Remedy Q4 morning result: As expected, the outlook foresees a year of investment before the start of earnings growth phase

Translation: Original comment published in Finnish on 2/10/2023 at 9:49 am.

Remedy reported slightly better-than-expected Q4 figures this morning. Based on the outlook, the company's revenue and earnings are expected to decline this year, ahead of the earnings growth phase that will start with the release of Alan Wake 2 at the end of the year. Remedy's traditional AAA projects (AW2, Control 2 and Max Payne) seem to be progressing as planned, but the multiplayer projects (Vanguard and Condor) will take time. Therefore, it’s still difficult to say exactly where their releases will fall in the estimated release schedule that we have outlined for 2024-2026.

Q4 revenue down sharply year-on-year, as expected

Remedy's Q4 revenue decreased by 31% to EUR 13.6 million and slightly exceeded our estimate of EUR 13.2 million. The comparison period was exceptionally good, with the development, licensing and distribution agreement with Tencent for the Vanguard project providing a significant boost to revenue growth. Now, the development and publishing agreement with 505 Games for Control 2 resulted in retroactive revenue for Q4. Alan Wake 2, which is in full production, also generated significant development fees in the quarter, with some development fees also coming from Vanguard, Condor and Max Payne. Royalty income for the quarter was EUR 1.1 million, which exceeded our estimate of EUR 0.4 million. Alan Wake Remastered didn't generate royalties yet in Q4, so revenue is probably still coming in from old games (especially Control).

Q4 result a notch better than we expected

In Q4, Remedy's operating profit was EUR 2.1 million (Q4’21: 10.3 MEUR) while we forecast EUR 1.1 million. For the full year, EBIT decreased to a loss of EUR -0.6 million. The years 2022-2023 will still be clear investment years for Remedy, when the company's results are not expected to be miraculous due to low royalty income, increasing recruitment, external game development and rising other costs. Profitability in Q4 was supported by the retrospective development fees from Control 2, which had the same effect on an even larger scale in the comparison period for Vanguard. Remedy's board proposes a small dividend of EUR 0.10 per share, compared to our estimate of EUR 0.17 which was also the level last year. The importance of dividends in Remedy's investment profile is currently very limited.

As expected, the outlook still foresees a sluggish year before the earnings growth phase starting in 2024

Remedy's outlook for 2023 foresees a decline in revenue and a loss-making operating result. This was well expected and our estimates see Remedy's 2023 revenue falling by 11% to EUR 38.2 million and EBIT to fall to EUR -10.7 million. As far as the company's game projects are concerned, Alan Wake 2 is starting to be complete in terms of content, and our target release date of late Q3'23 for the game still looks realistic. Development of Control 2 is well underway, and the game moved from conceptualization to proof-of-concept in January. The Condor and Vanguard multiplayer projects are still in the proof-of-concept phase and Remedy continues to patiently develop them. In our assumptions, we have projected the release of Condor by the end of 2024 and Vanguard by 2025, for which we may have to push back expectations somewhat. The Max Payne project continues in the conceptualization phase and, according to Remedy, the project is progressing well so far.