognition and game releases, while EV/sales, although also volatile, varies far less, whereas other multiples can swing higher due to margin profiles when titles reach peak sales. EV multiples are also neutral to a company s financial gearing. P/E is often used to compare companies and to take account of the differences in tax rates and financing costs. However, it is biased towards lower multiples for companies with high financial gearing. We believe that certain adjustments should be applied when using P/E in order to value companies appropriately. Key peers We regard CD Projekt and Paradox Interactive as the closest peers to Starbreeze. We regard CD Projekt as our key peer Paradox also shares some characteristics with Starbreeze Among our key peers, we see CD Projekt as the closest from Starbreeze s perspective, although we believe that CD Projekt has stronger, better established intellectual property. Similar to Starbreeze, CD Projekt is known for a handful of titles. Its Witcher franchise accounts for a majority of sales, and the large sales forecasts by consensus for future years are based on the release of Cyberpunk 277, which will be a new IP for the company. A large chunk of Starbreeze s revenue comes from the PAYDAY franchise, and it, like CD Projekt, has a large upcoming title with IP rights that have not been tested before. Paradox Interactive is another company that we think shares many characteristics with Starbreeze. Paradox is often mentioned for its niche games and loyal player base. We think this is similar to the PAYDAY franchise, which has by far the biggest Steam community and active player base loyal to the brand. Peer group valuation Multiples vary a lot due lumpy sales and growth expectations An optimal peer should have Looking at the aggregate of our sector valuation, we conclude that multiples are quite rich but also that the range is wide; some companies can have very high multiples for some years, only to drop ~8% sequentially owing to the revenue profiles. This is due to expectations of sales growth greatly exceeding 1% in some periods given how large game releases are scheduled and how they impact financials. Some companies, such as CD Projekt and Starbreeze, are more reliant on a few titles, causing large swings in sales growth, while companies such as EA Games or Activision Blizzard have completely different degrees of earnings stability. Marketing material commissioned by Starbreeze 11

12 a similar release schedule As such, to find an optimal comparison, we would need to find a peer with a similar schedule for the release of titles in the same year, meaning that looking at average or median multiples could be erroneous at any given time, in which case we would rather look at valuations over time. Based on our estimates, Starbreeze trades at a discount of 35-42% on 219E EV/EBITDA and EV/sales, despite having higher sales and profit growth than its peer group. It is worth highlighting, however, that the company is among the smallest in the group with a market of only 8% of the median company used in our peer comparisions. Estimate risk is likely also on the high side compared to some of its peers, due to Starbreeze s dependence on a limited number of AAA games. PEER GROUP VALUATION P/E EV/EBIT EV/EBITDA EV/Sales Name Country Mcap (EURm) 18E 19E 2E 18E 19E 2E 18E 19E 2E 18E 19E 2E Ubisoft Entertainment SA France 7, Electronic Arts Inc USA 31, Activision Blizzard Inc USA 45, Take-Two Interactive Software Inc USA 1, Zynga Inc USA 2, Glu Mobile Inc USA 423 n/a n/a n/a Majesco Ltd USA 137 NaN Konami Holdings Corp Japan 6, n/a n/a n/a Nintendo Co Ltd Japan 5, n/a n/a n/a neg Square Enix Holdings Co Ltd Japan 4, n/a n/a n/a Capcom Co Ltd Japan 2, n/a n/a n/a Sega Sammy Holdings Inc Japan 3, n/a n/a n/a Perfect World Co Ltd China 5, NaN NetEase Inc China 3, THQ Nordic AB Sweden Stillfront Group AB (publ) Sweden Paradox Interactive AB (publ) Sweden 1, CD Projekt SA Poland 2, Starbreeze (NRD est.) Sweden 3 n/a n/a Simple average 11, Simple median 3, Source: Thomson Reuters and Nordea Markets PEER GROUP VALUATION Sales growth EBITDA growth EBITDA margin Name Country Mcap (EURm) 18E 19E 2E 18E 19E 2E 18E 19E 2E Ubisoft Entertainment SA France 7,245 14% 22% 8% 38% 2% 1% 5% 49% 51% Electronic Arts Inc USA 31,151 5% 9% 6% 29% 16% 1% 35% 37% 39% Activision Blizzard Inc USA 45,585 7% 8% 7% 21% 15% 9% 38% 4% 41% Take-Two Interactive Software Inc USA 1,288 1% 44% -8% 19% 58% -6% 26% 28% 29% Zynga Inc USA 2,497 9% 9% 6% 176% 31% 1% 18% 21% 22% Glu Mobile Inc USA 423 6% 14% 18% -146% 61% 92% 6% 9% 15% Majesco Ltd USA 137-9% 17% 17% n/a 55% 88% 5% 6% 1% Konami Holdings Corp Japan 6,5 9% 7% 2% n/a n/a n/a 26% 28% 28% Nintendo Co Ltd Japan 5,172 12% 34% 8% n/a n/a n/a 16% 23% 27% Square Enix Holdings Co Ltd Japan 4,21 2% 8% 9% n/a n/a n/a 18% 19% 2% Capcom Co Ltd Japan 2,189 3% 6% 7% n/a n/a n/a 24% 25% 25% Sega Sammy Holdings Inc Japan 3,26-1% 3% 3% n/a n/a n/a n/a n/a n/a Perfect World Co Ltd China 5,516 24% 2% n/a 54% 18% n/a 23% 23% n/a NetEase Inc China 3,965 31% 25% 2% 12% 19% 13% 2% 19% 18% THQ Nordic AB Sweden % 15% 8% 256% 16% 91% 22% 22% 39% Stillfront Group AB (publ) Sweden % 17% 5% 195% 4% 6% 28% 34% 34% Paradox Interactive AB (publ) Sweden 1,36 36% 21% 19% n/a 25% 2% 59% 61% 61% CD Projekt SA Poland 2,433 13% 198% -29% -8% 295% -39% 53% 7% 6% Starbreeze (NRD est.) Sweden 3 157% 36% 52% n/a 18% 148% 21% 32% 52% Simple average 11,369 73% 27% 6% 222% 51% 25% 27% 3% 32% Simple median 3,73 9% 16% 7% 38% 25% 1% 24% 25% 29% Source: Thomson Reuters and Nordea Markets Marketing material commissioned by Starbreeze 12

13 We take a closer look at sector valuation over time Sector valuation over time As previously mentioned, we regard EV/EBITDA and EV/sales as the most relevant multiples for the gaming sector. We also choose to look at P/E multiples, as there are comprehensive consensus estimates available. For some multiples, we exclude the financial crisis years because they distort the comparisons. Our charts show a range for the multiples as well as the means. EV/sales Based on EV/sales, mean valuation and dispersion have increased for the sector Based on LTM EV/sales multiples, companies were trading in a narrower interval between 29 and 211, following the financial crisis. From 212 on, the interval becomes broader due to the varying performances of the companies. However, the mean increased from.7x in 29 to 5.x by year-end 217. SECTOR VALUATION LTM EV/SALES EV/Sales - LTM SECTOR VALUATION NTM EV/SALES EV/Sales - NTM st to 3r quartile: Midmean: 5.3 Source: Thomson Reuters and Nordea Markets 1st to 3r quartile: Midmean: 3. Source: Thomson Reuters and Nordea Markets EV/EBITDA Other forward-looking multiples paint a similar picture EV/EBITDA is neutral to a company s financial gearing and is not affected by amortisation and depreciation, which can vary a lot between companies. EV/EBITDA based on reported numbers has been sluggish over time, while the forward-looking multiple bottomed during and was followed by a sharp increase. After being range-bound for a few years, forward valuation started to increase again at the beginning of 217. SECTOR VALUATION LTM EV/EBITDA 5 EV/EBITDA - LTM SECTOR VALUATION NTM EV/EBITDA 25 EV/EBITDA - NTM st to 3r quartile: Midmean: 27.5 Source: Thomson Reuters and Nordea Markets 1st to 3r quartile: Midmean: 14.3 Source: Thomson Reuters and Nordea Markets EV/EBIT Mean NTM EV/EBIT now exceeds 2x for the space EV/EBIT is neutral to a company s financial gearing. It captures the operations capital intensity to the extent that depreciation levels approximately correspond to sustainable capex. Mean NTM EV/EBIT has increased sharply over the past year and recently exceeded 2x for the sector as a whole. Marketing material commissioned by Starbreeze 13

14 SECTOR VALUATION LTM EV/EBIT 7 6 SECTOR VALUATION NTM EV/EBIT 3 25 EV/EBIT LTM st to 3r quartile: Midmean: 31. EV/EBIT - NTM st to 3r quartile: Midmean: 2.8 Source: Thomson Reuters and Nordea Markets Source: Thomson Reuters and Nordea Markets Sector valuation at a distinct premium to MSCI World P/E P/E is often used to compare companies and to take account of the differences in tax rates and financing costs. However, it is biased towards lower multiples for companies with high financial gearing. P/E ratios for the peer group follow the same pattern as seen in earlier graphs, with both the lower and upper ends of the valuation range being pushed upwards. The average NTM P/E of 24.7x for the group is well above the 17.3x forward-looking earnings multiple for a broad global index such as MSCI World. P/E - LTM SECTOR VALUATION LTM P/E st to 3r quartile: Midmean: 47. Source: Thomson Reuters and Nordea Markets SECTOR VALUATION NTM P/E P/E - NTM st to 3r quartile: Midmean: 26.1 Source: Thomson Reuters and Nordea Markets Major divergence in performance within the games sector Price The chart below shows the price performance for a broader peer group within gaming. The development since 27 has been muted for the whole sector, although this is due to some companies showing extremely good performances, while others have failed considerably, as is evident in the broad range. This is yet another similarity that the gaming industry shares with pharmaceutical companies. Marketing material commissioned by Starbreeze 14

15 SECTOR PRICE PERFORMANCE Price st to 3r quartile: Midmean: Source: Thomson Reuters and Nordea Markets Pending game releases yield extreme differences in growth A closer look at sales forecasts The messy chart below is a good representation of how expectations on a stockspecific level may look in the gaming sector. Unlike, for example, the industrial or real estate sectors, there is a great divergence in gaming stocks companies can have rich valuations in spite of expectations of negative growth for specific years due to pending game releases. As shown in the chart below, CD Projekt is expected to have negative growth in sales for 217 and 219, after which it will increase substantially. In the case of Nintendo, sales growth is negative in 217, only to reach ~12% growth in 218. SECTOR GROWTH EXPECTATIONS 175% 125% 75% 25% -25% 17E 18E 19E Ubisoft Entertainment SA Electronic Arts Inc Activision Blizzard Inc Take-Two Interactive Software Inc Nintendo Co Ltd Sega Sammy Holdings Inc THQ Nordic AB Paradox Interactive AB (publ) Source: Thomson Reuters and Nordea Markets SECTOR GROWTH EXPECTATIONS 2% 15% 1% 5% % -5% 17E 18E 19E Source: Thomson Reuters and Nordea Markets Marketing material commissioned by Starbreeze 15

16 We provide a short description of the 18 companies used in our peer group valuation Description of peer companies Ubisoft Ubisoft Entertainment is a France-based company engaged in the development, publishing and distribution of video games. Founded in 1986, it is one of the bestknown game companies with titles such as Assassin s Creed, Far Cry, Splinter Cell and Ghost Recon. The company launched its service Uplay in 212 as a means to better control its distribution, which is a games platform that contains all of Ubisoft s titles, and is required for playing any of its games. Its games are still present on Steam, however. Ubisoft has a strong IP portfolio and titles across all gaming platforms. Activision Blizzard As one of the giants in the gaming industry, Activision Blizzard is clearly one of the dominant forces in the sector. The company was founded in 28 through the merger of Vivendi Games, which held the rights of the Warcraft and Diablo franchises, and Activision. Activision Blizzard is a holding company which owns and operates several independent studios, including Treyarch and Infinity Ward. Activision Blizzard is known for, other than the names listed above, Hearthstone, Call of Duty and Destiny, amongst others, all of which have been major successes. The company was one of the first to introduce gaming as a service through the subscription-based World of Warcraft, which has been leading in its genre since its inception in 24. Through Battle.net, the company distributes games from Blizzard (and some Activision titles), while Activision is distributed on all major platforms. Electronic Arts Also known as EA Games, Electronic Arts is one of the giants in the gaming industry, mostly known for its sport franchises, where it is the dominant player, but it is also behind titles such as Battlefield, Mass Effect, Dragon Age and Battlefront. Founded in 1982, EA was one of the pioneers in gaming. It develops and publishes games under the EA brand but also through wholly-owned subsidiaries such as DICE, BioWare and Visceral, all of which are leaders in their respective genres. Like Ubisoft and Activision Blizzard, EA has its own digital distribution through the Origin platform and is thus a competitor to Steam. Origin, however, only publishes titles from EA and excludes third-party titles. Take-Two Take-Two is the third-largest gaming company and is based in the US and Europe. Behind titles such as Grand Theft Auto (GTA), BioShock, Borderlands, Read Dead and Civilization, Take-Two is one of the most influential companies in the industry. It wholly owns publishers Rockstar Games, 2K Games and Private Division and boasts accolades such as having the best-selling single title and the fastest entertainment property to gross USD 1bn with GTA 5. Take-Two is active in both development and publishing. Paradox Interactive Paradox is a Sweden-based games company, mostly known for its Europa Universalis and Cities: Skylines franchise. The company specialises in strategy games in a certain niche and has a vibrant community and loyal player base. Over 9% of its sales come from digital channels. Paradox was founded in 1998 and was listed on the Swedish exchange in 216. Marketing material commissioned by Starbreeze 16

17 THQ Nordic THQ was originally founded in 1989 but filed for bankruptcy in 212 after having had severe financial struggles. After liquidation of its assets began at the end of the year, the THQ trademark was acquired by Nordic Games, which had also acquired large parts of the company s portfolio. In 216, the company changed its name to THQ Nordic, and was listed in Sweden the same year. THQ acquires, develops and publishes PC and console games globally, but its niche is to acquire established but underperforming brands and then develop them. Stillfront Stillfront is a Sweden-based independent developer and publisher of games primarily for browsers and mobile, but it also has a few titles for PCs and consoles. Its aim is to be among the leaders in indie gaming. It distributes its games globally but primarily targets Sweden, France, the UK, Germany and the US. CD PROJEKT RED Founded in 1994, CD PROJEKT RED began its gaming journey by translating major Western games into Polish. The company did the translation for one of the blockbuster RPGs of its time, the Baldur s Gate series. Work began on a sequel in a new setting, but the collaborating studio, Interplay Entertainment, found itself in financial distress and cancelled the game. The game instead became The Witcher which turned out to be a real blockbuster series. The Witcher 3: Wild Hunt, released in 215, is one of the most renowned games ever to be released. CD PROJEKT RED has become the most appreciated developer among players due to its approach of releasing free downloadable content, offering games free of DRM and not including microtransactions in its games. Japanese publishers We include five Japanese developers and publishers in our peer group. These differ largely from other companies in our peer group. The Japanese stock exchange is peculiar in an international sense due to wealthy families owning a lot of stock, which has led to less optimal capital structures than other countries. Furthermore, the central bank, Bank of Japan, has run quantitative easing for a number of years also on equities, vacuuming any assets it can get hold of. For many years, Japan has suffered from deflation trends, which have caused asset prices to appreciate. All of these factors have had impacts on valuation multiples, to some extent inflating them. We include Konami, Nintendo, Square Enix, Capcom and SEGA Sammy in our peer group valuation. Japanese developers and producers have had a vital presence in the gaming market since the sector s inception. They are behind consoles such as the PlayStation and Wii, as well as world-renowned titles such as Super Mario, Pokémon, Metal Gear Solid and Final Fantasy. Mobile gaming We also separate mobile gaming into its own category, including companies such as Zynga, Rovio and Glu Mobile. Although mobile gaming shares many similarities to console and PC gaming, it differs on cost structure and revenue. Development of mobile games is usually associated with lower costs and is a simpler form of gaming. Revenue generation also differs, with many developers making a living from advertisements in games, while others use in-app purchases. There are many PC games which have similar free-to-play models, but the vast majority of these types of games are on mobiles. Marketing material commissioned by Starbreeze 17

18 Company overview Starbreeze develops and publishes games and creates virtual reality experiences via its business areas Games, Publishing and VR Tech & Operations. The main business, Starbreeze Games, is built on PAYDAY 2, one of the world s most popular online games, and the pipeline includes titles such as OVERKILL s The Walking Dead, Project CrossFire and PAYDAY 3. Since 216, it is also publishing third-party developed games, including Dead by Daylight and RAID: World War II. The company is also focusing on emerging technologies, such as VR, and has pursued a VR strategy that enables the delivery of premium content by developing the StarVR headset, which will be delivered to location-based VR centres. Starbreeze is active within game development, publishing and VR experiences Studios in Paris, Los Angeles, Barcelona, Brussels, Luxembourg and India It has refined its business model to become a global entertainment provider The company s foundation is mainly built on the PAYDAY franchise Introduction Starbreeze is a creator, publisher and distributor of games and virtual reality entertainment products. The operations are divided into three business segments: Starbreeze Games, which develop in-house games, Publishing, which focuses on publishing of in-house and externally developed games and VR Tech & Operations, which includes technology and software development in VR as well as operations of VR centres. The company is headquartered in Stockholm and has studios in Paris, Los Angeles, Barcelona, Brussels, Luxembourg and India. It was listed on Aktietorget in 2 and since 2 October 217 it is traded on the Nasdaq OMX Stockholm. After closing the acquisition of Dhruva at the end of 217, the company now has approximately 65 employees. In the past two to three years, Starbreeze has been on a major transformation journey. Starting as a game developer working with external publishers, it has expanded its business to include publishing of externally developed games, diversifying its operations and potentially adding revenues in periods between its major game releases. The business has also been expanded further by investments in VR, supporting its ambition of becoming a global provider of world-class entertainment experiences. This journey to and the foundation of Starbreeze today have mainly been built on the successful PAYDAY franchise. PAYDAY 2 is still among the most popular games online, despite being launched four years ago. The company has considerable expertise in developing co-op first-person shooter games and looking ahead, we suggest that it will keep its focus on developing its own games. Its next AAA game, namely games with the highest development budget and level of promotion, will be the survival co-op game OVERKILL s The Walking Dead, which we expect to be launched this autumn. Marketing material commissioned by Starbreeze 18

19 Founded in 1998 as one of the first European game developers In 212 Starbreeze acquired the game development studio OVERKILL Relationship with 55 Games started with the title Brothers: A tale of Two Sons were busy times with the introduction of new business lines and selective M&A Initiated a joint venture with Acer on the StarVR project in 216 Company history Starbreeze was founded in 1998 as one of the first game developers in Europe. In 2, it merged with O3 Games and was listed on Aktietorget. During that time, it operated as a studio for hire. Three years after listing, the company experienced a major crisis as Swing Entertainment, one of its largest customers, declared bankruptcy and Starbreeze was forced to lay off 35% of its workforce. In 212 Starbreeze acquired the game development studio OVERKILL. OVERKILL was the developer of PAYDAY: The Heist and reported sales and EBIT in 211 of SEK 15.4m and SEK 4.3m, respectively. Starbreeze paid SEK 2m in newly issued shares and pledged to initiate an option programme aimed at senior management in SLG Everscreen, the owner of OVERKILL. The following year, the commercially successful game PAYDAY 2 and critically acclaimed Brothers: A Tale of Two Sons, based on a storyline by the movie director Josef Fares, were released. This also marked the start of a long-term relationship with 55 Games, which acted as the publisher of Brothers: A Tale of Two Sons. In 214, Starbreeze signed an agreement with Skybound Interactive to develop and publish the game OVERKILL s The Walking Dead. The next few years were eventful times in Starbreeze s history, as several projects were launched and the company made a number of acquisitions. It created its publishing segment in 215 and the first third-party project, Dead by Daylight, was published the following year. In 215, it initiated its VR venture with the acquisition of InfinitEye. A year later, it announced that it had entered into a partnership with Acer on its StarVR project, with Acer supporting the production and development of Starbreeze s VR headset. Among other VR-related announcements in 217, partnerships with IMAX and SEGA Entertainment were rolled out, with Starbreeze acting as a content provider to the VR centres operated by its partners. In the beginning of 216, Starbreeze and Smilegate, the creator of the popular game CrossFire, entered a long-term partnership to develop a new CrossFire game for the Western markets. Starbreeze also received distribution rights for its games, including PAYDAY 2 and OVERKILL s The Walking Dead, for the Asian PC and mobile markets Marketing material commissioned by Starbreeze 19

20 KEY EVENTS FOR STARBREEZE Key years 1998 Starbreeze Studios was founded 2 Merger with O3 Games Listed on Aktietorget 27 Release of The Darkness 212 Acquisition of OVERKILL software 213 PAYDAY 2 and Brothers: A Tale of Two Sons are released Acquisition of Germinose Inc. 214 Listed of First North 215 Acquisition of Paris-based InfiniEye Acquisition of Valhalla game engine 216 Partnership with Smilegate to develop new crossfire game and later a VR platform Dead by Daylight was released Acquisition of epawn, a French VR/AR company Acquired the outstanding rights to PAYDAY 217 Partners with IMAX on VR Acquired Enterspace, a Swedish location-based VR company Partners with SEGA on VR 218 directed issue and rights issue On 24 January 218, Starbreeze announced a directed share issue that brought in SEK 238m in gross proceeds. It also announced that it intends to offer existing shareholders the opportunity to participate in a rights issue of SEK 15M during H The reason for the share issues was a need to secure financing for the existing business plan following the poor reception of Raid: World War II and the delay in the release of OVERKILL s The Walking Dead, which have negatively impacted cash flows. SEK 75m of the proceeds will go towards securing financing of the existing business plan while the remainder will go towards new business opportunities that the company has identified to accelerate growth and broaden the revenue base within the core business. The remaining net proceeds from the directed share issue and the planned rights issue will thus be used for the following: New publishing titles not included in the aforementioned business plan Expansion of the existing game portfolio to new platforms and geographies, as well as extension of the development plan for PAYDAY 2 to 219 Accelerated production plan for PAYDAY 3 Detailed terms and conditions for the upcoming rights issue, which is conditional on approval by an extraordinary general meeting of shareholders on 2 March 218, is expected to be announced by 15 March 218, at the latest. Segment reporting introduced in Q2 217 Starbreeze Games consists of in-house developed game titles Its most successful game to date is PAYDAY 2 Business areas As of Q2 217, the operations are divided into three business areas; Starbreeze Games, Publishing and VR Tech & Operations. Starbreeze Games The Starbreeze Games segment consists of its in-house developed games. The company develops games for PC, console, mobile and location-based VR, which are published on digital platforms (mainly Steam) or sold via physical stores through agreements with external publishers. The game portfolio include titles such as PAYDAY and PAYDAY 2, which is the company s most popular game, with more than 16 million copies sold. The pipeline includes OVERKILL s The Walking Dead, Project CrossFire, Geminose and Storm to be developed and released over the coming years. Marketing material commissioned by Starbreeze 2

21 Focus on AAA games with large budgets and expected sales Games as a Service concept increases the lifetime of the game The company wants to develop AAA games with high replayability and a storyline that has potential to extend the game s lifetime through the release of additional content (so-called downloadable content, or DLCs). Since the release of PAYDAY 2 in 213, Starbreeze has released more than 17 updates, both paid and free, which have prolonged the game s lifetime. Starbreeze applies the games as a service concept on all of its titles. Games as a service is a way of keeping the game alive after the initial launch, by offering free and paid updates as well as community events. Even in the design phase, the company already has plans on how the product will be updated, up to four years after its release. Starbreeze designs its games based on four fundamental pillars: Starbreeze has a specific business model, based on four pillars, to attract players Gameplay first. Gameplay is the most important part of game development as it is about the interaction between the player and the game. It defines how the game feels, the challenges and how to overcome them. Have fun with friends. Starbreeze develops co-operative gameplay as it believes that games are most fun when played with others. Replayability. Part of its strategy is to make the game enjoyable enough to play again and again, which is closely linked to the games as a service concept offering continuous updates and community events. Community care. Starbreeze has a strong presence on Steam and other communication channels. By marketing its games on these communication channels, it ensures that the players have the latest information about its games. These communities also function as a two-way communication stream, where Starbreeze and players can interact and Starbreeze can use players feedback when it later updates its games. The first publishing title, Dead by Daylight, sold 27, copies during its first week Publishing The publishing segment offers publishing services for external developers. To leverage on its expertise, Starbreeze mainly collaborates with developers of similar games to those in its own portfolio. Currently, revenues primarily stem from the royalties it receives for the publishing project Dead by Daylight. Dead by Daylight was Starbreeze s first publishing project. It is an asymmetrical horror game developed by the Canadian studio Behaviour Digital. It was released for PC on 14 June 216 and sold 27, units during its first week. The game was released for console in June 217 and last year the company announced that DBD had sold over 3 million copies. RAID: World War II, developed by Lion Game Lion, was released in September, 217 IndieLabs is a project launched to find up and coming smaller studios VR Tech & Operations is an emerging business line with VR technology and software development Starbreeze, Lion Game Lion and 55 Games together released Raid: World War II for PC on 26 September 217. The title was released for PlayStation 4 and Xbox One in October. Starbreeze launched the IndieLabs brand in 216 and is focusing on smaller game projects with the ambition of finding upcoming games studios to use for larger projects. Antisphere, the first IndieLabs title, was released on Steam in July 217. However, sales for the PC version were lower than the company had expected and it decided not to invest further in the release on console format. VR Tech & Operations The VR Tech & Operations business area comprises the VR technology and software development, including the VR headset StarVR and the VR movie format PresenZ. The company believes that VR will be a key component of the industry due to its potential for immersive experiences and is pursuing a strategy to enable the delivery of premium content, leveraging on Starbreeze s strong IP portfolio. Marketing material commissioned by Starbreeze 21

22 VR STRATEGY TO ENABLE PREMIUM CONTENT Starbreeze has a clear VR strategy that aims to enable the delivery of premium content The StarVR headset is developed in collaboration with Acer through a JV StarVR Headset A key aspect of developing its VR experience is to combine the software and hardware in its StarVR headset. The headset is developed in a joint venture with Acer, called StarVR Corporation. Starbreeze owns and control IP rights, while Acer manufactures the product. Sales and marketing of the StarVR head-mounted display (HMD) headset is managed by the JV s sales organisation. The headset differentiates from competitors through its revolutionary 21 degree field of vision, 5K low persistent screen and perfect tracking via its Phase Space tracking. Starbreeze holds 33% of the StarVR JV and owns the IP rights epawn and Nozon were acquired in order to further develop the VR business The French company epawn, now Starbreeze Paris, was acquired in June 216 and in October 216, Starbreeze acquired the Belgian companies Nozon S.p.r.l. and Parallaxter S.p.r.l., which are developing the PresenZ Technology together. The technology allows interactive illusory position shift in 36-degree videos, VR content in post-production and 3D animation. The acquisitions were important steps in the company s VR strategy. Marketing material commissioned by Starbreeze 22

23 Enterspace to open its first VR centre in 218 which will showcase the LBE concept Collaborations with IMAX, SEGA and others where Starbreeze acts as content provider is the preferred path After the roll-out of locationbased entertainment, the aim is to capitalise on its expertise in content PAYDAY 2 was released in 213 and has since sold more than 16 million copies and generated more than SEK 7m in revenues Multiplayer game where players cooperate to carry out heists The Walking Dead will be released during H2 218 FPS zombie game where players cooperate to stay alive in a post-apocalyptic world Location-based VR centres Starbreeze VR s strategy is based on the concept of location-based VR through the establishment of VR centres. In June 217, Starbreeze finalised the acquisition of Enterspace, a location-based VR company. In August 217, the company announced that it had entered into an agreement with Emaar Entertainment to develop a 7, m 2 VR centre in Dubai. Enterspace will be the lead partner of the VR centre providing content, installation and operational experience. The VR Park, as it is called, opened on 1 March 218 in the prominent Dubai Mall and had eight of Starbreeze s experiences available at the opening. Enterspace will also open a VR centre in Stockholm following the Dubai opening. The Enterspace centres in Dubai and Stockholm will function as showcases for the LBE concept, which Starbreeze aims to develop through collaborations with partners. There is already an agreement with IMAX to offer VR experiences and in Q4 217 Starbreeze announced an ambition to roll out its concept in SEGA Entertainment s game arcades throughout Japan. Premium content As the VR segment grows, the company aims to develop premium content, both inhouse and as a publisher, for its StarVR headset and location-based VR centres. Starbreeze has a number of projects with external developers of VR game titles and has eg released John Wick Chronicles: Arcade Edition in VR. The long-term target is to make more of the company s existing titles available in all formats, including VR. Major titles PAYDAY 2 PAYDAY 2 is a four-player co-op shooter game developed by OVERKILL Software and published by 55 Games. PAYDAY 2 was released in August 213 for PC, PlayStation 2 and Xbox 36 for digital distribution and retail channels. It is the sequel to PAYDAY: The Heist, which was released in 211. PAYDAY 2 has sold more than 16 million units worldwide and generated revenues above SEK 7m between 213 and 217. Since its launch in 213, more than 17 updates have been released. In February 218, it will be launched on the Nintendo Switch. The game takes place in Washington DC, where the players, in the roles of the PAYDAY crew: Dallas, Hoxton, Wolf and Chains, go on a crime spree. In each heist, the players have to complete a series of tasks while the police attempt to take out the players. The new CrimeNet network offers the players a wide range of contracts, from kidnapping to emptying out bank vaults. As the offences become more elaborate and rewarding, the players also get the opportunity to customise the characters, guns and gear. OVERKILL s The Walking Dead OVERKILL s The Walking Dead is based on the book series by Robert Kirkman. The game was announced in 214 and was then slated to be released in 216. It has suffered from delays and the company now expects to release it during H2 218, for PC, Xbox One and PlayStation 4. The game is a four-player co-op first person shooter (FPS) game developed by OVERKILL, a Starbreeze Studio. In The Walking Dead, the gamer fights to stay alive in a post-apocalyptic world. The players have to cooperate on a range of missions and raids to secure their base camp against the dead and the living. Marketing material commissioned by Starbreeze 23

24 Dead by Daylight Dead by Daylight is a publishing title that sold about two million copies in its first year It is a horror game version of hide and seek developed by Behaviour Interactive Dead by Daylight was the first game to be released by the Starbreeze Publishing business area and was developed by the Canadian studio Behaviour Interactive. The game was released on 14 June 216 for PC and by August 217, it had sold more than two million units on the digital distribution platform Steam. Following the release, seven paid updates have been made and in June 217, the game was also released for console. Dead by Daylight is an asymmetrical multiplayer (four versus one) horror game for five players. It is a version of hide and seek, where one player takes the role of the killer and hunts the other four players, who try to avoid being caught and killed. The killer plays in first person while the survivors play in third person. STARBREEZE STUDIOS AND STARBREEZE PUBLISHING TITLE RELEASE SCHEDULE IP DEVELOPMENT STARBREEZE GAMES & OVERKILL OWNERSHIP GENRE PLATFORM PHASE TIMING PAYDAY: The Heist 1% Co-op, FPS, Action PSN & PC Released 211 PAYDAY 2 1% Co-op, FPS, Action PC Released 213 PAYDAY 2: Crimewave Edition 1% Co-op, FPS, Action PS4 & XBONE Released 215 PAYDAY 2: The Big Score 1% Co-op, FPS, Action PS4 & XBONE Released 216 PAYDAY 2 Switch 1% Co-op, FPS, Action Nintendo Switch In Production Feb 23/27, 218 OVERKILL s The Walking Dead % Co-op, FPS, Action PC, PS4 & XBONE In Production Fall, 218 PAYDAY Crime War 1% PvP, FPS, Action Mobile In Production 218 Geminose 1% Children, Music Nintendo Switch In Production TBC Project Crossfire % Co-op, FPS, Action PC In Pre-Production TBC Storm 1% Co-op, FPS, Action PC In Pre-Production TBC PAYDAY 3 1% Co-op, FPS, Action PC Design Phase TBC PUBLISHING Dead by Daylight % Horror, Asymmetric, 4v1 PC Released 216 John Wick Chronicles % VR, FPS, Action VR PC & LBE Released Feb 9, 217 Dead by Daylight % Horror, Asymmetric, 4v1 PS4 & XBONE Released June 2/23, 217 Antisphere 5% Arena shooter, 2v2 PC Released July 14, 217 RAID: World War II 5% Co-op, FPS, Action PC Released Sep 26, 217 RAID: World War II 5% Co-op, FPS, Action PS4 & XBONE Released Oct 1/13, 217 Psychonauts 2 % Adventure, platform Multiformat In Production TBC System Shock 3 % Not announced/defined Multiformat In Production TBC Deliver Us The Moon % Not announced/defined PC In Production TBC 1 Crowns n.a. Turn-based strategy PC Design Phase TBC Elementerra 5% VR, Puzzle VR PC In Production TBC The Raft 5% VR, Multiple. LBE VR LBE In Production TBC Hero % VR, Drama, Puzzle, LBE VR LBE In Production TBC APE-X % VR, Action, LBE VR LBE In Production TBC Project Golem 5% VR, Action, LBE VR LBE In Production TBC Starbreeze aims for net sales of SEK 2bn by 22 and positive EBITDA from Q4 218 and onwards Financial targets In conjunction with the change of listing in 217, the company presented ambitious new financial targets. Most notable is the bold revenue target, where a majority of the expected growth is anticipated to come from the company s in-house developed games. Net sales: At least SEK 2bn by 22, excluding PAYDAY 3. Profitability: To generate positive EBITDA in Q4 218 and on an annual basis subsequently. Dividend policy: No dividend in the next few years, as the cash flows generated will be used to finance further growth and development of the business. Long-term policy to distribute 5% of net profit after tax. Marketing material commissioned by Starbreeze 24

25 CEO Bo Andersson Klint joined Starbreeze in conjunction with the acquisition of OVERKILL Executive management and board of directors Starbreeze has an extensive management team led by CEO Bo Andersson Klint. He was formerly CEO of OVERKILL and became a member of the Starbreeze team when OVERKILL was acquired in 212. Bo Andersson Klint is one of the largest shareholders; his shares represent almost 8% of the capital and 24% of the votes in the company. Marketing material commissioned by Starbreeze 25

26 Marketing material commissioned by Starbreeze 26

27 Marketing material commissioned by Starbreeze 27

28 Shareholders CEO Andersson Klint is the largest shareholder in terms of votes, while Swedbank Robur holds the top spot in terms of capital The company s CEO, Bo Andersson Klint, is the largest owner in terms of voting power, with shares representing nearly 8% of the capital and 24% of the votes. Notable investors include Swedbank Robur, a large Swedish asset manager, which is the largest owner in terms of capital through three of its mutual funds. Första APfonden, one of the buffer funds in the Swedish national income pension system, is another prominent institutional investor with close to 11% of the capital. Korean partner Smilegate holds 3% of the capital and 5% of the votes. SHAREHOLDER STRUCTURE AS OF JANUARY 31, 218 Shareholder Capital Votes Bo Andersson Klint 1 7.9% 24.1% Försäkringsaktiebolaget Avanza Pension 8.1% 6.5% Swedbank Robur % 6.2% Smilegate Holdings Inc 3.2% 5.% Första AP-fonden 1.9% 4.2% CBLDN-BFCM Fulltx Third Party Asset 1.2% 2.% Michael Hjort 3.8% 1.9% Nordnet Pensionsförsäkring AB 1.5% 1.3% Viktor Vallin.3% 1.3% CBNY-National Financial Services LL 1.1% 1.1% Others 5.3% 46.4% Total 1.% 1.% 1Directly and indirectly through Varvtre AB 2 Swedbank Robur consists of three funds; Ny Teknik BTI, Småbolagsfond Sverige and Småbolagsfond Norden 3 Michael Hjorth owns shares via Indian Nation Aktiebolag. Source: Company data Marketing material commissioned by Starbreeze 28

29 The global games market After rapid growth in recent years, the global gaming market reached a landmark in 216 when aggregated sales reached USD 1bn for the first time. Looking at market estimates from Newzoo, the global gaming is expected to continue to grow at a 6% CAGR until 22. Consoles and PCs are still the core platforms for gaming, comprising about 54% of total revenue in 216. However, market growth is mainly attributable to other platforms, such as mobile, while growth rates for PCs and consoles are slowing. Players in the games industry can be divided into a number of categories Studios are responsible for developing games Include both work-for-hire and independent studios Publishers are responsible for funding and marketing the products IP owners include content providers such as Disney, Marvel, DC Comics and Blizzard Digital distribution is a highly concentrated market with a few large players Understanding the revenue streams Before jumping into the market structure, sizes and forecasts, we would like to touch on the revenue streams of a games developer, which we think is crucial to understand the space. Starbreeze is present in the categories below with asterisks. Studios* Studios develop games, from idea to execution, meaning they are responsible for the content, artwork, design, programming and testing of games. The types of studio also vary, from first-party developers (such as Rare or Sony, which create exclusive titles for certain platforms), to second-party developers who take on contracts from platform owners, third-party developers and fully independent ones. To succeed with a launch, a studio needs to have financial and marketing support from a publisher. A common process is that a studio pitches an idea to a publisher, which in turn invests a sum in the development of the game. Upon launch, the publisher is able to recoup its initial investment first, after which there is typically a revenue-sharing model on the copies sold. Notable developers include Activision, Avalanche, BioWare, Bethesda, Blizzard, DICE and Ubisoft. Due to the industry dynamics and revenue sharing with many stakeholders, studios typically get to keep between 1% and 4% of the revenue generated from a game. Publishers* Similar to book and movie publishers, video game publishers are responsible for advertising, market research and financial investment. Publishers fund a studio or a developer beforehand. A large publisher often handles the distribution of games itself as well. Publishers face numerous risks that are worth highlighting: the reliance on the Christmas selling season, which accounts for a significant portion of industry sales; product slippage; piracy; and cost inflation for game production. Sony, Tencent, Microsoft and Nintendo are the biggest publishers. Intellectual property owners* This category includes players such as Disney, Marvel, DC Comics and bigger game companies including Blizzard, which owns a lot of game franchises, such as Diablo and Warcraft. When IP owners license their property, they take a portion of the sales, typically between 1% and 2%. Licensing their intellectual property is pretty much all they do. Digital distributors Distribution in the games market is highly consolidated. There are many players, although the smaller ones have negligible market shares. Steam, the major gaming platform for PCs, is very dominant in this area. There are multiple sources citing its market share, which appears to range from 51% to 65%, followed by Amazon at 11% and Gamestop at ~9% in 216. Larger companies such as Electronic Arts and Activision Blizzard have their own platforms and only distribute their own titles and therefore bypass the fee to distribute games through Steam, which charges 15-3% of the sales value to distribute a game on its platform. Marketing material commissioned by Starbreeze 29

30 Retailers include physical stores such as Walmart and Home Depot, as well as specialised games stores All games are built on specific game engines Retailers This category includes classical retailers such as WalMart and Home Depot, as well as games retailers such as Gamestop and GAME. These retailers sell game codes but predominantly focus on physical copies. Although they are declining in importance for PC gaming, they are still important, especially for console gaming. The vast majority of PC games sold in retail today still need to be registered on platforms such as Steam or Origin (Electronic Arts). Physical copies usually receive a mark-up on price versus digital versions. Game engine owners All software is built on a graphics or game engine, which dictates the look or feel of the gameplay. The engine includes a renderer for graphics, a physics engine, collision detection and response, sound, animation, AI, memory management, and threading, ie it serves as the backbone of the software itself and is a crucial choice for developers. Most engines have some kind of specialisation, such as Creation, which is focused on role-playing games, and id and CRYENGINE, which are very focused on FPS (firstperson shooter) games. Other popular engines include Unreal (The Walking Dead, the upcoming game from Starbreeze is based on this engine) and Frostbite, which has been able to run games from different genres. Engine providers take 3-5% of the sales price of a game. Gaming is a USD 1bn market The market is expected to grow at a 6% CAGR up to 22 The global games market The gaming market has witnessed ample growth in the past years, with revenue exceeding the USD 1bn mark for the first time in 216. Since 212, the gaming market has grown by 54% and posted a CAGR of 9% for Forecasts point to further growth, albeit somewhat decelerating. Looking at market forecasts up to 22, the gaming market is expected to grow at a CAGR of ~6% from 217, while the figure lies at ~8% when using 212 as a base. It is safe to say that the market is massive, but it is also quite crowded with titles. Today, gaming caters for a wide variety of interests, from hard-core competitive gamers, to casual ones, viewers only or spontaneous phone players who spend only a few minutes a day playing. Gaming companies have truly become the leaders in interactive entertainment. Marketing material commissioned by Starbreeze 3

31 GLOBAL GAMES MARKET REVENUE USDbn E 219E 22E Global games market revenue Source: Newzoo and Nordea Markets GAMES REVENUE GROWTH Y/Y 12% 1% 8% 6% 4% 2% % E 219E 22E y/y Source: Newzoo and Nordea Markets GAMES REVENUE E 219E 22E Console Tablet Phone PC Browser PC Source: Newzoo and Nordea Markets Smartphones recently surpassed consoles as the leading platform for games Phone gaming crowned as no. 1 in 217 Gaming on smartphones recently surpassed consoles as the biggest platform in terms of gaming revenue, posting more than USD 35bn in turnover in 217. Currently accounting for 35% of the total market, smartphones are expected by Newzoo to grow their share to 4% by 22. Titles such as Candy Crush, Clash of Clans and Contest of Champions are widely played and reach a broad base of people. REVENUE SPLIT BY DEVICE 217 REVENUE SPLIT BY DEVICE 22 Phone 32% Console 31% Phone 4% Console 28% PC 23% Source: Newzoo and Nordea Markets Tablet 1% Browser PC 4% PC 19% Source: Newzoo and Nordea Markets Browser PC 3% Tablet 1% Consoles and PCs are still a core part of the gaming market, but market growth is coming from other platforms Consoles and PCs not the growth one might expect Console and PC gaming has traditionally been the core of the gaming sector. These alternatives have been around for a long time and although they are growing somewhat, the market has become quite mature. Given the nature of the industry dynamics, there are always opportunities for successfully marketed titles to earn a considerable amount of money and the variations in growth between companies can Marketing material commissioned by Starbreeze 31

32 be quite pronounced from year to year. Accounting for a ~54% share, or USD 6bn, the market is quite massive. Console and PC gaming is expected to grow by.5-2% annually SALES SPLIT The level of fragmentation varies between the platforms consoles in particular are dominated by the big companies, especially on Nintendo s platforms, while Sony PlayStation has come the furthest in integrating indie and low-budget franchises. Console and PC gaming combined is expected to show growth of.5-2% per year up to 22, implying that the market is becoming quite mature. Note that the figures only include consumer revenue from software, subscriptions and live services, ie no hardware revenue. GROWTH Y/Y USDbn E 219E 22E Console PC Source: Newzoo and Nordea Markets 5% 4% 3% 2% 1% % -1% -2% -3% -4% E 219E 22E Console PC Source: Newzoo and Nordea Markets APAC are the biggest consumers Asia is the largest consumer of games, comprising almost half of the global market APAC accounts for 47% of gaming revenue, with China at the forefront, offering a lucrative opportunity for Western games companies. North America and EMEA are roughly the same size. While Latin America has a large player base, it still lags significantly in terms of revenue. REVENUE SPLIT BY GEOGRAPHY 217 NAM 25% EMEA 24% LATAM 4% According to Newzoo, there are a total of 2.2bn games However, numbers could be slightly inflated Source: Newzoo and Nordea Markets APAC 47% Massive market of players but figures somewhat misleading According to Newzoo data, there are a total of 2.2bn gamers or gaming enthusiasts globally and 1.1bn excluding APAC. Crunching the numbers, we find that the definition of a gamer, according to Newzoo, is pretty much anyone who has installed a game on their smartphone. This means that the figures are somewhat inflated and a large number of players likely account for a minor share of wallet. Nonetheless, Newzoo s data shows there is considerable interest in the market and that the number of players is vast. Marketing material commissioned by Starbreeze 32

33 GAMERS BY MARKET - EXCLUDING APAC E-EU NAM W-EU LATAM MEA Gamers by market (m) Source: Newzoo and Nordea Markets GAMERS BY MARKET - INCLUDING APAC 1,4 1,2 1, E-EU NAM W-EU LATAM MEA APAC Gamers by market (m) Source: Newzoo and Nordea Markets Looking at the 5, highest grossing titles in 217, about 5% of all revenue is generated from the top 1 games Services such as Steam, AppStore and Google Play have created lower barriers to entry, but the vast majority of revenues are taken by the larger studios Have barriers to entry been lowered? There are more than 8, studios and developers on the market, according to data from Game Development. Using data from Steam as a proxy for the market, we note that around 7,6 titles were released in 217 but that the top games make up the lion s share of all sales. Our analysis reveals that the top 1 titles account for almost 5% of all sales. However, as our data lacks information regarding in-game purchases, we reason that the actual figure is likely much higher, especially considering that it does not include any data from major games such as DOTA2. Services such as Steam, AppStore and Google Play let independent developers and small studios reach an audience of millions. The usual suspects, however, take the majority of the market share. There are always a few titles from small studios that earn great bucks, but the vast majority of revenues are taken by the big names, showing the importance of being a high-profile publisher or IP owner. The average game on Steam sells only 32, copies. We lack data for the console industry, but believe it to have an even greater tilt towards large publishers as the independent market is still underdeveloped when it comes to consoles. TOP GAMES PERCENTAGE OF MARKET REVENUES NO OF GAMES ACCOUNTING FOR MARKET REVENUES 9% 8% 7% 6% 5% 4% 3% 2% 1% % Top 1 Top 25 Top 5 Top 1 Top 1, +1, Sales Source: Steamspy and Nordea Markets Source: Steamspy and Nordea Markets Most popular genres FPS games are the most popular category of games in the US First-person shooters (FPS) are the most popular games, grabbing close to a third of the market, followed by action games at 22%, and role playing games (RPG) at no. 3. As this data is only for the US, there are likely considerable differences in the split when looking at other regions. Due to the popularity of football in Europe and the popularity of the FIFA franchise, we reason that sports games likely make up a larger share in Europe, while RPGs and fighting games are especially popular in Asia. Marketing material commissioned by Starbreeze 33

34 REVENUE SPLIT BY GEOGRAPHY 217 Racing Other Strategy3% 4% 4% Fighting 6% FPS 28% Adventure 8% Sport 12% Steam is a dominant force, recording 18m concurrent players in January 218, up almost 3% y/y In 213, Steam had a 75% market share in digital games distribution Source: Newzoo and Nordea Markets RPG 13% Action 22% Steam a dominant force on the market Steam is a digital distribution platform developed by Valve Corporation, offering gaming, video streaming and social networking services for its community. The Steam platform is available for PC, Mac, Linux box, mobile devices and television, and is accessible in 237 countries and 21 languages. There are 287 million total active users on Steam. On 6 January 218, Steam Database reported that Steam had reached a peak of 18 million concurrent players for the first time, compared with 14 million players in January 217. According to a Bloomberg article, Steam had a 75% market share in game digital distribution in 213. We cannot find more recent data on this and although it is unclear what today s actual market share is, we believe a range between 5% and 75% would be fair given that Steam is still the dominant digital distributor. Electronic Arts and ActivisionBlizzard have their own distribution platforms for their own games called Origin and Battle. Apart from that, the vast majority of games are digitally distributed on Steam. Note that third-party vendors also offer Steam keys (licences for use of the games on Steam). STEAM'S PEAK CONCURRENT USERS 2 16 In millions There are multiple revenue models in the games market Full-price games are increasingly followed up with DLC sales, extending the lifetime and revenue Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Source: Statista and Nordea Markets Revenue model Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 The main revenue models in the games markets are described below. Jan-15 Mar-15 May-15 Full-price games are games sold at a relatively high one-time price. Generally, most of these games generate the majority of revenue in their first year. The most successful games can continue to generate revenue by releasing DLCs (downloadable content) after their initial release. Jul-15 Sep-15 Nov-15 Jan-16 Peak concurrent users Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Marketing material commissioned by Starbreeze 34

35 generation of a game Subscription and streaming games as well as free-to-play games offer alternative revenue models DLC sales are becoming more common as games are sold via digital distribution platforms such as Steam. On these platforms, the developer can release updates and extend the lifetime and revenue of a game. Subscription and streaming games are based on a model where the player subscribes to a platform and gains access to a number of titles. This revenue model, similar to DLC sales, is increasing with digital distribution channels. Free-to-play games are available to the player free of charge. Revenue stems from in-game ads or paid updates/features. This revenue model is most common for mobile phone games but has also been popular for PC games in Asia. Trends in the games market Trends in the games market include games with a context and microtransactions Games with a context. Digital distribution platforms and game communities are of increasing importance for game developers as they can communicate with gamers through these channels and better understand what their customers prefer. Watching other people play and being part of a context is important for the player today, according to Starbreeze. Microtransactions. Additional revenue streams for many popular games are microtransactions where the player can buy weapons or accessories for their characters. Console and PC differ in their technical progress, with PC seeing a more continuous technical development VR is a technology that Starbreeze sees as a key growth area The games industry is becoming ever more consolidated: top ten account for 54% of sales Average gamer is 35 years and about 41% of gamers are female Technical progress. The technical framework for games is based on how advanced the gaming device is. For console, the lifecycle is normally seven years and when a new platform is released, game developers need to improve game quality. For PC, the gamer decides when to upgrade his/her device and hence the technical development is more continuous. VR. Based on the technical progress, more game developers are focusing on VR. Starbreeze believes that revenue from VR will grow for all devices. The company sees the short- to medium-term potential for the VR technology in location-based entertainment (LBE), due to the costs associated with high-quality delivery of the technology. Consolidation. The games industry is undergoing a consolidation phase. According to Starbreeze, the ten largest game companies represented 54% of the revenue in global games market in 216, corresponding to USD 54bn. Other gaming facts you might not know The average age of gamers has been steady for a number of years, which is an indication that there are young newcomers joining, while older gamers are continuing to play. Although there is a common misperception that the vast majority of gamers are young men, the age of the average gamer is 35 and only 59% are men. Gaming facts Avg. age 35 Avg. age of purchasers 38 Households that own a gaming device 65% - exclusively for gaming 48% Avg. number of years gamers have been playing 13 Playing with others 54% Feel they connect with friends 53% Hours per week online with others 6.5 Hours per week in person with others 4.5 With friends 4% With family members 21% With parent(s) 17% With partner 15% Male gamers 59% Female gamers 41% Male purchasers 6% Female purchasers 4% Source: Bigfishgames and Nordea Markets Marketing material commissioned by Starbreeze 35

36 Business area: Starbreeze Games Starbreeze s games business area consists of the company s in-house developed games portfolio. Its most popular title is PAYDAY 2, which has sold more than 16 million copies to date. It also includes games under development such as OVERKILL s The Walking Dead and Project Crossfire. The games are primarily sold through digital platforms, the largest platform being Steam. Starbreeze s key differentiator compared with other development studios is that it uses a Game as Service concept, which refers to a predefined development plan for how the product will be updated for up to three years after launch. Starbreeze successful management of the PAYDAY franchise has enabled the company to broaden its operations PAYDAY 2 still makes a meaningful earnings contribution, four years after it was first released Starbreeze is on a path to evolve from studio-for-hire to an entertainment company providing a broad spectrum of experiences. A key component that has enabled this transformation journey has been the successful management of the PAYDAY franchise through its Game as Service model. The concept refers to a predefined development plan during the design phase for how the game will be updated, up to three years after its release. Essentially, the company aims to enhance sales spikes through continuous updates, thus prolonging the lifetime of the game. As a testament to the successful execution of the concept, Starbreeze has one of biggest players communities on Steam, where players interact with each other and with the company. In 217, Starbreeze reported revenues of SEK 122m for the games business area. PAYDAY 2 still comprises the vast majority of these sales, despite the game being released more than four years ago. STARBREEZE GAMES' REVENUE STARBREEZE GAMES' OPERATING COSTS Q1 216 Q2 216 Net sales Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Capitalised development costs Q4 217 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Operating costs Q2 217 Q3 217 Q4 217 Business model Games business model is built on four fundamental pillars Starbreeze game development strives to provide world-class entertainment based on four fundamental pillars: Gameplay first Have fun with friends Replayability Community care Quality assurance team ensures solid gameplay A key parameter to ensure that a game is entertaining and has a long useful life is based on the interaction between the player and the game, which is commonly referred to as gameplay. The concept can be a bit ambiguous, but is essentially defined by the pattern created by the rules and scope of the game, the challenges met by the player, what happens if you win or lose, etc. To certify solid gameplay, Starbreeze utilises its quality and games assurance team, which helps design and test the game to ensure that it is fun for the end user. Marketing material commissioned by Starbreeze 36

37 Creating loyalty through care of the game community Community care also has a central role in the business model and the company works proactively by implementing changes and listening to opinions from its players. In addition, it specialises in games with co-operative gameplay, where users can have fun together with their friends. Altogether, this fosters player loyalty and ensures that players return to play the game over and over again. Current portfolio Pipeline includes major titles to be developed and launched in the coming years Starbreeze s current portfolio includes its main franchise PAYDAY plus a pipeline including OVERKILL s The Walking Dead, Project Crossfire and Storm, which will be developed and launched over the coming years. STARBREEZE GAMES' CURRENT PORTFOLIO AND GAMES IN DEVELOPMENT IP DEVELOPMENT STARBREEZE GAMES & OVERKILL OWNERSHIP GENRE PLATFORM PHASE TIMING PAYDAY: The Heist 1% Co-op, FPS, Action PSN & PC Released 211 PAYDAY 2 1% Co-op, FPS, Action PC Released 213 PAYDAY 2: Crimewave Edition 1% Co-op, FPS, Action PS4 & XBONE Released 215 PAYDAY 2: The Big Score 1% Co-op, FPS, Action PS4 & XBONE Released 216 PAYDAY 2 Switch 1% Co-op, FPS, Action Nintendo Switch In Production Feb 23/27, 218 OVERKILL s The Walking Dead % Co-op, FPS, Action PC, PS4 & XBONE In Production Fall, 218 PAYDAY Crime War 1% PvP, FPS, Action Mobile In Production 218 Geminose 1% Children, Music Nintendo Switch In Production TBC Project Crossfire % Co-op, FPS, Action PC In Pre-Production TBC Storm 1% Co-op, FPS, Action PC In Pre-Production TBC PAYDAY 3 1% Co-op, FPS, Action PC Design Phase TBC PAYDAY 2 is co-op FPS game developed by OVERKILL Software PAYDAY 2 PAYDAY 2 is a four-player co-operative shooter game developed by OVERKILL Software. It was released in August 213 for PC, PlayStation 2 and Xbox 36 via digital distribution and retail channels and is a sequel to PAYDAY: The Heist, which launched in 211. It is expected to be launched for Nintendo Switch in February 218. The game takes place in Washington DC where the players, in the roles of the PAYDAY crew (Dallas, Hoxton, Wolf and Chains), go on a crime spree. In each heist, the players have to complete a series of tasks while the police attempt to stop them. The CrimeNet network offers the players a wide range of contracts; it is possible to choose anything from kidnapping to emptying bank vaults. As the crimes become bigger and more rewarding, the players are given the opportunity to customise the character as well as add new guns and other gear. Starbreeze has acquired the full rights for the PAYDAY franchise 55 Games could receive a revenue share capped at USD 4m for PAYDAY 3 A game based on the famous The Walking Dead franchise is expected to be released H2 218 The development of PAYDAY 2 was partially financed by 55 Games, which in return was granted exclusive publishing rights. In May 216, all parties agreed that the publishing rights to PC and mobile platforms for PAYDAY 2, plus the rights to future games, would revert to Starbreeze. Before, it was a 5/5 split between the parties. Starbreeze paid a consideration amounting to 1.9 million B-shares in Starbreeze, corresponding to USD 3m at the time. 55 Games also maintained the publishing rights on the console platform. 55 Games will also have the rights to an initial share of future revenues from PAYDAY 3, which is currently in design phase. In total, 55 Games will receive a 33% revenue share, capped at USD 4m, provided that Starbreeze does not release a sequel within three years of the launch of PAYDAY 3. Starbreeze has also entered into numerous licensing agreements with third parties for the use of IP in DLCs. OVERKILL s The Walking Dead OVERKILL s The Walking Dead is based on the popular comic book series by Robert Kirkman and its subsequent television series. We expect it to be released in H2 218 on PC, Xbox and PlayStation. Marketing material commissioned by Starbreeze 37

38 The game is said to be a four-player co-op FPS action game developed by OVERKILL, a Starbreeze Studio. The gamer will fight to stay alive in a post-apocalyptic world. Each character has its own abilities and players need to co-operate on a variety of missions and raids to secure their base camp, against the dead and the living. Revenue will be shared with the author and Skybound, who own The Walking Dead IP Starbreeze is to release a Western version of the successful Crossfire game, developed by Smilegate In 217 the game generated more than USD 1.4bn in gross sales PAYDAY Crime War will be Starbreeze s first step into mobile gaming Other games include sci-fi game Storm and song and dance game Geminose Starbreeze entered into a licensing and development agreement with the author and Skybound in 214. The revenue-sharing agreement has not been communicated by the company, but is said to be standardised royalty agreement. In 215, it also entered into a publishing agreement with 55 Games for the console version of the game. Starbreeze has the right to receive royalties on 55 Games net sales and will receive a licensing fee of USD 1m that will commence upon launch. Project Crossfire In January 216, Starbreeze signed a ten-year agreement with Korea s Smilegate to develop and publish a Western version of the Crossfire franchise, which has been hugely successful in Asia. According to Smilegate, Crossfire is among the world s bestselling online FPS games with more than eight million concurrent users and 65 million registered players. It generated more than USD 1.4bn in gross sales in 217, the majority of which derived from China. As the game applies a free-to-play model, the revenue is generated through microtransactions. Starbreeze was granted an investment of USD 4m from Smilegate, through a USD 15m equity issue and a USD 25m convertible bond. As part of the agreement, Smilegate will also be a distribution partner for PAYDAY and OVERKILL s The Walking Dead in Asia. PAYDAY Crime War The upcoming mobile game PAYDAY Crime War will be the first product where the PAYDAY series expands outside the PC and console segments. The co-op FPS game will also be Starbreeze s first step into mobile gaming. This is a market generally characterised by lower barriers of entry as games are simpler and less costly to develop. Other projects Storm is expected to have a PAYDAY meets science fiction theme. It is an in-house developed FPS game for PC and VR where Starbreeze owns the full IP. The project is said to be in early stages. On 1 September 214, Starbreeze acquired Geminose for a consideration of USD 7m in newly issued shares. The seller also has rights to receive a maximum earnout of USD 1m, paid out over a five-year period. Starbreeze is developing a game based on the Geminose characters that focuses on music and dance. In an initial phase, it is expected to be released exclusively on Nintendo Switch. Case study: Game as a service model used for PAYDAY 2 PAYDAY 2 has sold more than 16 million copies The business model based on game as a service seems particularly effective with strong IP, as evidenced by the successful execution with PAYDAY2. It was released in August 213 and has sold more than 16 million copies and has generated more than SEK 7m in revenues for Starbreeze since its launch. Marketing material commissioned by Starbreeze 38

39 PAYDAY 2'S OWNERS In millions Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Owners * Note that OVERKILL gave away five million copies of the game in June 217. PAYDAY 2'S SALES PAYDAY 2 sales Life cycle of the game has been prolonged through a continuous release of paid and free updates Game as a service model offers more flexibility in terms of pricing Typically, the life cycle of a game used to be front-end loaded, with the majority of sales generated around the release date. This has changed to some extent and Starbreeze is working actively to build and maintain its players community, primarily by releasing new DLCs, ie new missions, characters or weapons. Since 213, the company has released more than 17 free and paid updates. In 216 alone, it released nine paid DLCS, 11 free DLC bundles and a total of 72 updates. The price of paid updates is typically about USD 3-7. This payment model offers more flexibility as the company could charge a lower price for the game and monetise the release of new DLCs, which could extend the life expectancy of the game by several years and also increase the player base due to lower barriers to entry. *PAYDAY 2 was released in August 213. The generic comparison game was released in October 214. The chart above shows the sales trend from September 215 (thus, one year after PAYDAY 2 was released). Source: Company data PAYDAY 2 is still among the most popular games on Steam, with 5.5 million members in its community Usually, the number of players diminishes over time but this commitment to player experience has enabled PAYDAY 2 to retain a large number of players. It is still one of the most popular games on Steam, with more than 5.5 million community members. Another testament to the business model is the large spikes compared with the typical game when new updates to enhance the user experience are released. Marketing material commissioned by Starbreeze 39

40 PAYDAY 2'S AVERAGE DAILY PLAYERS 1, 8, 6, 4, 2, Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 Avg. Players Linear (Avg. Players) PAYDAY 2'S PEAK CONCURRENT PLAYERS 3, 25, 2, 15, 1, 5, Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 Peak Concurrent Players Linear (Peak Concurrent Players) PAYDAY 3: Can the success be replicated? The next focal point after the launches of OVERKILL s The Walking Dead and Project Crossfire will likely be PAYDAY 3. The game is still in the design phase, so it is difficult to make any firm predictions about its sales potential. Nonetheless, we find a number of compelling reasons why it could be at least as successful as its predecessor: We see a number of factors why PAYDAY 3 could be at least as successful as its predecessor Player base and Steam community is larger today Development budget is likely to be more sizeable Less revenue sharing Wider geographical scope. PAYDAY 2 sold about 1.6m copies in the first month PAYDAY: THE HEIST'S OWNERS PAYDAY 2 sold about 1.6 million copies in its first month, compared with about.4 million copies sold of PAYDAY: The Heist in its first six months. In Q1 214, the company announced that PAYDAY 2 and PAYDAY: The Heist had collectively sold nine million copies plus eight million DLCs over the previous 12 months. Almost 8% of sales were digital. PAYDAY 2'S OWNERS Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 In millions In millions Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Owners Owners * Note that OVERKILL gave away five million copies of PAYDAY 2 in June 217. Source: Steamspy and Nordea Markets The PAYDAY 2 s Steam community is large and still growing Starbreeze will receive a larger share of future PAYDAY revenues Source: Steamspy and Nordea Markets Since PAYDAY 2 was first released, the player base and community has grown significantly, enabling a better platform and starting point for PAYDAY 3. This is also true for the Steam platform as whole, as the number of players has more than doubled since 213. Furthermore, as Starbreeze has secured the rights to the franchise, the company will gain a larger share of revenue if the game is successful. The deal struck with 55 Games entitles it to a revenue share capped at a maximum of USD 4m. It is also likely that the game will entail a much larger development budget, as the PAYDAY franchise is viewed as a cornerstone of the business. Marketing material commissioned by Starbreeze 4

41 Collaboration with Smilegate enables distribution in Asia Finally, the collaboration with Smilegate enables wider geographic scope for the game with simultaneous release on the Asian markets. PAYDAY 2'S STEAM COMMUNITY In millions sep-14 nov-14 mar-15 jun-15 sep-15 dec-15 mar-16 jun-16 sep-16 dec-16 mar-17 jun-17 sep-17 Today PAYDAY 2 Steam community OVERKILL s The Walking Dead OVERKILL s The Walking Dead to be released during H2 218 Many games based on other media formats has failed In 214, Starbreeze announced a partnership for the rights to develop and release OVERKILL s The Walking Dead (OTWD). It was first expected to launch in 216 but, due to delays, the game has been postponed and is expected during H In the past, almost every blockbuster film was accompanied by a video game. After numerous failures, demand has more or less dried up and the internet is flooded with top ten worst video games based on movies lists. Anyone remember successful tiein games such as Ghostbusters II (199), Street Fighter: The Movie (1995), Robocop (23) and Fight Club (24)? This phenomenon is not isolated to the games industry; movie spin-offs of renowned games such as Angry Birds and Assassin s Creed have not reached the same heights as the original games in terms of reception from critics and attendance in cinemas. The main reason has been small budgets and rushed deadlines The Walking Dead is still among the most watched shows on TV; season eight is currently airing Naturally, this questions whether different entertainment formats based on the same franchise can coexist. We would argue, yes and no. In general, tie-in games have been rushed for release in connection with the film and have had relatively small development budgets. We believe different parts of the entertainment industry have their own unique strengths and by playing to those strengths it should be possible to utilise a strong franchise. If anything, history at least indicates that it is a really bad idea to just copy the original format. The comic book based Walking Dead franchise is undoubtedly huge, with season eight of the popular TV show currently airing. Viewings are somewhat below the peak and ratings are sliding, but it still attracts an audience of millions each week. Season eight was one of the most viewed shows in 217, only surpassed by Game of Thrones. On 15 January, AMC announced that The Walking Dead is being renewed for a ninth season, to premiere in late 218. Usually, the show starts airing in October each year. Marketing material commissioned by Starbreeze 41

42 THE WALKING DEAD'S VIEWERS In millions Source: Nielsen ratings Season 1 Season 2 Season 3 Season 4 Season 5 Season 6 Season 7 Season 8 Further proof of the strong franchise is the popular comic books Independent storyline makes OTWD less vulnerable if the show is cancelled First trailer introducing one of the main characters received major interest worldwide OTWD is based on the critically acclaimed comic book series with the blessing of its original author, Robert Kirkman. The comic series has also had success, which could be seen as further testament to the strength of the franchise. It was the top grossing comic book series in 212 and 213, according to Comichron. In our view, it is an advantage that OTWD will be an independent game with its own storyline rather than just a rerun of the TV series or comic book. It both mitigates the risk of being another failed remake and also makes demand less vulnerable if the TV show is eventually cancelled. The time and money invested, the experience of the team, the platform and the independent storyline set it apart from other productions. Because of these reasons, we believe there is little read-through from the less successful examples mentioned above. Is there an appetite for another zombie game? In its first attempt to hype the launch of the much-awaited game, Starbreeze released a trailer introducing Aidan, one of the four playable characters. The short two-minute trailer received more than 15 million viewers on YouTube and Facebook in the first week. In addition, the game has had almost 1.9m views on a single third-party account. Initial feedback also seems to be encouraging, with 98% positive reviews. Source: YouTube Telltale has released a storybased Walking Dead game, which has been a commercial success OTWD is also not the first game based on the franchise. Telltale Games launched its first episodic adventure game based on the comics back in 212. According to a statement by the company in July 217, it had sold a total of more than 5 million episodes worldwide since launch. Although the game is quite different and based on episodes, which are cheaper, it is further demonstration of the large fan base. The fourth and final season of the game is in development (The Walking Dead: The Final season) and is set to arrive sometime during 218. Marketing material commissioned by Starbreeze 42

43 Other similar zombie games such as Left 4 Dead 2 are among the ATH selling games, implying a clear interest in the genre Estimating sales potential of a new game franchise is difficult due to the limited public information available until the final marketing push, just before the game is launched. Looking at other successful FPS co-operative games with survival elements such as Valve s Left 4 Dead could provide a ballpark comparison. The sequel, Left 4 Dead 2, was released in November 29 and sold more than two million copies in retail alone (excluding Steam sales) in its first two weeks. In 212, the Left 4 Dead franchise had sold more than 12 million copies and, according to Steamspy, the total number of digital owners is 19.6 million today. Other co-op zombie games such as Dead Island and Dying Light have also received positive feedback and records above four million owners each on Steam. LEFT 4 DEAD'S 2 OWNERS Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Owners Source: Steamspy and Nordea Markets LEFT 4 DEAD'S AVERAGE DAILY PLAYERS 25, 2, 15, 1, 5, LEFT 4 DEAD'S PEAK CONCURRENT PLAYERS 2, 16, 12, 8, 4, Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Avg. Players Linear (Avg. Players) Peak Concurrent Players Linear (Peak Concurrent Players) Source: Steamspy and Nordea Markets Source: Steamspy and Nordea Markets LEFT 4 DEAD'S AVERAGE DAILY PLAYERS (ADJ.) 18, 15, 12, 9, 6, 3, Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Avg. Players Linear (Avg. Players) Source: Steamspy and Nordea Markets LEFT 4 DEAD'S PEAK CONCURRENT PLAYERS (ADJ.) 6, 45, 3, 15, Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Peak Concurrent Players Linear (Peak Concurrent Players) Source: Steamspy and Nordea Markets Marketing material commissioned by Starbreeze 43

44 Project Crossfire Starbreeze signed an agreement in 216 with Smilegate, to develop a Western version of its bestselling Crossfire FPS Crossfire has seen massive success in Asia but has not been the same hit in the West The free-to-play model and the game s simple graphics are factors that both explain the game s success in Asia as well as its lack of appeal in the West Partnering with Tencent as publisher in China was another crucial factor in the Crossfire s success When Starbreeze signed an agreement with Korean game company Smilegate to develop and publish a Western version of the Crossfire game in 216, it got its hands on IP from a franchise with more than eight million concurrent users and 65 million registered players. It has generated more than USD 8bn in sales worldwide since its 27 release, making it one of the world s bestselling online FPS games. The original Smilegate version of Crossfire is currently available in 8 countries including China, Vietnam, and in North America, South America and Europe, but it has not proven as successful in the West as it has in Asia. In the West, Counter-Strike: Global Offensive (CS:GO) has dominated the FPS PC game scene for a number of years. Crossfire s disappointing reception in the West can likely be explained by some of the same factors that made it such a hit in Asia. It is technologically quite a dated game, with simple graphics that allow the game to run on a wide range of computers. Combined with a free-to-play (F2P) sales model, which means that lower-income players do not need to pay upfront and that those without a gaming PC can play in internet cafes, this makes for quite low barriers of entry for new players. While this model works well in Asia, where microtransactions in the game have racked up accumulated sales of more than USD 8bn since its release in 27, Western gamers usually value more advanced graphics and have instead shown a preference for more premium games like CS:GO. However, due to the more fragmented market in Europe as well as the size of the Asian market, CS:GO only achieved sales of USD 341m in 217 compared to Crossfire s sales of USD 1.4bn in the same period. Another key factor behinds Crossfire s success in Asia was Smilegate s partnering with Chinese giant Tencent as its publisher there. With Tencent s distribution network, China quickly became the largest market for the game and it has accounted for a large majority of Crossfire s revenues to date. Crossfire s lack of appeal in the West has prompted Smilegate to partner up with Starbreeze, which has a strong record in developing co-op games with its PAYDAY franchise. In conjunction with the partnership agreement, Smilegate invested USD 4m, of which USD 15m was through an equity issue and USD 25m via a convertible bond in Starbreeze. This meant that Smilegate took a 3.4% stake in Starbreeze. As part of the 216 agreement, Smilegate will also be a distribution partner for PAYDAY and OTWD in Asia. Crossfire is still one of the highest grossing games; ten years after its 27 release, it ranked third in 217 s rank of PC games by worldwide revenues Crossfire was first released in 27 and is still one of the highest grossing games today. According to SuperData, it was third on the list of the world s top grossing titles ranked by December 217 earnings. For 217, Crossfire raked in USD 1.4bn in revenues, placing it third for the full year as well. The longevity of Crossfire is similar to that of other successful F2P MMO (massive multiplayer online) games. The long lifespan of such games can partly be explained by players sticking with these games after investing time and money in them. In developing markets, another factor is also that players also tend to stick with older titles because their PCs are not capable of running the latest games. CROSSFIRE'S ANNUAL SALES AND RANK AMONG TOP PC GAMES BY REVENUE Sales (USD bn) Rank among top PC games by revenue We expect a 22 release of Project Crossfire Source: SuperData and Nordea Markets While there has been no announcement regarding a release date for Project Crossfire, we estimate that the game will not be released until 22 as it is still in preproduction phase. Marketing material commissioned by Starbreeze 44

45 Difficult to estimate potential as the franchise has not seen the same success in the West as it has in Asia but CS:GO and Overwatch offer interesting reference points as they are both FPS games and will likely be key competitors for Project Crossfire Estimating the sales potential of a title based on Crossfire is difficult since there is always considerable uncertainty about the commercial potential of a new game franchise. While Smilegate s version of the game is highly popular in Asian markets, we still believe the success of a remake aimed at European and North American gamers is far from certain. The pricing model will also likely differ, as Starbreeze does not intend to launch Project Crossfire with a free-to-play model. As a reference point for Project Crossfire s potential, we can look at Valve s CS:GO. This is likely one of the most similar FPS games to Project Crossfire and consequently will likely be one of the main competitors for the upcoming Starbreeze title. CS:GO has built an owner base of close to 4 million players and the number of average daily players has held above 3, since mid-215. In 217, CS:GO earned USD 341m in revenues. Another reference point and likely competitor is Activision Blizzard s Overwatch, which was first released in 216 and had sales of USD 382m in 217. COUNTER-STRIKE: GLOBAL OFFENSIVE'S OWNERS In millions Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Owners Source: Steamspy and Nordea Markets CS:GO'S AVERAGE DAILY PLAYERS 5, 4, 3, 2, 1, CS:GO'S PEAK CONCURRENT PLAYERS 1,, 8, 6, 4, 2, Avg. Players Linear (Avg. Players) Peak Concurrent Players Linear (Peak Concurrent Players) Source: Steamspy and Nordea Markets Marketing material commissioned by Starbreeze 45

46 Business area: Publishing Starbreeze s Publishing segment offers publishing services to external developers. The operations started in 216 and reported sales of SEK 219.9m in 217. The first, and most successful, title released was Dead by Daylight, developed by Behavioural Interactive. More than two million units of the game have been sold and it accounted for SEK 22m of sales in 217. The Publishing pipeline includes several upcoming VR titles as well as 1 Crowns, Starbreeze s first foray into the strategy genre. Publishing First successful publishing title, Dead by Daylight, was released in 216 PUBLISHING'S REVENUE 1 8 The Publishing segment has been offering publishing services to third-party developers since 216. The company mainly collaborates with developers of similar games to those in Starbreeze s portfolio to maximise the use of its expertise. The first title released was Dead by Daylight, developed by Behaviour Interactive. Currently, the company s revenue mainly stems from royalties for the rights to Dead by Daylight. However, Starbreeze s aim is to grow the business area in order to diversify its games portfolio and generate cash flows also in periods between releases of its in-house developed games. PUBLISHING'S OPERATING COSTS Q1 216 Q2 216 Net sales Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Capitalised development costs Q4 217 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Operating costs Q2 217 Q3 217 Q4 217 Publishing reported revenue of SEK 219.9m in 217 Majority of revenue stems from digital distribution channels such as Steam The Publishing business area reported net sales of SEK 219.9m in 217 (SEK 176.1m), of which Dead by Daylight accounted for SEK 21.5m (SEK 143.7m), RAID: World War II for SEK 4.6m (SEK 32.5m, representing a minimum guarantee in royalties for the physical console version) and John Wick Chronicles for SEK 8.3m (SEK m). Capitalised development costs were SEK 26.1m (SEK 32.4m), relating to production costs. The majority of revenue stems from digital distribution channels such as Steam. The payment streams go from the customer via the distributor, which charges a standard fee, and then to Starbreeze. When Starbreeze acts as publisher, it pays royalties to the game developer, which in most cases holds the IP rights. Starbreeze reports the IP rights as revenue and deducts them as costs to external developers; hence the reported revenue is gross revenue. Business model The Publishing business model is built on five pillars, which differentiates Starbreeze from its competitors. Starbreeze focuses on publishing projects similar to its own games Development knowhow As Starbreeze is a game developer, it can provide knowledge and support to other developers to support them with games and projects. To be able to help in the best possible way, the Publishing segment mainly works with developers of similar games. Marketing material commissioned by Starbreeze 46

47 Global in-house production and marketing teams to support developers Starbreeze is generally granted exclusive publishing rights Starbreeze allows the publisher to maintain all, or a majority, of the rights to the IP - Starbreeze can offer developers a flexible deal with a high degree of freedom Global teams Starbreeze Studios has global in-house production and marketing teams to help its external developers during the process. Tailored publishing deals The Publishing business area publishes games in accordance with agreements made with each external developer. Starbreeze is generally granted an exclusive publishing licence under which the company has the right to sell, publish and distribute the games in languages and via platforms specified under the agreements. In some cases, games have been developed under work for hire agreements, under which all rights are transferred to Starbreeze. IP ownership Normally, the publisher owns the rights to the game, while the external developer is responsible for production. Sometimes, the publisher only releases, markets and distributes the game, while the game developer still own the rights. The latter gives the developer the creative freedom to design the games as it likes. This is also in line with Starbreeze s strategy, and the game developer retains all, or a large share of, the IP rights for its games. According to the company, it is, and will continue to be, flexible regarding financing agreements and management of IP rights. Games as a service Similar to the Starbreeze Games business area, the Publishing business area uses the games as a service concept. The concept involves extending the lifetime of the game through releases of new content in the form of paid and free game updates. By focusing on these pillars, Starbreeze can offer game developers an attractive deal, as the developer has a higher degree of creative freedom than when cooperating with a larger studio. Starbreeze allows the developer to retain influence over the game while providing support when needed. Games pipeline Pipeline includes renowned franchises such as Psychonauts 2 and System Shock 3 Since the release of Dead by Daylight, Starbreeze has signed projects with developers such as Tim Schafer s Double Fine Productions with Psychonauts 2, as well as Warren Spector s OtherSide Entertainment and its game, System Shock 3. The company recently also announced a new publishing agreement with Mohawk Games for a turn-based strategy game under the working title 1 Crowns. PUBLISHING'S CURRENT PORTFOLIO AND GAMES IN DEVELOPMENT IP DEVELOPMENT PUBLISHING OWNERSHIP GENRE PLATFORM PHASE TIMING Dead by Daylight % Horror, Asymmetric, 4v1 PC Released 216 John Wick Chronicles % VR, FPS, Action VR PC & LBE Released Feb 9, 217 Dead by Daylight % Horror, Asymmetric, 4v1 PS4 & XBONE Released June 2/23, 217 Antisphere 5% Arena shooter, 2v2 PC Released July 14, 217 RAID: World War II 5% Co-op, FPS, Action PC Released Sep 26, 217 RAID: World War II 5% Co-op, FPS, Action PS4 & XBONE Released Oct 1/13, 217 Psychonauts 2 % Adventure, platform Multiformat In Production TBC System Shock 3 % Not announced/defined Multiformat In Production TBC Deliver Us The Moon % Not announced/defined PC In Production TBC 1 Crowns n.a. Turn-based strategy PC Design Phase TBC Elementerra 5% VR, Puzzle VR PC In Production TBC The Raft 5% VR, Multiple. LBE VR LBE In Production TBC Hero % VR, Drama, Puzzle, LBE VR LBE In Production TBC APE-X % VR, Action, LBE VR LBE In Production TBC Project Golem 5% VR, Action, LBE VR LBE In Production TBC * FPS first person shooter, LBE location-based entertainment Marketing material commissioned by Starbreeze 47

48 Dead by Daylight was the first game released by Starbreeze Publishing The game has sold around 2.8 million copies and the Steam community group has surpassed 78, members Games portfolio Dead by Daylight Dead by Daylight was the first game released in the Starbreeze Publishing business area and was developed by the Canadian studio Behaviour Interactive. The game is an asymmetrical multiplayer (four versus one) horror game for five players. It is a version of hide and seek, where one player takes the role of the killer and hunts the other four players, who try to avoid being caught and killed. The killer plays in first person, while the survivors play in third-person. The game was released on 14 June 216 for PC and the console release followed in June 217. It have sold almost three million copies on the digital distribution platform Steam. As for PAYDAY, Starbreeze applies the concept games as a service to Dead by Daylight, and following the launch seven paid updates have been released. Today, the community has surpassed 78, members and up to 42,895 concurrent players have been noted by Starbreeze for the game. According to Steamspy, the game currently has about 2.8 million owners. Starbreeze financed the game development by investing USD 2m and will receive 5% of the royalties for the lifetime of the game, while Behaviour Interactive retains 1% of the IP rights. DEAD BY DAYLIGHT'S OWNERS - STEAM In millions Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Owners Source: Steamcharts and Nordea Markets DEAD BY DAYLIGHT'S AVERAGE DAILY PLAYERS - STEAM 18, 15, 12, 9, 6, 3, Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Avg. Players Linear (Avg. Players) DEAD BY DAYLIGHT'S SALES - ALL PLATFORMS Q2 216Q3 216Q4 216Q1 217Q2 217Q3 217Q4 217 Dead by Daylight sales DEAD BY DAYLIGHT'S PEAK PLAYERS - STEAM 5, 4, 3, 2, 1, Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Peak Players Linear (Peak Players) Source: Steamcharts and Nordea Markets Almost 15 years after the original title, Starbreeze and Double Fine Productions are releasing Psychonauts 2 After a slow start, sales picked up after Double Fine Source: Steamcharts and Nordea Markets Psychonauts 2 In February 216, Starbreeze signed an agreement with Double Fine Productions to publish the title Psychonauts 2. The game is a third-person action/adventure game where players control a newly graduated Psychonaut. The Psychonauts are an elite group of international secret agents born with powerful psychic abilities. We expect Psychonauts 2 to be released in 219 for PC, PS4 and Xbox One. The development of the game was previously funded by Double Fine Productions and through equity crowdfunding via the Fig service. The predecessor, Psychonauts, was published in 25 and was initially considered a commercial failure with only around 1, retail copies sold. In 211, Double Fine Marketing material commissioned by Starbreeze 48

49 acquired the rights to the game Starbreeze will be able to recoup 1% of its investment before revenue-sharing acquired the rights to the game and relaunched the title with support for digital distribution. In December 215, Double Fine reported that the game had sold 1.7 million copies, 1.2 million copies of which were sold after Double Fine had acquired the rights. According to Steamspy, the game currently has about 2.4 million owners. Starbreeze will be able to recoup 1% of its investment including marketing costs, with an initial revenue share of 85% after distribution and platform fees and the Fig crowdfunding revenue share. After the investment is fully recouped, Starbreeze s share of revenue will be 6%. Double Fine will retain the full intellectual property rights. PSYCHONAUT'S OWNERS In millions Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Owners *Note that the bump in September 217 refers to free versions of the game Source: Steamspy and Nordea Markets Warren Spector s OtherSide Entertainment game System Shock 3 is under development System Shock 2 has won a dozen awards and been included on greatest game of all times lists System Shock 3 System Shock 3 is a publishing collaboration with OtherSide Entertainment. The man behind the modern first-person role-playing game (RPG) genre, Warren Spector, who produced the first System Shock game in 1994, is returning to release the third game in the series. System Shock 2 was initially released in 1999 and received positive reviews but failed to meet commercial sales expectations. Many critics have since praised the game for having substantial influence on the FPS genre and the game is considered to have been well ahead of its time. It has won a dozen awards since, including seven game of the year titles and has been included in several greatest game of all time lists. Night Dive Studios acquired the rights and released an updated version of System Shock 2 in 211, and in 215 it was announced that OtherSide Entertainment had been licensed the rights to produce a sequel, System Shock 3. BioShock was released in 27 and is seen as a spiritual successor to System Shock 2 Starbreeze has invested USD 12m in the project and is able to recoup 12% before revenue-sharing A spiritual successor called BioShock was released in 27, inspired by System Shock with a similar plot. The game has been successful and has been followed by two sequels, BioShock 2 and BioShock Infinite, with each game having million owners on Steam, according to Steamspy. Starbreeze has invested USD 12m in a publishing-only deal and will be able to recoup 12% of its investment including marketing costs. After the investment is recouped, revenue will be split equally. Raid: World War II Starbreeze, Lion Game Lion and 55 Games jointly released the publishing title RAID: World War II for PC and console in autumn 217. The game is a four-player co-op first-shooter game in a World War II setting. Starbreeze invested USD 8m in game development and will be able to recoup 12% of the investment with a 5/5 royalty split. Starbreeze and Lion Game Lion will each own 5% of the IP rights. Marketing material commissioned by Starbreeze 49

50 RAID: WORLD WAR II'S OWNERS In millions Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Owners Source: Steamspy and Nordea Markets RAID: WORLD WAR II'S AVERAGE DAILY PLAYERS Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Avg. Players Linear (Avg. Players) Source: Steamcharts and Nordea Markets RAID: WORLD WAR II'S PEAK CONCURRENT PLAYERS 1,6 1,4 1,2 1, Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Peak Concurrent Players Linear (Peak Concurrent Players) Source: Steamcharts and Nordea Markets 1 Crowns will be Starbreeze s first foray into the strategy genre Publishing portfolio also includes VR titles John Wick Chronicles and ElemenTerra IndieLabs focuses on smaller game projects to find new upcoming studios 1 Crowns On 5 February 218, Starbreeze announced that it had signed a publishing agreement with Mohawk Games regarding a project currently under the working title 1 Crowns. The game, which is in the design phase of its development, is an epic-scale turnbased strategy game that lets players create the greatest dynasty in world history. The team behind Mohawk Games includes industry veterans from blockbuster titles such as Civilization IV and Civilization V. John Wick Chronicles John Wick Chronicles is a VR game published in cooperation with Lionsgate. It was released on Steam in February 217 and is available in the IMAX VR centre in Los Angeles. ElemenTerra ElemenTerra is the second publishing title in the VR segment. The player takes on a god-like role and rebuilds and designs planets in a cosmic disaster environment. Starbreeze is financing the development and will receive 5% of the royalties for the lifetime of the game. Starbreeze and Freeform Labs each own 5% of the intellectual property rights. IndieLabs The IndieLabs brand was launched in 216 under the Publishing business area and focuses on smaller game projects with the ambition of finding upcoming game developers to use for larger projects. Antisphere was the first IndieLabs title and was released on Steam in July 217. However, sales for the PC version were lower than expected and the company decided not to invest further in the console release. Marketing material commissioned by Starbreeze 5

51 Second title to be published is Deliver Us The Moon by the Dutch studio KeokeN Interactive The second IndieLabs project is to publish the title Deliver Us The Moon with the Dutch studio KeokeN Interactive. The game is set in the near future and the Earth s resources are nearly depleted. An astronaut travels to the moon in a do-or-die secret mission to save humanity. Starbreeze will be able to recoup 12% of its investment, and will subsequently retain 5% of the revenue after distribution fees. KeokeN will retain 1% of the IP rights. Marketing material commissioned by Starbreeze 51

52 Business area VR Tech & Operations Starbreeze s VR Tech & Operations business area is responsible for the development of VR technology and software, as well as the new concept of VR centres. These are centres for location-based entertainment (LBE) that Starbreeze views as its preferred means of VR content delivery. The business area includes the StarVR venture, a JV with Acer to develop the StarVR head-mounted display (HMD) headset, and technologies such as the VR movie format PresenZ. VR Tech & Operations is focused on R&D and has seen multiple additions through acquisitions since Starbreeze started its VR initiative in 215. The VR market is still in its infancy but PwC expects the size of the market to grow to USD 15bn by 221. Starbreeze believes VR will be a key component of the industry and has a strategy that aims to enable the delivery of premium content, leveraging on its strong IP portfolio. Starbreeze views locationbased VR as the preferred channel to deliver VR content The business line has been built on selective M&A VR strategy to establish the tech and LBE concept required to enable delivery of premium content VR TECH'S REVENUE The VR Tech & Operations business area comprises the Virtual Reality (VR) technology and software development, as well as the new concept of VR centres. These centres are a form of location-based entertainment (LBE) that Starbreeze considers its preferred means of VR content delivery. The business area includes the StarVR venture, which sells and markets the premium StarVR HMD headset, and the VR movie format PresenZ. The business area is focused on research and development and aims to support Starbreeze s vision of providing first-class entertainment products. The company believes that VR will be a key component of the industry in the future and is implementing a strategy of enabling the delivery of premium content, leveraging on its strong IP portfolio. Starbreeze s expansion into VR has been driven by a number of acquisitions, starting in June 215 with the acquisition of InfinitEye. This was followed by further deals, such as the establishment of a JV with Acer to develop the StarVR HMD and collaboration agreements with IMAX and SEGA Entertainment for their VR centres. The VR Tech business area is in the heavy investment phase and has yet to generate any profit. However, Starbreeze has taken many of the steps required to enable the delivery of premium content, ie developing the required tech and establishing the LBE concept through partnerships. The company expects that its VR strategy will ensure that the business area can contribute positively to the company s bottom line in the future. VR TECH'S OPERATING COSTS Q1 216 Q2 216 Net sales Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Capitalised development costs Q4 217 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Operating costs Q2 217 Q3 217 Q4 217 VR is still in an emerging phase and time to rollout and revenue potential is still The VR market In its Global Entertainment and Media Outlook report, PwC notes that there is considerable uncertainty in virtual reality with regards to the pace of change and the effect it will have. VR is also an area where uncertainty also hangs as a cloud Marketing material commissioned by Starbreeze 52

53 uncertain Growth rates will be high, albeit from a low base Shares many similarities with smartphone market, with game publisher leading the way PWC expects the market to grow 8% annually until 221, yielding a USD 15bn market over the speed of monetisation and the viability of new business models that the new technology enables. As a relatively novel technology that has yet to mature and prove its business potential, the size and growth of the VR market is subject to considerable uncertainty. The very definition of the VR market also differs as some actors, such as Newzoo - a leading provider of market intelligence covering the global games, e-sports and mobile markets - does not regard VR as a new segment in the market. Instead, it sees it as a part of the established console, PC and mobile games markets as VR headsets are available for all three segments. A common thread in most market estimates is the strong expected growth in the coming years as consensus seems to believe in the ability of the technology to establish itself and post impressive CAGRs, albeit from a rather low base. In its report, PwC notes that the VR market today is similar to that of the early days of the smartphone, ie a highly immature market with several underdeveloped business models and lots of experimental or low-quality content. While game publishers are making some progress, VR video creators still struggle with distribution and monetisation and the razor thin margins that result from the technical constraints and high costs of headsets. PwC foresees hardware (device) platform leaders emerging, paving the way for the maturing of marketplaces for content. In the report, PwC anticipates that the VR market will grow at an 8% five-year CAGR through 221, at which point it will be a USD 15bn market, compared with USD 869m in 216. PwC s projections for the three largest markets the US, China and Japan can be seen in the chart below. Source: Global entertainment and media outlook , PwC Other reports point to a market opportunity of between USD 13.1bn and USD 13.5bn in 22 Other estimates of the size of the VR market are generally in line with PwC s projections, although some divide the market into hardware and software components. For example, in a 216 report, JP Morgan estimated that the HMD market will grow by 52% annually in 216-2, going from HMD sales of USD 2.5bn in 216 to USD 13.5bn in 22. SuperData, a market intelligence provider covering the global gaming markets, estimates that of the total VR revenues of USD 28.3bn it expects in 22, software will account for USD 16.2bn. Marketing material commissioned by Starbreeze 53

54 WORLDWIDE VR REVENUE BY SEGMENT USDbn E 218E 219E 22E Hardware Consumer software/services Source: SuperData Growth rates to remain high beyond 22, VR games alone could reach USD 11.6bn in sales Interest starting to shift from home applications to location-based VR In the future, the B2B segment could offer additional upside Strategy to enable the delivery of premium content leveraging on Starbreeze s strong IP portfolio Moving into the third phase of its strategy delivery of premium content In another report from 216, Goldman Sachs estimated that the software market for HMD will generate sales of USD 13.1bn in 22, USD 6.9bn of which will be generated from the games market. Furthermore, it forecast sustained strong growth and estimated that hardware and software related to VR and AR (augmented reality) will generate sales of USD 8bn in 225, USD 11.6bn of which from the games market. While most of the focus for the future of the VR market has been in its game applications in a console, PC or mobile setting, a further VR-related trend that Starbreeze has observed is that location-based VR is on the rise and it expects to see a growing number of VR centres. This is a development that will demand content adapted to large-scale VR experiences and this observation and the belief that location-based entertainment (LBE) will be the best means of delivering VR content in the short to medium term, considering the cost of a premium VR headset, has been a key driver in Starbreeze s bet on VR centres. Apart from the games market, the progression of VR technology could also see additional applications for its use, both in B2C, eg changing how people attend a property viewing or how they see their doctor, and B2B channels, eg architects taking developers on a virtual tour of their blueprints. Armed forces around the world have also been early adopters of VR technology, using it for applications such as combat training and safety enhancement. The value of these applications for the VR technology is harder to estimate as it is still in its infancy and even more immature than the VR game market. Starbreeze s VR strategy Starbreeze s VR strategy is focused on enabling the delivery of premium content, thus leveraging on Starbreeze s strong IP portfolio. The strategy can be divided into three phases: the StarVR Headset, Location-based VR centres and Premium content. The first two phases have been necessary in order to develop the technology and infrastructure to deliver on the third, which is where Starbreeze s strength as a company comes into play and where the profit potential is greatest. The relationship between time and profit in the strategy can be seen in the visualisation below. Starbreeze has to date made significant progress in this three-pronged strategy as the StarVR headset has completed the R&D phase and location-based VR centres are now being rolled out through the IMAX and SEGA partnerships. This means that the heavy investment phase is transitioning into a new phase where focus shifts towards the end goal of delivering premium content. Marketing material commissioned by Starbreeze 54

55 StarVR Headset The StarVR headset is key for creating high-class entertainment experiences A key aspect of developing the VR experience is to integrate the company s software and hardware in the StarVR HMD headset. The purpose of developing a VR headset is to enable an end-to-end concept for LBE VR entertainment with full control of the entertainment experience. It also presents a pioneering opportunity to unlock the B2B market where multiple segments can be targeted, including arcade centres, real estate, engineering, healthcare, theme parks and shopping malls. Starbreeze partnered with Acer on the StarVR joint venture The headset was developed in a joint venture with Acer called StarVR Corporation, in which Starbreeze holds a 33% ownership share. Starbreeze owns and controls the IP rights and provides content, while Acer manufactures the product. Sales and marketing of the StarVR HMD headset is managed by the JV s sales organisation. The premium headset is differentiated from its competitors through its 21 degree field of vision, 5K low persistent screen and perfect tracking through Phase Space tracking. In February 218, Acer and Starbreeze confirmed that they were looking into an IPO of the StarVR JV, but no decision has been taken yet. Marketing material commissioned by Starbreeze 55

56 Source: StarVR Corporation Important VR technology acquired in 216 In addition to the StarVR JV, Starbreeze s tech investments include the acquisitions of the French company epawn, now Starbreeze Paris, in June 216 and in October 216, the Belgian companies Nozon S.p.r.l. and Parallaxter S.p.r.l., which together are developing the PresenZ Technology. The technology allows interactive illusory position shift in 36-degree videos, VR content and in post-production and 3D animation. Location-based VR centres Flagship centre for VR in Dubai and forthcoming centre in Stockholm to showcase the technology Partners with IMAX and SEGA on location-based entertainment Location-based VR is a key step in the VR strategy and the company sees great potential in VR arcades. In June 217, Starbreeze finalised the acquisition of Enterspace, a location-based VR company. In August 217, the company announced that it had entered an agreement for a 7,m 2 VR centre in Dubai. The Emaar Entertainment s VR Park, as it is called, opened on 1 March 218 in the prominent Dubai Mall and is slated to serve as a flagship for the VR LBE concept. Enterspace will be the lead partner to the VR centre providing content, installation and operational experience. In 218, Enterspace will also open a showcase VR centre in central Stockholm. In addition to the fully owned Enterspace, the company is betting on the LBE concept through partnerships. It has an agreement to supply IMAX with games and hardware for its VR centres in the US and a similar deal was announced in December with the Japanese entertainment company SEGA Entertainment. Starbreeze s StarVR JV with Acer will supply VR technology to IMAX and SEGA Entertainment. Premium content Long-term ambition to monetise on content, where the company has expertise and margins are high Content and IP ownership are the key in Starbreeze s VR strategy. The company is pursuing a strategy of developing premium content, both in-house and as a publisher, for its StarVR headset and location-based VR centres. Starbreeze also has a number of projects with external developers of VR game titles and has released John Wick Chronicles: Arcade Edition in VR. The long-term target is to make more of the company s existing titles available in VR. Marketing material commissioned by Starbreeze 56