Remedy Q3'24 flash comment: Figures above expectations, but AW2 sales development disappointing

Translation: Original published in Finnish on 11/1/2024 at 9:52 am EET.

Remedy reported significantly stronger Q3 figures this morning than we expected, as more development fees from the Control 2 project were recognized in the quarter than we anticipated. The company's game projects are also progressing in line with our expectations. On the negative side, Alan Wake 2 has not yet recouped its development and marketing budget, and now sales expectations are focused on the crucial November-December window. Overall, the report does not preliminarily cause any major changes to our view on Remedy's long-term potential.  x

Revenue grew significantly stronger than expected

Remedy’s Q3 revenue grew by 129% to 17.9 MEUR which clearly exceeded our 14.2 MEUR estimate. This growth was driven by the expected retroactive development payments for Control 2 under the Annapurna agreement (Annapurna is funding 50% of the game's development budget), which appear to have exceeded our expectations. Otherwise, as expected, the quarter saw significant development fees from the Max Payne subcontracting project, which is now in full production.

Royalty income for the quarter (0.8 MEUR) decreased slightly from the comparison period (1.1 MEUR) and was below our forecast (1.2 MEUR). In the third quarter, Alan Wake 2 did not yet generate any royalties. Remedy commented, as in the Q2 report, that the game has recouped the majority of its development and marketing costs, suggesting over 80% of the total. Thus, sales of the game seem to have been rather sluggish in recent months, and we now expect a recoup announcement in the report.

Stronger top line also strongly reflected in earnings

Remedy's Q3 EBIT was 2.4 MEUR, compared to our forecast of 0.2 MEUR. EBITDA (6.6 MEUR) was even higher than our forecast (1.2 MEUR), so depreciation for the quarter seems to have been higher than expected. Due to Remedy's very fixed cost structure, the revenue outperformance also directly translated into a better earnings performance compared to our forecast.

With the self-publishing of Control games, the result is still negative this year, as expected

Remedy had previously stated that it would clarify the outlook once decisions regarding Control games had been made. However, the company has now reaffirmed its guidance and continues to expect year-over-year revenue growth (2023: 33.9 MEUR) and EBIT (2023: -28.6 MEUR) to improve. However, the outlook has been revised to show that the EBIT will remain negative this year. As we noted in our earnings preview, our 2024 earnings forecast included an assumption for Q4 of 10 MEUR in development fees for FBC: Firebreak, which of course won't come when Remedy self-releases the game. Adjusted for this, the outlook is in line with our expectations.

Overall, the outlook revision did not add much new meat to the bones, and we believe the main reason for this is the uncertainty surrounding the sales performance of Alan Wake 2. The next 2 months are very important sales months for the game, and with the release of the second expansion pack and the physical copy, marketing activities and discount campaigns will increase significantly towards the end of the year. Their effectiveness will have a major impact on the royalties the game can generate at the end of the year.