Remedy Q4 on Friday: Outlook and Alan Wake 2 sales performance in focus

Translation: Original comment published in Finnish on 2/5/2024 at 8:23 am EET.

Remedy will report its Q4 results on Friday at 9.00 am EET. 2023 is still a clear investment phase for Remedy. This is reflected in the Q4 and full-year results, which are clearly negative. This year, royalties from Alan Wake 2 should clearly support the company's growth and earnings performance, and the main interest in the report is the outlook for the current year and information/commentary on the sales performance of AW2. In the big picture, the progress of the game projects in development in the production pipeline will again be key this year, as with the ramp-up of the multi-project model, we estimate that the release of AW2 is just the starting point for many more game releases to come this decade.

Quarterly development fees well below comparison period, AWR may surprise cautious expectations on royalties

We forecast Remedy's Q4 revenue to decrease by 42% to 7.9 MEUR. With the release of Alan Wake 2 (October 27), the development fees accrued for it are naturally significantly down year-on-year. In addition, the Control 2 publishing contract supported the comparison period's revenue. Since the end of the year, Alan Wake 2 has started to free up staff for other projects, which contributes to the development fees generated by these projects. Restarting the Vanguard project as Kestrel and returning to the conceptualization phase means lower development fees for this project before it moves forward in the production pipeline.

In terms of royalty income (Q4’23e: 1.4 MEUR), the rest of the year will be interesting for Alan Wake Remastered. The game recouped its production and marketing budgets during Q3, and now at the end of the year the excellent reception and marketing of AW2 has also supported sales of AWR. However, the game has been sold at a rather low price point, which is why our expectations are relatively conservative. Based on our current projections, we expect AW2 sales to recoup the game's production and marketing budget during Q1'24, at which point it will start earning Remedy royalties. Thus, last year's royalty figures are not yet directly affected by the release of AW2.

Q4 loss reflects last year's investment phase

In connection with this pre-comment, we revised our assumptions on the cost structure for the rest of the year upwards one notch and forecast Remedy's Q4 operating loss to be -5.4 MEUR (previously -4.7 MEUR). In the comparison period, EBIT was 2.1 MEUR. In line with its 2023 strategy, Remedy has increased its investment in game projects in development as they progress through the production pipeline. With low royalty revenues, increased recruitment, external game development and rising other costs, we expect EBIT for the full year 2023 to be a loss of -21.3 MEUR.

Alan Wake 2 royalties swing revenue and earnings heavily this year

In the Q4 report, Remedy's outlook will be very interesting, as based on the very strong critical success of AW2, we believe that the game can also be expected to have good commercial success in the coming years. So far, there are no concrete sales figures for AW2 yet, but we expect the Q4 report to provide at least verbal comments on sales developments. The comments may also indicate whether the game's production and marketing budget has already been recouped, after which Remedy and Epic will start splitting the game's profits in half. Our current forecast expects strong revenue (70.1 MEUR, +122%) and EBIT (17.6 MEUR, EBIT 25%) growth in 2024, driven by AW2's royalty income. Thus, guidance that merely indicates increasing revenue and improving earnings would still be of little informative value. Naturally, the development of game sales is affected by a number of variables and therefore there is still considerable uncertainty about the level of results for the current year.