Remedy Q3'24 preview: Future steps recently clarified

Translation: Original published in Finnish on 10/28/2024 at 7:51 am EET.

Remedy publishes its Q3 results on Friday at 9.00 am EET. We will review the report afresh in Remedy earnings live starting at 8.55 am (in Finnish). We expect the  Annapurna agreement signed during the quarter for Control 2 to increase Remedy's revenue significantly and lift EBIT slightly into positive territory. For FBC: Firebreak, the situation has now also been clarified and the 15 MEUR funding fund from Tencent will allow both games to be self-published.  The future stepping stones are becoming clearer, and the Q3 report will provide further insight through company commentary and a possible refinement of the outlook. The focus is also on the sales of Alan Wake 2, as our projections indicate that the game should have recouped its production and marketing budget by now.

We estimate that revenue was supported by back development fees for Control 2

We forecast Remedy's Q3 revenue to increase by 82% to 14.2 MEUR. This increase is due to the assumption of retroactive development payments for Control 2 under the Annapurna agreement (Annapurna funds 50% of the game’s development budget). Otherwise, we estimate that only the Max Payne subcontract project, which is in full production, has generated significant development fees.

We expect royalty income (Q3'24e: 1.2 MEUR) to remain at a low level until Q4, when we forecast Alan Wake 2 to start generating more significant royalties. To achieve this, Remedy should state in the report that AW2 has recouped its development and marketing costs. As of the Q2 report (August 9th), the game had covered "most" of its costs, over 80%.

Growing revenue also drives profitability into positive territory

We expect Remedy's EBIT to turn slightly positive in Q3 (MEUR 0.2) as significantly increasing development fees support profitability. Remedy's cost structure is largely fixed, so its profitability varies widely from quarter to quarter with revenue. Remedy's decision to self-publish Control 2 and  FBC: Firebreak (aka Condor) is also likely to increase the amount of development costs that can be capitalized, which may have already had a larger-than-expected positive impact on profitability in Q3. Of course, the capitalization/depreciation of development costs does not affect the company's cash flow. In order to enable the self-publishing of future games, Remedy entered into a 15 MEUR convertible bond agreement with Tencent.

Stepping stones for the coming years clear

In its outlook, Remedy expects its revenue to increase from the previous year (2023: 33.9 MEUR) and EBIT (2023: -28.6 MEUR) to improve. The company has commented that it will clarify the outlook once decisions on the Control games have been made, so the Q3 report will presumably provide some additional clarity on the outlook. Our current forecast for 2024 (revenue 60.8 MEUR, EBIT 5.4 MEUR) is not quite up to date, as before the FBC: Firebreak news, we had assumed a potential development fee pot of 10 MEUR for Q4 from a potential partner for Condor. Naturally, we will update our assumptions on this in connection with the Q3 results. Meanwhile, the Microsoft/Sony collaboration on the game is expected to generate revenue next year (the game will be available on Game Pass and PS Plus from the start). In addition, Remedy's royalty potential from the game is higher than we previously anticipated due to self-publishing and self-funding. However, the biggest variable in royalties is the ultimate reception of the game after its release next year.

Overall, Remedy's milestones for current game projects are starting to become clearer and we will try to refine our guidance accordingly based on the Q3 report. In the long term, we believe that the company's value creation depends primarily on the success of Control 2 and subsequent major AAA game projects, for which patience is still required.