Remedy Q1 on Monday: Our forecast sees AW2 royalties only starting to show in the figures in H2

Translation: Original comment published in Finnish on 4/23/2024 at 1:18 am EEST.

Remedy will report its Q1 results on Monday at 9.00 am EEST. We will review the report afresh in Remedy earnings live starting at 8.55 am (in Finnish). We still expect a very weak quarter in terms of numbers before AW2 starts to generate royalties in H2. Any further information on the sales development of the game (over 1.3 million copies sold at the beginning of February) will be of interest in the report. In addition, the decision on whether to choose a publishing partner or to self-publish Condor and Control 2 is one of the key issues concerning the company in the short term, but the report is unlikely to provide any further material information on the ongoing negotiations. This is an important long-term strategic decision that will shape the company's direction for the next decade. Given the potential of the Control Games brand, we believe that the company will work towards self-publishing both or one of the projects, which will also require additional funding.

We expect revenue to have increased year-on-year, but to remain at a relatively low level

We forecast Remedy's revenue to increase by 11% to 7.7 MEUR. In our forecast, the growth compared to the comparison period is driven in particular by royalty income (Q1’24e: 2.1 MEUR), which we expect to come in relatively nicely from Alan Wake Remastered, similar to the previous quarter. We expect development fees to have declined from the comparison period, when AW2 and Kestrel (then Vanguard), which was brought back to the drawing board, generated higher development fees. Resources have now been redirected to other projects, and we expect increasing development fees especially from the Max Payne project, which will go into production in Q2. Condor and Control 2 have also generated development fees, at least in January and February. Remedy subsequently acquired all rights to the Control game franchise from 505 Games, and is currently negotiating a potential new publishing partner while considering self-publishing the games.

H1 results still deep in the red ahead of AW2 royalties expected at year-end

We forecast Remedy's earnings development to reflect the ongoing investment phase in H1 before AW2 royalties start to flow in the second half of the year. Therefore, as in previous quarters, we expect Q1 EBIT to be significantly in the red (-7.9 MEUR). The full-year earnings development will be significantly impacted by the composition of the publishing agreement for Condor and Control 2 or the decision to self-publish the games.

Outlook clarified after final decisions on the Control projects

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. Based on the very weak figures for 2023, the guidance does not yet provide much information value. For Condor and Control 2, the level of development fees for the current year and the coming years is uncertain due to the release agreements under negotiation or the decision to self-publish. The more risk Remedy wants to take on these projects, the less development fees will be generated. Correspondingly, this translates into higher royalty potential for Remedy. The company said it will clarify its outlook for 2024 once a decision has been made on the business model and potential arrangements for Control 2 and Condor. We will also revisit our estimates once the decisions on these games have been made. Our current forecast for this year is for a revenue of 50.4 MEUR (+49%) and an operating loss of -12.6 MEUR.