Remedy Q4 next Wednesday: AW2 royalties and Control games' publishing contract bring fluctuations to 2024 figures

Translation: Original comment published in Finnish on 3/53/2024 at 7:07 am EET

Remedy will report its Q4 results next Wednesday at 9.00 am EET. With the profit warning issued in February, the earnings figures that are clearly in the red as expected are already known. In addition, the company already provided information on the sales development of Alan Wake 2, so key short-term information concerning the figures has already been given. 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. However, the ongoing negotiations on a possible new publishing contract with Control 2 and Condor bring its own variable to the equation. Remedy acquired all rights to the Control game brand from 505 Games at the end of February at a good price in our opinion.

Preliminary data means revenue and earnings figures are already known

Based on preliminary data, Remedy's revenue for 2023 was 33.9 MEUR and EBITDA -17.0 MEUR. Thus, Q4 revenue was approximately 10.3 MEUR (-25%) and EBITDA -3.9 MEUR. With the release of Alan Wake 2 (October 27), the development fees accrued for it were 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 has contributed 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, 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. Prior to the preliminary information, our revenue forecast for Q4 was clearly more moderate than the outcome, and we expected AWR’s royalties to surprise positively compared to our previous cautious assumption.

Last year’s sharply negative result reflects the investment phase

In line with its 2023 strategy, Remedy increased its investment in game projects under development as they progress through the production pipeline. The royalties that remained low, increased recruitment, increased external game development and increased other costs are reflected in last year’s big losses, which were further deepened by the 7.2 MEUR write-down in Vanguard.

Alan Wake 2 royalties and possible new publishing contract of Control games bring a big pendulum to revenue and earnings this year

In the Q4 report, Remedy's outlook will be very interesting, as based on the strong critical success of AW2 and issued sales figures, we believe the game can be expected to have good commercial success in the coming years. Remedy announced in February that Alan Wake 2 had sold 1 million copies by the end of December 2023, and 1.3 million copies by the beginning of February 2024. According to Remedy, the game's retail price has remained high and it has already recouped a significant portion of its development and marketing costs, after which Epic Games and Remedy will split the net proceeds. We believe 'a significant portion' refers to a 50-80% recoup, and in our forecast we expect royalties to begin accumulating from Q3’24.

Our current forecast expects AW2 royalties to boost Remedy’s revenue (51.1 MEUR, +51%) to strong growth in 2024. We expect EBITDA (2024e: (-1.0 MEUR) and EBIT (-6.2 MEUR) to improve significantly, but to remain slightly below zero due to the increased cost structure. The information value of guidance that only indicates revenue growth and improving earnings would be weak, but indicating a positive result would be a surprise compared to our expectations. 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. The possible self-publishing of Control projects or including a new publishing partner brings its own variable to the equation. Self-publishing of both or one of the projects would mean lower development fees in the short term (more negative result) but would enable a higher royalty potential in the longer term.