Revenue and EBIT were well below our estimates for the second half of 2019. As we do not know the conditions in the agreement between the publisher and Remedy, we believe the payment from Epic Games for platform exclusivity is the main reason for the estimate-miss. The slow sales start for the game Control has likely also impacted the timing of the royalty payments in the second half of 2019 as well as marketing and physical distribution deductions.
Royalty payments from Control in H2 2019
If we look at our source gamstat, the game sold approximately 337 000 units on Playstation during 2019, which means a total of about 680 000 units on all platforms according to our game sales model. Based on these sales numbers a royalty payment of around EUR 6 million during the second half is fairly accurate. We also believe there is a delay in royalty payments, which means sales from the holiday season will be realized during H1 2020.
As of February 9, the game Control has sold approximately 415 000 copies on Playstation, which means a total of 800 000 copies in total we believe. The game has received several “game of the year” awards and is considered one of the best games of 2019 globally amongst critics. These awards have boost sales during the last months. With a growth (units sold) of at least 15% during January according to our estimates Control seams to develop extremely well. However, it is important to understand that the average price per unit has decreased since launch (but only minor discounts compared to industry standards). The solid sales growth is a proof that Control is a high-quality game.
The most important note in the report from a financial point of view is the following sentences; “Remedy expects its revenue and operating profit to increase during 2020. The majority of the revenue and operating profit growth is expected to materialize during the second half-year period”.
We still believe Control will be a profitable project. According to an interview with “gamesindustry.biz”, the development budget was below EUR 30 million.
We expect royalty payments from Control will be higher in 2020 mostly due to exclusivity deals with Epic Games and Microsoft (for the subscription service Game Pass). But also, from continued strong game sales boosted by two major DLCs during the year.
However, Remedy wrote that the majority of revenue and operating growth is expected in the second half of the year. We expect royalty payments from Crossfire X and a partnership agreement with a platform owner for 1-2 games in the pipeline are the main revenue drivers.
We had too high expectations on H2 2019 but somewhat conservative estimates for 2020. For all the reasons above, we will likely increase our estimated revenue and profitability for 2020.
In August last year, Sony acquired Insomniac. Last week SEC filings revealed that Sony paid USD 229 million for the studio. We believe the previous owners in Insomniac also have a potential earn-out agreement. In our view, Insomniac is comparable to Remedy when it comes to achieved quality in their developed games (with a certain advantage to Insomniac). The latest game from Insomniac was Spider-man, a PS4 exclusive that has sold close to 23 million copies according to gamstat. The strong IP and the big-budget are the most obvious reasons for the big difference in-game sales compared to Remedy games.
The valuation of Remedy is approximately USD 180 million. The main difference between those companies when we look at assets is Remedy’s graphics engine Northlight and their game IPs. Insomniac did not own their biggest IPs. We still believe Remedy is an obvious potential acquisition target.
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