Starbreeze’s Q3 revenues and adjusted EBIT aligned with our expectations. The company highlighted its ability to significantly reduce investment levels for PD3 heading into its second year, partly due to the phase-out of Operation Medic Bag (“OMB”). However, the report did not provide any roadmap or strategic insights for 2025 to address the ongoing low player activity in the game. Meanwhile, Starbreeze continues to engage in active discussions with several industry players regarding potential collaborations on Project Baxter, although no concrete results have materialized yet.

Revenues from PD3 were below our estimates but PD2 revenue surprised

Starbreeze’s Q3 revenues amounted to 43 MSEK (Q2’24: 40 MSEK), which was in line with our estimate. The significant decrease in y/y revenue reflects the impact of PD3’s launch in the prior comparison period. The q/q revenue increase was driven primarily by higher revenue from PD2, partially offset by weaker third-party publishing sales. PD3 revenues remained stable at 23 MSEK (Q2’24: 22 MSEK), falling short of our 29 MSEK estimate. PD2 and third-party publishing revenues were 11.5 MSEK and 6 MSEK, respectively, with third-party publishing aligning with expectations, while PD2 outperformed our forecast of 7 MSEK. 

Adjusted EBIT in line with expectations

Starbreeze reported an adjusted operating profit (EBIT) of -63 MSEK in Q3 (Q2’23: -71 MSEK), matching our expectations. The reported EBIT, however, came in at -55 MSEK but includes a reversal of previously expensed personnel costs of 8 MSEK related to the company’s long-term incentive program linked to the PD3 launch. Excluding this adjustment, operating expenses were slightly below our estimates.

Cash flow from operating activities after WC changes was -16 MSEK, with paid receivable linked to PD3 sales having a positive effect on working capital of about 5 MSEK. An additional 20 MSEK in trade receivables linked to PD3 remains to be collected after the quarter’s end. Investments (CAPEX) for the quarter totaled 65 MSEK, leading to a free cash flow of -81 MSEK (Q2’24: -65 MSEK). Starbreeze did not receive any game development financing during the quarter, and its cash balance stood at 249 MSEK at the end of Q3 (Q2’24: 334 MSEK), with virtually no debt. While the cash decline this quarter was anticipated and the current cash position remains solid, a continued low level of PD3 activity may erode cash further in the coming quarters, even as PD3 investments decrease with a reduced team and the completion of OMB as the company enters year two.

Mixed signals cast uncertainty on a possible recovery for PD3

The PD3 game has seen significant improvement over the past year, thanks to new content updates, gameplay enhancements, and bug fixes. The shift in community sentiment reflects these achievements, leaning more positively than before. However, player activity remains muted and, hence, does not fully reflect the game’s progress. Additionally, community interest, as measured by activity, still favors the predecessor - a game Starbreeze no longer monetizes in the same way (e.g., through ongoing DLC releases).

We believe recent developments in PD3 support our broader outlook, suggesting that a significant resurgence in player base and revenue is unlikely. Instead, we anticipate that player numbers and revenues will gradually decline through 2025 and beyond. To revise this perspective, we would need to see a substantial and sustained increase in player engagement over an extended period.

The decline in the cash position during the quarter underscores the critical role PD3’s recovery plays in enabling Starbreeze to self-publish Project Baxter. Without a significant rebound in PD3’s performance, we continue to believe Starbreeze may need to seek a co-financer for the game or explore alternative strategies to meet the planned 2026 launch timeline.