Starbreeze reported stronger-than-expected revenues for Q3 this morning. Operating profit (EBIT) came in lower than our estimates due to higher D&A. Revenues were driven by PAYDAY 3 sales and the game financing liability being recognized as revenue. According to Starbreeze, the initial sales exceeded their expectations, but due to the technical issues at launch, sales after Q3 have been somewhat lower. The company will now work on regaining the players’ trust to hopefully get PAYDAY 3 back on track, which is essential for the share price to recover.

Revenues exceeded our expectations

Starbreeze’s Q3 revenues increased by over 1,000% to SEK 494 million, exceeding our estimate of SEK 433 million. The higher revenues were due to stronger than projected sales of PAYDAY 3, which accounted for SEK 194 million of the Q3 revenues. The game financing liability being credited to revenues was SEK 247 million (our estimate was SEK 259 million). The game financing liability has no cash flow effect. PAYDAY 2 sales also surprised to the upside by coming in at SEK 52 million (Q3’22: MSEK 36).

EBIT and net profit lower than expected due to a larger D&A charge

In Q3, Starbreeze’s operating profit (EBIT) increased to SEK 300 million but was somewhat lower than our estimate of SEK 351 million due to a significantly higher depreciation and amortization than estimated. D&A for Q3 came in at SEK 142 million, compared to our estimate of SEK 53 million. The higher D&A charge was due to Starbreeze choosing a more aggressive D&A schedule for capitalized game development costs related to PAYDAY 3 than we expected. According to the company, a depreciation of 1/3 of the asset was made in connection with the launch. Both financial expenses and taxes were minimal, leading to an EPS of SEK 0.21.

As the game financing liability that was credited to revenues has no cash flow effect, the quarter’s operating cash flow was significantly lower than EBITDA. Cash flow from operating activities before working capital came in at SEK 189 million. Operating cash flow after working capital was SEK 11 million due to a large increase in operating receivables linked to PAYDAY 3 sales. After paying off the remaining debt during the quarter, Starbreeze had Cash and cash equivalents of SEK 312.9 million at the end of the quarter.

PAYDAY 3’s success is essential for the company going forward

PAYDAY 3’s launch is now behind us, but the game will remain a crucial part of Starbreeze and, together with PAYDAY 2, essentially represents the only relevant source of revenue. By now, it’s no secret that release issues and subsequent issues have led to weaker sales and a lower player count than expected. The decrease in player count creates downward pressure on the short-term estimates. If Starbreeze, however, manages to entice players to return to the game with new updates, the game’s fortunes might still improve. Starbreeze took the first step in that journey earlier this week when they announced two new free heists for PAYDAY 3. Players will also receive new first-person animations, weapons, skins, and a host of improvements based on player feedback. We welcome Starbreeze’s decision to actively try to stimulate the players’ interest in the game and the company’s willingness to listen to players’ complaints regarding the progression system. In addition to PAYDAY, the company has scaled up the development for their next game, Project BAXTER, while the publishing organization is working on several third-party publishing projects.