Translation: Original comment published in Finnish on 08/05/2024 at 7:15 am EEST

Remedy publishes its Q2 results on Friday at 9.00 am EEST. We will review the report afresh in Remedy earnings live starting at 8.55 am (in Finnish). Due to development fees, which are low in our forecasts, we expect a weak quarter in earnings terms. The focus is particularly on AW2’s sales figures, which if they in line with our forecasts should indicate that the game has covered its production and marketing costs in July-August. In addition, any additional information about negotiations to choose a publishing partner or self-release of Condor and Control 2 is of interest, as these decisions will determine Remedy’s direction in the next decade. Given the potential of the Control franchise, we believe that the company will work towards self-publishing both or one of the projects, which will also require additional funding.

In terms of revenue, we expect a weak quarter before AW2’s royalties start flowing in H2

We expect Remedy's Q2 revenue to decrease by 16% to 7.5 MEUR. We estimate that during the quarter significant development fees have only flowed from the Max Payne subcontracting project that transferred to production during Q2. No development fees have probably been collected from the Control projects in Q2 since Remedy acquired all the rights to Condor and Control 2 in February. In addition, Kestrel, which was in early conceptualization was buried in May. The development of AW2 add-ons (DLC) may have generated some development fees during the quarter. We expect royalties (Q2’24e): 1.3 MEUR) to have grown slightly from the comparison period supported by Alan Wake Remastered.

Instead of Q2’s revenue, the likely update from Remedy concerning  AW2’s sales figures is of more interest. In the Q1 report, the company commented that the game had already covered a significant share (which we believe refers to 50-80%) of its development and marketing costs. The game had sold more than 1.3 million copies by the beginning of February, and its retail price has remained high. With the assumptions of our forecasts, AW2 should start generating royalty income from Q3, so if this happens, the company should announce in the report that the game has covered its development and marketing costs.

Low revenue forecast is also reflected in the earnings lines

We expect Remedy's earnings development to still reflect the ongoing investment phase before AW2 royalties start to flow in the second half of the year. Due to the low revenue level and mainly a fixed cost structure, we expect EBIT (-6.8 MEUR) to have been significantly in the red. The full-year earnings development will also be affected by the composition of the publishing agreement for Condor and Control 2 or the decision to self-publish the games.

The guidance (and our forecasts) will change once the decisions on the Control games have been taken

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 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 review our forecasts after these decisions. Our current forecast for this year is for a revenue of 48.6 MEUR (+43%) and an operating loss of -8.8 MEUR.